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 progressing XCART™, a personalized Chimeric Antigen Receptor (“CAR”) T platform
technology engineered to target patient- and tumor-specific neoantigens. The Company is initially advancing 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. The XCART technology, developed by the Scripps Research Institute in collaboration with the Shemyakin-Ovchinnikov
Institute of Bioorganic Chemistry, is believed to have the potential to significantly enhance the safety and efficacy of cell therapy
for B-cell lymphomas by generating patient- and tumor-specific CAR T cells.
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. It employs the natural polymer polysialic
acid to prolong a drug's circulating half-life and potentially improve other pharmacological properties. Xenetic incorporates its
patented and proprietary technologies into a number of drug candidates currently under development with biotechnology and pharmaceutical
industry collaborators to create what the Company believes will be the next-generation biologic drugs with improved pharmacological
properties over existing therapeutics.
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, and 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. During 2019, the Company completed two stock offerings that resulted in $16.1 million of
net proceeds to the Company. The Company believes that its existing resources will
be adequate to fund the Company’s operations through mid-2021. 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 and market conditions, many of which are beyond its
control.
2.
|
Summary of Significant Accounting Policies
|
Preparation of Interim Financial
Statements
The accompanying condensed consolidated
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, 2019 filed with the SEC on March 26, 2020 and
amended on April 29, 2020.
On June 25, 2019, the Company effected
a reduction, on a 1 for 12 basis, in its authorized common stock, par value $0.001, along with a corresponding and proportional
decrease in the number of shares issued and outstanding (the “Reverse Stock Split”). On the effective date of the Reverse
Stock Split, (i) every 12 shares of common stock were reduced to one share of common stock, with any fractional amounts rounded
up to one share; (ii) the number of shares of common stock into which each outstanding warrant, restricted stock unit, or option
to purchase common stock were proportionately reduced on the same basis as the common stock; (iii) the exercise price of each outstanding
warrant or option to purchase common stock were proportionately increased on a 1 for 12 basis; and (iv) the number of shares of
common stock into which each share of preferred stock could be converted were proportionately reduced on the same basis as the
common stock. Unless otherwise indicated, all of the share numbers, share prices, and exercise prices have been adjusted, on a
retroactive basis, to reflect this Reverse Stock Split.
Certain prior period amounts have been
reclassified to conform to the presentation for the current period.
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, 2020
and 2019, 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 November 2018, the Financial
Accounting Standards Board (“FASB”) issued ASU 2018-18, Clarifying the Interaction between Topic 808 and Topic 606. The
guidance clarifies that certain transactions between collaborative arrangement participants should be accounted for as
revenue under ASC 606 when the collaborative arrangement participant is a customer for a promised good or service that is
distinct within the collaborative arrangement. The guidance also precludes entities from presenting amounts related to
transactions with a collaborative arrangement participant that is not a customer as revenue, unless those transactions are
directly related to third-party sales. ASU 2018-18 is effective in the first quarter of 2020 and should be applied
retrospectively to January 1, 2018, when the Company adopted ASC 606. Early adoption is permitted. The new guidance was
adopted on January 1, 2020 and it did not have a material effect on the Company’s condensed consolidated financial
statements.
In August 2018, the FASB issued ASU 2018-13,
Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement. The guidance eliminates,
adds and modifies certain disclosure requirements for fair value measurements as part of its disclosure framework project. ASU
2018-13 is effective for annual reporting periods beginning after December 15, 2019 and interim periods within those annual periods
and early adoption is permitted. The new guidance was adopted on January 1, 2020 and it did not have a material effect on the Company’s
condensed consolidated financial statements.
3.
|
Significant Strategic Collaborations
|
The Company has entered into various research,
development, license and supply agreements with Takeda Pharmaceuticals Co. Ltd. (“Takeda”), Serum Institute of India
(“Serum Institute”), 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, 2020. In October 2017, the Company granted to 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 $57,000 earned on sales
by the sublicensee during the fourth quarter of 2019 were recorded as revenue by the Company during the three months ended March
31, 2020. 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. There
were no remaining performance obligations and all other revenue recognition criteria were met. There were no amounts recognized
under this sublicense agreement during the three months ended March 31, 2019. No amounts were recognized as revenue related to
the Serum Institute, Pharmsynthez or SynBio agreements during the three months ended March 31, 2020 and 2019.
