The accompanying notes are an integral part of
these unaudited condensed consolidated financial statements.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Background
Xenetic Biosciences, Inc. (“Xenetic”
or the “Company”), incorporated in the state of Nevada and based in Framingham, Massachusetts, is a biopharmaceutical company
focused on advancing innovative immune-oncology technologies addressing hard to treat oncology indications. The Company’s Deoxyribonuclease
(“DNase”) oncology platform, in development for the treatment of solid tumors, is aimed at improving outcomes of existing
treatments, including immunotherapies, by targeting Neutrophil Extracellular Traps (“NETs”). The Company is also developing
its personalized Chimeric Antigen Receptor (“CAR”) T platform technology, XCART™, to develop cell-based therapeutics
targeting the unique B-cell receptor on the surface of an individual patient’s malignant tumor cells, for the treatment of B-cell
lymphomas. On April 26, 2022, the Company entered into exclusive license and sublicense agreements with CLS Therapeutics Ltd. (“CLS”)
to develop its interventional DNase based oncology platform as more fully described in Note 11.
Additionally, Xenetic is leveraging its proprietary
drug delivery platform, PolyXen®, by partnering with biotechnology and pharmaceutical companies. PolyXen is an enabling
platform technology which can be applied to protein or peptide therapeutics. PolyXen has demonstrated its ability to improve the half-life
and other pharmacological properties of next-generation biologic drugs. The Company receives royalty payments under an exclusive license
arrangement in the field of blood coagulation disorders.
As used in this Quarterly Report on Form 10-Q
(“Quarterly Report”), unless otherwise indicated, all references herein to “Xenetic,” the “Company,”
“we” or “us” refer to Xenetic Biosciences, Inc. and its wholly owned subsidiaries.
The Company, directly or indirectly, through its
wholly-owned subsidiaries, Hesperix S.A. (“Hesperix”) and Xenetic Biosciences (U.K.) Limited (“Xenetic UK”), and
the wholly-owned subsidiaries of Xenetic UK, Lipoxen Technologies Limited (“Lipoxen”), Xenetic Bioscience, Incorporated and
SymbioTec, GmbH (“SymbioTec”), own various United States (“U.S.”) federal trademark registrations and applications
along with unregistered trademarks and service marks, including but not limited to XCART, OncoHist™, PolyXen, ErepoXen™, and
ImuXen™, which are used throughout this Quarterly Report. All other company and product names may be trademarks of the respective
companies with which they are associated.
Going Concern and Management’s Plan
Management evaluates whether there are conditions
or events, considered in the aggregate that raise substantial doubt about the Company’s ability to continue as a going concern within
one year after the date that the financial statements are issued. The Company has incurred substantial losses since its inception and
expects to continue to incur operating losses in the near-term. These factors raise substantial doubt about its ability to continue as
a going concern. The Company believes that it has access to capital resources through possible public or private equity offerings, debt
financings, corporate collaborations, related party funding, or other means to continue as a going concern. The Company believes that
its existing resources will be adequate to fund the Company’s operations into the second quarter of 2023. However, the Company anticipates
it may need additional capital in the long-term to pursue its business initiatives. The terms, timing and extent of any future financing
will depend upon several factors, including the achievement of progress in its clinical development programs, its ability to identify
and enter into licensing or other strategic arrangements, and factors related to financial, economic, geo-political, industry and market
conditions, many of which are beyond its control. The capital markets for the biotech industry can be highly volatile, which make the
terms, timing and extent of any future financing uncertain.
During March 2020, a
global pandemic was declared by the World Health Organization related to the outbreak of a novel strain of coronavirus, or COVID-19. The
pandemic has significantly affected economic conditions in the U.S., accelerating during the first half of March 2020 and continuing throughout
2020 and 2021 and into 2022, as federal, state and local governments reacted to the public health crisis with mitigation measures, creating
significant uncertainties in the U.S. economy. The Company continues to evaluate the effects of the COVID-19 pandemic on its business
and while there has been no significant impact to the Company’s operations to date, the Company at this time remains uncertain of
the impact this event may have on the Company’s future operations. The extent to which the COVID-19 pandemic affects our business,
operations and financial results will depend on numerous evolving factors that we may not be able to accurately predict, and such uncertainty
is expected to continue for some time.
