Notes to Consolidated Financial Statements (Unaudited)
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 certain diseases and in turn create safe and effective therapies to treat these diseases. At the heart of the Company is a proprietary technical knowhow to translate natural human immunity into therapeutic product candidates. Additionally, the Company has built a framework for commercial manufacturing, using technology that required less capital, fewer operators and provided greater flexibility than standard industry practices.
Currently, the Company is developing new antibodies to replace a previous generation True Human anti-IL-1⍺ antibody that was sold in 2019. Under terms of the sale, XBiotech is permitted to pursue discovery of new True Human anti-IL-1⍺ antibodies for use in all areas of medicine with the exception of dermatology.
XBiotech’s scientists have discovered and characterized a panel of new anti-IL-1⍺ antibodies from a human donor and has cloned the genes for these antibodies into cells that can be used for production of novel therapeutics. The antibody products are planned to be used in human clinical trials in 2021 and ultimately commercialized. The Company’s Research and Development team has successfully engineered a cell-based production system for the first of its new anti-IL-1⍺ antibodies to enable the Company’s drug manufacturing process at its state-of-the-art facility in Austin, Texas, for which the Company has broken ground on an expansion project to accommodate future growth. The new antibody targets damaging inflammation by neutralizing interleukin-1alpha (IL-1á), an inflammatory substance produced by the body, which is involved in diseases such as cancer, arthritis and cardiovascular indications. With the right to pursue the discovery and development of new True Human™ antibodies targeting IL-1⍺ outside of dermatology, this product candidate is the first in a line of new therapies being developed at XBiotech which are planned to be pursued in major areas of medicine with unmet need.
The Company has developed and transferred screening technology to a blood donor organization that enables blood donors that have COVID-19 immunity to be identified. In the second quarter of 2020, XBiotech scientists searched and found a few ideal blood donors with strong natural immunity to COVID-19. During the third quarter XBiotech’s scientists used blood from these donors to identify and isolate antibody leads which are currently bring tested for efficacy against SARS-CoV-2. The Company is also working on cell line development of these leads.
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. All of these risks are likely to be exacerbated by the outbreak of the novel strain of coronavirus, SARS-CoV-2 (“COVID-19”) and its ongoing impact, which has disrupted our business operations and will continue to do so. We cannot determine at this time the length or severity of these disruptions. 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. On December 30, 2019, the Company entered into a clinical manufacturing agreement and a clinical trial service agreement with Janssen Biotech Inc. The Company believes that its cash and cash equivalents of $238.4 million at September 30, 2020, as well as revenue generated from the Janssen contracts will enable the Company to achieve several major inflection points, including potential new clinical studies with our lead product candidate. We expect to have sufficient cash through two 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”). In the opinion of management, the accompanying consolidated financial statements reflect all adjustments (consisting only of normal recurring items) considered necessary to present fairly the Company’s financial position at September 30, 2020 and December 31, 2019, the results of its operations and comprehensive loss for the three months and nine months periods ended September 30, 2020 and 2019, and the cash flows for the nine months periods ended September 30, 2020 and 2019.
Basis of Consolidation
The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany transactions have been eliminated upon consolidation.
Use of Estimates
The preparation of financial statements in accordance with accounting principles generally accepted in the U.S. requires management to make estimates and assumptions that affect the reported values of amounts in the financial statements and accompanying notes. Actual results could differ from those estimates.
Revenue
Revenue from Janssen Agreements
The Company recognizes revenues from its Janssen Agreements as follows.
The Company entered into its clinical manufacturing and clinical trial services arrangements in connection with its sale of certain intellectual property on December 30, 2019. These contracts commenced January 1, 2020. While these agreements are not considered contracts with a customer based on the terms thereof, we are applying the revenue recognition guidance by analogy.
XBiotech is still in the research and development phase; however, the eventual output of the Company’s intended ordinary activities will be the licensing of intellectual property and/or sale of commercialized compounds for use in pharmaceutical treatment of disease, not the performance of manufacturing of development stage compounds or clinical trials for others. Although Janssen is not a customer, as these services are not the output of XBiotech’s ordinary activities, the Company evaluated the terms of the agreements and has analogized to Accounting Standards Codification, Topic 606, Revenue from Contracts with Customers (“ASC 606”) for clinical manufacturing and clinical trial services revenue recognition.
