ITEM 1B. UNRESOLVED STAFF COMMENTS
Not applicable.
ITEM 2.
ITEM 2.PROPERTIES
Our operations are based primarily in Austin, Texas. On January 12, 2008, the Company entered a lease agreement to lease its facility in Austin, Texas, USA. On September 15, 2010, the Company entered into a second lease agreement to lease additional space in Austin, TX, USA. On March 20, 2013, the Company extended the lease for another 21 months with the same terms and rental rates as the current lease. We have grown our workforce significantly over the past year and expect to continue to add a significant number of additional employees during 2017. To accommodate larger-scale commercial manufacturing needs, we purchased 48 acres of industrial-zoned property located five miles from Austin’s central business district. In September 2014, we commenced ground-breaking on a new manufacturing facility on this property. All construction activities were completed in September of 2016. The Company is currently preparing this new manufacturing facility to produce registration batches of product. Data from these manufacturing runs will be submitted to the EMA to support the approval of the new manufacturing facility. The current plan is to submit that filing by late Q2 or early Q3 2017.The facility will not be placed into service until approval has been received.
ITEM 3.
ITEM 3.LEGAL PROCEEDINGS
On December 1, 2015, a purported securities class action complaint captioned Yogina Rezko v. XBiotech Inc., John Simard, Queena Han and WR Hambrecht & Co., LLC was filed against us, certain of our officers and directors and the underwriter for our initial public offering in the Superior Court for the State of California, Los Angeles County. On December 2, 2015, a purported securities class action complaint captioned Linh Tran v. XBiotech Inc., John Simard and Queena Han was filed against us and certain of our officers and directors in U.S. District Court for the Western District of Texas. The lawsuits are based on substantially similar factual allegations and purport to be class actions brought on behalf of purchasers of the Company's securities during the period from April 15, 2015 through November 23, 2015. The complaint filed in California state court alleges that the defendants violated the Securities Act of 1933, as amended (the "Securities Act"), and the complaint filed in federal court alleges that the defendants violated the Securities Exchange Act of 1934, as amended (the "Exchange Act"), in each case by making materially false and misleading statements concerning the Company's Phase III clinical trial conducted in Europe to assess Xilonix™ as a treatment for colorectal cancer. The California complaint purports to assert claims for violations of Sections 11, 12(a)(2) and 15 of the Securities Act, and the federal complaint purports to assert claims for violation of Sections 10(b) and 20(a) of the Exchange Act and Rule 10b-5 promulgated thereunder. Both complaints seek, on behalf of the purported class, an unspecified amount of monetary damages, interest, fees and expenses of attorneys and experts, and other relief.
In September 2016, a stay was granted at the Superior Court for the State of California, Los Angeles County, in Yogina Rezko v. XBiotech Inc., John Simard, Queena Han and WR Hambrecht & Co., LLC, in light of the ongoing case, Linh Tran v. XBiotech Inc., John Simard and Queena Han, in the U.S. District Court for the Western District of Texas, leaving plaintiffs with an opportunity re-file a complaint in Texas. In October 2016, the Texas securities class action lawsuit was dismissed with prejudice. The California plaintiffs did not re-file a complaint in Texas, and thus XBiotech continues to defend against this securities class action lawsuit. A tentative hearing date of April 14, 2017, has been set at the Superior Court for the State of California, Los Angeles County. We are unable to estimate the outcome of the California matter or the resulting financial impact to us, if any.
ITEM 4.
ITEM 4.MINE SAFETY DISCLOSURES
Not applicable.
PART II
ITEM 5.
ITEM 5.MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.
Market Information
Our common stock began trading on the NASDAQ Global Select Market on April 15, 2015 under the symbol “XBIT.” Prior to that time, there was no established public trading market for our common stock. The following table sets forth the high and low prices per share for our common stock on the NASDAQ Global Select Market for the periods indicated:
Holders of record
At March 1, 2017, there were 2,043 holders of record of our common stock. Because many of our shares are held by brokers and other institutions on behalf of stockholders, we are unable to estimate the total number of beneficial holders represented by these record holders.
Dividends
We have never paid or declared any cash dividends on our common stock. We currently intend to retain any earnings for future growth and, therefore, do not expect to pay cash dividends in the foreseeable future.
Use of Proceeds from IPO
On April 14, 2015, our registration statement on Form S-1 (File No. 333-201813) was declared effective by the Securities and Exchange Commission for our initial public offering pursuant to which we sold an aggregate of 4,000,000 shares of our common stock to investors at a price of $19.00 per share. W.R. Hambrecht + Co., Inc. acted as the sole underwriter. The offering commenced as of April 14, 2015 and did not terminate before all of the securities registered in the registration statement were sold. On April 17, 2015, we closed the sale of such shares, resulting in net proceeds to us of approximately $70.6 million after deducting underwriting discounts and commissions of $3.8 million and other offering expenses of approximately $1.6 million. No payments were made by us to directors, officers or persons owning ten percent or more of our common stock or to their associates, or to our affiliates.
Construction of the new manufacturing facility located in Austin, Texas was completed in August 2016. The Company is currently preparing this new manufacturing facility to produce registration batches of product. Data from these manufacturing runs will be submitted to EMA to support approval of the new facility. The current plan is to submit that filing by late Q2 or early Q3 2017.
ITEM 6.
ITEM 6.SELECTED FINANCIAL DATA
The following selected consolidated financial data for each of the four years ended December 31, 2016 are derived from our audited consolidated financial statements. The selected consolidated financial data set forth below should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the financial statements, and the related Notes, included elsewhere in this annual report on Form 10-K. Historical results are not necessarily indicative of future results. Set forth below are our selected consolidated financial data (in thousands, except share and per share amounts)
ITEM 7MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion and analysis of our financial condition and results of operations together with our financial statements and related notes thereto included elsewhere in this annual report on Form 10-K. Some of the information contained in this discussion and analysis or set forth elsewhere in this annual report on Form 10-K, including information with respect to our plans and strategy for our business and related financing, includes forward-looking statements that involve risks and uncertainties. As a result of many factors, including those factors set forth in the “Risk Factors” section of this annual report on Form 10-K, our actual results could differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.
