Xenetic Biosciences(XBIO) - 2022 Q2 - Quarterly Report

PART I FINANCIAL INFORMATION Presents unaudited condensed consolidated financial statements and management's discussion of financial condition and operations ITEM 1 – FINANCIAL STATEMENTS Presents unaudited condensed consolidated financial statements, including balance sheets, operations, equity, cash flows, and detailed notes Condensed Consolidated Balance Sheets Details the company's financial position, including assets, liabilities, and stockholders' equity at specific dates Condensed Consolidated Balance Sheet Highlights | Metric | June 30, 2022 (Unaudited) ($) | December 31, 2021 ($) | | :-------------------------------- | :------------------------ | :------------------ | | Cash | $14,927,440 | $18,244,030 | | Total current assets | $15,376,173 | $18,723,429 | | Total assets | $16,468,104 | $19,815,360 | | Total current liabilities | $1,279,183 | $1,421,103 | | Total liabilities | $1,279,183 | $1,421,103 | | Total stockholders' equity | $15,188,921 | $18,394,257 | Condensed Consolidated Statements of Operations Details the company's revenues, expenses, and net loss over specific reporting periods Condensed Consolidated Statements of Operations Highlights | Metric | Three Months Ended June 30, 2022 ($) | Three Months Ended June 30, 2021 ($) | Six Months Ended June 30, 2022 ($) | Six Months Ended June 30, 2021 ($) | | :--------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Royalty revenue | $416,710 | $287,603 | $805,703 | $478,819 | | Research and development | $(2,077,499) | $(524,550) | $(3,178,898) | $(1,154,279) | | General and administrative | $(1,026,290) | $(890,704) | $(1,933,599) | $(1,821,282) | | Loss from operations | $(2,687,079) | $(1,127,651) | $(4,306,794) | $(2,496,742) | | Net loss | $(2,672,190) | $(1,106,678) | $(4,265,801) | $(2,452,623) | | Basic and diluted net loss per share | $(0.19) | $(0.13) | $(0.31) | $(0.28) | | Weighted-average shares outstanding | 14,066,573 | 8,746,692 | 13,755,046 | 8,746,479 | Condensed Consolidated Statements of Stockholders' Equity Outlines changes in equity accounts, including common stock, additional paid-in capital, and accumulated deficit Changes in Stockholders' Equity (Six Months Ended June 30, 2022) | Item | Change in Common Stock Par Value ($0.001) | Change in Additional Paid in Capital ($) | Change in Accumulated Deficit ($) | Total Stockholders' Equity Impact ($) | | :-------------------------------------------------- | :------------------------------------ | :--------------------------------- | :---------------------------- | :-------------------------------- | | Balance as of January 1, 2022 | $13,465 | $205,952,729 | $(182,547,265) | $18,394,257 | | Issuance of common stock for IPR&D | $875 | $804,125 | – | $805,000 | | Share-based expense | – | $255,465 | – | $255,465 | | Exercise of purchase warrants | $2 | $(2) | – | – | | Net loss | – | – | $(4,265,801) | $(4,265,801) | | Balance as of June 30, 2022 | $14,342 | $207,012,317 | $(186,813,066) | $15,188,921 | Condensed Consolidated Statements of Cash Flows Summarizes cash inflows and outflows from operating, investing, and financing activities over specific periods Condensed Consolidated Statements of Cash Flows Highlights | Cash Flow Activity | Six Months Ended June 30, 2022 ($) | Six Months Ended June 30, 2021 ($) | | :------------------------------------ | :----------------------------- | :----------------------------- | | Net loss | $(4,265,801) | $(2,452,623) | | Net cash used in operating activities | $(2,816,590) | $(2,245,998) | | Net cash used in investing activities | $(500,000) | $0 | | Net change in cash | $(3,316,590) | $(2,245,998) | | Cash at beginning of period | $18,244,030 | $11,527,552 | | Cash at end of period | $14,927,440 | $9,281,554 | | Issuance of common stock to acquire IPR&D (non-cash) | $805,000 | $0 | Notes to Condensed Consolidated Financial Statements Provides detailed explanations and disclosures for figures presented in the condensed consolidated financial statements Note 1. The Company Describes the company's business, operational challenges, and Nasdaq compliance status - Xenetic Biosciences, Inc. is a biopharmaceutical company focused on immune-oncology technologies, specifically its DNase platform for hard-to-treat cancers and the personalized CAR T platform (XCART) for B-cell lymphomas. The