XBIT US Equity☆

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 audited consolidated financial statements for the year ended December 31, 2023 and related notes thereto, which have been prepared in accordance with U.S. GAAP, 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 within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and is subject to the safe harbor created by those sections. 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. For more information, see “Cautionary Statement About Forward-Looking Statements.” In particular, we encourage you to review the risks and uncertainties described in “Risk Factors” in this annual report on Form 10-K. These forward-looking statements are made as of the date of this report, and we do not intend, and do not assume any obligation, to update these forward-looking statements, except as required by law. All dollar amounts stated herein are in U.S. dollars unless specified otherwise.

34

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.

Following the Janssen Transaction in December 2019, the tender offer in February 2020, and the dividends paid in July 2021, retained accumulated deficit earnings as of December 31, 2023 was ($52.3) million. We had a net loss of $24.6 million for the year ended December 31, 2023, compared to a net loss of $32.9 million for the year ended December 31, 2022. During the fiscal year of 2024, we don’t expect to generate any revenues. 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. In addition to these research and development expenses, we expect general and administrative costs to increase, particularly in consideration of current inflationary trends. We will need to generate significant revenues to achieve or sustain profitability, and we may never do so. As of December 31, 2023, we had 82 employees.

Components of Results of Operations

Revenues

Prior to receiving payments under the clinical manufacturing agreement entered in connection with the Janssen Transaction, we had not generated any revenue. Under the clinical manufacturing agreement, we manufactured 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 continued to manufacture Bermekimab through November 2022. The contract terminated in November 2022. 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.

Operating Expenses

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, share-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.

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.

35

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, 2023, we have recorded total research and development expenses, including share-based compensation, of $311.9 million. Our total research and development expenses for the year ended December 31, 2023 was $32.8 million, compared to $31.5 million the year ended December 31, 2022. Share-based compensation accounted for $2.8 million for the year ended December 31, 2023 and $3.6 million for the year ended December 31, 2022.

Research and development expenses as a percentage of total operating expenses was 88% for the year ended December 31, 2023, and 83% for the year ended December 31, 2022. The percentages, excluding share-based compensation, were 88% for the year ended December 31, 2023, and 85% for the year ended December 31, 2022.

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 $4.7 million for the year ended December 31, 2023, and $6.3 million for the year ended December 31, 2022. Share-based compensation accounted for $0.5 million for the year ended December 31, 2023, and $1.4 million for the year ended December 31, 2022.

General and administrative expenses as a percentage of total operating expenses was 12% for the year ended December 31, 2023, and 17% for the year ended December 31, 2022. The percentages, excluding share-based compensation, were 12% for the year ended December 31, 2023, and 15% for the year ended December 31, 2022.

Critical Accounting Estimates

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.

Share-Based Compensation

Stock-based awards are measured at fair value at each grant date. We recognize share-based compensation expenses ratably over the requisite service period of the option award.

36

Determination of the Fair Value of Share-Based Compensation Grants

The determination of the fair value of share-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 share-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 $ 2.89 $ 4.92

Risk-free interest rate 3.3%-4.6 % 1.5%-4.1 %

Dividend yield — —

With the exception of the dividend paid in 2021, we have assumed no dividend yield because we do not expect to pay dividends in the foreseeable future. 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.

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.

37

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.

Results of Operations

Revenue

Revenue during the years ended December 31, 2023, and 2022 are summarized as follows (in thousands):

Year Ended December 31,

Revenue

Manufacturing revenue $ - $ 4,010

Clinical Trial revenue - -

Total revenue $ - $ 4,010

We had not generated any revenue before the year 2020. Under the clinical manufacturing agreement with Janssen and the addendum, for the year ended December 31, 2022, we have recorded $4.0 million as manufacturing revenue.

Cost of Goods Sold

Cost of goods sold during the years ended December 31, 2023, and 2022 are summarized as follows (in thousands):

Year Ended December 31,

Cost of goods sold

Manufacturing cost $ - $ 651

Clinical trial cost - -

Total cost of goods sold $ - $ 651

We had not incurred any cost of goods sold before the year 2020.The manufacturing cost for the year ended December 31, 2022, represents period expense for manufacturing, quality assurance and quality control departments.

