ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion and analysis of our financial condition and results of operations together with our financial statements and related notes thereto included elsewhere in this annual report on Form 10-K. Some of the information contained in this discussion and analysis or set forth elsewhere in this annual report on Form 10-K, including information with respect to our plans and strategy for our business and related financing, includes forward-looking statements that involve risks and uncertainties. As a result of many factors, including those factors set forth in the “Risk Factors” section of this annual report on Form 10-K, our actual results could differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.
Overview
XBiotech Inc. (“XBiotech” or the “Company) is a pre-market biopharmaceutical company engaged in discovering and developing True HumanTM monoclonal antibodies for treating a variety of diseases. True HumanTM 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 HumanTM pipeline and manufacturing system.
After the Janssen Transaction in December 2019 and the tender offer in February 2020, we had retained earnings of $97.6 million. We had a net loss of $11.2 million for the year ended December 31, 2020, compared to a net income of $668.6 million for the year ended December 31, 2019, and a net loss of $21.1 million for the year ended December 31, 2018. During the next year, we expect that the revenues from Janssen Transaction will generate enough cash for our research and development activities. However, the term of the clinical manufacturing agreement will end on December 31, 2021. 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. In addition to these increasing research and development expenses, we expect general and administrative costs to increase as we continue to operate as a public company. We will need to generate significant revenues to achieve or sustain profitability, and we may never do so. As of December 31, 2020, we had 91 employees.
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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. Following the end of 2021, the agreement will expire and we will not be entitled to receive any more such revenues. In addition, we entered into a 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. 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 operating expenses as incurred.
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 December 31, 2020, we have recorded total research and development expenses, including share-based compensation, of $219.3 million. Our total research and development expenses for the year ended December 31, 2020 was $9.5 million, compared to $24.1 million the year ended December 31, 2019, and $15.7 million for the year ended December 31, 2018. Share-based compensation accounted for $3.6 million for the year ended December 31, 2020, $1.6 million for the year ended December 31, 2019 and $0.7 million for the year ended December 31, 2018.
Research and development expenses as a percentage of total operating expenses was 34% for the year ended December 31, 2020, 77% for the year ended December 31, 2019, and 75% for the year ended December 31, 2018. The percentages, excluding stock-based compensation, were 36% for the year ended December 31, 2020, 81% for the year ended December 31, 2019 and 78% for the year ended December 31, 2018.
Based on the results of our preclinical studies, we anticipate that 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 was $18.2 million for the year ended December 31, 2020, $7.1 million for the year ended December 31, 2019 and $5.3 million for the year ended December 31, 2018. Share-based compensation accounted for $7.5 million for the year ended December 31, 2020, $1.7 million for the year ended December 31, 2019 and $1.0 million for the year ended December 31, 2018.
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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.
While our significant accounting policies are more fully described in the notes to our financial statements appearing in this Annual Report on Form 10-K, we believe that the following accounting policies are the most critical to understanding and evaluating our reported financial results.
Stock-Based Compensation
Stock-based awards are measured at fair value at each grant date. We recognize stock-based compensation expenses ratably over the requisite service period of the option award.
Determination of the Fair Value of Stock-Based Compensation Grants
The determination of the fair value of stock-based compensation arrangements is affected by a number of variables, including estimates of the expected stock price volatility, risk-free interest rate and the expected life of the award. We value stock options using the Black-Scholes option-pricing model, which was developed for use in estimating the fair value of traded options that are fully transferable and have no vesting restrictions. Black-Scholes option-pricing model and other option valuation models require the input of highly subjective assumptions, including the expected stock price volatility. If we made different assumptions, our stock-based compensation expenses, net loss, and net loss per common share could be significantly different. We determine that the fair value of common stock as the closing price of the Company’s common stock as reported by NASDAQ on the option grant date.
The following summarizes the assumptions used for estimating the fair value of stock options granted during the periods indicated:
Year Ended December 31,
Weighted-average grant date fair value per share $ 12.23 $ 9.36 $ 4.38
Dividend yield — — —
We have assumed no dividend yield because we do not expect to pay dividends in the foreseeable future, which is consistent with our past practice. The risk-free interest rate assumption is based on observed interest rates for U.S. Treasury securities with maturities consistent with the expected life of our stock options. The expected life represents the period of time the stock options are expected to be outstanding and is based on the simplified method when the stock option includes “plain vanilla” terms. Under the simplified method, the expected life of an option is presumed to be the midpoint between the vesting date and the end of the agreement term. We used the simplified method due to the lack of sufficient historical exercise data to provide a reasonable basis upon which to otherwise estimate the expected life of the stock options. For stock options that did not include “plain vanilla” terms, we used the contractual life of the stock option as the expected life. Such stock options consisted primarily of options issued to our board of directors that were immediately vested at issuance. Expected volatility is based on historical volatilities for publicly traded stock of comparable companies over the estimated expected life of the stock options. The Company accounts for forfeitures as they occur rather than on an estimated basis.