Under ASC 606, an entity recognizes revenue when (or as) its customer obtains control of promised goods or services, in an amount that reflects the consideration that the entity expects to receive in exchange for those goods or services. To determine revenue recognition for arrangements that an entity determines are within the scope of ASC 606 (or for those analogized to it), the entity performs the following five steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the entity satisfies a performance obligation. We only apply the five-step model to contracts (including by analogy) when it is probable that we will collect the consideration we are entitled to in exchange for the goods or services we transfer to the counterparty. At contract inception, once the contract is determined to be within the scope of or analogized to ASC 606, we assess the goods or services promised within each contract and determine those that are performance obligations, and assess whether each promised good or service is distinct. We then recognize as revenue the amount of the transaction price that is allocated to the respective performance obligation when (or as) the performance obligation is satisfied.
Manufacturing Revenue
We have a Clinical Manufacturing Agreement that we account for by analogy to ASC 606, under which we agreed to manufacture bermekimab for use by Janssen in clinical trials, in exchange for payments of $4.5 million per quarter, paid in advance, for up to two years, though Janssen may terminate the contract for any reason with 60-days’ notice. Quantities are estimated for the two-year period, but are only binding on the Company and Janssen for the next four months of each period, other than by the 60-day notice termination. If, during any calendar quarter, the Company fails to deliver all of the Clinical Products ordered by Janssen, subject to our agreed upon capacity, the next quarter’s fee is reduced proportionately for the shortfall volume. Negative adjustments may also occur for delivered Clinical Products that do not meet quality specifications, though we expect to meet these standards.
We received payment of $4.5 million from Janssen based on billing schedules established in the contract on December 30, 2019 for manufacturing in each quarter of 2020. Due to the coronavirus pandemic, the Company failed to fully complete the manufacture of drugs specified for the March purchase order due to supply disruptions for the syringes used to hold the manufactured compound in the second quarter of 2020. We completed the manufacturing for this order in the third quarter of 2020. In addition, due to the coronavirus pandemic, Janssen requested that we delay shipment of June volumes for which we had completed manufacturing. We recognized revenue for those volumes held at Janssen’s request, as they are segregated for future delivery. As of September 30, 2020, the Company had completed the manufacture of drugs specified for the September purchase order.
Clinical Trial Service Revenue
On December 30, 2019, we entered into a Transition Services Agreement with Janssen. Pursuant to the Transition Services Agreement, the Company has agreed to continue operational management, on a fee-for-service basis, of two ongoing clinical trials related to bermekimab. The arrangement may continue as long as the clinical trials are ongoing; however, Janssen may terminate the contract at any time with 30 day notice.
The coronavirus pandemic had no material effect on our clinical trial services during the third quarter of 2020. However, the timelines for future clinical trial services could be extended in the future as a result of the pandemic, which could delay or otherwise adversely affect our revenue. Because our fees are directly related to third party costs of our vendors, our clinical trial service revenues in future periods are likely to be affected by our vendors’ ability to operate and the activities of trial candidates due to the effects of the pandemic and mitigating activities. Our first three quarter results may not be indicative of future revenues or costs associated with these clinical trials.
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.
Share-Based Compensation
The Company accounts for its share-based compensation awards in accordance with ASC Topic 718, Compensation-Stock Compensation (“ASC 718”). ASC 718 requires all share-based payments to employees, including grants of employee stock options, to be recognized in the statements of operations based on their grant date fair values. For stock options granted to employees and to members of the board of directors for their services on the board of directors, the Company estimates the grant date fair value of each option award using the Black-Scholes option-pricing model. The use of the Black-Scholes option-pricing model requires management to make assumptions with respect to the expected term of the option, the expected volatility of the common stock consistent with the expected life of the option, risk-free interest rates and expected dividend yields of the common stock. To determine the fair value of its common stock, the Company uses the closing price of the Company’s common stock as reported by NASDAQ. For awards subject to service-based vesting conditions, the Company recognizes share-based compensation expense, equal to the grant date fair value of stock options on a straight-line basis over the requisite service period. The Company accounts for forfeitures as they occur rather than on an estimated basis.