38

Expenses

Research and Development

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

Year Ended December 31, Increase % Increase

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 increased 4% to $32.8 million for the year ended December 31, 2023 compared to $31.5 million for the year ended December 31, 2022. The rise was mainly due to the increase in clinical trials activities, related to the new study being initiated in the second quarter of 2023. The increase of salaries and related expenses was mainly due to the $4.5 million bonus to the Chief Executive Officer in June 2023 compared to the $3.8 million bonus in June 2022, in which 85% was allocated to research and development expenses in 2023 compared to 60% in 2022. In addition, the decrease of laboratory and manufacturing supplies was primary caused by a reduction in raw material purchasing for clinical trial drug manufacturing.

General and Administrative

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

Year Ended December 31, Increase % Increase

39

General and administrative expenses decreased 26% to $4.7 million for the year ended December 31, 2023 compared to $6.3 million for the year ended December 31, 2022. The decrease was primarily driven by the salaries and related expenses. The bonus to the Chief Executive Officer in June 2023 was $4.5 million compared to the $3.8 million bonus in June 2022, in which 15% was allocated to general and administrative expenses in 2023 compared to 40% in 2022. Share-based compensation decreased $1.0 million mainly due to the termination of VP of Finance and HR in February 2023, which resulted in the forfeiture of unvested awards, and the stock option expense per share of new grants decreased compared to the expense of fully amortized grants. In addition, professional fees increased $0.4 million mainly caused by the service fees related to the tender offer in June 2023.

Other Income

The following table summarizes other income (in thousands):

Year Ended December 31,

Other income (expense) 883 (121 )

Foreign exchange gain (loss) 1,893 (2,800 )

The interest income for the years ended December 31, 2023 and 2022 was mainly generated from the Company’s Canadian bank accounts and interest bearing time deposits. The other income during the year ended December 31, 2023 was primarily from American Stock Transfer & Trust Company, LLC in accordance with the terms outlined in the settlement agreement. Foreign exchange gain (loss) was due to the fluctuation between the US dollar and the Canadian dollar in the year ended December 31, 2023 compared to 2022.

Income Taxes

The Company’s income tax expense for the tax period ended December 31, 2023 of $0.2 million, was primarily driven by adjustments related to prior periods and current year uncertain tax positions. The Company's income tax benefit for the tax period ended December 31, 2022 of $0.7 million, was primarily driven by the estimated 2022 Canadian loss carrybacks to 2019. The Company expects to maintain its full valuation allowance in all jurisdictions during 2024.

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, 2023, 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. In July 2022, we purchased interest bearing time deposits in the amount of $59.5 million for a one-year term, and upon maturity in July 2023, both the principal amount and the accrued interest were returned. At December 31, 2023, we had cash and cash equivalents of $200.0 million as compared to cash and cash equivalents of $157.3 million at December 31, 2022. The following table summarizes our sources and uses of cash (in thousands):

40

Year Ended December 31,

Net cash (used in) provided by: 2022 2022

Financing activities (9 ) -

Effect of foreign exchange rate on cash and cash equivalents (46 ) (961 )

Net change in cash and cash equivalents $ 42,717 $ (79,677 )

Operating Activities

During the years ended December 31, 2023 and 2022 net cash used in operating activities was $(18.7) million and $(14.8) million, respectively. Net cash used in the years ended December 31, 2023 and 2022 primarily resulted from our net losses, whereas for the year ended December 31, 2022 the company received $4 million in revenue from the clinical manufacturing agreement with Janssen and the addendum.

Investing Activities

During the years ended December 31, 2023 and 2022, our investing activities generated net cash of $61.5 million and used net cash of $63.9 million, respectively. In July 2022, we purchased interest bearing time deposits in the amount of $63.3 million. Upon maturity in July 2023, we obtained both the principal amount and the accrued interest.

Financing Activities

During the year ended December 31, 2023, our financing activities used net cash of $9 thousand. We purchased 3,561 shares of our common stock, at a price of $4.00 per share, for an aggregate cost of approximately $14 thousand. During the year ended December 31, 2023, employees exercised stock options to purchase 1,250 shares of our common stock for approximately $5 thousand in net proceeds.

