Annual Report for Fiscal Year Ending 12-31, 2025 (Form 10-K)

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

You should read the following discussion and analysis of our financial condition and results of operations together with our audited consolidated financial statements for the year ended December 31, 2025 and related notes thereto, which have been prepared in accordance with U.S. GAAP, included elsewhere in this annual report on Form 10-K. Some of the information contained in this discussion and analysis or set forth elsewhere in this annual report on Form 10-K, including information with respect to our plans and strategy for our business and related financing, includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and is subject to the safe harbor created by those sections. As a result of many factors, including those factors set forth in the "Risk Factors" section of this annual report on Form 10-K, our actual results could differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis. For more information, see "Cautionary Statement About Forward-Looking Statements." In particular, we encourage you to review the risks and uncertainties described in "Risk Factors" in this annual report on Form 10-K. These forward-looking statements are made as of the date of this report, and we do not intend, and do not assume any obligation, to update these forward-looking statements, except as required by law. All dollar amounts stated herein are in U.S. dollars unless specified otherwise.

Overview

XBiotech Inc. ("XBiotech" or the "Company") is a pre-market biopharmaceutical company engaged in discovering and developing True Human™ monoclonal antibodies for treating a variety of diseases. True Human™ monoclonal antibodies are those which occur naturally in human beings-as opposed to being derived from animal immunization or otherwise engineered. We believe that naturally occurring monoclonal antibodies have the potential to be safer and more effective than their non-naturally occurring counterparts. XBiotech is focused on developing its True Human™ pipeline and manufacturing system.

Following the Janssen Transaction in December 2019, the tender offer in February 2020, and the dividends paid in July 2021, our accumulated deficit as of December 31, 2025 was ($136.3) million. We had a net loss of $45.5 million for the year ended December 31, 2025, compared to a net loss of $38.5 million for the year ended December 31, 2024. During the fiscal year of 2026, we don't expect to generate any revenue. In addition, we expect to incur significant and increasing operating losses for the foreseeable future as we advance our drug candidates from discovery through preclinical testing and clinical. In addition to these research and development expenses, we expect general and administrative costs to increase, particularly in consideration of current inflationary trends. We will need to generate significant revenues to achieve or sustain profitability, and we may never do so. As of December 31, 2025, we had 85 employees.

Components of Results of Operations

Revenues

Prior to receiving payments under the clinical manufacturing agreement entered in connection with the Janssen Transaction, we had not generated any revenue. Under the clinical manufacturing agreement, we manufactured Bermekimab for use by Janssen in clinical trials, in exchange for fixed payments, paid in quarterly installments through 2021. In February 2022, we entered a new manufacturing contract with a Janssen-related company whereby we continued to manufacture Bermekimab through November 2022. The contract terminated in November 2022. Our ability to generate any additional revenue and/or to become profitable (or sustain any profitability) depends on our ability to successfully commercialize any product candidates we may advance in the future.

Operating Expenses

Research and Development Expenses

Research and development expense consists of expenses incurred in connection with identifying and developing our drug candidates. These expenses consist primarily of salaries and related expenses, share-based compensation, laboratory and manufacturing supplies, facility costs, costs for preclinical and clinical research, development of quality control systems, quality assurance programs and manufacturing processes. We charge all research and development expenses to operating expenses as incurred.

The clinical development costs may further increase going forward with potentially more advanced studies in the future as we evaluate our clinical data and pipeline.

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, 2025, we have recorded total research and development expenses, including share-based compensation, of $397.1 million. Our total research and development expenses for the year ended December 31, 2025 was $47.4 million, compared to $37.8 million the year ended December 31, 2024. Share-based compensation accounted for $2.7 million for the year ended December 31, 2025 and $1.1 million for the year ended December 31, 2024.

Research and development expenses as a percentage of total operating expenses was 85% for the year ended December 31, 2025, and 89% for the year ended December 31, 2024. The percentages, excluding share-based compensation, were 86% for the year ended December 31, 2025, and 90% for the year ended December 31, 2024.

