Quarterly Report for Quarter Ending September 30, 2026 (Form 10-Q)

Item 2.

Management's Discussion and Analysis of Financial Condition and Results of Operations

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

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, the accumulated deficit as of September 30, 2026 was ($153.1) million. We had net losses of $4.5 million and $16.7 million for the three months and nine months ended September 30, 2026, respectively, compared to net losses of $6.0 million and $18.6 million for the three months and nine months ended September 30, 2025, respectively. We do not expect to generate any revenue in 2026. 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 and clinical testing. In addition to these increasing 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 September 30, 2026, we had 52 employees.

Research and Development Expenses

Research and development expenses consist 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.

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 September 30, 2026, we have recorded total research and development expenses, including share-based compensation, of $407.6 million. Our total research and development expenses for the three months and nine months ended September 30, 2026 were $4.7 million and $15.2 million, respectively, compared to $5.1 million and $22.0 million for the three months and nine months ended September 30, 2025, respectively. Share-based compensation related to research and development accounted for $2 thousand and $17 thousand for the three months and nine months ended September 30, 2026, respectively, compared to $17 thousand and $2.7 million for the three months and nine months ended September 30, 2025, respectively.

Research and development expenses, as a percentage of total operating expenses for the three months and nine months ended September 30, 2026 were 88% and 85%, respectively, compared to 84% and 85% for the three months and nine months ended September 30, 2025, respectively. The percentages of research and development expenses compared to total operating expenses, excluding share-based compensation, for the three months and nine months ended September 30, 2026 were 89% and 87%, respectively, compared to 84% and 86% for the three months and nine months ended September 30, 2025.

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, maintenance expenses, share-based compensation, and professional fees for legal services. Our total general and administration expenses for the three months and nine months ended September 30, 2026 were $663 thousand and $2.6 million, respectively, compared to $1.0 million and $3.9 million for the three months and nine months ended September 30, 2025, respectively. Share-based compensation related to general and administrative expenses accounted for $62 thousand and $392 thousand for the three months and nine months ended September 30, 2026, respectively, and $7 thousand and $762 thousand for the three months and nine months ended September 30, 2025, respectively.

General and administrative expenses, as a percentage of total operating expenses for the three months and nine months ended September 30, 2026 were 12% and 15%, respectively, compared to 16% and 15% for the three months and nine months ended September 30, 2025, respectively. The percentages of general and administrative expense compared to total operating expenses, excluding share-based compensation, for the three months and nine months ended September 30, 2026 were 11% and 13%, respectively, compared to 16% and 14% for the three months and nine months ended September 30, 2025.

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 (U.S. 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.

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. As of September 30, 2026 and December 31, 2025, 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):

		Three Months Ended September 30,								Increase				% Increase
		2026				2025				(Decrease)				(Decrease)
Salaries and related expenses		$	2,482			$	2,662			$	(180	)			-7	%
Laboratory and manufacturing supplies			540				535				5				1	%
Clinical trials and sponsored research			166				120				46				38	%
Share-based compensation			2				17				(15	)			-88	%
Facility allocation			1,141				1,308				(167	)			-13	%
Other			325				438				(113	)			-26	%
Total		$	4,656			$	5,080			$	(424	)			-8	%

		Nine Months Ended September 30,								Increase				% Increase
		2026				2025				(Decrease)				(Decrease)
Salaries and related expenses		$	8,062			$	11,755			$	(3,693	)			-31	%
Laboratory and manufacturing supplies			1,648				1,783				(135	)			-8	%
Clinical trials and sponsored research			529				746				(217	)			-29	%
Share-based compensation			17				2,698				(2,681	)			-99	%
Facility allocation			3,637				3,648				(11	)			0	%
Other			1,266				1,402				(136	)			-10	%
Total		$	15,159			$	22,032			$	(6,873	)			-31	%

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 decreased by $424 thousand to $4.7 million for the three months ended September 30, 2026, compared to $5.1 million for the three months ended September 30, 2025. The decrease was mainly due to lower personnel related expenses resulting from the company-wide reduction in workforce in July 2026, as well as reduced facility expenses associated with a lower employee headcount.

Research and development expenses decreased by $6.9 million to $15.2 million for the nine months ended September 30, 2026, compared to $22.0 million for the nine months ended September 30, 2025. The decrease of salaries and related expenses was mainly due to the $4.0 million bonus to the former Chief Executive Officer Mr. Simard in March 2025 in which 85%, or $3.4 million was allocated to research and development expenses. Stock-based compensation decreased due to the issuance of stock options with immediate vesting and grant date fair value of $3.0 million to the former Chief Executive Officer Mr. Simard in March 2025, with 85% or $2.5 million of the expense allocated to research and development.