We expect to continue to incur operating losses in the future. We do not expect to receive any additional revenue under the clinical manufacturing agreement with Janssen. Further, we may 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. As of December 31, 2023, our principal sources of liquidity were our cash and cash equivalents, which totaled approximately $200.0 million.

Based on our cash and liquid assets, we believe that our cash and liquid assets will provide us with sufficient financial resources to fund operations and meet our capital requirements and anticipated obligations as they become due.

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 DISCLOSURES ABOUT MARKET RISKS

We are a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and are not required to provide the information required under this item.

41

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Index to Financial Statements

Reports of Independent Registered Public Accounting Firm (PCAOB Firm ID: 726) 43

Consolidated Balance Sheets 44

Consolidated Statements of Operations 45

Consolidated Statements of Comprehensive Loss 46

Consolidated Statements of Shareholders’ Equity 47

Consolidated Statements of Cash Flows 48

Notes to Consolidated Financial Statements 49

42

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Shareholders and Board of Directors of XBiotech Inc.

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of Xbiotech Inc. and subsidiaries (the “Company”) as of December 31, 2023 and 2022, and the related consolidated statements of operations, comprehensive loss, shareholders’ equity, and cash flows for the years then ended, and the related notes to the consolidated financial statements (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2023 and 2022, and the results of their operations and their cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.

Basis for Opinion

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these 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 audits 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 entity’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 Matters

Critical audit matters are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. We determined that there are no critical audit matters.

/s/ Whitley Penn LLP

We have served as the Company's auditor since 2022.

Austin, Texas

March 15, 2024

43

XBiotech Inc.

Consolidated Balance Sheets

(in thousands, except share data)

Assets

Current assets:

Interest bearing time deposits - 60,172

Accrued interest receivable 860 1,216

Income tax receivable 75 548

Prepaid expenses and other current assets 760 601

Liabilities and shareholders’ equity

Current liabilities:

Income tax payable 83 55

Long-term liabilities:

Deferred tax liability - 59

Shareholders’ equity:

Accumulated other comprehensive income - 826

Total liabilities and shareholders’ equity $ 226,615 $ 246,103

See accompanying notes to consolidated financial statements.

44

XBiotech Inc.

Consolidated Statements of Operations

(in thousands, except share and per share data)

Year Ended December 31,

Revenue:

Manufacturing revenue $ - $ 4,010

Total revenue - 4,010

Cost of goods sold:

Manufacturing cost - 651

Total cost of goods sold - 651

Operating expenses:

Other income:

Other income (expense) 883 (121 )

Foreign exchange gain (loss) 1,893 (2,800 )

Income tax (expense) benefit (244 ) 688

Net loss per share—basic $ (0.81 ) $ (1.08 )

Net loss per share—diluted $ (0.81 ) $ (1.08 )

See accompanying notes to consolidated financial statements.

45

XBiotech Inc.

Consolidated Statements of Comprehensive Loss

(in thousands)

Year Ended December 31,

Realized comprehensive income - (1,567 )

Foreign currency translation adjustment (252 ) 422

Reclassification of deferred tax assets (574 ) -

See accompanying notes to consolidated financial statements.

46

XBiotech Inc.

Consolidated Statements of Shareholders' Equity

(in thousands)

Foreign currency translation adjustment - - 422 - 422

Realized comprehensive income - - (1,567 ) - (1,567 )

Share-based compensation expense - 5,062 - - 5,062

Tender offer (4 ) (14 ) - - (14 )

Foreign currency translation adjustment - - (252 ) - (252 )

Reclassification of deferred tax assets - 574 (574 ) - -

Issuance of common stock under stock option plan 1 5 - - 5

Share-based compensation expense - 3,262 - - 3,262

See accompanying notes to consolidated financial statements.