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 $8.3 million for the year ended December 31, 2025, and $4.7 million for the year ended December 31, 2024. Share-based compensation accounted for $0.9 million for the year ended December 31, 2025, and $0.6 million for the year ended December 31, 2024.

General and administrative expenses as a percentage of total operating expenses was 15% for the year ended December 31, 2025, and 11% for the year ended December 31, 2024. The percentages, excluding share-based compensation, were 14% for the year ended December 31, 2025, and 10% for the year ended December 31, 2024.

Critical Accounting Estimates

Our Management's Discussion and Analysis of Financial Condition and Results of Operations is based on our financial statements, which have been prepared in conformity with generally accepted accounting principles in the United States (US GAAP). The preparation of our financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and expenses incurred during the reported periods.

We base estimates on our historical experience, known trends and various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

While our significant accounting policies are more fully described in the notes to our financial statements appearing in this Annual Report on Form 10-K, we believe that the following accounting policies are the most critical to understanding and evaluating our reported financial results.

Share-Based Compensation

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

Determination of the Fair Value of Share-Based Compensation Grants

The determination of the fair value of share-based compensation arrangements is affected by a number of variables, including estimates of the expected stock price volatility, risk-free interest rate and the expected life of the award. We value stock options using the Black-Scholes option-pricing model, which was developed for use in estimating the fair value of traded options that are fully transferable and have no vesting restrictions. Black-Scholes option-pricing model and other option valuation models require the input of highly subjective assumptions, including the expected stock price volatility. If we made different assumptions, our share-based compensation expenses, net loss, and net loss per common share could be significantly different. We determine that the fair value of common stock as the closing price of the Company's common stock as reported by NASDAQ on the option grant date.

The following summarizes the assumptions used for estimating the fair value of stock options granted during the periods indicated:

		Year Ended December 31,
		2025				2024
Weighted-average grant date fair value per share		$	2.68			$	3.96
Expected volatility			79%-80	%			79%-83	%
Risk-free interest rate			3.7%-4.5	%			3.6%-4.4	%
Expected life (in years)			5.29-10.00				5.00-6.25
Dividend yield			-				-

With the exception of the dividend paid in 2021, we have not historically paid dividends. We have assumed no dividend yield because we do not expect to pay dividends in the foreseeable future. The risk-free interest rate assumption is based on observed interest rates for U.S. Treasury securities with maturities consistent with the expected life of our stock options. The expected life represents the period of time the stock options are expected to be outstanding and is based on the simplified method when the stock option includes "plain vanilla" terms. Under the simplified method, the expected life of an option is presumed to be the midpoint between the vesting date and the end of the agreement term. We used the simplified method due to the lack of sufficient historical exercise data to provide a reasonable basis upon which to otherwise estimate the expected life of the stock options. For stock options that did not include "plain vanilla" terms, we used the contractual life of the stock option as the expected life. Such stock options consisted primarily of options issued to our board of directors that were immediately vested at issuance. Expected volatility is based on historical volatilities for publicly traded stock of comparable companies over the estimated expected life of the stock options. The Company accounts for forfeitures as they occur rather than on an estimated basis.

Income Taxes

We account for income taxes under the asset and liability method. We record deferred tax assets and liabilities for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, as well as for operating loss and tax credit carryforwards. We measure deferred tax assets and liabilities using enacted tax rates expected to apply to taxable income in the years in which we expect to recover or settle those temporary differences. We recognize the effect of a change in tax rates on deferred tax assets and liabilities in the results of operations in the period that includes the enactment date. We assess the likelihood that deferred tax assets will be realized, and we recognize a valuation allowance if it is more likely than not that some portion of the deferred tax assets will not be realized. This assessment requires judgment as to the likelihood and amounts of future taxable income by tax jurisdiction. To date, with the exception of certain Canada deferred tax assets that will reverse in a period in which they may be carried back, we have provided a valuation allowance against our deferred tax assets as we believe the objective and verifiable evidence of our historical pretax net losses outweighs any positive evidence of our forecasted future results. Although we believe that our tax estimates are reasonable, the ultimate tax determination involves significant judgment. We will continue to monitor the positive and negative evidence and will adjust the valuation allowance as sufficient objective positive evidence becomes available.

