Xenetic Biosciences(XBIO) - 2020 Q4 - Annual Report

PART I ITEM 1 – BUSINESS Xenetic Biosciences, Inc. is a biopharmaceutical company focused on advancing its personalized CAR T platform technology, XCART, for B-cell lymphomas, while also leveraging its PolyXen drug delivery platform through partnerships Overview Xenetic Biosciences is a biopharmaceutical company focused on XCART, a personalized CAR T platform technology targeting patient- and tumor-specific neoantigens for B-cell lymphomas[24] - The XCART technology, developed by Scripps Research and IBCH, aims to enhance the safety and efficacy of cell therapy for B-cell lymphomas by generating patient- and tumor-specific CAR T cells[24][27] - The company also utilizes its proprietary PolyXen drug delivery platform to prolong drug half-life and improve pharmacological properties, partnering with other companies for its application[29][30] - Development of XBIO-101 for progestin-resistant endometrial cancer has been suspended due to patient enrollment and retention challenges in its Phase 2 trial[31][32] Our Strategy The company's primary strategy is to advance the XCART technology through regulatory approval and commercialization for B-cell Lymphomas, while also seeking industry collaborations for other uses and indications - Xenetic plans to opportunistically advance its PolyXen platform through collaborative out-license arrangements to generate shareholder value and working capital for XCART development[35] - The company intends to pursue orphan drug designations and accelerated approval pathways for relevant oncology indications in the U.S. and Europe[36] Business Developments Key business developments in 2020 included a research funding agreement with Scripps Research, a Master Services Agreement with Pharmsynthez for XCART development, and a registered direct offering to increase capital - On May 15, 2020, Xenetic entered into a Research Funding and Option Agreement with Scripps Research, committing up to $3.0 million to fund preclinical development of XCART over 27 months[38] - On June 12, 2020, a Master Services Agreement (MSA) was signed with Pharmsynthez to advance XCART development for B-cell malignancies, with an estimated total cost of approximately $1.8 million for a Stage 1 study and potential milestone payments up to $1,050,000[39][40] - On December 4, 2020, shareholders approved an increase in authorized Common Stock to 50,000,000 shares[42] - On December 10, 2020, the company completed a registered direct offering of 2,448,980 shares of Common Stock at $2.45 per share, generating approximately $6.0 million in gross proceeds[43] Our Technology and Drug Candidates The company's patent portfolio covers five core proprietary technologies, with a primary focus on oncology drugs and future development anticipated solely on the XCART platform - The company's patent portfolio spans five core proprietary technologies: XCART, XBIO-101, PolyXen, OncoHist, and ImuXen, with a primary focus on oncology drugs[44] - In 2020, internal development efforts were limited to winding down the XBIO-101 Phase 2 trial and preliminary XCART development, with future focus anticipated solely on XCART[45] - XCART is a personalized CAR T platform targeting patient-specific tumor neoantigens for B-cell lymphomas, aiming for enhanced safety and efficacy with limited off-tumor toxicities[45] - PolyXen is a drug delivery platform using polysialic acid (PSA) to extend drug circulation time and improve pharmacological properties[46] - OncoHist is a therapeutic platform utilizing modified human histone H1.3 for targeted cell apoptosis across various cancer indications[46] - ImuXen is a liposomal co-entrapment encapsulation technology designed to maximize cell and immune system-mediated responses for vaccines[46] Research, Outside Services and Collaborations The company relies on third-party contract manufacturers, CROs, and strategic collaborations for pipeline development, as it lacks in-house research facilities - The company relies on contract manufacturers, CROs, and strategic collaborations (Pharmsynthez/SynBio, Serum Institute, Takeda) for pipeline development, as it lacks in-house research facilities[47][49] - Xenetic expects to collect milestone payments and royalties from collaborations if drugs are successfully developed and marketed, though no near-term milestone or royalty payments are anticipated, except for ongoing royalties from Takeda and potential royalties from SynBio[48] Our Drug Candidate Pipeline The company's pipeline includes XCART for B-cell Non-Hodgkin lymphomas and ErepoXen, a PolyXen platform drug, with collaborators advancing its clinical development in various territories - XCART is a personalized CAR T cell platform targeting patient-specific tumor neoantigens, with initial focus on B-cell Non-Hodgkin lymphomas, an estimated $5 billion+ annual global market opportunity[50][51] - ErepoXen (polysialylated erythropoietin, PSA-EPO) uses the PolyXen platform for anemia in CKD patients, designed to extend half-life. Clinical development is not pursued internally, but out-license opportunities are entertained[52] - SynBio received positive Phase II(b)/III clinical trial data for ErepoXen (Epolong) in Russia in December 2020 and filed for registration, expecting production by Q1 2022[54] - Serum Institute completed Phase I and Phase II safety trials for ErepoXen in 95 human subjects with no significant drug-related adverse events, and may leverage SynBio's data for a Phase