company also has a drug delivery platform, PolyXen, generating royalty payments[26] - The Company has incurred substantial losses since inception, raising substantial doubt about its ability to continue as a going concern. Existing resources are projected to fund operations into Q3 2023, but additional capital will be needed long-term[29] - Xenetic received a Nasdaq notification on June 3, 2022, for non-compliance with the minimum bid price requirement ($1.00) and has until November 30, 2022, to regain compliance[29] Note 2. Impact of COVID-19 Assesses the current and potential future impact of the COVID-19 pandemic on the company's operations - The COVID-19 pandemic has not significantly impacted the Company's operations to date, but the future impact remains uncertain and dependent on evolving factors[30] Note 3. Summary of Significant Accounting Policies Outlines the key accounting principles and methods used in preparing the interim financial statements - Interim financial statements are prepared in accordance with SEC rules, with certain disclosures condensed or omitted. Results for interim periods are not necessarily indicative of full-year results[31] - Basic and diluted net loss per share are the same due to the Company's net loss position, making potentially dilutive securities anti-dilutive[34] - The Company is evaluating ASU 2016-13 (Financial Instruments - Credit Losses) but does not anticipate a material effect on its consolidated financial statements upon adoption[35] Note 4. Significant Strategic Collaborations Details the company's key partnerships, royalty agreements, and research funding arrangements - The Company recorded royalty revenue of approximately $0.4 million and $0.8 million for the three and six months ended June 30, 2022, respectively, from a sublicense agreement with Takeda Pharmaceuticals Co. Ltd. for its PolyXen technology[37] - The research funding and option agreement with The Scripps Research Institute for XCART development was mutually terminated for additional funding during Q2 2022, with $2.4 million paid to date[38] - A Statement of Work was entered into with Catalent Pharma Solutions, LLC for cGMP manufacturing of Human DNase I, with an estimated total cost of up to $5 million over approximately 17 months[39] Note 5. Acquisitions Describes recent sublicense and license agreements, including consideration and future milestone obligations - On April 26, 2022, Xenetic entered into exclusive sublicense and license agreements with CLS Therapeutics Ltd. for its DNase enzyme technology for cancer treatment and CAR T therapies[40][42] - Total consideration for these agreements was approximately $1.3 million, comprising a $0.5 million cash payment and $0.8 million in 875,000 common shares issued. This amount was expensed as in-process research and development (IPR&D)[44] - The Company is obligated to pay CLS up to $26 million in potential cash milestone payments and issue an additional 950,000 shares of common stock based on regulatory milestones, plus tiered royalties on net sales[41][43] Note 6. Fair Value Measurements Explains valuation methods for financial instruments and their classification within the fair value hierarchy - The carrying amounts of the Company's financial instruments approximate fair value due to their short maturities. No financial instruments were classified as Level 3 in the fair value hierarchy[46] Note 7. Stockholders' Equity Provides details on outstanding warrants and their exercise activity impacting stockholders' equity - As of June 30, 2022, 4,629,630 Series A Warrants were outstanding, exercisable at $3.30 per share and expiring on February 23, 2025. No Series A Warrants were exercised or forfeited during the reporting period[47] - Publicly traded warrants to purchase approximately 21,000 shares were outstanding, with an exercise price of $13.00 and expiring July 17, 2024. Approximately 1,984 shares were exercised on a cashless basis during the six months ended June 30, 2022[49] Note 8. Share-Based Expense Details the classification and impact of share-based compensation expenses on the financial statements Share-Based Expense Classification | Category | Three Months Ended June 30, 2022 ($) | Three Months Ended June 30, 2021 ($) | Six Months Ended June 30, 2022 ($) | Six Months Ended June 30, 2021 ($) | | :-------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Research