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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, with the exception of certain Canada deferred tax assets that will reverse in a period in which they may be carried back, 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 year ended December 31, 2020, 2019 and 2018 are summarized as follows (in thousands):
Year Ended December 31,
Revenue
Manufacturing revenue $ 18,000 $ - $ -
Clinical Trial revenue 25,975 - -
Other revenue 22 - -
Total revenue $ 43,997 $ - $ -
We had not generated any revenue before the year 2020. Under the clinical manufacturing agreement with Janssen, for the year ended December 31, 2020, we have recorded $18.0 million as manufacturing revenue. Clinical trial revenue for the year ended December 31, 2020 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 $20.0 million pass-through revenue for two ongoing trials and $6.0 million mark-up revenue. The other revenue $22 thousand is generated from the grant of a non-exclusive license.
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Cost of Goods Sold
Cost of goods sold during the year ended December 31, 2020,2019 and 2018 are summarized as follows (in thousands):
Year Ended December 31,
Cost of goods sold
Manufacturing cost $ 12,859 $ - $ -
Clinical trial cost 21,689 - -
Total cost of goods sold $ 34,548 $ -
We had not incurred any cost of goods sold before the year 2020. The manufacturing cost for the year ended December 31, 2020 represents period expense for manufacturing, quality assurance and quality control departments. Clinical trial cost for the year ended December 31, 2020 is $21.7 million, which is the pass-through expenses for two ongoing trials and other related clinical trial department expenses.
Expenses
Research and Development
Research and Development costs are summarized as follows (in thousands):
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.
Research and development expenses decreased 60% to $9.5 million for year ended December 31, 2020 compared to $24.1 million for the year ended December 31, 2019. The decrease was mainly due to classification of certain expenses incurred in connection with the Janssen Transaction to cost of goods sold rather than research and development expense. Manufacturing department expenses related to the clinical manufacture agreement we entered into as part of the Janssen Transaction, as well as expenses pursuant to the Transition Services Agreement entered into as part of the Janssen Transaction were classified as cost of goods sold. Stock–based compensation expenses increased due to the new grants to employees and Chief Executive Officer in the fourth quarter of 2019.
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Research and development expenses increased 53% to $24.1 million for year ended December 31, 2019 compared to $15.7 million for the year ended December 31, 2018. The research and development expenses increase for the year ended December 31, 2019 compared to the year ended December 31, 2018 was caused by the increase of laboratory and manufacturing supplies for the clinical trial opened in the third quarter of the year 2019. Labor costs also increased due to the bonus to employees and growing size of the research and development workforce. In addition, there was a $2.7 million increase in clinical trial and sponsored research expense due to the phase II trials opened in the third quarter of the year 2019.
General and Administrative
General and administrative costs are summarized as follows (in thousands):
General and administrative expenses increased 155% to $18.2 million for the year ended December 31, 2020 compared to $7.1 million for the year ended December 31, 2019. The stock-based compensation increase was mainly due to the new grants to employees and Chief Executive Officer in the fourth quarter of 2019. Salaries and related expense increased due to the bonus to the Chief Executive Officer in June 2020. Also, professional fees increased $1.0 million mainly due to professional and legal fees related to the tender offer completed in February 2020.
General and administrative expenses increased 36% to $7.1 million for the year ended December 31, 2019 compared to $5.3 million for the year ended December 31, 2018. The increase was mainly due to a $0.8 million increase of Share-based compensation to Board members and the Chief Executive Officer. Also, professional fees increased $0.9 million mainly due to professional and legal fees related to the Janssen Transaction. Salaries and related expenses increased in 2019 due to the bonus to general and administrative workforce.
Other Income
The following table summarizes other income (in thousands):
Year Ended December 31,
Gain from Janssen Transaction - 750,000 -
Other income (loss) (503 ) 10 4
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The interest income for the year ended December 31, 2020 and 2019 was mainly from the interest generated from the Company’s Canadian bank account and escrow account. The other expense for the year ended December 31, 2020 was a charitable donation. Foreign exchange gain (loss) was mainly due to the fluctuation between the US dollar and the Euro, and the US dollar and the Canadian dollar in the year ended December 31, 2020 compared to 2019.
Other income for the year ended December 31, 2019 includes a $750 million gain from the business purchase agreement with Janssen in December. The $564 thousand of interest income for the year ended December 31, 2019 is mainly from the interest generated from the Company’s Canadian bank account. Foreign exchange loss was mainly due to Canada local currency for income tax purposes different than its functional currency and the fluctuation between US dollar and Euro in the year ended December 31, 2019 compared to the year ended December 31, 2018.The $400 thousand of interest income for the year ended December 31, 2018 is mainly from the interest generated from the Company’s Canadian bank account. Foreign exchange loss was mainly due to the fluctuation between US dollar and Euro in the year ended December 31, 2018.