Share-based compensation expense recognized for the three months and nine months ended September 30, 2020 and 2019 was included in the following line items on the Consolidated Statements of Operations (in thousands).
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
Research and development
|
|
$
|
935
|
|
|
$
|
386
|
|
|
$
|
2,682
|
|
|
$
|
972
|
|
General and administrative
|
|
|
1,870
|
|
|
|
411
|
|
|
|
5,887
|
|
|
|
881
|
|
Cost of goods sold
|
|
|
350
|
|
|
|
-
|
|
|
|
1,218
|
|
|
|
-
|
|
Total share-based compensation expense
|
|
$
|
3,155
|
|
|
$
|
797
|
|
|
$
|
9,787
|
|
|
$
|
1,853
|
|
The fair value of each option is estimated on the date of grant using the Black-Scholes method with the following assumptions:
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
|
|
2020
|
|
2019
|
|
2020
|
|
|
2019
|
|
Dividend yield
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Expected volatility
|
|
|
87%
|
|
|
90%
|
-
|
91%
|
|
87%
|
-
|
91%
|
|
80%
|
-
|
91%
|
Risk-free interest rate
|
|
0.33%
|
-
|
0.44%
|
|
1.59%
|
-
|
1.89%
|
|
0.33%
|
-
|
1.87%
|
|
1.59%
|
-
|
2.64%
|
Expected life (in years)
|
|
5.38
|
-
|
6.25
|
|
5.38
|
-
|
6.25
|
|
5.38
|
-
|
10
|
|
5.38
|
-
|
10
|
Weighted-average grant date fair value per share
|
|
|
12.46
|
|
|
|
5.66
|
|
|
|
12.05
|
|
|
|
5.14
|
|
Cash and Cash Equivalents
The Company considers highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. Cash and cash equivalents consisted primarily of cash on deposit in U.S., German, Swiss, Japanese 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 consolidated financial statements include financial instruments for which the fair market value of such instruments may differ from amounts reflected on a historical cost basis. Financial instruments of the Company consist of cash deposits, accounts and other receivables, accounts payable, and certain accrued liabilities. These financial instruments are held at cost, which generally approximates fair value due to their short-term nature.
The Company follows ASC Topic 820, Fair Value Measurements and Disclosures, which establishes a fair value hierarchy for those instruments measured at fair value that distinguishes between assumptions based on market date (observable inputs) and the Company’s own assumptions (unobservable inputs). The hierarchy consists of three levels:
|
•
|
Level 1—Unadjusted quoted prices in active markets for identical assets or liabilities.
|
|
•
|
Level 2—Quoted prices for similar assets and liabilities in active markets, quoted prices in markets that are not active, or inputs which are observable, either directly or indirectly, for substantially the full term of the asset or liability.
|
|
•
|
Level 3—Unobservable inputs that reflect the Company’s own assumptions about the assumptions market participants would use in pricing the asset or liability in which there is little, if any, market activity for the asset or liability at the measurement date.
|
At September 30, 2020 and December 31, 2019, the Company did not have any assets or liabilities that are measured at fair value on a recurring basis. The carrying amounts reflected in the balance sheets for cash and cash equivalents, prepaid expenses and other current assets, accounts payable, and accrued expenses approximate their fair values at September 30, 2020 and December 31, 2019, due to their short-term nature.
Property and Equipment
Property and equipment, which consists of land, construction in process, furniture and fixtures, computers and office equipment, scientific equipment, leasehold improvements, vehicles and building are stated at cost and depreciated over the estimated useful lives of the assets, with the exception of land and construction in process which are 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
|
|
|
|
|
|
●
|
Mobile facility
|
27.5 years
|
|
|
|
|
|
●
|
Building
|
39 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.
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 September 30, 2020.