and development expenses | $23,128 | $19,026 | $42,306 | $29,736 | | General and administrative expenses | $112,742 | $90,896 | $213,159 | $156,470 | | Total share-based expense | $135,870 | $109,922 | $255,465 | $186,206 | - During the six months ended June 30, 2022, the Company granted 200,000 employee stock option awards with a weighted-average grant date fair value of $0.99 per option share[54] Note 9. Income Taxes Explains the company's income tax position, including no provision due to losses and valuation allowances - No provision for income taxes was recorded due to incurred losses. A valuation allowance of approximately $32.6 million was recorded against deferred tax assets as of June 30, 2022[56] Note 10. Commitments Outlines the company's contractual obligations, primarily related to operating lease liabilities Operating Lease Information | Metric | Six Months Ended June 30, 2022 ($) | Six Months Ended June 30, 2021 ($) | | :------------------------------------------ | :----------------------------- | :----------------------------- | | Cash paid for lease liabilities | $19,087 | $17,160 | | Right-of-use assets - ST | $9,611 | $37,408 | | Right-of-use assets - LT | $0 | $7,957 | | Current lease liabilities | $9,611 | $37,408 | | Non-current lease liabilities | $0 | $7,957 | Note 11. Related Party Transactions Details transactions with related parties, including loan interest income and director affiliations - Interest income on the Pharmsynthez Loan decreased, with no interest recorded in Q2 2022 due to Russian sanctions preventing payments. The loan receivable is classified as long-term, with U.S.-based collateral deemed adequate[61][63] - One of the Company's directors, Roger Kornberg, is on CLS's scientific advisory board but does not own equity or receive economic benefit from the CLS license agreements[65] Note 12. Subsequent Events Reports significant events occurring after the reporting period, such as new research collaborations - On August 2, 2022, the Company announced a research and development collaboration with Belgian Volition SARL Limited to develop NETs-targeted adoptive cell therapies for cancer, with Volition funding the program and shared commercialization proceeds[67] ITEM 2 – MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Management's perspective on financial condition, operational results, liquidity, business overview, and performance comparisons BUSINESS OVERVIEW Describes the company's biopharmaceutical focus, key technology platforms, and R&D strategy - Xenetic is a biopharmaceutical company focused on immune-oncology, advancing its DNase platform for solid tumors and XCART for B-cell lymphomas. The newly acquired DNase oncology platform will be prioritized[74] - The Company also leverages its PolyXen drug delivery platform through partnerships, generating royalty payments. Significant resources are committed to R&D, with no drug candidates yet approved for commercial sale[74][75] Effects of the COVID-19 Pandemic Assesses current and potential future impact of the COVID-19 pandemic on operations and financial results - The COVID-19 pandemic has not had a significant operational impact on the Company to date, but the ultimate impact on financial results remains uncertain due to evolving factors[76] RESULTS OF OPERATIONS Analyzes the company's financial performance, comparing revenues and expenses for current and prior periods Comparison of Quarter Ended June 30, 2022 and 2021 Compares financial performance for the three months ended June 30, 2022, against the same period in 2021 Quarterly Financial Performance Comparison (Q2 2022 vs. Q2 2021) | Description | June 30, 2022 ($) | June 30, 2021 ($) | Increase (Decrease) ($) | Percentage Change | | :-------------------------------- | :------------ | :------------ | :------------------ | :---------------- | | Royalty revenue | $416,710 | $287,603 | $129,107 | 44.9% | | Research and development | $(2,077,499) | $(524,550) | $1,552,949 | 296.1% | | General and administrative | $(1,026,290) | $(890,704) | $135,586 | 15.2% | | Loss from operations | $(2,687,079) | $(1,127,651) | $1,559,428 | 138.3% | | Net loss | $(2,672,190) | $(1,106,678) | $1,565,512 | 141.5% | - Research and development expenses increased by $1.6 million (296.1%) to $2.1 million, primarily due to a $1.3 million in-process research and