Income Taxes
Overall income tax benefit for the year ended December 31, 2020 is $1.6 million primarily due to an estimated $1.8 million refund of prior year Canadian taxes through a carryback of current year losses and a $155 thousand deferred tax benefit in Canada. In addition, there is additional 2020 current income tax expense of $261 thousand in the United States and $108 thousand in Germany deferred tax expense. Income tax expense for the year ended December 31, 2019 is $49.8 million due to the income generated from the Janssen Transaction. It includes $1.8 million United State income taxes, $48.0 million Canadian income taxes and $13 thousand deferred tax benefit in Canada. No income tax expense was recorded for the year ended December 31, 2018 due to losses and a full valuation allowance in all jurisdictions.
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 December 31, 2020, we have funded our operations principally through private placements and public offerings of equity securities, which have provided aggregate cash proceeds of approximately $110.2 million. We received $675 million in cash proceeds from the Janssen Transaction in the year ended December 31, 2019, and $44 million revenue from the manufacturing agreement and clinical trial agreement in the year ended December 31, 2020. We will receive $75 million cash from the same transaction in 2021. During the next year, we expect that the revenues from Janssen Transaction will generate enough cash for our research and development activities. At December 31, 2020, we had cash and cash equivalents of $237.4 million as compared to cash and cash equivalents of $714.6 million at December 31, 2019. The following table summarizes our sources and uses of cash (in thousands):
Year Ended December 31,
Effect of foreign exchange rate on cash and cash equivalents 1,372 149 513
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During the years ended December 31, 2020, 2019 and 2018, our operating activities used net cash of $65.1 million, $18.3 million, and $16.5 million respectively. The use of net cash in each of these periods primarily resulted from our net incomes and losses and the payment for income tax. The increase in the year ended December 31, 2020 is mainly caused by the 2019 income tax payment $54.1 million due to our net income for that year. Also, we generated revenue from Janssen Transaction in the year 2020. The increase in net loss from operations for the year ended December 31, 2019 as compared to the year ended December 31, 2018 was primarily due to the increase of laboratory and manufacturing supplies.
During the years ended December 31, 2020, 2019 and 2018, our investing activities changed net cash of $3.7, $674.8 million, and $0.1 million, respectively. The decrease for the year ended December 31, 2020 compared to the year ended December 31, 2019 was primarily due to no $675 million gain from the Janssen Transaction in the year 2019. The increase for the year ended December 31, 2019 as compared to the year ended December 31, 2018 was due to the $675 million gain from the Janssen Transaction.
During the year ended December 31, 2020, our financing activities used net cash proceeds of $409.7 million and during the years ended December 31,2019 and 2018, our financing activities provided $42.1 million, and $0.2 million, respectively. During the year ended December 31, 2020, employees exercised stock options to purchase a total of 1.8 million shares of our common stock for approximately $10.3 million in net proceeds. On February 19, 2020, we used approximately $420 million to purchase 14,000,000 common shares at a price of $30.00 per share, relating to the tender offer completed in February 2020. During the year ended December 31, 2019, we sold 4.8 million shares under the Common Shares Purchase Agreement with Piper Jaffray & Co for net proceeds of approximately $38 million. Employees exercised stock options to purchase a total of 771 thousand shares of our common stock for approximately $3.8 million in net proceeds. During the year ended December 31, 2018, employees exercised stock options to purchase a total of 161 thousand shares of common stock for a total of approximately $0.2 million in net proceeds.
We expect to continue to incur operating losses in the future. Although we are currently receiving clinical manufacturing revenue and clinical trial service revenue from Janssen, we will not receive any product revenue until a drug candidate has been approved by the FDA, EMA or similar regulatory agencies in other countries and successfully commercialized. Further, the clinical manufacturing agreement will expire on December 31, 2021, after which we do not expect to receive any additional revenue under that agreement. As of December 31, 2020, our principal sources of liquidity were our cash and cash equivalents, which totaled approximately $237.4 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 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE OF 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.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Financial Statements
Report of Independent Registered Public Accounting Firm 49
Consolidated Balance Sheets 51
Consolidated Statements of Operations 52
Consolidated Statements of Comprehensive Loss 53
Consolidated Statements of Shareholders’ Equity 54
Consolidated Statements of Cash Flows 55
Notes to Consolidated Financial Statements 56
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Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of XBiotech Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of XBiotech Inc. (the Company) as of December 31, 2020 and 2019, the related consolidated statements of operations, comprehensive income (loss), shareholders' equity and cash flows for each of the three years in the period ended December 31, 2020, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2020, in conformity with U.S. generally accepted accounting principles.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgements. The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
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Accrued Clinical Trial Cost
/s/ Ernst & Young LLP
We have served as the Company‘s auditor since 2005.
Austin, Texas
March 16, 2021
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XBiotech Inc.