Income Taxes
Income taxes are recorded in accordance with ASC 740, Accounting for Income Taxes (“ASC 740”), which provides for deferred taxes using an asset and liability approach. The Company recognizes deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. The Company determines its deferred tax assets and liabilities based on differences between financial reporting and tax bases of assets and liabilities, which are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. Valuation allowances are provided if based upon the weight of available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized.
The Company makes estimates and judgments in determining the need for a valuation allowance, including the estimation of its taxable income or loss for the three months and nine months ended September 30,2020. Realization of 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 certain deferred tax assets with a valuation allowance. The Company may in the future determine that certain deferred tax assets are more-likely-than-not 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.
ASC 740 clarifies the accounting for uncertainty in income taxes recognized in the financial statements and provides that a tax benefit from an uncertain tax position may be recognized when it is more likely than not that the position will be sustained upon examination, including resolutions of any related appeals or litigation processes, based on the technical merits. This interpretation also provides guidance on measurement, derecognition, classification, interest and penalties, accounting in interim periods and disclosure. The Company’s policy for recording interest and penalties associated with uncertain tax positions is to record such items as a component of tax expense.
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 income/loss per share (“EPS”) is computed by dividing net loss by the weighted average number of common shares outstanding during each period. Diluted EPS is computed by dividing net income/loss by the weighted average number of common shares and common share equivalents outstanding (if dilutive) during each period. The number of common share equivalents, which include stock options, is computed using the treasury stock method.
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-Q.
Recent Accounting Pronouncements
Recently Issued Accounting Pronouncements
In June 2016, the FASB issued guidance on financial instruments and related credit losses. The guidance requires that financial assets measured at amortized cost be presented at the net amount expected to be collected. The allowance for credit losses is a valuation account that is deducted from the amortized cost basis. The statement of comprehensive income reflects the measurement of credit losses for newly recognized financial assets, as well as the expected credit losses during the period. The measurement of expected credit losses is based upon historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. Credit losses relating to available-for-sale debt securities will be recorded through an allowance for credit losses rather than as a direct write-down to the security. The updated guidance is effective for annual periods beginning after December 15, 2019, and is applicable to the Company in fiscal 2020. The Company adopted the new standard effective January 1, 2020. The primary impact for the Company was the timing of recording expected credit losses on its trade receivables. The Company does not have a history of significant credit losses and this guidance did not have a material impact on its consolidated financial statements.
In February 2016, the FASB established Topic 842, Leases, by issuing Accounting Standards Update (ASU) No. 2016-02, which supersedes ASC 840, Leases, and requires lessees to recognize leases on-balance sheet and disclose key information about leasing arrangements. Topic 842 was subsequently amended by ASU No. 201801, Land Easement Practical Expedient for Transition to Topic 842; ASU No. 2018-10, Codification Improvements to Topic 842, Leases; and ASU No. 201811, Targeted Improvements. Topic 842, as amended (the "new lease standard") establishes a right-of-use model (ROU) that requires a lessee to recognize a ROU asset and lease liability on the balance sheet for all leases with a term longer than 12 months. Leases will be classified as finance or operating, with classification affecting the pattern and classification of expense recognition in the income statement. The effective date of the new guidance is for the Company’s first quarter of fiscal year 2019. The FASB has approved an optional, alternative method to adopt the lease standard by recognizing a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. The Company adopted the new standard effective January 1, 2019, using the alternative method. The Company did not have a cumulative adjustment impacting retained earnings. Adoption of the lease standard did not have a material impact on the Company’s consolidated financial statements.
In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, which simplifies the accounting for income taxes by removing certain exceptions to the general principles in Topic 740. The amendments also improve consistent application of and simplify GAAP for other areas of Topic 740 by clarifying and amending existing guidance. The standard will become effective for interim and annual periods beginning after December 15, 2020, with early adoption permitted. We early adopted ASU 2019-12 during the quarter ended March 31, 2020. The adoption of ASU 2019-12 resulted in no material impact to the Company's financial statements.