development (IPR&D) expense from licensing the DNase oncology platform[80] - General and administrative expenses increased by $0.1 million (15.2%) to $1.0 million, mainly due to higher legal costs associated with the DNase oncology platform licensing[82] Comparison of Six Months Ended June 30, 2022 and 2021 Compares financial performance for the six months ended June 30, 2022, against the same period in 2021 Six-Month Financial Performance Comparison (H1 2022 vs. H1 2021) | Description | June 30, 2022 ($) | June 30, 2021 ($) | Increase (Decrease) ($) | Percentage Change | | :-------------------------------- | :------------ | :------------ | :------------------ | :---------------- | | Royalty revenue | $805,703 | $478,819 | $326,884 | 68.3% | | Research and development | $(3,178,898) | $(1,154,279) | $2,024,619 | 175.4% | | General and administrative | $(1,933,599) | $(1,821,282) | $112,317 | 6.2% | | Loss from operations | $(4,306,794) | $(2,496,742) | $1,810,052 | 72.5% | | Net loss | $(4,265,801) | $(2,452,623) | $1,813,178 | 73.9% | - R&D expenses for the six months increased by $2.0 million (175.4%) to $3.2 million, primarily due to a $1.3 million IPR&D expense from the DNase oncology platform licensing and increased spending on the XCART platform[87] - General and administrative expenses increased by $0.1 million (6.2%) to $1.9 million, mainly due to increased legal costs related to the DNase oncology platform licensing[88] Liquidity and Capital Resources Assesses the company's ability to meet short-term obligations and fund operations, including cash and capital needs - The Company incurred a net loss of approximately $4.3 million for the six months ended June 30, 2022, leading to an accumulated deficit of approximately $186.8 million[92] Liquidity and Capital Resources Summary | Metric | June 30, 2022 ($) | December 31, 2021 ($) | | :----------------- | :------------ | :---------------- | | Working capital | $14.1 million | $17.3 million | | Cash | $14.9 million | $18.2 million | | Current liabilities | $1.3 million | $1.4 million | - Working capital decreased by $3.2 million, primarily due to the net loss and $0.5 million cash used for the DNase oncology platform license[92] - Management has substantial doubt about the Company's ability to continue as a going concern due to sustained losses, though existing resources are expected to fund operations into Q3 2023. Additional capital will be needed long-term[93] - The Company received a Nasdaq notice on June 3, 2022, for non-compliance with the minimum bid price requirement and has until November 30, 2022, to regain compliance[93] Cash Flow Summary (Six Months Ended June 30) | Cash Flow Type | 2022 ($) | 2021 ($) | | :------------------------------------ | :----------- | :----------- | | Net cash used in operating activities | $(2.8) million | $(2.2) million | | Net cash used in investing activities | $(0.5) million | $0 | | Net cash from financing activities | $0 | $0 | Contractual Obligations and Commitments Discusses any material changes to the company's contractual obligations and financial commitments - There were no material changes in contractual obligations and commitments from those disclosed in the Annual Report on Form 10-K for the year ended December 31, 2021[98] Off Balance Sheet Arrangements Confirms the absence of off-balance sheet financing arrangements with material financial impact - The Company does not have any off-balance sheet financing arrangements that have or are reasonably likely to have a material effect on its financial condition or results of operations[99] Recent Accounting Standards Refers to disclosures on new accounting standards in the company's annual report - For a discussion of recent accounting standards, refer to Note 3 in the Company's Annual Report on Form 10-K for the year ended December 31, 2021[100] Critical Accounting Policies and Estimates States that there are no material changes to the company's critical accounting policies and estimates - There have been no material changes in the Company's critical accounting policies and estimates from those disclosed in its Annual Report on Form 10-K for the year ended December 31, 2021[101] ITEM 3 – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company is exempt from market risk disclosures as it qualifies as a "smaller reporting company" - The Company is not required