47

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:

Foreign exchange (gain) loss (1,893 ) 2,800

Share-based compensation expense 3,262 5,062

Changes in operating assets and liabilities:

Accrued interest receivable 356 (1,216 )

Prepaid expenses and other current assets (160 ) 334

Deferred tax liability (59 ) (815 )

Net cash (used in) provided by operating activities (18,725 ) (14,824 )

Investing activities

Purchase of property and equipment (362 ) (585 )

Net cash provided by (used in) investing activities 61,497 (63,892 )

Financing activities

Cash paid in tender offer (14 ) -

Issuance of common stock under stock option plan 5 -

Net cash used in financing activities (9 ) -

Effect of foreign exchange rate on cash and cash equivalents (46 ) (961 )

Net change in cash and cash equivalents 42,717 (79,677 )

Supplemental Information:

Purchases of property and equipment in accounts payable $ 19 $ 18

See accompanying notes to consolidated financial statements.

48

XBiotech Inc.

Notes to Consolidated Financial Statements

1. Organization

XBiotech Inc. (“XBiotech” or the “Company”) was incorporated in Canada on March 22, 2005. The Company’s headquarters are located in Austin, Texas. 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. XBiotech Germany GmbH was dissolved in February 2023.

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 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 HumanTM antibody that blocked IL-1a activity for $750 million in cash and up to $600 million in potential milestone payments (the “Janssen Transaction”). On February 2, 2022, XBiotech announced an addendum to the 2019 Janssen Manufacturing Agreement. XBiotech continued to manufacture Bermekimab for use by Janssen in its clinical trials through November 2022. 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 HumanTM antibodies targeting IL-1a for areas of medicine outside of dermatology. The Company’s True HumanTM antibody discovery technology has been used to identify new IL-1a targeting product candidates and has already brought one such candidate into a clinical studies in oncology and rheumatology; and another anti-IL-1a antibody into a Phase I study in neurology. While the Company previously was focused on a single True HumanTM antibody targeting IL-1a, it is now developing more than one product candidate that targets IL-1a to be used in different areas of medicine.

The Company is subject to a number of risks common to companies in clinical stage 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 $200.0 million at December 31, 2023, will enable the Company to achieve several major inflection points, including completion of clinical studies with lead product candidates. The Company expects to have sufficient cash through at least 12 months from the date of this report.

2. Significant Accounting Policies

Basis of Presentation

These consolidated financial statements have been prepared in conformity with U.S. Generally Accepted Accounting Principles (“US GAAP”). In the opinion of management, the accompanying consolidated financial statements reflect all adjustments (consisting only of normal recurring items) considered necessary to present fairly the Company’s financial position at December 31, 2023 and 2022, the results of its operations and comprehensive loss for the years ended December 31, 2023, and 2022, and the cash flows for the years ended December 31, 2023, and 2022.

49

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 recognized 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 generated revenue through November 2022. While these agreements are not considered contracts with a customer based on the terms thereof, the Company has applied the revenue recognition guidance by analogy.

XBiotech is still in the research and development phase. 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 was not a customer, as these services are not the output of XBiotech’s ordinary activities, the Company evaluated the terms of the agreements and 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 had a Clinical Manufacturing Agreement that it accounted for by analogy to ASC 606. In 2022 the Company executed a new manufacturing agreement with a Janssen related company. The agreement generated $4.0 million in revenue through termination in November 2022.

50

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 that 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

In December 2023, the FASB issued ASU 2023-09, "Income Taxes (Topic 740): Improvements to Income Tax Disclosures" ("ASU 2023-09"), which enhances the transparency and decision usefulness of income tax disclosures. Adjustments to the annual disclosure of income taxes include: (1) A tabular rate reconciliation comprised of eight specific categories, (2) Incomes taxes paid, disaggregated between significant federal, state, and foreign jurisdictions, (3) Eliminates requirements to disclose the nature and estimate of reasonably possible changes to unrecognized tax benefits in the next 12 months or that an estimated range cannot be made, and (4) Adds a requirement to disclose income (or loss) from continuing operations before income tax expense (or benefit) and income tax expense (or benefit) from continuing operations disaggregated between domestic and foreign. The ASU is effective for public business entities for fiscal years beginning on or after December 15, 2024 with early adoption permitted. The amendments in ASU 2023-09 should be applied on a prospective basis and retrospective application is permitted. The Company is in the process of evaluating the impact of adoption of ASU 2023-09 on the Company's consolidated financial statements and disclosures.

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.

51

The Company recognizes and measures uncertain tax benefits in accordance with 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, if any, in income 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 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 years ended December 31, 2023, and 2022 was included in the following line items on the consolidated statements of operations (in thousands).