Consolidated Balance Sheets
(in thousands, except share data)
Assets
Current assets:
Accounts receivable 4,113 -
Escrow receivable 75,063 -
Deferred cost of goods sold 2,177 -
Income tax receivable 6,574 -
Prepaid expenses and other current assets 582 1,669
Escrow receivable - 75,000
Liabilities and shareholders’ equity
Current liabilities:
Contract liabilities - 4,500
Long-term liabilities:
Shareholders’ equity:
Accumulated other comprehensive loss 1,266 (106 )
Total liabilities and shareholders’ equity $ 353,744 $ 816,877
See accompanying notes.
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XBiotech Inc.
Consolidated Statements of Operations
(in thousands, except share and per share data)
Year Ended December 31,
Revenue:
Manufacturing revenue $ 18,000 $ - $ -
Clinical trial service revenue 25,975 - -
Other revenue 22 - -
Cost of goods sold:
Manufacturing cost 12,859 - -
Clinical trial cost 21,689 - -
Total cost of goods sold 34,548 - -
Gross margin 9,449 - -
Operating expenses:
Other income (loss):
Gain from Janssen Transaction - 750,000 -
Other income (loss) (503 ) 10 4
Net income (loss) per share—basic $ (0.36 ) $ 17.17 $ (0.59 )
Net income (loss) per share—diluted $ (0.36 ) $ 14.44 $ (0.59 )
See accompanying notes.
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XBiotech Inc.
Consolidated Statements of Comprehensive Income (Loss)
(in thousands)
Year Ended December 31,
Foreign currency translation adjustment 1,372 149 513
See accompanying notes.
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XBiotech Inc.
Consolidated Statements of Shareholders' Equity
(in thousands)
Number of Common Stock Accumulated Other Comprehensive Retained
Shares Amount Income (Loss) Earnings Total
Foreign currency translation adjustment - - 513 - 513
Issuance of common stock, net of issuance cost 300 - - - -
Issuance of common stock under stock option plan 161 401 - - 401
Subscription receivable - (200 ) - - (200 )
Share-based compensation expense - 1,660 - - 1,660
Foreign currency translation adjustment - - 149 - 149
Issuance of common stock under stock option plan 771 3,835 - - 3,835
Subscription receivable - (102 ) - - (102 )
Collection of stock subscription receivable - 302 - - 302
Share-based compensation expense - 3,358 - - 3,358
Foreign currency translation adjustment - - 1,372 - 1,372
Issuance of common stock under stock option plan 1,785 10,276 - - 10,276
Share-based compensation expense - 12,581 - - 12,581
See accompanying notes.
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XBiotech Inc.
Consolidated Statements of Cash Flows
(in thousands)
Year Ended December 31,
Operating activities
Adjustments to reconcile net loss to net cash used in operating activities:
Gain from Janssen Transaction - (675,000 ) -
Deferred tax asset (90 ) (444 ) -
Changes in operating assets and liabilities:
Account receivable (4,113 ) - -
Income tax receivable (6,574 ) - -
Deferred cost of goods sold (2,177 ) - -
Prepaid expenses and other current assets 1,087 (472 ) 372
Deferred rent - (3 ) (15 )
Investing activities
Purchase of property and equipment (3,727 ) (204 ) (122 )
Cash received from Janssen Transaction - 675,000 -
Financing activities
Issuance of common stock and warrants, net (420,000 ) 38,062 -
Issuance of common stock under stock option plan 10,276 3,732 201
Collection of subscription receivable - 302 -
Effect of foreign exchange rate on cash and cash equivalents 1,372 149 513
Supplemental Information:
Accrued purchases of property and equipment 676 - -
Subscription receivable - 302 200
Income tax paid 54,087 - -
See accompanying notes.
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XBiotech Inc.
Notes to Consolidated Financial Statements
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 Switzerland AG, a wholly-owned subsidiary of the Company, was incorporated in Zug, Switzerland in August 2010. XBiotech Japan K.K., a wholly-owned subsidiary of the Company, was incorporated in Tokyo, Japan in March 2013. 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.
In 2005, the Company began to develop a new framework for commercial manufacturing, using technology that required less capital, fewer operators and provided greater flexibility than standard industry practices.
With the manufacturing capability to produce its True HumanTM antibody therapy, in 2010, the Company began a clinical trial program. The first clinical trial program at MD Anderson Cancer Center began treating the sickest cancer patients irrespective of tumor type. Soon thereafter, the Company used the same antibody therapy in various clinical studies at treatment centers around the United States (U.S.) and abroad to investigate the antibody effect in patients that had vascular disease, leukemia, type 2 diabetes, psoriasis or acne.
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 $237.4 million at December 31,2020, will enable the Company to achieve several major inflection points, including potential new clinical studies with its lead product candidate. The Company expect to have sufficient cash through one year from the report issuance date.
2. Significant Accounting Policies
Basis of Presentation
These consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States (US GAAP).
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.
