XBiotech Inc. - Quarter Report: 2015 September (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

For the quarterly period ended September 30, 2015

or

Commission File Number 001-37437

XBIOTECH INC.

(Exact name of registrant as specified in charter)

8201 E. Riverside Drive, Bldg. 4, Suite 100

Austin, TX 78744

(Address of principal executive offices)(Zip Code)

Telephone Number (512) 386-2900

(Registrant’s telephone number, including Area Code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes ý      No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ý  No  ¨

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

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

As of November 10, 2015, the registrant had 32,184,465 shares of common stock outstanding.

XBIOTECH INC.

THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2015

INDEX

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 Cash Flows

(in thousands)

See accompanying notes.

XBiotech Inc.

Notes to Consolidated Financial Statements

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward – looking Statements

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

All forward looking statements in this Quarterly Report on Form 10-Q involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by these forward-looking statements. Factors that may cause actual results to differ materially from current expectations in this Quarterly Report on Form 10-Q, include, among other things, those under the heading “Risk Factors” included in our Prospectus filed with the Securities and Exchange Commission ("SEC") on April 16th, 2015, and elsewhere in this Quarterly Report on Form 10-Q. These factors should not be construed as exhaustive and should be read in conjunction with the other cautionary statements that are included in this Quarterly Report on Form 10-Q.  Given these uncertainties, you should not place undue reliance on these forward-looking statements. Except as required by law, we assume no obligation to update or revise these forward-looking statements for any reason, even if new information becomes available in the future.

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

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 September 30, 2015, we had an accumulated deficit of $118.8 million. We had net losses of $10.8 million and $25.6 million for three months and nine months ended September 30, 2015, respectively, compared to $7.0 million and $15.4 million for three months and nine months ended September 30, 2014, respectively. 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 begin to operate as a public company. We will need to generate significant revenues to achieve profitability, and we may never do so. On April 17, 2015, the Company closed its initial public offering of 4,000,000 shares of its common stock at a price of $19.00 per share for a total offering amount of $76,000,000, before underwriting discounts, commissions and other Company expenses. Net proceeds to the Company totaled approximately $70.6 million after deducting underwriting discounts and commissions of $3.8 million and other offering expenses of approximately $1.6 million. As of September 30, 2015, we had 73 employees.

Recent Events:

Clinical trial and construction of the new manufacturing facility Highlights

As of September 30, 2015 XBiotech has achieved some significant milestones with its Xilonix and 514G3 programs. Enrollment on a Phase III Symptomatic Colorectal Cancer Study has been completed and 61 subjects have been randomized and dosed. Additionally, the first dose cohort has been enrolled on a Staphylococcus Aurues Bacteremia Phase I/II Study with a brand new antibody therapy, 514G3. Having met this milestone, sites were given the green light to advance to the next dose level in the Phase I portion of the study.

There was significant progress in the third  quarter with regard to construction of the new manufacturing facility located in Austin Texas.  During the quarter the building walls, structural steel, and roofing were installed.  Build out of the interior was started in administrative and lab spaces, and the building was prepared for installation of clean rooms.  Final engineering designs were completed for the manufacturing spaces with clean room construction scheduled to commence in Q4 2015.  All activities are on schedule per the current project plan with anticipated building completion in March of 2016 and validation of product in July 2016.

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, Xilonix™, 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 operations 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 September 30, 2015, we have recorded total research and development expenses, including share-based compensation, of $90.9 million. Our total research and development expenses for the three months and nine months ended September 30, 2015 were $9.7 million and $20.9 million, respectively, compared to $4.3 million and $9.9 million for the three months and nine months ended September 30, 2014, respectively. Share-based compensation accounted for $0.7 million and $1.7 million for the three months and nine months ended September 30, 2015, respectively, compared to $2.3 million and $2.8 million for the three months and nine months ended September 30, 2014, respectively.