Overview
XBiotech Inc. is a clinical-stage biopharmaceutical company engaged in discovering and developing True Human™ monoclonal antibodies for treating a variety of different diseases. True Human™ monoclonal antibodies are those which occur naturally in human beings-as opposed to being derived from animal immunization technologies 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. While primarily focused on bringing our lead product candidate, Xilonix™, to market, we have also developed a proprietary True Human™ monoclonal antibody discovery platform and manufacturing system.
We have never been profitable and, as of December 31, 2016, we had an accumulated deficit of $183.4 million. We had a net loss of $52.8 million for the year ended December 31, 2016, compared to $37.5 million for the year ended December 31, 2015, and $21.7 million for the year ended December 31, 2014. We expect to incur significant and increasing operating losses for the foreseeable future as we advance our drug candidates from discovery through preclinical testing and clinical trials and seek regulatory approval and eventual commercialization. In addition to these increasing research and development expenses, we expect general and administrative costs to increase as we add personnel and operate as a public company. We will need to generate significant revenues to achieve profitability, and we may never do so. As of December 31, 2016, we had 106 employees.
Recent Events:
Clinical Trial and Construction of the New Manufacturing Facility Highlights
As of March 2017, XBiotech has achieved some significant milestones with lead product candidate and 514G3 programs. Enrollment in a Phase III symptomatic colorectal cancer study has. As the study endpoints were satisfactorily met, XBiotech has proceeded with the submission of a Marketing Authorization Application (MAA) to the European Medicines Agency (EMA) in March 2016. XBiotech also completed enrollment in a second Phase III study, a double-blind placebo controlled study for improving survival in metastatic colorectal cancer. A total of 643 patients were randomized in over twenty countries globally and the first interim analysis was successfully completed in February 2017. We have also completed a pharmacokinetics study with our lead product candidate which was conducted in connection with the MAA. Furthermore, XBiotech successfully completed its global staphylococcus aureus (S. aureus) bacteremia phase I/ II study with 514G3, a novel True Human™ therapeutic antibody for treating serious infections due to s. aureus.
In August 2016 the Company completed construction of the new manufacturing facility located in Austin, Texas. The 40,000 square foot facility will provide a significant increase in the Company’s manufacturing and quality operations in anticipation of possible commercialization of the Company’s product pipeline. The new facility will increase about ten-fold the Company’s current production capacity.
Revenues
To date, we have not generated any revenue. Our ability to generate revenue and become profitable depends on our ability to successfully commercialize our lead product candidate or any other product candidate we may advance in the future.
Research and Development Expenses
Research and development expense consists of expenses incurred in connection with identifying and developing our drug candidates. These expenses consist primarily of salaries and related expenses, stock-based compensation, the purchase of equipment, laboratory and manufacturing supplies, facility costs, costs for preclinical and clinical research, development of quality control systems, quality assurance programs and manufacturing processes. We charge all research and development expenses to operating expenses as incurred.
Clinical development timelines, likelihood of success and total costs vary widely. We do not currently track our internal research and development costs or our personnel and related costs on an individual drug candidate basis. We use our research and development resources, including employees and our drug discovery technology, across multiple drug development programs. As a result, we cannot state precisely the costs incurred for each of our research and development programs or our clinical and preclinical drug candidates. From inception through December 31, 2016, we have recorded total research and development expenses, including share-based compensation, of $143.6 million. Our total research and development expenses for the year ended December 31, 2016 was $42.5 million, compared to $31.3 million the year ended December 31, 2015, and $14.3 million for the year ended December 31, 2014. Share-based compensation accounted for $2.1 million for the year ended December 31, 2016, $2.2 million for the year ended December 31, 2015 and $1.3 million for the year ended December 31, 2014.
Research and development expenses as a percentage of total operating expenses was 81% for the year ended December 31, 2016, 83% for the year ended December 31, 2015, and 66% for the year ended December 31, 2014. The percentages, excluding stock-based compensation, was 86% for the year ended December 31, 2016, 88% for the year ended December 31, 2015 and 88% for the year ended December 31, 2014.
As planned, our clinical development costs increased as we advanced our lead product candidate as an anti-cancer therapy for treating last-line metastatic colorectal cancer (mCRC), under a regulatory pathway through global phase III clinical trials under EMA and FDA jurisdictions. The Company’s MAA submission in Europe could potentially position the Company to generate related revenues in 2017 if it receives EMA marketing approval and the Company successfully completes the commercialization plan for its lead product candidate.
The clinical research and development costs may decrease going forward with the completion of the Phase I/II S. aureus Bacteremia study and as we enter the maintenance phase of the FDA pivotal phase III mCRC trial. Although, expenses could increase due to potential marketing approval of our lead product candidate in Europe and related commercialization costs, as well as, the potential of pursuing advanced clinical studies in various indications.
Based on the results of our preclinical studies, we anticipate that we will select drug candidates and research projects for further development on an ongoing basis in response to their preclinical and clinical success and commercial potential. For research and development candidates in early stages of development, it is premature to estimate when material net cash inflows from these projects might occur.
General and Administrative Expenses
General and administrative expense consists primarily of salaries and related expenses for personnel in administrative, finance, business development and human resource functions, as well as the legal costs of pursuing patent protection of our intellectual property and patent filing and maintenance expenses, share-based compensation, and professional fees for legal services. Our total general and administration expenses was 10.3 million for the year ended December 31, 2016, $6.2 million for the year ended December 31, 2015 and $7.4 million for the year ended December 31, 2014. Share-based compensation accounted for $3.5 million for the year ended December 31, 2016, $2.2 million for the year ended December 31, 2015 and $5.7 million for the year ended December 31, 2014.