Prior to its initial public offering on April 15, 2015, the Company utilized significant estimates and assumptions in determining the fair value of its common stock. The board of directors determined the estimated fair value of the Company’s common stock based on a number of objective and subjective factors, including the prices at which the Company sold shares of its common stock to third parties and external market conditions affecting the biotechnology industry sector. After the initial public offering, the fair market value is calculated by using the closing price of the Company’s common stock as reported by NASDAQ.
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Revenue
Revenue from 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. 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 up to two years, though Janssen may terminate the contract for any reason with 60-days’ notice. Quantities are estimated for the two-year period, but are only binding on the Company and Janssen for the next four months of each period, other than by the 60-day notice termination. If, during any calendar quarter, the Company fails to deliver all of the Clinical Products ordered by Janssen, subject to our agreed upon capacity, the next quarter’s fee is reduced proportionately for the shortfall volume. Negative adjustments may also occur for delivered clinical products that do not meet quality specifications, though the Company expects meet these standards.
Clinical Trial Service Revenue
On December 30, 2019, the Company entered into a Transition Services Agreement with Janssen. Pursuant to the Transition Services Agreement, the Company has agreed to continue operational management, on a fee-for-service basis, of two ongoing clinical trials related to bermekimab. The arrangement may continue as long as the clinical trials are ongoing; however, Janssen may terminate the contract at any time with 30 days notice.
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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 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 makes estimates and judgments in determining the need for a provision for income taxes, including the estimation of its taxable income or loss for the full fiscal year. The Company has accumulated significant deferred tax assets that reflect the tax effects of net operating losses and tax credit carryovers and temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Realization of deferred tax assets is dependent upon future earnings. The Company is uncertain about the timing and amount of any future earnings. Accordingly, the Company offsets certain deferred tax assets with a valuation allowance. The Company may in the future determine that certain deferred tax assets more-likely-than-not be realized, in which case the Company will reduce its valuation allowance in the period in which such determination is made. If the valuation allowance is reduced, the Company may recognize a benefit from income taxes in its statement of operations in that period.
Income taxes are recorded in accordance with ASC 740,Accounting for Income Taxes (“ASC 740”), which provides for deferred taxes using an asset and liability approach. The Company recognizes deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. The Company determines its deferred tax assets and liabilities based on differences between financial reporting and tax bases of assets and liabilities, which are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. Valuation allowances are provided if based upon the weight of available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized.
ASC 740 clarifies the accounting for uncertainty in income taxes recognized in the financial statements and provides that a tax benefit from an uncertain tax position may be recognized when it is more likely than not that the position will be sustained upon examination, including resolutions of any related appeals or litigation processes, based on the technical merits. This interpretation also provides guidance on measurement, derecognition, classification, interest and penalties, accounting in interim periods and disclosure. The Company’s policy for recording interest and penalties associated with uncertain tax positions is to record such items as a component of tax expense.
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, which 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. 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.
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Share-based compensation expense recognized for the years ended December 31, 2020, 2019 and 2018 was included in the following line items on the Consolidated Statements of Operations (in thousands).
Year Ended December 31,
Cost of goods sold 1,486 - -
The fair value of each option is estimated on the date of grant using the Black-Scholes method with the following assumptions:
Year Ended December 31,
Weighted-average grant date fair value per share $ 12.23 $ 9.36 $ 4.32
Dividend yield — — —
Due to the adoption of ASU No.2016-09, “Stock Compensation” on January 1, 2017, the Company accounts for forfeitures as they occur rather than on an estimated basis.
Cash and Cash Equivalents
The Company considers highly liquid investments with a maturity of 90 days or less when purchased to be cash equivalents. Cash and cash equivalents consisted primarily of cash on deposit in U.S., German, Swiss and Canadian banks. Cash and cash equivalents are stated at cost which approximates fair value.
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.
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Fair Value Measurements
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 December 31, 2020 and 2019, 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 December 31, 2020 and 2019, 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 (years) 7
● Office equipment (years) 5
● Scientific equipment (years) 5
● Vehicles (years) 5
● Mobile facility (years) 27.5
● Building (years) 39
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 December 31, 2020.
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.
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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 Income/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. The Company has evaluated subsequent events through the date of filing this Form 10-K.
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.
In February 2016, the FASB established Topic 842, Leases, by issuing Accounting Standards Update (ASU) No.2016-02, which supersedes ASC 840, Leases, and requires lessees to recognize leases on-balance sheet and disclose key information about leasing arrangements. Topic 842 was subsequently amended by ASU No.201801, Land Easement Practical Expedient for Transition to Topic 842; ASU No.2018-10, Codification Improvements to Topic 842, Leases; and ASU No.201811, Targeted Improvements. Topic 842, as amended (the "new lease standard") establishes a right-of-use model (ROU) that requires a lessee to recognize a ROU asset and lease liability on the balance sheet for all leases with a term longer than 12 months. Leases will be classified as finance or operating, with classification affecting the pattern and classification of expense recognition in the income statement. The effective date of the new guidance is for the Company’s first quarter of fiscal year 2019. The FASB has approved an optional, alternative method to adopt the lease standard by recognizing a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. The Company adopted the new standard effective January 1, 2019, using the alternative method. The Company did not have a cumulative adjustment impacting retained earnings. Adoption of the lease standard did not have a material impact on the Company’s consolidated financial statements.