Year Ended December 31,

General and administrative 465 1,421

Total share-based compensation expense $ 3,262 $ 5,062

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 $ 2.89 $ 4.92

Risk-free interest rate 3.3%-4.6 % 1.5%-4.1 %

Dividend yield - -

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, and Canadian banks. Cash and cash equivalents are stated at cost which approximates fair value.

52

Interest Bearing Time Deposits

As of December 31, 2022, the Company held guaranteed investment certificates from a financial institution. The guaranteed investment certificates had a 12-month term at origination with interest payable at maturity. The Company obtained both the principal amount and accrued interest in July 2023 upon maturity.

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, time 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:

At December 31, 2023 and 2022, 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 consolidated balance sheets for cash and cash equivalents, interest bearing time deposits, prepaid expenses and other current assets, accounts payable, and accrued expenses approximate their fair values at December 31, 2023 and 2022, 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 using the straight-line method over the estimated useful lives of the assets, with the exception of land and construction in process which are not depreciated. The useful lives are as follows:

● Furniture and fixtures 7 years

● Office equipment 5 years

● Scientific equipment 5 years

● Vehicles 5 years

● Mobile facility 27.5 years

● Building 39 years

53

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. The 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, 2023.

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 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.

54

Recent Accounting Pronouncements

Recently Issued Accounting Pronouncements

In June 2016, the Financial Accounting Standard Board (‘FASB”) issued Accounting Standards Update (“ASU” or “standard”) No. 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. Subsequently, the FASB issued several clarifying standard updates to clarify and improve the ASU. These ASUs significantly change how entities will measure credit losses for most financial assets and certain other instruments that are not measured at fair value through net income. The most significant change in this standard is a shift from the incurred loss model to the expected loss model that will be based on an estimate of current expected credit loss (“CECL”). Under the standard, disclosures are required to provide users of the financial statements with useful information in analyzing an entity’s exposure to credit risk and the measurement of credit losses. The Company adopted the standard effective January 1, 2023. The impact of the adoption was not considered material to the consolidated financial statements.

3.Revenue

On February 2, 2022, the Company announced an addendum to the 2019 Janssen Manufacturing Agreement XBiotech continued to manufacture Bermekimab for use by Janssen in its clinical trials through November 2022. For the year ended December 31, 2022, the Company recorded $4.0 million of revenues, under the February 2022 agreement. The agreement was terminated in November 2022.

4. Property and Equipment and Building Construction in Progress

Property and equipment consisted of the following as of December 31, 2023 and 2022 (in thousands):

Computer and office equipment $ 279 $ 274

Construction in process 469 401

Depreciation expenses related to property and equipment amounted to approximately $1.7 million and $2.6 million, for the years ended December 31, 2023, and 2022, respectively. Construction in process is related to research and development and manufactory equipment. Depreciation expense is recorded to research and development and general and administrative expense line items on the Consolidated Statements of Operations (in thousands).

5. Accrued Expenses

Accrued expenses consist of the following as of December 31, 2023, and 2022 (in thousands):

Accrued compensation and related expenses $ 562 $ 489

Accrued professional fees 52 117

Accrued clinical trial expenses 2,826 928

55

6. Common Stock

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

On May 17, 2023, XBiotech announced that it had commenced a “modified Dutch auction” tender offer to purchase up to $80.0 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 $3.80 nor greater than $4.00 per common share, to the seller in cash. The tender offer expired on June 15, 2023.

On June 20, 2023, the Company announced the final results of its “modified Dutch Auction” tender offer. The Company accepted for purchase 3,561 shares of its common stock, at a price of $4.00 per share, for an aggregate cost of approximately $14 thousand, excluding fees and expenses related to the tender offer. These shares represented an immaterial percent of the shares outstanding. The repurchased shares were retired and have been classified to reduce common stock in the accompanying consolidated balance sheet as of December 31, 2023.

During the year ended December 31, 2023, 1,250 shares of common stock were issued upon the exercise of stock options at a price of $3.84 per share for total proceeds of $4,800.

No stock options were exercised from January 1, 2022 through December 31, 2022.