Critical Accounting Policies
Our Management’s Discussion and Analysis of Financial Condition and Results of Operations is based on our financial statements, which have been prepared in conformity with generally accepted accounting principles in the United States (US GAAP). The preparation of our financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and expenses incurred during the reported periods.
We base estimates on our historical experience, known trends and various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
While our significant accounting policies are more fully described in the notes to our financial statements appearing in this Annual Report on Form 10-K, we believe that the following accounting policies are the most critical to understanding and evaluating our reported financial results.
Stock-Based Compensation
Stock-based awards are measured at fair value at each grant date. We recognize stock-based compensation expenses ratably over the requisite service period of the option award.
Determination of the Fair Value of Stock-Based Compensation Grants
The determination of the fair value of stock-based compensation arrangements is affected by a number of variables, including estimates of the expected stock price volatility, risk-free interest rate and the expected life of the award. We value stock options using the Black-Scholes option-pricing model, which was developed for use in estimating the fair value of traded options that are fully transferable and have no vesting restrictions. Black-Scholes option-pricing model and other option valuation models require the input of highly subjective assumptions, including the expected stock price volatility. If we made different assumptions, our stock-based compensation expenses, net loss, and net loss per common share could be significantly different. Prior to our initial public offering in April 2015, we issued common stock for cash consideration to investors. We believe that such transactions represent the best evidence of fair value of our common stock. Therefore, we used the sales price of our common stock prior to our initial public offering (IPO) in April 2015 as the fair value of our common stock. After our IPO, we determine that the fair value of common stock is equal to 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:
We have assumed no dividend yield because we do not expect to pay dividends in the foreseeable future, which is consistent with our past practice. The risk-free interest rate assumption is based on observed interest rates for U.S. Treasury securities with maturities consistent with the expected life of our stock options. The expected life represents the period of time the stock options are expected to be outstanding and is based on the simplified method when the stock option includes “plain vanilla” terms. Under the simplified method, the expected life of an option is presumed to be the midpoint between the vesting date and the end of the agreement term. We used the simplified method due to the lack of sufficient historical exercise data to provide a reasonable basis upon which to otherwise estimate the expected life of the stock options. For stock options that did not include “plain vanilla” terms, we used the contractual life of the stock option as the expected life. Such stock options consisted primarily of options issued to our board of directors that were immediately vested at issuance. Expected volatility is based on historical volatilities for publicly traded stock of comparable companies over the estimated expected life of the stock options. As part of the requirements of ASC 718, the Company is required to estimate potential forfeitures of stock grants and adjust compensation cost recorded accordingly. We based our estimate of pre-vesting forfeitures, or forfeiture rate, on historical forfeiture rates. We apply the estimated forfeiture rate to the total estimated fair value of the awards, as derived from the Black-Scholes model, to compute the share-based compensation expenses, net of pre-vesting forfeitures, to be recognized in our consolidated statements of operations.
Results of Operations
Revenue
We did not record any revenue during the years ended December 31, 2016, 2015 and 2014.
Expenses
Research and Development
Research and Development costs are summarized as follows (in thousands):
We do not currently track our internal research and development costs or our personnel and related costs on an individual drug candidate basis. We use our research and development resources, including employees and our drug discovery technology, across multiple drug development programs. As a result, we cannot state precisely the costs incurred for each of our research and development programs or our clinical and preclinical drug candidates.
Research and development expenses increased by 36% to $42.5 million for year ended December 31, 2016 compared to $31.3 million for the year ended December 31, 2015.
The increase in research and development expenses for the year ended December 31, 2016 compared to the year ended December 31, 2015 was due to a $5.2 million increase of clinical trial activities and sponsored research expense, related to an expansion of clinical sites globally. In addition, there was a continued increase in laboratory and manufacturing supplies expense due to the increase of manufacturing processing development activities, research activities, quality control activities and the validation of equipment in the new manufacturing facility. The increase is also due to higher salaries and related expenses in 2016 due to the growing size of our workforce from 70 to 96. We also incurred increased allocated facility expense due to the facility expense incurred in the new manufacturing facility. Stock-based compensation increased due to the issuance of stock options to new employees.
The increase in research and development expenses for the year ended December 31, 2015 compared to the year ended December 31, 2014 was due to a $10.7 million increase of clinical trial activities and sponsored research expense, which results primarily from the clinical trial started in Europe and the US. The increase is also due to higher salaries and related expenses in 2015 due to the growing size of our workforce from 49 to 70 and a $330 thousand bonus payment to an executive officer in the second quarter of 2015. Laboratory and manufacturing supplies also increased due to the increase of manufacturing processing development activities, research activities and quality control activities. Stock-based compensation increased due the issuance of stock options to new employees.
General and Administrative
General and administrative costs are summarized as follows (in thousands):
General and administrative expenses increased 66% to $10.3 million for the year ended December 31, 2016 compared to $6.2 million for the year ended December 31, 2015. The increase was principally due to a $0.6 million salary increase from the growth of our workforce and a $135 thousand bonus payment to an executive officer in March 2016. Share-based compensation also increased by $1.3 million due to the grant of stock options to board members in March, September and December 2016. The increase in professional fees was attributable to the commercialization activities in Europe and public relationship activity. Other reasons for increases included insurance, travel expenses, recruiting activities and allocated facility expense.
General and administrative expenses decreased by 17% to $6.2 million for the year ended December 31, 2015 compared to $7.5 million for the year ended December 31, 2014. The decrease was primarily related to the stock-based compensation expenses of $5.7 million in 2014 resulting mainly from immediately-vested granted stock options granted to board members and employees in the second half of 2014. As an offset of the decrease, professional fees increased due to additional legal fees after the Company became a public entity. Salaries and related costs increased primarily due to new employees in the general and administrative department. Patent filing expenses also increased due to the increase of worldwide patent certification activities and a $330 thousand bonus payment to an executive officer in the second quarter of 2015.