General and Administrative

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

		Three Months Ended September 30,								Increase				% Increase
		2026				2025				(Decrease)				(Decrease)
Salaries and related expenses		$	165			$	154			$	11				7	%
Patent filing expense			137				188				(51	)			-27	%
Share-based compensation			62				7				55				786	%
Professional fees			172				219				(47	)			-21	%
Other			127				399				(272	)			-68	%
Total		$	663			$	967			$	(304	)			-31	%

		Nine Months Ended September 30,								Increase				% Increase
		2026				2025				(Decrease)				(Decrease)
Salaries and related expenses		$	575			$	993			$	(418	)			-42	%
Patent filing expense			505				568				(63	)			-11	%
Share-based compensation			391				762				(371	)			-49	%
Professional fees			716				874				(158	)			-18	%
Other			393				701				(308	)			-44	%
Total		$	2,580			$	3,898			$	(1,318	)			-34	%

General and administrative expenses decreased by $304 thousand to $663 thousand for the three months ended September 30, 2026 compared to $1.0 million for the three months ended September 30, 2025. General and administrative expenses decreased by $1.3 million to $2.6 million for the nine months ended September 30, 2026 compared to $3.9 million for the nine months ended September 30, 2025.

The three months decrease was mainly caused by the directors' fees recognized during the third quarter of 2025, whereas the corresponding fees for 2026 are expected to be recognized in the fourth quarter.

Compared to the nine months ended September 30, 2025, the decrease in the general and administrative expenses in the nine months ended September 30, 2026 was primarily due to the decrease in salaries and related expenses and shared-based compensation. The decrease in salaries and related expenses was due to the $4.0 million bonus to the former Chief Executive Officer Mr. Simard in March 2025, in which 15% or $0.6 million was allocated to general and administrative expenses. Stock-based compensation decreased due to the issuance of $3.0 million in stock options to the former Chief Executive Officer Mr. Simard in March 2025, with 15% or $0.5 million of the expenses allocated to general and administrative department.

Other income (loss)

The following table summarizes other income (in thousands):

		Three Months Ended September 30,								Nine Months Ended September 30,
		2026				2025				2026				2025
Interest income		$	831			$	1,427			$	2,631			$	4,460
Interest expense			-				-				-				(88	)
Other income (loss)			15				(85	)			1,042				906
Foreign exchange gain (loss)			48				(1,201	)			(2,497	)			2,163
Total		$	894			$	141			$	1,176			$	7,441

The interest income for the three months and nine months ended September 30, 2026 and 2025 was from the interest generated from the Company's Canadian bank accounts. The interest expense for the nine months ended September 30, 2025 was the interest for the convertible loans. The other income during the nine months ended September 30, 2026 was primarily attributable to the receipt of an Employee Retention Credit from the Internal Revenue Service. The other income during the nine months ended September 30, 2025 was the cancellation of a penalty by the Canada Revenue Agency for the 2020 tax year. Foreign exchange gain (loss) was mainly due to the fluctuation between the US dollar and the Canadian dollar in the three months and nine months ended September 30, 2026 compared to 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 September 30, 2026, we have funded our operations principally through private placements and public offerings of equity securities, which have provided aggregate cash proceeds of approximately $278.6 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 September 30, 2026, we had cash and cash equivalents of $105.0 million as compared to cash and cash equivalents of $147.4 million at September 30, 2025. The following table summarizes our sources and uses of cash (in thousands):

		Nine Months Ended September 30,
Net cash (used in) provided by:		2026				2025
Operating activities		$	(18,005	)		$	(16,968	)
Investing activities			(12	)			(255	)
Financing activities			-				(10,250	)
Effect of foreign exchange rate on cash and cash equivalents			(2,497	)			2,163
Net change in cash and cash equivalents		$	(20,514	)		$	(25,310	)

During the nine months ended September 30, 2026 and 2025, our operating activities used net cash of $18.0 million and $17.0 million, respectively. The use of net cash in each of these periods primarily resulted from our net losses. The increase in net cash used in operations for the nine months ended September 30, 2026 in comparison to the nine months ended September 30, 2025 was mainly due to the $4.5 million payment for Mr. Simard's 2025 annual bonus in January 2026.

During the nine months ended September 30, 2026 and 2025, our investing activities used net cash of $12 thousand and $255 thousand, respectively. The use of cash was for fixed asset purchases and the preparation for the construction of a potential new facility.

During the nine months ended September 30, 2025, the net cash used in our financing activities was mainly related to the related party Convertible Loan. On January 3, 2024, we entered into a Convertible Loan Agreement (the "Loan") with John Simard, the Company's Founder, President, Chief Executive Officer and Chairman, who provided $10 million net cash for the potential 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.

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 September 30, 2026, our principal sources of liquidity were our cash and cash equivalents, which totaled approximately $105.0 million.

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.