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’ expiration 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:

56

Options Exercise Price Weighted- Average Exercise Price

Exercised - - -

The weighted average fair value of the options issued to directors, employees and consultants during the fiscal years ended December 31, 2023, and 2022, was $2.89 and $4.92, respectively. The total intrinsic value of options exercisable and total options outstanding at December 31, 2023 was $2.2 million and $4.1 million. The total intrinsic value of options exercisable and total options outstanding at December 31, 2022 was immaterial. The total fair value of options vested during the years ended December 31, 2023, and 2022 was $3.5 million, and $5.6 million, respectively.

A summary of the activity in the Company’s nonvested shares is as follows:

Year Ended December 31,

As of December 31, 2023, there was approximately $1.4 million of unrecognized compensation cost, related to stock options granted under the Plan which will be amortized to stock compensation expense over the next 1.1 years. The weighted-average remaining contractual term of outstanding options as of December 31, 2023 is 5.39 years. Total exercisable stock options as of December 31, 2023 is 4.5 million. The weighted-average exercise price of options exercisable as of December 31, 2023 is $10.07 per share and the weighted-average remaining contractual term is 4.93 years.

8. Net Loss Per Share

The following summarizes the computation of basic and diluted net income(loss) per share for the years ended December 31, 2023, and 2022 (in thousands, except share and per share data):

Year Ended December 31,

Net loss per share—basic $ (0.81 ) $ (1.08 )

Net loss per share—diluted $ (0.81 ) $ (1.08 )

57

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,

9. Income Taxes

The components of income before income taxes are as follows (in thousands):

Years Ended December 31,

The components of the provision for income taxes are as follows for the years ended December 31, 2023, and 2022 (in thousands):

Deferred

United States - -

Total income tax expense (benefit) $ 244 $ (688 )

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, 2023, and 2022:

58

Income tax benefit computed at federal tax rate 27.0 % 27.0 %

Foreign operations (5.4 )% (4.1 )%

Change in valuation allowance (26.1 )% (14.6 )%

Tax credits generated 8.6 % 3.5 %

Prior year adjustments (2.3 )% 0.4 %

Changes in uncertain tax positions (0.4 )% (0.3 )%

Foreign exchange gain and loss 2.1 % (1.6 )%

Stock compensation (2.4 )% (2.3 )%

Non-deductible compensation (6.8 )% (5.8 )%

Foreign Liquidation 4.5 % 0.0 %

The effective tax rate for the year ended December 31, 2023 varied from the Canadian statutory rate primarily due to losses in jurisdictions for which a valuation allowance is recorded and a benefit may not be recognized. The effective tax rate for the year ended December 31, 2022 varied from the Canadian statutory rate primarily due to losses in jurisdictions for which a valuation allowance is recorded and a benefit may not be recognized, a shift in income between jurisdictions related to certain transfer pricing adjustments which impacted the benefit associated with available loss carrybacks, and non-deductible compensation.

The tax effect of temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases that give rise to deferred tax assets and liabilities is as follows:

Net operating loss carryforwards $ 1,288 $ -

Capitalized research expenses 7,800 5,210

Share issuance costs 39 229

Foreign exchange - 687

Deferred tax assets before valuation allowance 18,204 12,994

Uncollectible debts - 975

Net deferred tax asset (liability) $ - $ (59 )

For the year ended December 31, 2023, the Company has a USA federal net operating loss carryforward of $6.2M which will carryforward indefinitely. The Company has $6.6M of USA federal research and development tax credits carryforwards which are presented in the financial statements net of $1.4M of related uncertain tax positions, which will begin to expire in 2037. In addition, the Company has $0.8M of Texas research and development tax credits carryforwards which are presented in the financial statements net of $0.2M of related uncertain tax positions, which will begin to expire in 2042. Also, after weighing all available and positive and negative evidence the Company determined a full valuation allowance for all jurisdictions was necessary.

For the year ended December 31, 2023, the Company has not recorded any outside basis difference deferreds given its intention to indefinitely reinvest earnings from its foreign operations. In addition, given the Company's estimated outside tax basis in its USA investment is in excess of book basis, there is no unrecognized deferred tax liability.