Other Income
The following table summarizes other income (in thousands):
The $49 thousand of interest income for the year ended December 31, 2016 is mainly from the interest generated from the Canadian bank. Other income consists primarily of a $21 thousand gain from the sale of fully-depreciated scientific equipment for the year ended December 31, 2015. Foreign exchange expense changed in the year ended December 31, 2016 compared to the year ended December 31, 2015.
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, 2016, we have funded our operations principally through the private placement of equity securities and our initial public offering, which have provided aggregate cash proceeds of approximately $223.9 million. At December 31, 2016, we had cash and cash equivalents of $34.3 million as compared to cash and cash equivalents of $91.1 million at December 31, 2015. The following table summarizes our sources and uses of cash (in thousands):
During the years ended December 31, 2016, 2015 and 2014, our operating activities used net cash of $46.0 million, $33.3 million and $11.7 million, respectively. The use of net cash in each of these periods primarily resulted from our net losses. The increase in net loss from operations for the year ended December 31, 2016 as compared to the year ended December 31, 2015 and 2014 was mainly due to the increase in clinical trial and manufacturing activities, as well as, the growing size of our workforce.
During the years ended December 31, 2016, 2015 and 2014, our investing activities used net cash of $13.9 million, $10.4 million, and $1.4 million, respectively. We spent approximately $9.2 million on the construction of our new manufacturing facility and building during the year ended December 31, 2016. We also spent $2.4 million more on purchases of scientific equipment during the year ended December 31, 2016, compared to $2.3 million during the year ended December 31, 2015.
During the years ended December 31, 2016, 2015 and 2014, our financing activities provided net cash proceeds of $2.9 million, $77.5 million and $63.2 million, respectively. During the year ended December 31, 2016, employees exercised stock options to purchase a total of 204,159 shares of our common stock for approximately $1.1 million in net proceeds. Also, we sold 144,426 shares under a Common Stock Sales Agreement with H.C. Wainwright & Co. LLC for net proceeds of approximately $1.8 million. During the year ended December 31, 2015, we received IPO proceeds of $76.0 million and incurred offering costs of $5.4 million, which consisted of underwriters’ commission direct incremental legal, accounting and other professional service fees related to our IPO.
On September 26, 2016, we entered into a Common Stock Sales Agreement with H.C. Wainwright & Co. LLC, which establishes an at-the-market equity program pursuant to which we may offer and sell shares of our common stock, no par value per share, from time to time as set forth in the Sales Agreement. The Sales Agreement provides for the sale of shares of our common stock having an aggregate offering price of up to $50,260,000. Sales of shares under the Sales Agreement will be made pursuant to the registration statement on Form S-3, which was declared effective by the U.S. Securities and Exchange Commission on September 1, 2016, and a related Prospectus Supplement filed with the SEC on September 26, 2016.
We expect to continue to incur substantial operating losses in the future. We will not receive any product revenue until a drug candidate has been approved by the EMA or similar regulatory agencies in other countries and successfully commercialized. As of December 31, 2016, our principal sources of liquidity were our cash and cash equivalents, which totaled approximately $34.3 million.
Contractual Obligations and Commitments
On January 12, 2008, we entered a lease agreement to lease our facility in Austin, Texas. On September 15, 2010, we entered into a second lease agreement to lease additional space in Austin, Texas. On March 20, 2013, we extended the lease for an additional 21 months on the same terms and rental rates as the current lease. On February 28, 2015, we extended the lease for another 4 years. The future minimum lease payments are as follows as of December 31, 2016 (in thousands):
Rent expense was approximately $761,000, $688,000 and $535,000 for the years ended December 31, 2016, 2015 and 2014, respectively.
Concerning the new manufacturing facility, the total estimated future payment to our general contractor is $1.2 million. The last payment is expected to occur in Q1 2017.
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.
ITEM 7A.QUANTITATIVE AND QUALITATIVE DISCLOSURE OF MARKET RISKS
The Company is not currently exposed to material market risk arising from financial instruments, changes in interest rates or commodity prices, or fluctuations in foreign currencies. The Company has no need to hedge against any of the foregoing risks and therefore currently engages in no hedging activities.
ITEM 8.
ITEM 8.FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders of XBiotech Inc.
We have audited the accompanying consolidated balance sheets of XBiotech Inc. (the Company) as of December 31, 2016 and 2015, and the related consolidated statements of operations, comprehensive loss, shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2016. 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 conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company’s internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purposes of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of XBiotech Inc. at December 31, 2016 and 2015, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2016, in conformity with U.S. generally accepted accounting principles.
/s/ Ernst & Young LLP
Austin, Texas
March 16, 2017
XBiotech Inc.
Consolidated Balance Sheets
(in thousands, except share data)
See accompanying notes.
XBiotech Inc.
Consolidated Statements of Operations
(in thousands, except share and per share data)
See accompanying notes.
XBiotech Inc.
Consolidated Statements of Comprehensive Loss
(in thousands)
See accompanying notes.
XBiotech Inc.
Consolidated Statements of Shareholders' Equity
(in thousands)
See accompanying notes.
XBiotech Inc.
Consolidated Statements of Cash Flows
(in thousands)
See accompanying notes.
XBiotech Inc.
Notes to Consolidated Financial Statements
1. Organization
XBiotech Inc. (XBiotech or the Company) was incorporated in Canada on March 22, 2005. XBiotech USA, Inc., a wholly-owned subsidiary of the Company, was incorporated in Delaware, United States in November 2007. XBiotech Switzerland AG, a wholly-owned subsidiary of the Company, was incorporated in Zug, Switzerland in August 2010. XBiotech Japan K.K., a wholly-owned subsidiary of the Company, was incorporated in Tokyo, Japan in March 2013. XBiotech Germany GmbH, a wholly-owned subsidiary of the Company, was incorporated in Germany in January 2014. The Company’s headquarters are located in Austin, Texas.
Since its inception, XBiotech has focused on advancing technology to rapidly identify and clone antibodies from individuals that have resistance to disease. At the heart of the Company is a proprietary technical knowhow to translate natural human immunity into therapeutic product candidates.