We account for uncertain tax positions by recognizing the financial statement effects of a tax position only when, based upon technical merits, it is more likely than not that the position will be sustained upon examination. We recognize potential accrued interest and penalties associated with unrecognized tax positions within our global operations in income tax expense.

Clinical Trial Accruals

Expense accruals related to clinical trials are based on actual services received and efforts expended pursuant to contracts with third party service providers which conduct and manage clinical trials on the Company's behalf. The financial terms of these agreements vary from contract to contract and may result in uneven payment flows. Payments under some of these contracts depend on factors such as the successful enrollment of patients and the completion of clinical trial milestones. The Company accrues costs based on the actual services rendered in the period over which services were performed and the level of effort expended in each period based upon patient enrollment, clinical site activations, or information provided to the Company by its vendors on their actual costs incurred. Any estimates of the level of services performed or the costs of these services could differ from actual results.

Results of Operations

Expenses

Research and Development

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

		Year Ended December 31,								Increase				% Increase
		2025				2024				(Decrease)				(Decrease)
Salaries and related expenses		$	34,444			$	18,091			$	16,353				90	%
Laboratory and manufacturing supplies			2,545				4,240				(1,695	)			-40	%
Clinical trials and sponsored research			930				7,039				(6,109	)			-87	%
Share-based compensation			2,692				1,127				1,565				139	%
Other			6,779				7,260				(481	)			-7	%
Total		$	47,390			$	37,757			$	9,633				26	%

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 26% to $47.4 million for the year ended December 31, 2025 compared to $37.8 million for the year ended December 31, 2024. The rise was mainly due to the increase in salaries and related expenses. John Simard retired from his role as President and Chief Executive Officer effective December 8, 2025. Pursuant to Section 8(c) of Mr. Simard's Executive Employment Agreement, the Company paid a severance amount of $17.3 million, and Mr. Simard's 2025 annual bonus of $4.5 million was approved by the Compensation Committee in December 2025. A total of 85% of Mr. Simard's compensation was allocated to research and development expenses, with the remainder allocated to general and administrative expenses. The decrease in clinical trial and sponsored research expenses was primarily due to the absence of clinical trials in progress during 2025. In addition, stock-based compensation increased due to the issuance of stock options with immediate vesting and grant date fair value at $3.0 million to Mr. Simard in March 2025, with 85% of the expense allocated to research and development. Other expenses primarily included approximately $5.0 million of facility-related expenditures for both the year ended December 31, 2025 and 2024 and miscellaneous costs such as travel, equipment maintenance, and laboratory safety.

General and Administrative

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

		Year Ended December 31,								Increase				% Increase
		2025				2024				(Decrease)				(Decrease)
Salaries and related expenses		$	4,521			$	1,524			$	2,997				197	%
Patent filing expense			777				816				(39	)			-5	%
Share-based compensation			930				626				304				49	%
Professional fees			1,018				902				116				13	%
Other			1,049				846				203				24	%
Total		$	8,295			$	4,714			$	3,581				76	%

General and administrative expenses increased 76% to $8.3 million for the year ended December 31, 2025 compared to $4.7 million for the year ended December 31, 2024. This increase was primarily driven by higher salaries and related expenses resulting from John Simard's severance payment and his 2025 annual bonus, with 15% of the expense allocated to general and administrative expenses. In addition, share-based compensation expense increased due to the issuance of stock options with immediate vesting and a grant-date fair value of $3.0 million to Mr. Simard in March 2025, of which 15% was allocated to general and administrative expenses.