III waiver in India[55][56] - Collaborators' preclinical and clinical data from licensed territories can be utilized by Xenetic for decision-making regarding development and commercialization in major markets, particularly for PolyXen in orphan oncology indications[57] Significant Collaborations and Strategic Arrangements Xenetic maintains key collaborations with Takeda, Pharmsynthez (SynBio), and Serum Institute, involving licensing agreements, research funding, and royalty payments for its technology platforms - Takeda has an exclusive research, development, and license agreement for polysialylated blood coagulation factors using PolyXen technology. Takeda terminated SHP656 development in 2017 but commenced a new, undisclosed internal project[58][59] - Under a 2017 Sublicense Agreement, Takeda paid Xenetic a one-time $7.5 million and agreed to single-digit royalty payments on net sales of Covered Products, which commenced in late 2019[60] - SynBio (a Pharmsynthez subsidiary) has an exclusive license to develop and commercialize drug candidates using Xenetic's PolyXen, OncoHist, and ImuXen platforms in Russia and CIS, with Xenetic retaining rights to use generated preclinical/clinical data outside these markets[61][65] - Pharmsynthez has a collaborative R&D license for six drug candidates based on PolyXen and ImuXen in Russia/CIS, with Xenetic having rights to use preclinical/clinical data outside these regions[66][68] - Pharmsynthez (directly and indirectly through SynBio) held approximately 5.1% of Xenetic's outstanding Common Stock as of December 31, 2020, and also holds preferred stock and warrants[69] - In June 2020, Xenetic and Pharmsynthez entered into an MSA and Work Order to advance XCART development for B-cell malignancies, superseding a prior SRA[70] - A $500,000 loan agreement with Pharmsynthez from Q4 2019 was extended to January 2022, with specific repayment terms for principal and interest[72] - Serum Institute has an exclusive license to use PolyXen technology for PSA-EPO development in certain territories, responsible for all preclinical and clinical trials at its own expense, with royalty payments based on net sales[73] Our Intellectual Property Xenetic protects its proprietary technology through patents, trade secrets, and know-how, focusing on major pharmaceutical markets globally - Xenetic protects its proprietary technology through patents, trade secrets, and know-how, with a focus on major pharmaceutical markets globally[74][77] - As of February 3, 2021, the company directly or indirectly owns over 170 U.S. and international patents and pending applications covering XCART, PolyXen, and other product candidates[78] - Issued patents generally provide 20 years of exclusionary rights from the earliest filing date, with potential for up to five years of patent term extension in the U.S. for FDA-approved products[81] Manufacturing and Supply Xenetic relies entirely on third-party manufacturers for its drug candidates, including Serum Institute for PolyXen products, and plans to seek a third-party for XCART clinical supply - Xenetic does not have internal manufacturing capabilities and relies on third-party manufacturers, including Serum Institute for PolyXen technology products[87] - The company anticipates seeking a third-party manufacturer for its XCART technology clinical supply needs[87] Government Regulation Drug and biologic development, testing, manufacturing, and marketing are extensively regulated by government authorities in the U.S. and other countries, involving rigorous processes and ongoing compliance - Drug and biologic development, testing, manufacturing, and marketing are extensively regulated by government authorities in the U.S. and other countries[88][89] - The U.S. drug development process involves preclinical testing, IND submission, three phases of human clinical trials (Phase 1, 2, 3), NDA/BLA submission, FDA inspection of manufacturing facilities (cGMP), and FDA review and approval[90][91][96] - The Orphan Drug Act provides incentives and a seven-year exclusive marketing period in the U.S. for drugs treating rare diseases, with similar provisions in the European Union (ten years)[102][118][119] - Expedited development and review programs (Fast Track, Priority Review, Accelerated Approval, Breakthrough Therapy Designation) are available for drugs treating serious conditions with unmet medical needs or substantial improvement potential[105][107][108] - Post-approval, products remain subject to ongoing regulatory requirements, including manufacturing compliance (cGMP), labeling, advertising, and post-marketing studies[109] - U.S. patents may be eligible for up to five years of patent term extension under the Hatch-Waxman Amendments, and new chemical entities can receive five years of non-patent marketing exclusivity[111][112] - Sales and reimbursement of approved products depend on coverage by third-party payors (government, commercial insurance), which are increasingly challenging prices and imposing cost controls[127] Environmental Regulation The company's environmental compliance costs are minimal due to its reliance on unaffiliated manufacturers for drug candidate production - The company's environmental compliance costs are minimal as it does not manufacture its own drug candidates, relying on unaffiliated manufacturers[133] Employees As of December 31, 2020, Xenetic employed four full-time employees and supplements its workforce with external specialists and consultants for various