In 2005, the Company began to develop a new framework for commercial manufacturing, using technology that required less capital, fewer operators and provided greater flexibility than standard industry practices.
With the manufacturing capability to produce its True Human™ antibody therapy, in 2010 the Company began a clinical trial program. The first clinical trial program at MD Anderson Cancer Center began treating the sickest cancer patients irrespective of tumor type. Soon thereafter, the Company used the same antibody therapy in various clinical studies at treatment centers around the United States (U.S.) and abroad to investigate the antibody effect in patients that had vascular disease, leukemia, type 2 diabetes, psoriasis or acne.
The Company continues to be subject to a number of risks common to companies in similar stages of development. Principal among these risks are the uncertainties of technological innovations, dependence on key individuals, development of the same or similar technological innovations by the Company’s competitors and protection of proprietary technology. The Company’s ability to fund its planned clinical operations, including completion of its planned trials, is expected to depend on the amount and timing of cash receipts from future collaboration or product sales and/or financing transactions. The Company believes that its cash and cash equivalents of $34.3 million at December 31, 2016, and the proceeds of $31.6 million from the issuance of common stock in March 2017 (See Note 11) will enable the Company to achieve several major inflection points, including potential marketing authorization in Europe, completion of ongoing clinical studies in oncology and infectious disease, as well as launching its new manufacturing center. We expect to have sufficient cash through one year from the report issuance date.
2. Significant Accounting Policies
Basis of Presentation
These consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States (US GAAP).
Basis of Consolidation
The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany transactions have been eliminated upon consolidation.
Use of Estimates
The preparation of financial statements in accordance with accounting principles generally accepted in the U.S. requires management to make estimates and assumptions that affect the reported values of amounts in the financial statements and accompanying notes. Actual results could differ from those estimates.
Prior to its initial public offering on April 15, 2015, the Company utilized significant estimates and assumptions in determining the fair value of its common stock. The board of directors determined the estimated fair value of the Company’s common stock based on a number of objective and subjective factors, including the prices at which the Company sold shares of its common stock to third parties and external market conditions affecting the biotechnology industry sector. After the initial public offering, the fair market value is calculated by using the closing price of the Company’s common stock as reported by NASDAQ.
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.
Income Taxes
The Company makes estimates and judgments in determining the need for a provision for income taxes, including the estimation of its taxable income or loss for the full fiscal year. The Company has accumulated significant deferred tax assets that reflect the tax effects of net operating losses and tax credit carryovers and temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Realization of certain deferred tax assets is dependent upon future earnings. The Company is uncertain about the timing and amount of any future earnings. Accordingly, the Company offsets these deferred tax assets with a valuation allowance. The Company may in the future determine that certain deferred tax assets will likely be realized, in which case the Company will reduce its valuation allowance in the period in which such determination is made. If the valuation allowance is reduced, the Company may recognize a benefit from income taxes in its statement of operations in that period.
The GAAP guidance requires recognition of the impact of a tax position in our financial statements only if that position is more likely than not to be sustained upon examination by taxing authorities, based on the technical merits of the position. Any interest and penalties related to uncertain tax positions will be reflected in income tax expense. Determining the consolidated provision for income taxes involves judgments, estimates and the application of complex tax regulations. We are required to provide for income taxes in each of the jurisdictions where we operate, including estimated liabilities for uncertain tax positions. Although we believe that we have provided adequate liabilities for uncertain tax positions, the actual liability resulting from examinations by taxing authorities could differ from the recorded income tax liabilities and could result in additional income tax expense having a material impact on our consolidated results of operations. Changes of estimates in our income tax liabilities are reflected in our income tax provision in the period in which the factors resulting in the change to our estimate become known to us. We benefit from the tax credit incentives under the U.S. research and experimentation tax credit extended to taxpayers engaged in qualified research and experimental activities while carrying on a trade or business.
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 life of the option and the expected volatility of the common stock consistent with the expected life of the option, risk-free interest rates and expected dividend yields of the common stock. For awards subject to service-based vesting conditions, the Company recognizes share-based compensation expense, equal to the grant date fair value of stock options, on a straight-line basis over the requisite service period.
Share-based compensation expense recognized for the years ended December 31, 2016, 2015 and 2014 was included in the following line items on the Consolidated Statements of Operations (in thousands).
No related tax benefits were recognized for the years ended December 31, 2016, 2015 and 2014.
The fair value of each option is estimated on the date of grant using the Black-Scholes method with the following assumptions:
We based our estimate of pre-vesting forfeitures, or forfeiture rate, on historical forfeiture rates. We apply the estimated forfeiture rate to the total estimated fair value of the awards, as derived from the Black-Scholes model, to compute the share-based compensation expenses, net of pre-vesting forfeitures, to be recognized in our consolidated statements of operations.
Cash and Cash Equivalents
The Company considers highly liquid investments with a maturity of 90 days or less when purchased to be cash equivalents. Cash and cash equivalents consisted primarily of cash on deposit in U.S., German, Swiss and Canadian banks. Cash and cash equivalents are stated at cost which approximates fair value.
Concentrations of Credit Risk
Financial instruments that potentially subject the Company to credit risk consist primarily of cash and cash equivalents. The Company holds these investments in highly-rated financial institutions, and limits the amounts of credit exposure to any one financial institution. These amounts at times may exceed federally insured limits. The Company has not experienced any credit losses in such accounts and does not believe it is exposed to any significant credit risk on these funds. The Company has no off-balance sheet concentrations of credit risk, such as foreign currency exchange contracts, option contracts or other hedging arrangements.
Fair Value Measurements
The Company follows ASC Topic 820, Fair Value Measurements and Disclosures, which establishes a fair value hierarchy for those instruments measured at fair value that distinguishes between assumptions based on market data (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, 2016 and 2015, the Company did not have any assets or liabilities that were remeasured at fair value on a recurring basis. The carrying amounts reflected in the balance sheets for cash and cash equivalents, prepaid expenses and other current assets, accounts payable, and accrued expenses approximate their fair values at December 31, 2016 and 2015, due to their short-term nature.
