XBiotech Inc. 10-K

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) December 31, 2023 December 31, 2022 Assets Current assets: Cash and cash equivalents $ 200,023 $ 157,306 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 Total current assets 201,718 219,843 Property and equipment, net 24,897 26,260 Total assets $ 226,615 $ 246,103 Liabilities and shareholders ’ equity Current liabilities: Accounts payable $ 2,516 $ 2,408 Accrued expenses 3,501 1,603 Income tax payable 83 55 Total current liabilities 6,100 4,066 Long-term liabilities: Income tax payable 1,669 1,576 Deferred tax liability - 59 Total liabilities 7,769 5,701 Shareholders ’ equity: Preferred stock, no par value, unlimited shares authorized, no shares outstanding - - Common stock, no par value, unlimited shares authorized, 30,436,964 and 30,439,275 shares outstanding at December 31, 2023 and December 31, 2022, respectively 271,152 267,325 Accumulated other comprehensive income - 826 Accumulated deficit ( 52,306 ) ( 27,749 ) Total shareholders’ equity 218,846 240,402 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, 2023 2022 Revenue: Manufacturing revenue $ - $ 4,010 Total revenue - 4,010 Cost of goods sold: Manufacturing cost - 651 Total cost of goods sold - 651 Gross margin - 3,359 Operating expenses: Research and development 32,848 31,544 General and administrative 4,662 6,305 Total operating expenses 37,510 37,849 Loss from operations ( 37,510 ) ( 34,490 ) Other income: Interest income 10,421 3,823 Other income (expense) 883 ( 121 ) Foreign exchange gain (loss) 1,893 ( 2,800 ) Total other income 13,197 902 Loss before income taxes ( 24,313 ) ( 33,588 ) Income tax (expense) benefit ( 244 ) 688 Net loss $ ( 24,557 ) $ ( 32,900 ) Net loss per share—basic $ ( 0.81 ) $ ( 1.08 ) Shares used to compute basic net loss per share 30,438,459 30,439,275 Net loss per share—diluted $ ( 0.81 ) $ ( 1.08 ) Shares used to compute diluted net loss per share 30,438,459 30,439,275 See accompanying notes to consolidated financial statements. 45 XBiotech Inc. Consolidated Statements of Comprehensive Loss (in thousands) Year Ended December 31, 2023 2022 Net loss $ ( 24,557 ) $ ( 32,900 ) Realized comprehensive income - ( 1,567 ) Foreign currency translation adjustment ( 252 ) 422 Reclassification of deferred tax assets ( 574 ) - Comprehensive loss $ ( 25,383 ) $ ( 34,045 ) See accompanying notes to consolidated financial statements. 46 XBiotech Inc. Consolidated Statements of Shareholders' Equity (in thousands) Number of Shares Common Stock Amount Accumulated Other Comprehensive Income Retained Earnings (Accumulated deficit) Total Balance at December 31, 2021 30,439 $ 262,263 $ 1,971 $ 5,151 $ 269,385 Net loss - - - ( 32,900 ) ( 32,900 ) Foreign currency translation adjustment - - 422 - 422 Realized comprehensive income - - ( 1,567 ) - ( 1,567 ) Share-based compensation expense - 5,062 - - 5,062 Balance at December 31, 2022 30,439 267,325 826 ( 27,749 ) 240,402 Net loss - - - ( 24,557 ) ( 24,557 ) 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 Balance at December 31, 2023 30,436 $ 271,152 $ - $ ( 52,306 ) $ 218,846 See accompanying notes to consolidated financial statements. 47 XBiotech Inc. Consolidated Statements of Cash Flows (in thousands) Year Ended December 31, 2023 2022 Operating activities Net loss $ ( 24,557 ) $ ( 32,900 ) Adjustments to reconcile net loss to net cash (used in) operating activities: Depreciation 1,744 2,614 Foreign exchange (gain) loss ( 1,893 ) 2,800 Share-based compensation expense 3,262 5,062 Changes in operating assets and liabilities: Income tax receivable 473 8,556 Accrued interest receivable 356 ( 1,216 ) Prepaid expenses and other current assets ( 160 ) 334 Accounts payable 91 357 Accrued expenses 1,895 229 Income tax payable 123 155 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 ) Proceeds from maturity (purchases of) interest bearing time deposits 61,859 ( 63,307 ) 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 ) Cash and cash equivalents, beginning of year 157,306 236,983 Cash and cash equivalents, end of year $ 200,023 $ 157,306 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 Human™ 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 Human™ antibodies targeting IL-1a for areas of medicine outside of dermatology. The Company’s True Human™ 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 Human™ 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, 2023 2022 Research and development $ 2,797 $ 3,641 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, 2023 2022 Weighted-average grant date fair value per share $ 2.89 $ 4.92 Expected volatility 80 %- 82 % 82 %- 83 % Risk-free interest rate 3.3 %- 4.6 % 1.5 %- 4.1 % Expected life (in years) 5.38 – 6.25 5.38 – 6.25 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: ● 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, 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): 2023 2022 Computer and office equipment $ 279 $ 274 Furniture and fixtures 129 129 Land 1,418 1,418 Scientific equipment 16,367 16,059 Vehicle 112 112 Building 24,173 24,173 Mobile facility 189 189 Construction in process 469 401 Accumulated depreciation ( 18,239 ) ( 16,495 ) $ 24,897 $ 26,260 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): 2023 2022 Accrued compensation and related expenses $ 562 $ 489 Accrued professional fees 52 117 Accrued clinical trial expenses 2,826 928 Other 61 69 $ 3,501 $ 1,603 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 Options outstanding at December 31, 2021 4,656,677 $ 2.71 -$ 21.74 $ 10.68 Granted 152,600 3.65 - 11.25 7.07 Exercised - - - Forfeitures ( 250,375 ) 3.27 - 21.74 12.31 Options outstanding at December 31, 2022 4,558,902 $ 2.71 -$ 21.74 $ 10.47 Granted 809,600 3.38 - 6.04 4.12 Exercised ( 1,250 ) 3.84 3.84 Forfeitures ( 327,734 ) 3.84 - 19.09 10.43 Options outstanding at December 31, 2023 5,039,518 $ 2.71 -$ 21.74 $ 9.46 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, 2023 2022 Shares Weighted Average Granted Date Fair Value Shares Weighted Average Granted Date Fair Value Nonvested at January 1, 429,950 8.25 1,131,458 8.59 Granted during the period 809,600 2.89 152,600 4.92 Vested during the period ( 569,100 ) 6.17 ( 716,491 ) 7.86 Forfeited during the period ( 98,025 ) 5.14 ( 137,617 ) 9.40 Nonvested at end of period 571,925 2.40 429,950 8.25 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, 2023 2022 Net loss $ ( 24,557 ) $ ( 32,900 ) Weighted-average number of common shares—basic 30,438,459 30,439,275 Net loss per share—basic $ ( 0.81 ) $ ( 1.08 ) Weighted-average number of common shares—diluted 30,438,459 30,439,275 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, 2023 2022 Stock options 5,039,518 4,558,902 9. Income Taxes The components of income before income taxes are as follows (in thousands): Years Ended December 31, 2023 2022 United States $ ( 27,144 ) $ ( 28,161 ) Foreign 2,831 ( 5,427 ) Total $ ( 24,313 ) $ ( 33,588 ) The components of the provision for income taxes are as follows for the years ended December 31, 2023, and 2022 (in thousands): Current 2023 2022 United States $ 130 $ 457 Foreign 173 ( 329 ) Total 303 128 Deferred United States - - Foreign ( 59 ) ( 816 ) Total ( 59 ) ( 816 ) 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 2023 2022 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 % Other 0.3 % ( 0.2 )% Total ( 1.0 ) % 2.0 % 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: 2023 2022 Net operating loss carryforwards $ 1,288 $ - Research and other credits 5,851 3,820 Stock based compensation 2,530 2,703 Capitalized research expenses 7,800 5,210 Share issuance costs 39 229 Accrued liabilities 696 294 Foreign exchange - 687 Deferred tax assets before valuation allowance 18,204 12,994 Valuation allowance ( 17,576 ) ( 11,225 ) Deferred tax assets 628 1,719 Depreciation 535 710 Prepaid assets 93 93 Uncollectible debts - 975 Deferred tax liability 628 1,777 Net deferred tax asset (liability) $ - $ ( 59 ) For the year ended December 31, 2023, the Company has a USA federal net operating loss carryforward of $ 6.2 M which will carryforward indefinitely. The Company has $ 6.6 M of USA federal research and development tax credits carryforwards which are presented in the financial statements net of $ 1.4 M of related uncertain tax positions, which will begin to expire in 2037. In addition, the Company has $ 0.8 M of Texas research and development tax credits carryforwards which are presented in the financial statements net of $ 0.2 M 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): 2023 2022 Balance as of January 1 $ 2,864 $ 2,389 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 ) - Balance at December 31 $ 2,973 $ 2,864 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 $ 1.7 M and $ 1.6 M, respectively, of unrecognized tax benefits that if recognized would affect the annual effective tax rate. In addition, it is reasonably possible that approximately $ 0.1 M 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 Loss from operations $ ( 7,145 ) $ ( 13,258 ) $ ( 8,520 ) $ ( 8,588 ) Net loss ( 3,816 ) ( 8,742 ) ( 7,364 ) ( 4,635 ) Net loss per share—basic and diluted ( 0.13 ) ( 0.29 ) ( 0.24 ) ( 0.15 ) 2022 First Quarter Second Quarter Third Quarter Fourth Quarter Loss from operations $ ( 7,845 ) $ ( 12,094 ) $ ( 6,389 ) $ ( 8,162 ) Net loss ( 5,395 ) ( 11,644 ) ( 12,658 ) ( 3,203 ) 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.