Research and development expenses, as a percentage of total operating expenses for the three months and nine months ended September 30, 2015 were 90% and 82%, respectively, compared to 62% and 65% for the three months and nine months ended September 30, 2014, respectively. The percentages, excluding stock-based compensation, for the three months and nine months ended September 30, 2015 were 91% and 87%, respectively, compared to 92% and 88% for the three months and nine months ended September 30, 2014, respectively.

As planned, our clinical costs will increase as we advance Xilonix™ as an anti-cancer therapy for treating last-line metastatic colorectal cancer, under a regulatory path through Phase III clinical trials in Europe and the US and when we expand the studies to South America, Australia and Canada, with all territories expected to be active by the end of 2015. Our clinical study underway in Europe that is being regulated by the European Medicines Agency ("EMA") have completed enrollment in August, 2015. Depending on the outcome of this study, submission for marketing approval with the EMA could take place by the year ended 2015, which could position the Company to generate related revenues in 2017 if it receives EMA marketing approval and the Company successfully completes it commercialization plan for Xilonix™. The clinical research and development costs will also increase as we have launched phase 1 and 2 clinical study of novel True Human™ therapeutic antibody for treating serious infections due to Staphylococcus aureus in the U.S. We expect to expand this study to Europe, South Korea and Taiwan by the end of 2015. The Company’s plans to pursue an advanced regulatory path for Pyoderma Gangrenosum is on hold indefinitely while we await the outcome of other programs in later stages of development. In the meantime, 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 R&D 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, stock–based compensation, and professional fees for legal services. Our total general and administration expenses for the three months and nine months ended September 30, 2015 were $1.1 million and $4.5 million, respectively, compared to $2.6 million and $5.5 million for the three months and nine months ended September 30, 2014, respectively. Share-based compensation accounted for $0.2 million and $1.7 million for the three months and nine months ended September 30, 2015, respectively, compared to $0.3 million and $2.2 million for the three months and nine months ended September 30, 2014, respectively.

Critical Accounting Policies

Our Management’s Discussion and Analysis of our 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, or 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 Quarterly Report on Form 10-Q, 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 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 new 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 during these periods as the fair value of our common stock.

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.

Results of Operations

Revenue

We did not record any revenue during the three months and nine months ended September 30, 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 124% to $9.7 million for three months ended September 30,2015 compared to $4.3 million for the three months ended September 30, 2014. Research and development expenses increased by 110% to $20.9 million for the nine months ended September 30, 2015 compared to $9.9 million for the nine months ended September 30, 2014.

The increase in research and development expenses for the three months ended September 30, 2015 compared to the three months ended September 30, 2014 was due to a continued increase of employees working at the Company from 68 to 73 and salary increase for current employees. Laboratory and manufacturing supplies also increased due to the increase of the research activities as well as quality control activities. The sharp increase of clinical trials and sponsored research results primarily from the clinical trial started in Europe and the US. In the meantime, stock–based compensation increased due to issuing stock options to new employees and the expenses related to the employees’ options awarded in 2015.

Compared to the nine months ended September 30, 2014, research and development expenses doubled for the nine months ended September 30, 2015. This increase was principally due to a $5.7 million increase in clinical trial activities, mainly in Europe and the US. The laboratory and manufacturing supplies increased due to manufacturing processing development activities. Labor costs also increased due to current employees’ salary increase and the growing size of the workforce, increases in stock-based compensation due to the stock options awarded in the second half of 2014 and the continuing vesting of such awards in 2015.

General and Administrative

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

General and administrative expenses decreased by 59% to $1.1 million for the three months ended September 30, 2015 compared to $2.6 million for the three months ended September 30, 2014. General and administrative expenses decreased by 17% to $4.5 million for the nine months ended September 30, 2015 compared to $5.5 million for the nine months ended September 30, 2014.

The three months decrease was primarily related to the stock–based compensation expenses of $2.3 million in 2014 due to the immediately-vested grant of stock options to board members and employees in the second half of 2014. The salary 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.