3. |
Summary of Significant Accounting Policies |
Preparation of Interim Financial Statements
The accompanying condensed consolidated interim
financial statements were prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”)
and, in the opinion of management, include all normal and recurring adjustments necessary to present fairly the results of the interim
periods shown. Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S.
generally accepted accounting principles have been condensed or omitted pursuant to such SEC rules and regulations. Management believes
that the disclosures made are adequate to make the information presented not misleading. The results for the interim periods are not necessarily
indicative of results for the full year. The condensed consolidated financial statements contained herein should be read in conjunction
with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended
December 31, 2021 filed with the SEC on March 22, 2022, and amended on April 28, 2022.
Principles of Consolidation
The condensed consolidated financial statements
of the Company include the accounts of Hesperix, Xenetic UK and Xenetic UK’s wholly owned subsidiaries: Lipoxen, Xenetic Bioscience,
Incorporated, and SymbioTec. All intercompany balances and transactions have been eliminated in consolidation.
Basic and Diluted Net Loss per Share
The Company computes basic net loss per share
by dividing net loss applicable to common stockholders by the weighted-average number of shares of the Company’s common stock outstanding
during the period. The Company computes diluted net loss per share after giving consideration to the dilutive effect of stock options
that are outstanding during the period, except where such non-participating securities would be anti-dilutive.
For the three months ended March 31, 2022 and
2021, basic and diluted net loss per share are the same for each respective period due to the Company’s net loss position. Potentially
dilutive, non-participating securities have not been included in the calculations of diluted net loss per share, as their inclusion would
be anti-dilutive.
Recent Accounting Standards
In June 2016, the Financial Accounting Standards
Board issued Accounting Standards Update (“ASU”) 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement
of Credit Losses on Financial Instruments. The guidance modifies the measurement and recognition of credit losses for most financial
assets and certain other instruments. The amendment updates the guidance for measuring and recording credit losses on financial assets
measured at amortized cost by replacing the “incurred loss” model with an “expected loss” model. This may result
in earlier recognition of allowance for losses. ASU 2016-13 is effective for smaller reporting public entities for fiscal years beginning
after December 15, 2022, but early adoption is permitted. We are currently evaluating the impact of adoption, but we do not anticipate
that it will have a material effect on our consolidated financial statements.
4. |
Significant Strategic Collaborations |
The Company has entered into various research,
development, license and supply agreements with Serum Institute of India (“Serum Institute”), PJSC Pharmsynthez (“Pharmsynthez”)
and SynBio LLC (“SynBio”), a wholly owned subsidiary of Pharmsynthez. The Company and its collaborative partners continue
to engage in research and development activities with no resultant commercial products through March 31, 2022. No amounts were recognized
as revenue related to the Serum Institute, Pharmsynthez or SynBio agreements during the three months ended March 31, 2022 and 2021, respectively.
In October 2017, the Company granted to Takeda
Pharmaceuticals Co. Ltd. (“Takeda”) the right to grant a non-exclusive sublicense to certain patents related to the Company’s
PolyXen technology that were previously exclusively licensed to Takeda in connection with products related to the treatment of blood and
bleeding disorders. Royalty payments of approximately $0.4 million and $0.2 million were recorded as revenue by the Company during the
three months ended March 31, 2022 and 2021, respectively, and are based on single digit royalties on net sales of certain covered products.
The Company’s policy is to recognize royalty payments as revenue when they are reliably measurable, which is upon receipt of reports
from Takeda. The Company receives these reports in the quarter subsequent to the actual sublicensee sales. At the time the revenue was
received, there were no remaining performance obligations and all other revenue recognition criteria were met.
On May 15, 2020, the Company and The Scripps Research
Institute (“Scripps Research”) entered into a Research Funding and Option Agreement (the “Scripps Agreement”),
pursuant to which the Company has agreed to provide Scripps Research an aggregate of up to $3.0 million to fund research relating to advancing
the pre-clinical development of XCART. The research funding is payable by the Company to Scripps Research on a quarterly basis in accordance
with a negotiated budget, which provides for an initial payment of approximately $300,000 on the date of the Scripps Agreement and subsequent
quarterly payments of approximately $300,000 over a 27-month period. Under the Scripps Agreement, Scripps Research has granted the Company
a license within the Field (as defined in the Scripps Agreement) to any Patent Rights or Technology (as defined in the Scripps Agreement)
under the terms of that certain license agreement with Scripps Research, dated February 25, 2019, assigned to the Company on March 1,
2019. Additionally, the Company has the option to acquire a worldwide exclusive license to Scripps Research’s rights in the Technology
or Patent Rights not already licensed to the Company, as well as a non-exclusive, royalty-free, non-transferrable license to make and
use Scripps Research Technology (as defined in the Scripps Agreement) solely for the Company’s internal research purposes during
the performance of the research program contemplated by the Scripps Agreement. The Company has paid $2.4 million to Scripps Research under
this agreement through March 31, 2022. As of March 31, 2022 and December 31, 2021, approximately $0.2 million has been recognized as an
advance payment under this agreement and is included in prepaid expenses and other current assets.