4.
|
Property and Equipment, net
|
Property and equipment, net consists of
the following:
|
|
March 31,
2020
|
|
December 31,
2019
|
Office and computer equipment
|
|
$
|
42,289
|
|
|
$
|
42,289
|
|
Furniture and fixtures
|
|
|
14,738
|
|
|
|
14,738
|
|
Property and equipment – at cost
|
|
|
57,027
|
|
|
|
57,027
|
|
Less accumulated depreciation
|
|
|
(56,861
|
)
|
|
|
(56,270
|
)
|
Property and equipment – net
|
|
$
|
166
|
|
|
$
|
757
|
|
Depreciation expense was approximately
$1,000 for the three months ended March 31, 2020 and 2019, respectively.
5.
|
Indefinite-Lived Intangible Assets
|
The Company’s indefinite-lived intangible
asset, OncoHist, is in-process research and development (“IPR&D”) relating to the Company’s business combination
with SymbioTec in 2012. The carrying value of the IPR&D was approximately $9.2 million as of March 31, 2020 and December 31,
2019, respectively. IPR&D is required to be tested annually until the project is completed or abandoned. The IPR&D is not
yet commercialized and, therefore, has not yet begun to be amortized as of March 31, 2020. The Company assesses IPR&D for impairment
at least annually as of October 1 or when events or changes in circumstances indicate that the carrying value may be impaired.
No impairment was recorded during the three months ended March 31, 2020 nor during the year ended December 31, 2019.
6.
|
Fair Value Measurements
|
Accounting Standards Codification (“ASC”)
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. The carrying amounts of certain
of the Company’s financial instruments approximates fair value due to their short maturities.
Warrants
In connection with certain of the Company’s
collaboration agreements and consulting arrangements, the Company has issued warrants to purchase shares of common stock as payment
for services. As of each of March 31, 2020 and December 31, 2019, collaboration warrants to purchase 32,412 shares of common stock
were outstanding. These warrants have an average weighted exercise price of $136.45 and expiration dates ranging from May 2020
through May 2021. No collaboration warrants were granted or exercised in connection with collaboration or consulting services during
the three months ended March 31, 2020 and 2019, respectively.
In addition, the Company has outstanding
warrants to purchase an aggregate of 439,083 and 658,557 shares of common stock in connection with debt and equity financing arrangements
as of March 31, 2020 and December 31, 2019, respectively. These warrants have an average weighted exercise price of $40.24 and
$31.16 as of March 31, 2020 and December 31, 2019, respectively, and expiration dates ranging from July 2020 through September
2026. There were no debt and equity financing warrants granted during the three months ended March 31, 2020, and warrants to purchase
129,084 shares of common stock were granted during the three months ended March 31, 2019. During the three months ended March 31,
2020, debt and equity financing warrants to purchase approximately 219,000 shares of common stock were exercised on a cashless
one-for-one basis. No debt or equity financing warrants were exercised during the three months ended March 31, 2019.
Total share-based expense related to stock
options, restricted stock units (“RSUs”) and common stock awards were approximately $0.2 million during the three months
ended March 31, 2020 and 2019, respectively.
Share-based compensation expense is classified
in the condensed consolidated statements of operations as follows:
|
|
Three Months Ended March 31,
|
|
|
2020
|
|
2019
|
Research and development expenses
|
|
$
|
13,358
|
|
|
$
|
11,418
|
|
General and administrative expenses
|
|
|
152,240
|
|
|
|
222,522
|
|
|
|
$
|
165,598
|
|
|
$
|
233,940
|
|
Employee Stock Options
There were no employee stock options or
RSUs granted or exercised during the three months ended March 31, 2020 and 2019, respectively. The Company recognized a total of
$0.2 million of compensation expense related to employee stock options during the three months ended March 31, 2020 and 2019, respectively.
Non-Employee Stock Options
The Company did not grant any non-employee
stock options during the three months ended March 31, 2020 and 2019, respectively. The Company recognized approximately $4,000
of expense during the three months ended March 31, 2020. The Company did not recognize any expense related to non-employee stock
options during the three months ended March 31, 2019.