Property and Equipment
Property and equipment, which consists of land, furniture and fixtures, computers and office equipment, scientific equipment, leasehold improvements and vehicles are stated at cost and depreciated over the estimated useful lives of the assets, with the exception of land which is not depreciated, using the straight line method. The useful lives are as follows:
• Furniture and fixtures 7 years
• Office equipment 5 years
• Leasehold improvements Shorter of asset’s useful life or remaining lease term
• Scientific equipment 5 years
• Vehicles 5 years
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.
Building Construction in Progress
Building construction in progress consists of the accumulated expenditures to build the new XBiotech manufacturing facility located in Austin, Texas, which includes the cost for land clearing, architecture design, engineering services, city permits, installation of utilities, construction materials and labor and construction management. The office place in the building will be placed in service and the Company will start to commence depreciation in January 2017. The manufacturing facility is still in the process of validation. The Company will commence depreciation over its estimated useful life once it is placed into service.
Impairment of Long-Lived Assets
The Company periodically evaluates its long-lived assets for potential impairment in accordance with ASC Topic 360, Property, Plant and Equipment. Potential impairment is assessed when there is evidence that events or changes in circumstances indicate that the carrying amount of an asset may not be recovered. Recoverability of these assets is assessed based on undiscounted expected future cash flows from the assets, considering a number of factors, including past operating results, budgets and economic projections, market trends and product development cycles. If impairments are identified, assets are written down to their estimated fair value. The Company has not recognized any impairment through December 31, 2016.
Foreign Currency Transactions
Certain transactions are denominated in a currency other than the Company’s functional currency of the U.S. dollar, and the Company generates assets and liabilities that are fixed in terms of the amount of foreign currency that will be received or paid. At each balance sheet date, the Company adjusts the assets and liabilities to reflect the current exchange rate, resulting in a translation gain or loss. Transaction gains and losses are also realized upon a settlement of a foreign currency transaction in determining net loss for the period in which the transaction is settled.
Comprehensive Income (Loss)
ASC Topic 220, Comprehensive Income, requires that all components of comprehensive income (loss), including net income (loss), be reported in the financial statements in the period in which they are recognized. Comprehensive income (loss) is defined as the change in equity during a period from transactions and other events and circumstances from non-owner sources, including unrealized gains and losses on investments and foreign currency translation adjustments.
Segment and Geographic Information
Operating segments are identified as components of an enterprise about which separate discrete financial information is available for evaluation by the chief operating decision maker, or decision making group, in making decisions on how to allocate resources and assess performance. The Company’s chief operating decision maker is the Chief Executive Officer. The Company and the chief operating decision maker view the Company’s operations and manage its business as one operating segment. Substantially all of the Company’s operations are in the U.S. geographic segment.
Net Loss per Share
Net 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 loss by the weighted average number of common shares and common share equivalents outstanding (if dilutive) during each period. The number of common share equivalents, which include stock options, is computed using the treasury stock method.
Subsequent Events
The Company considered events or transactions occurring after the balance sheet date but prior to the date the consolidated financial statements are available to be issued for potential recognition or disclosure in its consolidated financial statements. We have evaluated subsequent events through the date of filing this Form 10-K.
Recent Accounting Pronouncements
In August 2014, the FASB issued ASU 2014-15, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern. The ASU is intended to define management’s responsibility to evaluate whether there is substantial doubt about an organization’s ability to continue as a going concern and to provide related footnote disclosures. For all entities, the ASU is effective for annual periods ending after December 15, 2016 and interim periods within annual periods beginning after December 15, 2016. The adoption of this standard did not have a material effect on the Company’s financial statements or disclosures.
In February 2016 the FASB issued final guidance that will change the accounting for leases. The FASB issued final guidance that requires lessees to put most leases on their balance sheets but recognize expenses on their income statements in a manner similar to today’s accounting. The guidance also eliminates today’s real estate-specific provisions for all entities. For lessors, the guidance modifies the classification criteria and the accounting for sales-type and direct financing leases. All entities classify leases to determine how to recognize lease-related revenue and expense. Classification continues to affect what lessors record on the balance sheet. For calendar-year public business entities and certain calendar-year not-for-profit entities and employee benefit plans, the guidance is effective in 2019, and interim periods within that year. For other calendar-year entities, it is effective in 2020, and interim periods in 2021. Early adoption is permitted for all entities. The adoption of this standard will require the Company to record its operating leases on the balance sheet.
In November 2015, the FASB issued ASU 2015-17, Balance Sheet Classification of Deferred Taxes. We adopted these accounting changes on a prospective basis during the three months ended December 31, 2016. To simplify the presentation of deferred income taxes, the amendments in this update require that deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position. The amendments in this update apply to all entities that present a classified statement of financial position. For public business entities, the amendments in this update are effective for financial statements issued for annual periods beginning after December 15, 2016, and interim periods within those annual periods. The adoption of this standard did not have a material effect on the Company’s financial statements or disclosures.
3. Property and Equipment and Building Construction in Progress
Property and equipment consisted of the following as of December 31, 2016 and 2015 (in thousands):
Depreciation expenses related to property and equipment amounted to approximately $698,000, $699,000, and $664,000 and for the years ended December 31, 2016, 2015 and 2014, respectively. Construction in process is related to research and development and manufactory equipment.
Building construction in progress consists of the accumulated expenditures to build the new XBiotech manufacturing facility located in Austin, Texas, which includes the cost for land clearing, architecture design, engineering services, city permits, installation of utilities, construction materials and labor and construction management. The office space in the building will be placed in service and the Company will start to commence depreciation in January 2017. The manufacturing facility is still in the process of validation. The Company will commence depreciation over its estimated useful life once it is placed into service.
4. Accrued Expenses
Accrued expenses consist of the following as of December 31, 2016, and 2015 (in thousands):
5. Common Stock
Pursuant to its Articles, the Company has an unlimited number of shares available for issuance with no par value.