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In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, which simplifies the accounting for income taxes by removing certain exceptions to the general principles in Topic 740. The amendments also improve consistent application of and simplify GAAP for other areas of Topic 740 by clarifying and amending existing guidance. The standard will become effective for interim and annual periods beginning after December 15, 2020, with early adoption permitted. The Company early adopted ASU 2019-12 as of January 1, 2020. The adoption of ASU 2019-12 resulted in no material impact to the Company's financial statements.
3.Revenue
On December 30, 2019, the Company entered into a Transition Services Agreement with Janssen. Pursuant to the Transition Services Agreement, the Company has agreed to continue operational management, on a fee-for-service basis, of two ongoing clinical trials related to bermekimab. In consideration for all of the services to be provided, for each calendar quarter during the term of such agreement, Janssen shall pay the Company a fee for such quarter equal to all pass-through costs incurred by the Company during such calendar quarter, exclusive of the allocation of certain internal costs that are not considered pass-through pursuant to the agreement, plus a markup of 30%. For the year ended December 31, 2020, the Company has recorded $18.0 million of manufacturing revenue and $26.0 million of clinical trial service revenue.
In the year 2020, we received $18.0 million in payments from Janssen based on billing schedules established in the contract on December 30, 2019 for drug manufacturing and $21.9 million in payments from Janssen for clinical trial service.
4. Property and Equipment and Building Construction in Progress
Property and equipment consisted of the following as of December 31,2020 and 2019 (in thousands):
Computer and office equipment $ 557 $ 482
Leasehold improvements - 802
Depreciation expenses related to property and equipment amounted to approximately $2.2 million, $2.4 million, and $2.4 million for the years ended December 31,2020,2019 and 2018, respectively. Construction in process is related to research and development and manufactory equipment. Depreciation expense is recorded to cost of goods sold, research and development and general and administrative expense line items on the Consolidated Statements of Operations (in thousands).”
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5. Accrued Expenses
Accrued expenses consist of the following as of December 31,2020, and 2019 (in thousands):
Accrued compensation and related expenses 443 337
Accrued professional fees 174 566
Accrued clinical trial expenses 497 3,082
6. Common Stock
Pursuant to its Articles, the Company has an unlimited number of shares available for issuance with no par value.
During June 2019, under the Common Shares Purchase Agreement with Piper Jaffray & Co., the Company sold 4.8 million shares of common stock at a price $8.25 per share for total net proceeds of $37.5 million, including the capitalized underwriter’s commission of $2.3 million and other related fees of $0.2 million.
From January through December 2019, 771 thousand shares of common stock were issued upon the exercise of stock options at a price of $2.50 to $15.00 per share for total proceeds of $3.8 million.
On January 4, 2020, XBiotech announced that it had commenced a “modified Dutch auction” tender offer to purchase up to $420.0 million of its common shares, or such lesser number of common shares as are properly tendered and not properly withdrawn, at a price not less than $30.00 nor greater than $33.00 per common share, to the seller in cash. The tender offer expired on February 12, 2020.
On February 19, 2020, the Company announced the final results of its “modified Dutch Auction” tender offer. The Company accepted for purchase 14,000,000 shares of its common stock, $0.01 par value per share, at a price of $30 per share, for an aggregate cost of approximately $420.0 million, excluding fees and expenses related to the tender offer. These shares represented approximately 32.67 percent of the shares outstanding. $6.99 per share or total of $97.9 million of these shares repurchases have been classified to reduce common stock and $23.34 per share or total of $322.1 million of these shares repurchases have been classified to reduce retained earnings in the accompanying consolidated balance sheet as of December 31, 2020.
From January through December 31, 2020, 1.8 million shares of common stock were issued upon the exercise of stock options at a price of $2.71 to $19.09 per share for total proceeds of $10.3 million.
7. 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.
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.
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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
The weighted average fair value of the options issued to directors, employees and consultants during the fiscal years ended December 31,2020,2019 and 2018, was $12.23, $9.36 and $2.97, respectively. Options with an intrinsic value of $(6.10), $(10.25) and $(2.22), became vested during 2020,2019 and 2018, respectively. The total intrinsic value of options exercisable and total options outstanding on December 31,2020 and December 31, 2019 was $30.0 million and $42.4 million respectively. The total fair value of options vested during the years ended December 31,2020,2019 and 2018 was $12.9 million, $2.0 million, and $1.7 million, respectively.