Other Income

The following table summarizes other income (in thousands):

		Year Ended December 31,
		2025				2024
Interest income		$	5,679			$	9,812
Interest expense			(88	)			(807	)
Other income			1,456				432
Foreign exchange gain (loss)			3,333				(5,529	)
Total		$	10,380			$	3,908

Interest income for the years ended December 31, 2025 and 2024 was primarily generated from the Company's Canadian bank accounts and decreased due to lower interest rates and a lower cash balance. Interest expense for the years ended December 31, 2025 and 2024 related to interest on the Company's convertible loans. The other income during the year ended December 31, 2025 was primarily attributable to the receipt of the Employee Retention Credit from the Internal Revenue Service and the cancellation of a penalty by the Canada Revenue Agency related to the 2020 tax year. The other income during the year ended December 31, 2024 was mainly from the reversal of the previous clinical trial accrual associated with visits that occurred prior to 2022 for which the Company has not received an invoice. Foreign exchange gain (loss) was due to the fluctuation between the US dollar and the Canadian dollar during the reporting periods.

Income Taxes

The Company's income tax expense for the tax year ended December 31, 2025 of $0.23 million was primarily driven by state gross margin taxes and current year uncertain tax positions. The Company's income tax benefit for the tax year ended December 31, 2024 of $0.03 million was primarily driven by uncertain tax position activity and the estimated 2024 Canadian loss carryback to 2023. The Company expects to maintain its full valuation allowance on all jurisdictions during 2025.

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, 2025, we have funded our operations principally through private placements and public offerings of equity securities, which have provided aggregate cash proceeds of approximately $276.3 million, excluding the February 2020 tender offer cash payment. We received $675 million in cash proceeds from the Janssen Transaction in the year ended December 31, 2019. In June 2021, we received the remaining $75 million in cash from the escrow receivable from the same transaction. In July 2021, we paid $75 million in dividends to shareholders. At December 31, 2025, we had cash and cash equivalents of $125.6 million as compared to cash and cash equivalents of $172.7 million at December 31, 2024. The following table summarizes our sources and uses of cash (in thousands):

		Year Ended December 31,
Net cash (used in) provided by:		2025				2024
Operating activities		$	(39,920	)		$	(30,963	)
Investing activities			(289	)			(1,304	)
Financing activities			(10,250	)			10,450
Effect of foreign exchange rate on cash and cash equivalents			3,333				(5,529	)
Net change in cash and cash equivalents		$	(47,126	)		$	(27,346	)

Operating Activities

During the years ended December 31, 2025 and 2024 net cash used in operating activities was $39.9 million and $31.0 million, respectively. Net cash used in the years ended December 31, 2025 and 2024 primarily resulted from our net losses. The rise in net losses was mainly due to the increase in salaries and related expenses.

Investing Activities

During the years ended December 31, 2025 and 2024, our investing activities used net cash of $0.3 million and $1.3 million, respectively. The use of cash was for fixed asset purchases and the preparation for a new facility.

Financing Activities

During the year ended December 31, 2025 and 2024, the net cash (used in) provided by our financing activities was mainly related to the convertible loan. On January 3, 2024, we entered into a convertible loan agreement (the "Loan") with John Simard, the Company's Founder, Chairman and former President and Chief Executive Officer, which provided $10 million net cash for the construction of a new, state-of-the-art research and development facility at the Company's property at 5217 Winnebago Lane in Austin, Texas. On January 31, 2025, the Loan was terminated upon full repayment of the principal and interest by the Company. Additionally, during the year ended December 31, 2024, employees exercised stock options to purchase 50,767 shares of our common stock for approximately $200 thousand in net proceeds.

We expect to continue to incur operating losses in the future. We do not expect to receive any additional revenue under the clinical manufacturing agreement with Janssen. Further, we may not receive any product revenue until a drug candidate has been approved by the FDA, EMA or similar regulatory agencies in other countries and successfully commercialized. As of December 31, 2025, our principal sources of liquidity were our cash and cash equivalents, which totaled approximately $125.6 million.

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

Off-Balance Sheet Arrangements

Since inception, we have not engaged in any off-balance sheet activities, including the use of structured finance, special purpose entities or variable interest entities.