In February 2014, the Company sold 1.2 million shares of common stock for total proceeds of approximately $12.0 million from the exercise of warrants by its warrant holders. From July through November 18, 2014, the Company sold approximately 601,000 shares of common stock at a price of $15.00 per share for total proceeds of approximately $9.0 million. Each share had one warrant attached, which would be exercisable for 180 days into a single common share in the Company at a price of $15.00 per share. As of December 31, 2014, the Company had total warrants outstanding for the purchase of 493,000 shares of common stock at a price of $15.00 per share.
From November 24, 2014 through December 31, 2014, the Company sold 3.0 million shares of common stock at $15.00 per share pursuant to stock subscription agreements for total proceeds of $44.8 million of which $410,000 remained uncollected as of December 31, 2014 and was received in January 2015. The Company incurred issuance costs of approximately $1.9 million in cash and $0.4 million in non-cash consideration.
In December 2014, 15,000 stock options were exercised at a price of $10.00 for total proceeds of $0.15 million.
From January to March 2015, warrants to purchase a total of 164,999 shares of common stock were exercised at $15.00 per share for a total of $2.5 million. Also, the Company received approximately $8,000 in January 2015 from 15,000 exercised stock options at $0.55 per share.
On April 17, 2015, the Company sold 4.0 million shares of common stock at $19.00 per share in its Initial Public Offering (“IPO”) resulting in net proceeds of $70.6 million.
From April to June 2015, excluding the IPO, the Company issued 208,333 shares of common stock for total proceeds of approximately $3.1 million from the exercise of warrants by common stock shareholders. Also, the Company received $0.7 million from 106,000 exercised stock options.
In July 2015, 12,000 stock options were exercised at a price of $2.50 for total proceeds of $30,000.
From October through December 31, 2015, 226,141 shares of common stock were issued upon the exercise of stock options at the price between $0.53 to $10 per share for total proceeds of $639,253.
From January through December 2016, 204 thousand shares of common stock were issued upon the exercise of stock options at a price of $ 0.74 to $19.09 per share for a total of $1.1 million.
From November through December 2016, under the Common Stock Sales Agreement with H.C. Wainwright & Co. LLC, the Company sold 145 thousand shares of common stock at a price between $13.60 to $14.17 per share for total proceeds of $1.8 million.
6. Common Stock Options
On November 11, 2005, the board of directors of the Company adopted a stock option plan (“the 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 will be non-transferable and may be exercised only by the participant, or in the event of the death of the participant, a legal representative until the earlier of the options’ expiry date or the first anniversary of the participant’s death, or such other date as may be specified by the Compensation Committee.
The term of the options is at the discretion of the Compensation Committee, but may not exceed 10 years from the grant date. The options expire on the earlier of the expiration date or the date three months following the day on which the participant ceases to be an officer or employee of or consultant to the Company, or in the event of the termination of the participant with cause, the date of such termination. Options held by non-employee Directors have an exercise period coterminous with the term of the options.
The number of common shares reserved for issuance to any one person pursuant to this 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 Plan is as follows:
The weighted average fair value of the options issued to directors, employees and consultants during the fiscal years ended December 31, 2016, 2015 and 2014, was $7.29, $17.95 and $8.23, respectively. Options with an intrinsic value of $1.63, $2.86 and $2.90, became vested during 2016, 2015 and 2014, respectively. The total intrinsic value of options exercisable and total options outstanding at December 31, 2016 was $15,398,000 and $15,588,000, respectively. The total fair value of options vested during the years ended December 31, 2016, 2015 and 2014 was $5,728,000, $5,463,000 and $6,999,000, respectively.
As of December 31, 2016, there was approximately $3.8 million of unrecognized compensation cost, related to stock options granted under the Plan which will be amortized to stock compensation expense over the next 2.19 years.
7. Net Loss Per Share
The following summarizes the computation of basic and diluted net loss per share for the years ended December 31, 2016, 2015 and 2014 (in thousands, except share and per share data):
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.
8. Income Taxes
The Company recorded no provision for income taxes for the years ended December 31, 2016, 2015 and 2014 due to the reported net losses in each year.
A reconciliation of the Company’s Canadian federal statutory income tax rate to the Company’s effective income tax rate is as follows for the years ended December 31, 2016, 2015 and 2014:
During the years ended December 31, 2016, 2015 and 2014, the Company had no interest and penalties related to income taxes.
As of December 31, 2016, and 2015, the Company has unused net operating losses of approximately $133.0 million.(approximately $108.9 million in Canada, $18.6 million in the U.S., $4.8 million in Germany and $0.6 million in Switzerland and Japan) and $87.1 million.(approximately $70.8 million in Canada, $11.7 million in the U.S., $4.0 million in Germany and $0.6 million in Switzerland and Japan) respectively available to reduce taxable income of future years. The tax benefit of net operating losses begin to expire in 2025 in Canada, 2028 in U.S., 2034 in Germany 2018 in Switzerland, and 2022 in Japan.
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The Company has established a valuation allowance due to uncertainties regarding the realization of deferred tax assets based upon the Company’s lack of earnings history. Significant components of the Company’s deferred tax assets and liabilities as of December 31, 2016, 2015 and 2014 as follows (in thousands):
Due to additional current year loses, the valuation allowance increased by approximately $11.5 and $10.3 million during the year ended December 31, 2016 and 2015 respectively.
The Company applies the accounting guidance in ASC 740 related to accounting for uncertainty in income taxes. The Company’s reserves related to taxes are based on a determination of whether, and how much of, a tax benefit taken by the Company in its tax filings or positions is more likely than not to be realized following resolution of any potential contingencies present related to the tax benefit. As of December 31, 2016 and 2015, the Company had no unrecognized tax benefits.
The Company files federal income tax returns in Canada, US, Switzerland, Germany, and Japan. The Company also files income tax returns in the state of Texas in the US. The statute of limitations for assessment by local taxing authorities is open for tax years ended after December 2011. There are currently no federal or state income tax audits in progress.