As of December 31, 2020, there was approximately $6.3 million of unrecognized compensation cost, related to stock options granted under the Plan which will be amortized to stock compensation expense over the next 1.85 years.
8. Net Income/Loss Per Share
The following summarizes the computation of basic and diluted net income(loss) per share for the years ended December 31, 2020, 2019 and 2018 (in thousands, except share and per share data):
Year Ended December 31,
Net income (loss) per share—basic $ (0.36 ) $ 17.17 $ (0.59 )
Net income (loss) per share—diluted $ (0.36 ) $ 14.44 $ (0.59 )
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The following potentially dilutive securities outstanding, prior to the use of the treasury stock method or if-converted method, have been excluded from the computation of diluted weighted-average common shares outstanding, because including them would have had an anti-dilutive effect due to the losses reported.
Year Ended December 31,
Warrants to purchase common stock - - -
9. Income Taxes
The components of income before income taxes are as follows (in thousands):
(In thousands) Years Ended December 31,
The components of the provision for income taxes are as follows for the years ended December 31,2020,2019, and 2018 (in thousands):
Other Foreign - - -
Deferred
United States - - -
Other Foreign 108 - -
Total income tax expense $ (1,606 ) $ 49,824 $ -
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The provision for income taxes differs from the amount computed by applying the Canada statutory rate to pre-tax income as follows for the years ended December 31,2020,2019, and 2018:
Income tax benefit computed at federal tax rate 27.0 % 27.0 % 26.0 %
Capital gains and foreign exchange 1.2 % (13.0 )% -
Change in valuation allowance (37.3 )% (6.3 )% (20.3% )
Tax Credits generated 34.5 % - -
Prior year adjustments 1.7 % (0.4 )% (2.3% )
Changes in Uncertain Tax Positions (7.7 )% 0.2 % -
Stock compensation and other (6.9 )% (0.6 )% (3.4 )%
On December 22, 2017, the President of the United States signed into law the Tax Cuts and Jobs Act, or TCJA, tax reform legislation. TJCA significantly changes U.S. tax law by, among other things, lowering U.S. corporate income tax rates and implementing a territorial tax system. TCJA reduced the U.S corporate tax rate from 35% to 21%, effective January 1, 2018.
In connection with TJCA, the Company remeasured certain deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future, which is generally 21%. The remeasurement of the Company’s’ deferred tax balance was offset by application of its valuation allowance. The Company applied the guidance in SAB 118 when accounting for the enactment-date effects of the Act in 2017 and throughout 2018.
Significant components of the Company’s deferred tax assets and liabilities as of December 31,2020,2019, and 2018 are as follows (in thousands):
Deferred tax assets:
Foreign Exchange 950 - -
Deferred rent - - 1
Deferred tax liabilities:
Foreign exchange 108 - -
Valuation allowance for deferred tax assets (7,585 ) (2,794 ) (48,442 )
Net deferred tax asset including valuation allowance $ 533 $ 443 $ —
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As of December 31,2020,2019, and 2018, the Company had unused net operating losses of approximately $0.1 million each year in both Switzerland and Japan, approximately $0, $0, and $141.7 million in Canada, and $0, $0, and $30.9 million in the U.S., respectively, available to reduce taxable income of future years. The tax benefit of net operating losses begins to expire in 2022 in Switzerland and Japan.
As of December 31,2020,2019, and 2018, the Company had unused research and other tax credits of approximately $4.0 million, $0, and $3.1 million in the U.S. available to reduce tax in future years. The tax benefit of the credits begins to expire in 2029 if unused.
The valuation allowance increased by $4.8 million during the year ended December 31, 2020 primarily due to stock compensation and the generation of additional tax credit carryforwards. The valuation allowance decreased by $45.6 million during the year ended December 31, 2019 due to the usage of substantially all net operating losses and tax credit carryforwards as a result of the Janssen Transaction.
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. With the exception of certain items that will generate cash refunds through loss carryback claims in the next two years, the Company has established a full valuation allowance in the U.S., Switzerland, Japan and a partial valuation allowance on certain deferred tax assets in Canada due to uncertainties regarding the realization of these deferred tax assets based upon the Company’s lack of earnings history, and the Company’s expectation to continue incurring significant expenses for the foreseeable future.
The Company has not provided Canadian income taxes or withholding taxes on the undistributed earnings of the U.S. subsidiary or the excess of the financial reporting over the tax basis of our investment in the U.S. subsidiary as of December 31, 2020 because these amounts are considered to be indefinitely reinvested in the U.S. The Company intends to use available cash to expand our research and development and manufacturing facilities, and also fund the development of our manufacturing processes. The amount of the outside basis difference that is indefinitely reinvested is $7.1 million as of December 31, 2020. Determination of the amount of any unrecognized deferred income tax liability on this temporary difference is not practicable.