3. Revenue
We received payment of $4.5 million for the third quarter of 2020 from Janssen in September 2020 based on billing schedules established in the contract on December 30, 2019 for manufacturing. Due to the coronavirus pandemic, the Company did not fully complete the manufacture of drugs specified for the June purchase order until the third quarter. As of September 30, 2020, the Company had completed the manufacture of drugs specified for the September purchase order. In addition, due to the pandemic, Janssen requested that we delay shipment of June volumes for which we had completed manufacturing. We recognized revenue for those volumes held at Janssen’s request, as they are segregated for future delivery. Consequently, as of September 30, 2020, we recorded $6.0 million revenue for the third quarter of 2020.
On December 30, 2019, the Company entered into a Transition Services Agreement with Janssen. Pursuant to the Transition Services Agreement, the Company has agreed to continue operational management, on a fee-for-service basis, of two ongoing clinical trials related to bermekimab. In consideration for all of the services to be provided, for each calendar quarter during the term of such agreement, Janssen shall pay the Company a fee for such quarter equal to all pass-through costs incurred by the Company during such calendar quarter, exclusive of the allocation of certain internal costs that are not considered pass-through pursuant to the agreement, plus a markup of 30%. For the three months and nine months ended September 30, 2020, the Company has recorded $4.5 million and $25.2 million of gross revenue, respectively, under this arrangement, with the corresponding expense to clinical services cost of goods sold.
4. Property and Equipment
Property and equipment consisted of the following as of September 30, 2020 and December 31, 2019 (in thousands):
|
|
September 30, 2020
|
|
|
December 31, 2019
|
|
Manufacturing equipment
|
|
$
|
3,053
|
|
|
$
|
3,492
|
|
Winnebago building
|
|
|
19,591
|
|
|
|
19,406
|
|
Other fixed assets
|
|
|
3,563
|
|
|
|
2,273
|
|
Total property and equipment
|
|
$
|
26,207
|
|
|
$
|
25,171
|
|
5. Common Stock
Pursuant to its Articles, the Company has an unlimited number of shares available for issuance with no par value.
During June 2019, under the Common Shares Purchase Agreement with Piper Jaffray & Co., the Company sold 4.8 million shares of common stock at a price $8.25 per share for total net proceeds of $37.5 million, including the capitalized underwriter’s commission of $2.3 million and other related fees of $0.2 million.
From January through December 2019, 771 thousand shares of common stock were issued upon the exercise of stock options at a price of $2.50 to $15.00 per share for total proceeds of $3.8 million.
On January 4, 2020, XBiotech announced that it had commenced a “modified Dutch auction” tender offer to purchase up to $420.0 million of its common shares, or such lesser number of common shares as are properly tendered and not properly withdrawn, at a price not less than $30.00 nor greater than $33.00 per common share, to the seller in cash. The tender offer expired on February 12, 2020.
On February 19, 2020, the Company announced the final results of its “modified Dutch Auction” tender offer. The Company accepted for purchase 14,000,000 shares of its common stock, $0.01 par value per share, at a price of $30 per share, for an aggregate cost of approximately $420.0 million, excluding fees and expenses related to the tender offer. These shares represented approximately 32.67 percent of the shares outstanding. $6.66 per share or total of $93.24 million of these share repurchases have been classified to reduce common stock and $23.34 per share or total of $326.76 million of these share repurchases have been classified to reduce retained earnings in the accompanying consolidated balance sheet as of September 30, 2020.
From January through September 2020, 1.7 million shares of common stock were issued upon the exercise of stock options at a price of $2.71 to $19.09 per share for total proceeds of $10.4 million.
6. Common Stock Options
On November 11, 2005 and April 1, 2015, the board of directors of the Company adopted stock option plans (“the Plans”) pursuant to which the Company may grant incentive 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 are 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 the Plan adopted in 2005 may not, in aggregate, exceed 5% of the total number of outstanding common shares. The exercise price per common share under each option is 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 Plans is as follows:
|
|
Options
|
|
|
Exercise Price
|
|
Weighted-Average
Exercise Price
|
|
Options outstanding at December 31, 2019
|
|
|
6,965,730
|
|
|
$2.71
|
-
|
$21.99
|
|
|
6.09
|
|
Granted
|
|
|
214,500
|
|
|
8.89
|
-
|
14.77
|
|
|
16.71
|
|
Exercised
|
|
|
(1,704,905
|
)
|
|
2.71
|
-
|
19.09
|
|
|
6.11
|
|
Forfeitures
|
|
|
(57,042
|
)
|
|
4.26
|
-
|
21.80
|
|
|
8.53
|
|
Options outstanding at September 30, 2020
|
|
|
5,418,283
|
|
|
$2.71
|
-
|
$21.99
|
|
|
6.20
|
|
As of September 30, 2020, there was approximately $9.0 million of unrecognized compensation cost, related to stock options granted under the Plans which will be amortized to stock compensation expense over the next 1.68 years.