to provide market risk disclosures because it is a "smaller reporting company" as defined in Rule 12b-2 of the Exchange Act[102] ITEM 4 – CONTROLS AND PROCEDURES Management affirmed the effectiveness of disclosure controls and procedures, with no material changes to internal control - Management concluded that disclosure controls and procedures were designed at a reasonable assurance level and were effective as of June 30, 2022[104] - There were no material changes in internal control over financial reporting during the period covered by this Quarterly Report[105] PART II OTHER INFORMATION Covers legal proceedings, risk factors, equity sales, defaults, and other miscellaneous disclosures ITEM 1 – LEGAL PROCEEDINGS The company is not currently involved in or threatened by any material legal proceedings - The Company is not currently subject to any material legal proceedings, nor are any material legal proceedings threatened against it[108] ITEM 1A – RISK FACTORS Updates risk factors, highlighting profitability challenges, platform dependence, collaboration reliance, and Nasdaq delisting Risks Related to Our Financial Condition and Capital Requirements Addresses risks from historical losses, accumulated deficit, and ongoing need for additional financing - The Company has never been profitable, has an accumulated deficit of approximately $186.8 million as of June 30, 2022, and expects to incur significant operating losses, requiring additional financing[110][111] - Future profitability depends on funding R&D, regulatory approval, market acceptance of drug candidates, and the ability to raise additional capital[111] Risks Related to the Discovery and Development of our Pharmaceutical Products Highlights risks tied to successful clinical development, regulatory approval, and commercialization of drug candidates - The Company's business is substantially dependent on the successful clinical development, regulatory approval, and commercialization of the DNase oncology platform, which requires substantial resources and efforts[112] - Failure to maintain or obtain academic and strategic collaborations could delay, limit, or terminate clinical development programs, adversely affecting the business[112] Risks Related to Our Reliance on Third-Parties Examines risks stemming from dependence on external collaborations for drug development and commercialization - The Company may seek additional collaborations for drug candidates but faces significant competition. Inability to secure favorable terms could force delays or curtailment of development programs[113][114][117] - Establishing collaborations is complex and time-consuming, and a reduced number of potential partners due to industry consolidation adds to the challenge[115] Risks Related to Our Common Stock Discusses risks concerning the company's common stock, including Nasdaq compliance and potential delisting - The Company received a Nasdaq notice on June 3, 2022, for non-compliance with the minimum bid price requirement ($1.00) and has until November 30, 2022, to regain compliance[118][119] - Failure to regain compliance could lead to delisting from the Nasdaq Capital Market, which would materially affect the market price and liquidity of the common stock and reduce the Company's ability to raise capital[120] ITEM 2 – UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS There were no unregistered sales of equity securities or use of proceeds to report during the period - None[121] ITEM 3 – DEFAULTS UPON SENIOR SECURITIES There were no defaults upon senior securities to report during the period - None[123] ITEM 4 – MINE SAFETY DISCLOSURES This item is not applicable to the Company - Not applicable[124] ITEM 5 – OTHER INFORMATION There is no other information to report under this item - None[125] ITEM 6 – EXHIBITS Lists all exhibits incorporated by reference or filed, including agreements, certifications, and financial statements - Key exhibits include Exclusive Sublicense and License Agreements with CLS Therapeutics LTD, a Statement of Work with Catalent Pharma Solutions, LLC, and certifications from the Principal Executive and Financial Officers[127] SIGNATURES The report is formally signed by the Chief Executive Officer and Chief Financial Officer - The report is signed by Jeffrey F. Eisenberg, Chief Executive Officer, and James Parslow, Chief Financial Officer[131]