The Company applies the accounting guidance in ASC 740 related to accounting for uncertainty in income taxes. The Company’s reserves related to taxes are based on a determination of whether, and how much of, a tax benefit taken by the Company in its tax filings or positions is more likely than not to be realized following resolution of any potential contingencies present related to the tax benefit. A reconciliation of the beginning and ending amount of unrecognized tax benefits as of December 31,2020,2019 and 2018 is as follows (in thousands):
Additions based on tax positions related to the current year 49 46 0
Additions for tax positions of prior years 955 1,010 0
Reductions for tax positions of prior years 0 0 0
Settlements 0 0 0
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The Company recognized interest and penalties related to unrecognized tax benefits of $27 thousand, $0, and $0 are included as a component of income tax expense for the years ended December 31, 2020, 2019, and 2018, respectively. As of December 31, 2020, 2019, and 2018, there are $1.1 million, $1.1 million, and $0, respectively, of unrecognized tax benefits that if recognized would affect the annual effective tax rate. None of the positions are expected to significantly increase or decrease within 12 months.
The Company files federal income tax returns in Canada, U.S, Switzerland, Germany, and Japan. The Company also files income tax returns in the state of Texas in the U.S. The statute of limitations for assessment by local taxing authorities is open for tax years ended after December 2012 and all years since 2008 for the U.S. remain open until such time the 2019 tax year statute of limitation closes. There are currently no federal or state income tax audits in progress.
10. Selected Quarterly Financial Data (Unaudited)
Selected Quarterly Financial Data (Unaudited) for the year ended December 31, 2020 and 2019 is presented below (in thousands except per share data):
2020 First Quarter Second Quarter Third Quarter Fourth Quarter
Net loss per share—basic and diluted (0.00 ) (0.24 ) (0.09 ) (0.06 )
2019 First Quarter Second Quarter Third Quarter Fourth Quarter
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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES.
Management's Evaluation of our Disclosure Controls and Procedures
As of the end of the year covered by this Annual Report on Form 10-K, 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. 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.
Management’s Annual Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act). We conducted an assessment of the effectiveness of our internal control over financial reporting based on the criteria set forth in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework). Based on our assessment, we have concluded that our internal control over financial reporting was effective as of December 31, 2020, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with GAAP.
Changes in Internal Control Over Financial Reporting
There was no change in our internal control over financial reporting that occurred during the fourth quarter of the year ended December 31, 2020 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.
ITEM 9B. OTHER INFORMATION
None.
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PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
We incorporate by reference the information required by this Item with respect to directors and the Audit Committee from the information under the caption “ELECTION OF DIRECTORS,” including in particular the information under “Nominating and Corporate, Governance and Review Committee” , “Audit Committee”, “Report of the Audit Committee & the Board of Directors”, “Code of Ethics” and “Delinquent Section 16(a) Reports” and “EXECUTIVE OFFICERS” contained in our definitive Proxy Statement (the “Proxy Statement”), which we will file on or about April 29, 2021 with the Securities and Exchange Commission in connection with the solicitation of proxies for our 2021 Annual Meeting of Stockholders to be held on June 18, 2021.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated herein by reference to the information contained under the sections captioned “EXECUTIVE COMPENSATION”, “DIRECTOR COMPENSATION”, “Compensation Committee Interlocks and Insider Participation,” “Employment Arrangements” and “Compensation Committee Report” of the Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The information required by this item will be set forth under the heading “Security Ownership of Certain Beneficial Owners and Management" in our Proxy Statement and is incorporated herein by reference.
The information required by Item 201(d) of Regulation S-K will be set forth in the section headed “Equity Compensation Plan Information” in our Proxy Statement and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
The information required by this item will be set forth in the section headed “Transactions with Related Persons” in our Proxy Statement and is incorporated herein by reference.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The information required by this item will be set forth in the section headed “Ratification of Selection of Independent Registered Public Accounting Firm” in our Proxy Statement and is incorporated herein by reference.
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PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
Financial Statements
See Index to Consolidated Financial Statements under Item 8 of Part II.
Financial Statement Schedules
None
EXHIBIT INDEX
Exhibit Number Description
71
72
21.1* List of subsidiaries
23.1* Consent of Ernst & Young LLP
104 Cover Page Interactive Data File (embedded within the iXBRL document).
+ Indicates management contract or compensatory plan
* Filed herewith
ITEM 16.FORM 10–K SUMMARY
Not applicable.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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 on March 16, 2021.
XBIOTECH INC.,
/S/ JOHN SIMARD
Name: John Simard
Title: President and Chief Executive Officer
(Principal Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature and Title Date
John Simard, Chief Executive Officer (Principal Executive Officer) and Director
/S/ W. THORPE MCKENZIE March 16, 2021
W. Thorpe McKenzie, Director
/S/ Jan-Paul Waldin March 16, 2021
Jan-Paul Waldin, Director
/S/ Donald MacAdam March 16, 2021
Donald MacAdam, Director
Peter Libby, Director
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