7. Net Income/Loss Per Share
The following summarizes the computation of basic and diluted net income/loss per share for three months and Nine Months ended September 30, 2020 and 2019 (in thousands, except share and per share data):
|
|
Three Months Ended
September 30,
|
|
|
|
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
Net loss
|
|
$
|
(2,526
|
)
|
|
$
|
(6,150
|
)
|
|
$
|
(9,383
|
)
|
|
$
|
(17,866
|
)
|
Weighted-average number of common shares—basic and diluted
|
|
|
29,037,074
|
|
|
|
41,019,230
|
|
|
|
31,345,760
|
|
|
|
38,190,584
|
|
Net loss per share—basic and diluted
|
|
$
|
(0.09
|
)
|
|
$
|
(0.15
|
)
|
|
$
|
(0.30
|
)
|
|
$
|
(0.47
|
)
|
8. Income Taxes
The Company did not record a tax provision during the three months ended September 30, 2019 due to the Company having no revenues or income prior to December 2019. During the three months ended September 30, 2020, the Company recorded an income tax benefit of $668 thousand. The Company’s effective income tax rate was 20.9% and 12.6% for the three and nine months ended September 2020, respectively, compared to an effective income tax rate of 0% for the three and nine months ended September 30, 2019.
The Company did not record a tax provision during the nine months ended September 30, 2019 due to the Company having no revenues or income prior to December 2019. During the nine months ended September 30, 2020, the Company recorded an income tax benefit of $1.4 million. The forecasted 2020 annual effective tax rate of 8.0% has been applied to net income before income taxes for the nine months ended September 30, 2020. Further adjustments have been made for the tax effect of discrete tax benefits of stock compensation and tax expenses of 2019 tax return true-ups realized during the current period, resulting in a 12.6% effective tax rate for the nine months ended September 30, 2020. The difference in the 27% Canadian statutory tax rate and the annual forecasted effective tax rate is primarily a result of the jurisdictional mix of earnings and losses, valuation allowances, and certain non-deductible compensation expenses. The Company maintains a valuation allowance against all deferred tax assets in Switzerland, Germany and Japan and certain deferred tax assets in the US and Canada in the current and forecasted annual periods that we concluded are not more-likely-than-not to be realizable.
9. Subsequent Events
The ongoing COVID-19 pandemic is disrupting our business operations, which we expect to continue throughout the remainder of 2020 and possibly beyond. We have experienced actual disruption to our supply chain regarding our ability to single use consumables, gloves andmasks, all of which are required in our manufacturing and/or clinical and drug discovery operations. Although we concluded that COVID-19 did not result in material adverse impacts on the Company’s results of operations and financial position at September 30, 2020, if supply disruptions and purchase reductions continue, our clinical manufacturing revenue will be, and our clinical trial service revenue could be, adversely impacted. In addition, social distancing restrictions imposed by national, state and local governments have required adjustments to staffing levels and may impact the willingness of employees to work in laboratory, manufacturing and clinical settings, even after these orders and restrictions are relaxed or allowed to expire. Ongoing restrictions and other disruptions related to COVID-19 could delay our efforts to identify, manufacture, enter into clinical studies, seek regulatory approvals or otherwise commercialize any product candidates.
The company signed a licensing agreement with Bio Bridge Global, a Texas nonprofit and its subsidiary South Texas Blood and Tissue Center located in San Antonio to out license an ELISA methodology for detecting and quantifying antibodies against SARS-COV-2. Under this agreement allows BBG to provide blood products and services based on use of XBiotech’s testing technology for detecting COVID-19 antibodies.