The components of income before income taxes are as follows:
In November 2015, the FASB issued ASU 2015-17, Balance Sheet Classification of Deferred Taxes. We adopted these accounting changes on a prospective basis during the three months ended December 31, 2016. To simplify the presentation of deferred income taxes, the amendments in this update require that deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position. The amendments in this update apply to all entities that present a classified statement of financial position. For public business entities, the amendments in this update are effective for financial statements issued for annual periods beginning after December 15, 2016, and interim periods within those annual periods. The adoption of this standard did not have a material effect on the Company’s financial statements or disclosures.
9. Related-Party Transactions
Legal fees of approximately $37,000 were incurred to a law firm for legal services rendered in which a former director of the Company is a senior partner in 2014. There are no related-party transactions in 2015 and 2016.
10. Commitments and Contingencies
On January 12, 2008, the Company entered a lease agreement to lease its facility in Austin, Texas, U.S. On September 15, 2010, the Company entered into a second lease agreement to lease additional space in Austin, TX, U.S. Both leases expired in 2013. On March 20, 2013, the company extended the lease for another 21 months with the same terms and rental rates as the current leases. On February 28, 2015, the Company extended the leases for another four years with two years early termination right. The future minimum lease payments are as follows as of December 31, 2016 (in thousands):
Rent expense was approximately $761,000, $688,000 and $535,000 for the years ended December 31, 2016, 2015 and 2014, respectively.
XBiotech Corporate officers, Queena Han (VP of Finance) and John Simard (President and CEO), XBiotech Inc., and certain directors were named defendants in securities class action civil suits filed in federal court at the U.S. District Court for the Western District of Texas, in Austin, Texas and state court at the Los Angeles County Superior Court, in California. In the California action, the underwriter WR Hambrecht & Co., LLC is also named as a defendant. These civil suits were filed on December 1, 2015. The foundation for both suits are similar in that the plaintiffs allege the officers of the Company made false and misleading statements, violating the securities laws, in the IPO documents in April 2015. Specifically, these alleged false statements in the IPO documents are in relation to the European Phase III clinical trial for Xilonix™. The allegations focus on a press release posted by XBiotech on November 23, 2015, explaining certain issues with patient data. Plaintiffs allege the company knew of these issues during the IPO and neglected to disclose them in supporting documentation filed with the Security and Exchange Commission (SEC). As a result of the news release, XBiotech (traded on the NASDAQ) stock tumbled. The resulting securities class action lawsuits are seeking relief for plaintiffs who report financial losses due to the alleged false and misleading statements. In September 2016, a stay was granted in the California case. Plaintiffs were, at that time, left with the opportunity to re-file in Texas prior to the decision on the motion to dismiss. Plaintiffs did not re-file in Texas before the case was dismissed with prejudice in October 2016. Plaintiffs are seeking to re-open the case in California. A tentative hearing date of April 14, 2017 has been set.
11. Subsequent Events
During February 2017, the Company sold 87,326 shares of common stock at an average price of $12.23 per share. Net cash proceeds from these transactions totaled approximately $1 million after deducting commissions and fees. Sales of shares under the Sales Agreement are made pursuant to the registration statement on Form S-3, which was declared effective by the U.S. SEC on September 1, 2016, and a related Prospectus Supplement filed with the SEC on September 26, 2016.
On March 3, 2017, the Company entered into subscription agreements with accredited investors providing for the issuance and sale by the Company of approximately 2,433,795 common shares in a registered direct offering at $13 per share. The Company received gross proceeds of approximately $31,639,335. Sales of shares under the Subscription Agreements are made pursuant to the registration statement on Form S-3, which was declared effective by the U.S. Securities and Exchange Commission on September 1, 2016, and related Prospectus Supplement filed with the SEC on March 3, 2017.
ITEM 9.
ITEM 9.CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A.
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, 2016, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with GAAP.
Changes in Internal Control Over Financial Reporting
There was no change in our internal control over financial reporting that occurred during the fourth quarter of the year ended December 31, 2016 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Limitations on Effectiveness of Controls and Procedures
In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply judgment in evaluating the benefits of possible controls and procedures relative to their costs.
ITEM 9B.
ITEM 9B.OTHER INFORMATION
None.
PART III
ITEM 10.
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 “Section 16(0) Beneficial Ownership Reporting Compliance” and “EXECUTIVE OFFICERS” contained in our definitive Proxy Statement (the “Proxy Statement”), which we will file on or about April 28, 2017 with the Securities and Exchange Commission in connection with the solicitation of proxies for our 2017 Annual Meeting of Stockholders to be held on June 19, 2017.
ITEM 11.
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.
ITEM 12.SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The information required by this item will be set forth under the heading “Security Ownership of Certain Beneficial Owners and Management" in our Proxy Statement and is incorporated herein by reference.
The information required by Item 201(d) of Regulation S-K will be set forth in the section headed “Equity Compensation Plan Information” in our Proxy Statement and is incorporated herein by reference.
ITEM 13.
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.
ITEM 14.PRINCIPAL ACCOUNTING FEES AND SERVICES
The information required by this item will be set forth in the section headed “Ratification of Selection of Independent Registered Public Accounting Firm” in our Proxy Statement and is incorporated herein by reference.
PART IV
ITEM 15.
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
ITEM 16.FORM 10-K SUMMARY
Not applicable.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on March 16, 2017.
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
/S/ John Simard
March 16, 2017
John Simard, Chief Executive Officer (Principal Executive Officer) and Director
/S/ Queena Han
March 16, 2017
Queena Han, Vice President of Finance & Human Resources (Principal Financial Officer and Principal Accounting Officer)
/ S/ Fabrizio Bonanni
March 16, 2017
Fabrizio Bonanni, Director
/S/ W. Thorpe Mckenzie
March 16, 2017
W. Thorpe McKenzie, Director
/S/ Daniel Vasella
March 16, 2017
Daniel Vasella, Director
EXHIBIT INDEX