5. |
Fair Value Measurements |
Accounting Standards Codification Topic 820, Fair
Value Measurement, defines fair value as the price that would be received to sell an asset or be paid to transfer a liability in an
orderly transaction between market participants at the measurement date. The Company applies the following fair value hierarchy, which
prioritizes the inputs used to measure fair value into three levels and bases the categorization within the hierarchy upon the lowest
level of input that is available and significant to the fair value measurement. Level 1 inputs are quoted prices in active markets for
identical assets or liabilities that the reporting entity has the ability to access at the measurement date. Level 2 utilizes quoted market
prices in markets that are not active, broker or dealer quotations, or alternative pricing sources with reasonable levels of price transparency.
Level 3 inputs are unobservable inputs for the asset or liability in which there is little, if any, market activity for the asset or liability
at the measurement date. As of March 31, 2022 and December 31, 2021, the carrying amounts of the Company’s financial instruments
approximates fair value due to their short maturities. There were no financial instruments classified as Level 3 in the fair value hierarchy
during the three months ended March 31, 2022 and 2021.
Warrants
In connection
with its July 2021 private placement, the Company issued warrants to purchase an aggregate of 4,629,630 shares of the Company’s
common stock (the “Series A Warrants”). The Series A Warrants are immediately exercisable at a price of $3.30 per share of
common stock and expire on February 23, 2025. No Series A Warrants were exercised or forfeited during the three months ended March 31,
2022.
In addition to the Series A Warrants, warrants
to purchase approximately 29,000 and 31,000 shares of the Company’s common stock were outstanding as of March 31, 2022 and December
31, 2021, respectively, as described below.
Publicly traded warrants to purchase approximately
21,000 and 23,000 shares of common stock were outstanding as of March 31, 2022 and December 31, 2021, respectively. These warrants have
an exercise price of $13.00 per share and expire on July 17, 2024. The warrants trade on NASDAQ under the symbol “XBIOW.”
The warrants also provide that if the weighted-average price of common stock on any trading day on or after 30 days after issuance is
lower than the then-applicable exercise price per share, each warrant may be exercised, at the option of the holder, on a cashless basis
for one share of common stock. Warrants to purchase approximately 1,684 shares and 1,485 shares of common stock were exercised on a cashless,
one-for-one basis during the three months ended March 31, 2022 and 2021, respectively. None of these warrants were forfeited during the
three months ended March 31, 2022 and 2021.
Warrants to purchase approximately 8,000 shares
of the Company’s common stock were outstanding as of March 31, 2022 and December 31, 2021. These warrants have an exercise price
of $2.91 per share and expire on July 3, 2026. None of these warrants were exercised or forfeited during the three months ended March
31, 2022 and 2021.
Total share-based expense related to stock options
and restricted stock units (“RSUs”) was approximately $0.1 million during each of the three months ended March 31, 2022 and
2021.
Share-based expense is classified in the condensed
consolidated statements of operations as follows:
Schedule of Share-Based Compensation Expense | |
| | | |
| | |
| |
Three Months Ended March 31, | |
| |
2022 | | |
2021 | |
Research and development expenses | |
$ | 19,178 | | |
$ | 10,710 | |
General and administrative expenses | |
| 100,417 | | |
| 65,574 | |
| |
$ | 119,595 | | |
$ | 76,284 | |
Employee Stock Options
During the three months ended March 31, 2022,
the Company granted 200,000 stock option awards to purchase shares of common stock. The weighted average grant date fair value per option
share was $0.99. Key assumptions used in the Black-Scholes option pricing model for options granted during the three months ending March
31, 2022 were the Company’s stock price, a risk free rate of 2.38%, an expected life of 5.88
years and an expected volatility rate of 126.32%. During the three months ended March 31, 2021, the Company granted 200,000 stock
option awards to purchase shares of common stock. The Company recognized a total of approximately $0.1 million of compensation expense
related to employee stock options during each of the three months ended March 31, 2022 and 2021, respectively. No employee stock options
or RSUs were exercised and none expired during the three months ended March 31, 2022 and 2021.