Common Stock Awards
During the three months ended March 31,
2019, the Company granted 685 common stock awards based on the value of the professional services provided and the average stock
price during the quarter. As all services were rendered during the three months ended March 31, 2019, approximately $17,000 of
expense related to common stock awards was recognized. There were no common stock awards granted during the three months ended
March 31, 2020. As of March 31, 2020, there were 8,341 common stock awards authorized but not issued.
During the three months ended March 31,
2020 and 2019, 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 $26.1 million and $25.9 million as of March 31, 2020 and December 31, 2019, respectively.
As of March 31, 2020 and December 31, 2019,
the net deferred tax liability of $2.9 million on the condensed consolidated balance sheets is related to book and tax basis differences
for intangible assets with indefinite lives. In accordance with ASC 740-10-30-18, the deferred tax liability related to the intangible
assets cannot be used to offset deferred tax assets when determining the amount of the valuation allowance for deferred tax assets
which are not more-likely-than-not to be realized. This results in a net deferred tax liability, even though the Company has a
full valuation allowance on its other net deferred tax assets. This net deferred tax liability will continue to be reflected on
the balance sheet until the related intangible assets are no longer held by the Company.
As of March 31, 2020 and December 31,
2019, 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:
|
|
Three Months
Ended
March 31,
|
|
|
2020
|
Operating cash flow information:
|
|
|
|
|
Cash paid for amounts included in the measurement of lease liabilities
|
|
$
|
6,824
|
|
Supplemental balance sheet information
related to our operating leases is as follows:
|
|
Balance Sheet Classification
|
|
March 31, 2020
|
Right-of-use assets
|
|
Prepaid expenses and other
|
|
$
|
13,218
|
|
Current lease liabilities
|
|
Accrued expenses and other current liabilities
|
|
$
|
13,218
|
|
11.
|
Related Party Transactions
|
The Company has entered into various research,
development, license and supply agreements with Serum Institute and Pharmsynthez (as well as SynBio, a wholly owned subsidiary
of 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, 2019 filed with the SEC on March 26, 2020 as amended on April 29, 2020.
On July 19, 2019, the Company acquired
the XCART technology platform from Hesperix and Opko Pharmaceuticals LLC (“OPKO”). Dr. Dmitry Genkin, one of our directors
and Chairman of Pharmsynthez, was a director and significant shareholder of Hesperix. In addition, the Company agreed to repay
an approximate $225,000 loan that Dr. Genkin entered into with Hesperix. Mr. Adam Logal, one of our directors, is Senior Vice President,
Chief Financial Officer, Chief Accounting Officer and Treasurer of OPKO Health, Inc., the parent company of OPKO.
During the third quarter of 2019, the Company
entered into a sponsored research agreement with Pharmsynthez related to experiments identified by the Company to support its efforts
as it prepares for initial tech transfer of the XCART methods to a future academic collaborator. Under the agreement, the Company
made a $350,000 payment to Pharmsynthez during the third quarter of 2019, which is refundable on pro rata basis if the project
is terminated prematurely as a result of Pharmsynthez failing to perform the work. The Company expensed approximately $0.1 million
related to this agreement during the three months ended March 31, 2020. As of March 31, 2020 and December 31, 2019, approximately
$0.1 million and $0.2 million, respectively, was recorded as an advanced payment and included in Prepaid expenses and other on
the condensed consolidated balance sheets.
In October 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
August 2011 Stock Subscription and Collaborative Development of Pharmaceutical Products Agreement between the Company and
SynBio. The Pharmsynthez Loan has a term of 15-months and accrues 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 equity interests of the Company owned by Pharmsynthez and SynBio. The Company recognized approximately $13,000 of
interest income related to this loan during the three months ended March 31, 2020. As of March 31, 2020, the Pharmsynthez
Loan was included in Prepaid expenses and other on the condensed consolidated balance sheets. As of December 31, 2019, the
Pharmsynthez Loan was included in Other assets on the condensed consolidated balance sheets.
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. During March 2020, a global pandemic was declared by the
World Health Organization related to the rapidly growing 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, 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 is currently evaluating 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 is uncertain of the impact this event may have on the
Company’s future operations. The extent to which the coronavirus 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.