59

The Company is subject to income tax in multiple jurisdictions, including Canada, USA, and the state of Texas. The Company has Canadian, USA, and Texas income tax returns that are open to examination for the 2020, 2020, and 2019 tax years, respectively. In addition, the utilization of tax carryforwards, from periods prior to those previously mentioned may also be audited by the taxing authorities once utilized. As a result, the Company continuously monitors its current and prior filing positions in order to determine if any unrecognized tax positions need to be recorded. The analysis involves considerable judgement and is based on the best information available. A reconciliation of the beginning and ending amount of unrecognized tax benefits as of December 31, 2023 and 2022 are as follows (in thousands):

Additions based on tax positions related to the current year 389 130

Additions for tax positions of prior years 260 346

Reductions for tax positions of prior years (4 ) -

Settlements & statute of limitations (536 ) -

The Company recognized interest and penalties related to unrecognized tax benefits of $93 thousand and $63 thousand as a component of income tax expense for the years ended December 31, 2023 and 2022, respectively. As of December 31, 2023 and 2022, there are $1.7M and $1.6M, respectively, of unrecognized tax benefits that if recognized would affect the annual effective tax rate. In addition, it is reasonably possible that approximately $0.1M of the unrecognized tax benefits may be recognized in the next 12 months as a result of a lapse of the statute of limitations. No other positions are expected to significantly decrease within the next 12 months.

10. Subsequent Event

On January 3, 2024, the Company entered into a Convertible Loan Agreement (the “Loan”) with John Simard, the Company’s Founder, President, Chief Executive Officer and Chairman. The Loan provides $10 million in immediate funding for the construction of a new, state-of-the-art research and development facility at the Company's property at 5217 Winnebago Lane in Austin, Texas. The Loan is secured by the real estate and cash holdings of the Company, with interest to accrue at a simple rate equal to eight percent per year and interest-only payments to be made at six-month intervals after the Loan is funded. At Mr. Simard’s election, the balance may be converted to XBiotech stock at any time the Loan balance is outstanding at a fixed conversion price equal to the average Nasdaq Official Closing Price of the common stock (as reflected on Nasdaq.com) for the five trading days immediately preceding the signing of this Agreement, which is $4.048 per share. The conversion feature is subject to a 19.9% cap limiting the number of shares that could be converted under the Agreement based on Mr. Simard’s total stock ownership in the Company at the time of conversion. The Loan also allows Mr. Simard to obtain immediate cash repayment of the Loan balance at his election one year after the loan is funded or upon certain other conditions set forth in the Loan. The Loan was negotiated, evaluated, and approved on behalf of the Company by a committee of independent and disinterested directors.

11. Selected Quarterly Financial Data (Unaudited)

Selected Quarterly Financial Data (Unaudited) for the years ended December 31, 2023 and 2022 is presented below (in thousands except per share data):

60

2023 First Quarter Second Quarter Third Quarter Fourth Quarter

Net loss per share—basic and diluted (0.13 ) (0.29 ) (0.24 ) (0.15 )

2022 First Quarter Second Quarter Third Quarter Fourth Quarter

Net loss per share—basic and diluted (0.18 ) (0.38 ) (0.42 ) (0.10 )

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, 2023, 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 year ended December 31, 2023 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

61

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.

ITEM 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS

None.

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 28, 2024 with the Securities and Exchange Commission in connection with the solicitation of proxies for our 2024 Annual Meeting of Stockholders to be held on June 23, 2024.

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.

62

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 ACCOUNTANT 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.

63

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

64

65

21.1* List of subsidiaries

23.1* Consent of Independent Registered Public Accounting Firm, Whitley Penn LLP

97 XBiotech Inc. Clawback Policy

+ Indicates management contract or compensatory plan

* Filed herewith

ITEM 16.FORM 10–K SUMMARY

Not applicable.

66

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 15, 2024.

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

Angela Hu, Principal Financial Officer and Principal Accounting Officer

/s/ W. THORPE MCKENZIE March 15, 2024

W. Thorpe McKenzie, Director

/s/ JAN-PAUL WALDIN March 15, 2024

Jan-Paul Waldin, Director

/s/ DONALD MACADAM March 15, 2024

Donald MacAdam, Director

Peter Libby, Director

67