Non-Employee Stock Options
There were no non-employee stock options granted
or exercised and none expired during the three months ended March 31, 2022 and 2021, respectively. The Company did not recognize any expense
related to non-employee stock options during the three months ended March 31, 2022 and 2021, respectively.
During the three months ended March 31, 2022 and
2021, there was no provision for income taxes as the Company incurred losses during both periods. Deferred tax assets and liabilities
reflect the net tax effect of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes
and the amounts used for income tax purposes. The Company records a valuation allowance against its deferred tax assets as the Company
believes it is more likely than not the deferred tax assets will not be realized. The valuation allowance against deferred tax assets
was approximately $31.8 million and $31.4 million as of March 31, 2022 and December 31, 2021, respectively.
As of March 31, 2022 and December 31, 2021,
the Company did not record any unrecognized tax positions.
Supplemental cash flow information and non-cash
activity related to our operating leases are as follows:
Cash flow information regarding leases | |
| | | |
| | |
| |
Three Months Ended March 31, | | |
Three Months Ended March 31, | |
| |
2022 | | |
2021 | |
Operating cash flow information: | |
| | | |
| | |
Cash paid for amounts included in the measurement of lease liabilities | |
$ | 9,475 | | |
$ | 8,413 | |
Supplemental balance sheet information related
to our operating leases is as follows:
Supplemental information related to operating leases | |
| |
| | | |
| | |
| |
Balance Sheet Classification | |
March 31, 2022 | | |
March 31, 2021 | |
Right-of-use assets - ST | |
Prepaid expenses and other | |
$ | 17,568 | | |
$ | 36,545 | |
Right-of-use assets - LT | |
Other assets | |
$ | – | | |
$ | 17,568 | |
Current lease liabilities | |
Accrued expenses and other current liabilities | |
$ | 17,568 | | |
$ | 36,545 | |
Non-current lease liabilities | |
Other long-term liabilities | |
$ | – | | |
$ | 17,568 | |
10. |
Related Party Transactions |
The Company has entered into various research,
development, license and supply agreements with Serum Institute and Pharmsynthez, each a related party whose relationship has not materially
changed from that disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021 filed with the SEC
on March 22, 2022, as amended on April 28, 2022.
During the fourth quarter
of 2019, the Company entered into a loan agreement with Pharmsynthez (the “Pharmsynthez Loan”), pursuant to which the Company
advanced Pharmsynthez an aggregate principal amount of up to $500,000 to be used for the development of a specific product under the Company’s
Co-Development Agreement with Pharmsynthez. The Pharmsynthez Loan had a term of 15-months and accrued interest at a rate of 10% per annum.
The Pharmsynthez Loan is guaranteed by all of the operating subsidiaries of Pharmsynthez, including SynBio and AS Kevelt, and is secured
by all of the common and preferred stock of the Company owned by Pharmsynthez and SynBio. The Company recognized approximately $9,000
and $12,000 of interest income related to this loan during the three months ended March 31, 2022 and 2021, respectively.
Effective January 23, 2021, the Company entered
into a First Amendment to Loan Agreement and Other Loan Documents with Pharmsynthez, Kevelt and SynBio (the “Pharmsynthez Loan Extension”)
to modify the repayment terms and maturity of the Pharmsynthez Loan to January 2022. The terms of the Pharmsynthez Loan Extension called
for two (2) equal monthly principal payments of $25,000 in each of January 23, 2021 and February 28, 2021 and the payment of all outstanding
accrued interest in six (6) equal monthly installments from January 31, 2021 through June 30, 2021. In addition, the Pharmsynthez Loan
Extension required monthly interest payments and the repayment of the remaining principal amount in six (6) equal monthly installments
from August 2021 through January 2022.
Effective August 31, 2021, the Company entered
into a Second Amendment to Loan Agreement and Other Loan Documents with Pharmsynthez, Kevelt and SynBio (the “Second Pharmsynthez
Loan Extension”) to modify the repayment terms and maturity of the Pharmsynthez Loan to July 2022. The terms of the Second Pharmsynthez
Loan Extension called for an upfront fee of $12,500 and two (2) equal monthly principal payments of $25,000 on September 30, 2021 and
October 31, 2021. In addition, the Second Pharmsynthez Loan Extension required monthly interest payments and the repayment of the remaining
principal amount in six (6) equal monthly installments from February 2022 through July 2022. All other terms of the Pharmsynthez Loan,
as amended, remain in effect. All required payments under the Second Pharmsynthez Loan Extension had been made through January 31, 2022.