The nine months decrease was also primarily due to the stock–based compensation expenses in connection with the stock options to board members, consultants and employees in the second half of 2014. The increase of professional fees, which partially offset the decrease, was due to an increase in legal fees after the Company became a public entity. Salaries and related costs increased resulted from current employees’ salary increase, the growing size of the workforce, and a bonus payment to an executive officer.

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 September 30, 2015, 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 $206.4 million. The following table summarizes our sources and uses of cash (in thousands):

During the nine months ended September 30, 2015 and 2014, our operating activities used net cash of $22.6 million and $8.2 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 nine months ended September 30, 2015 as compared to the nine months ended September 30, 2014 was due to the increase in clinical trial activities in Europe and the growing size of workforce.

During the nine months ended September 30, 2015 and 2014, our investing activities used net cash of $6.6 million and $0.8 million, respectively. We spent approximately $4.7 million more on the construction of our new manufacturing facility during the nine months ended September 30, 2015 compared to the nine months ended September 30, 2014. We also spent $1.1 million more on purchases of scientific equipment during the nine months ended September 30, 2015, compared to the nine months ended September 30, 2014.

During the nine months ended September 30, 2015 and 2014, our financing activities provided net cash proceeds of $77.5 million and $17.4 million, respectively. During the nine months ended September 30, 2015, we received IPO proceeds of $72.2 million and incurred offering costs of $1.6 million, which consisted of direct incremental legal, accounting and other professional service fees related to our IPO. Also, during the nine months ended September 30, 2015, investors exercised warrants to purchase a total of 373,332 shares of our common stock at an exercise price of $15.00 per share for a total of approximately $5.6 million in net proceeds, and exercised stock option to purchase a total of 133,000 shares of our common stock for a total of approximately $0.7 million in net proceeds. In January 2015, we received previously outstanding subscription receivable in the amount of $0.4 million.

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 FDA or similar regulatory agencies in other countries and successfully commercialized. As of September 30, 2015, our principal sources of liquidity were our cash and cash equivalents, which totaled approximately $105.7 million.

On April 14, 2015, our registration statement on Form S-1 (File No. 333-201813) was declared effective by the SEC for our initial public offering pursuant to which we sold an aggregate of 4,000,000 shares of our common stock at a price of $19.00 per share. 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. There has been no material change in the planned use of proceeds from our initial public offering as described in our final prospectus filed with the Securities and Exchange Commission on April 16, 2015 pursuant to Rule 424(b).

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, 2014, we extended the lease for an additional 21 months on the same terms and rental rates as the current lease. Rent expense was $164 thousand and $139 thousand for the three months ended September 30, 2015 and 2014, respectively. On February 28, 2015, we extended the lease for another 4 years. The future minimum lease payments are as follows as of September 30, 2015 (in thousands):

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.

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.

Management's Evaluation of our Disclosure Controls and Procedures

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

Changes in Internal Control

There was no change in our internal control over financial reporting that occurred during the period covered by this Quarterly Report on Form 10-Q 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.

PART II - OTHER INFORMATION

We are not currently a part to any material litigating or other material legal proceedings.

There have been no material changes in the risk factors previously disclosed in our final prospectus filed with the SEC on April 16, 2015.

(a) Recent Sales of Unregistered Equity Securities

During the period between July 1, 2015 and September 30, 2015, one investor exercised a warrant to purchase a total of 12,000 shares of our common stock at price of $2.50 per share for a total of approximately $30 thousand in net proceeds from this exercised warrant.

(b) 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.

There has been no material change in the planned use of proceeds from our initial public offering as described in our final prospectus filed with the Securities and Exchange Commission on April 16, 2015 pursuant to Rule 424(b). We are holding the balance of the net proceeds from the IPO in a bank account at CIBC USD account.

Not Applicable.

Not Applicable.

Not Applicable.

*Exhibits filed herewith.

**Exhibits furnished herewith.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

EXHIBIT INDEX

* Exhibits filed herewith.

**Exhibits furnished herewith.

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