In February 2022, the Company received a request from Pharmsynthez to further extend the principal repayments until September 2022. The
Company agreed to extend the maturity date, although final terms of such extension are under negotiation. All other terms of the Pharmsynthez
Loan, as amended, are expected to remain in effect. As a result of this request and the current economic uncertainty due to the conflict
between Russia and Ukraine and associated sanctions imposed by the U.S. and other countries in response, the Company has classified the
loan receivable as long-term as of March 31, 2022 and December 31, 2021. The Company assessed the collectability of the loan and determined
that the collateral held by the Company, consisting of all of the common and preferred stock of the Company owned by Pharmsynthez and
SynBio, was adequate to support the outstanding principal balance. As of March 31, 2022 and December 31, 2021, approximately $ million
was included in other assets on the condensed consolidated balance sheet.
In April 2022, the Company agreed to license certain
technology from CLS as described in Note 11. One of the Company’s directors, Roger Kornberg, is a member of the scientific advisory
board of CLS, however, Mr. Kornberg does not own any equity of CLS and is not receiving any economic benefit as a result of the transactions
contemplated by the License Agreement and Sublicense Agreement. Mr. Adam Logal, one of our directors, is Senior Vice President, Chief
Financial Officer, Chief Accounting Officer and Treasurer of OPKO Health, Inc. (“OPKO”).
The Company performed a review of events subsequent
to the balance sheet date through the date the financial statements were issued and determined that there were no such events requiring
recognition or disclosure in the financial statements except as described below.
Exclusive Sublicense Agreement
On April 26, 2022, the Company entered into an
Exclusive Sublicense Agreement (the “Sublicense Agreement”) with CLS pursuant to which the Company received an exclusive license,
under certain patent rights and know-how owned or controlled by CLS, to develop and commercialize pharmaceutical products and methods
incorporating DNase enzyme for use in treatment of cancer (the “Sublicensed Products”). Under the terms of the Sublicense
Agreement, the Company will have sole responsibility for, and shall use commercially reasonable efforts to, among other things, research,
develop and obtain marketing approval for the Sublicensed Products in the U.S. and certain European markets, and to commercialize such
Sublicensed Products in the relevant market once marketing approval is obtained.
In consideration for the license and other rights
granted to the Company under the Sublicense Agreement, the Company issued to CLS 375,000 shares of the Company’s common stock (the
“Sublicense Agreement Shares”), of which 250,000 Sublicense Agreement Shares were issued directly to OPKO in lieu of transfer
indirectly from CLS to EirGen Pharma Ltd. (“EirGen”), a wholly owned subsidiary of OPKO, in satisfaction of certain third-party
contractual obligations between CLS and EirGen. Additionally, the Company is obligated to pay to CLS up to $13,000,000 in cash in potential
milestone payments for the achievement of certain clinical and regulatory milestones, as well as issue an additional 950,000 shares of
the Company’s common stock to CLS based on the achievement of certain regulatory milestones. In addition, the Company is obligated
to pay tiered royalties ranging from the mid-single to low-double digits on net sales of licensed products falling within the scope of
the license during the Royalty Term (as defined in the Sublicense Agreement), as well as pay a percentage share in the low-to-mid teens
of certain consideration received by the Company from any sublicensees.
Exclusive License Agreement
On April 26, 2022, the Company entered into an
Exclusive License Agreement (the “License Agreement”) with CLS, pursuant to which the Company received an exclusive license
under certain patent rights and know-how owned or controlled by CLS to develop and commercialize pharmaceutical products and methods incorporating
DNase in conjunction with CAR T therapies (the “Licensed Products”). Under the terms of the License Agreement, the Company
will have sole responsibility for, and shall use commercially reasonable efforts to, among other things, research, develop and obtain
marketing approval for the Licensed Products in the U.S. and certain European markets, and to commercialize such Licensed Products in
the relevant market once marketing approval is obtained.
In consideration for the license and other rights
granted to the Company under the License Agreement, the Company paid CLS a one-time fee of $500,000 in cash, issued to CLS 500,000 shares
of the Company’s common stock, and is obligated to pay up to $13,000,000 in cash in potential milestone payments for the achievement
of certain clinical and regulatory milestones for each Licensed Product. In addition, the Company is obligated to pay tiered royalties
ranging from the mid-single to low-double digits on net sales of licensed products falling within the scope of the license during the
Royalty Term (as defined in the License Agreement), as well as pay a percentage share in the mid-teens to low double digits of certain
consideration received by the Company from any sublicensees.