functions - As of December 31, 2020, Xenetic employed four full-time employees and utilizes external specialists and consultants for regulatory affairs, R&D, and other functions[135][136] Competition The pharmaceutical and biotechnology industries are highly competitive, with numerous companies and institutions developing cancer treatments and immuno-oncology technologies, including CAR T therapies - The pharmaceutical and biotechnology industries are highly competitive, with numerous companies, academic institutions, and governmental agencies developing cancer treatments and immuno-oncology technologies, including CAR T[137][138] - For B-cell lymphomas, Xenetic faces competition from four currently approved CAR T therapies (Novartis' Kymriah, Gilead's Yescarta and Tecartus, Bristol Myers Squibb's Breyanzi) and over 100 CAR T products in development[139][140] - Competing drug delivery platforms for PSA include PEGylation, Fc-fusion, albumin-fusion, HESylation, PASylation, and CTP-fusion[142] ITEM 1A – RISK FACTORS The company faces significant risks, including its history of unprofitability and need for substantial additional funding, which could dilute stockholders or force delays in product development Risks Related to Our Financial Condition and Capital Requirements Xenetic has a history of unprofitability and an accumulated deficit, requiring substantial additional funding that could dilute stockholders or restrict operations - Xenetic has never been profitable, had an accumulated deficit of approximately $176.9 million as of December 31, 2020, and expects to incur significant operating losses for the foreseeable future[148][149][150] - The company will require substantial additional funding beyond its $11.5 million cash balance as of December 31, 2020, to complete clinical trials, obtain regulatory approval, and commercialize drug candidates[152][153] - Raising additional capital may dilute existing stockholders, restrict operations through debt covenants, or require relinquishing rights to technologies or drug candidates through collaborations[154][156][158] Risks Related to the Discovery and Development of our Pharmaceutical Products The business is highly dependent on the successful clinical development, regulatory approval, and commercialization of the XCART platform, facing challenges in patient enrollment, trial delays, and market acceptance - The business is substantially dependent on the successful clinical development, regulatory approval, and commercialization of the XCART platform technology[159] - As an early-stage company, Xenetic has no products approved for commercial sale and its ability to generate product revenues depends on successful development and commercialization of drug candidates, which is a highly speculative and risky undertaking[160] - Difficulty in enrolling patients in clinical studies could delay or prevent clinical trials, increasing costs and potentially terminating product development[162][165] - Substantial delays in clinical trials or failure to demonstrate safety and efficacy could prevent timely commercialization of drug candidates[166][167] - Clinical trials may fail to demonstrate safety and efficacy, leading to additional testing, delays, or denial of regulatory approval, harming the business and stock price[171][172] - Even if regulatory approval is obtained, it may be for a narrower indication than expected, or the drug candidate will remain subject to ongoing regulatory scrutiny and post-approval requirements[176][177][179] - Commercial success depends on market acceptance by physicians, patients, and third-party payors, which is uncertain and influenced by factors like efficacy, safety, pricing, and reimbursement[183][185][186] - Failure to obtain or maintain adequate coverage and reimbursement for approved drug candidates could limit marketability and revenue generation[188][191][193] - The company may fail to obtain orphan drug designations or maintain associated benefits, and market opportunities for drug candidates may be limited to specific patient populations or later-stage therapies[197][198][199][200] - Healthcare legislative reform measures, such as the Affordable Care Act and subsequent changes, may adversely affect the company's ability to sell drug candidates profitably[201][202][203] Risks Related to Our Reliance on Third-Parties The company's reliance on third-party collaborators, CROs, and manufacturers for development, clinical studies, and production exposes it to risks of conflicts, unsatisfactory performance, and intellectual property misappropriation - Conflicts with collaborators or strategic partners may arise, leading to actions in their self-interest, potentially limiting Xenetic's ability to implement its strategies or causing delays/termination of product development[204][205][206] - Reliance on third-parties (CROs, clinical investigators) to conduct clinical studies poses risks if they perform unsatisfactorily, fail to comply with regulations (GCPs), or do not recruit sufficient patients, leading to delays or termination[207][208][209] - Collaborators may adopt alternative technologies, shift resources, or fail to develop commercially viable products, negatively impacting revenues and development strategy[211] - Inability to establish additional collaborations on commercially reasonable terms could force the company to alter development and commercialization plans, or increase expenditures[212][213][215] - Entering collaborations may require relinquishing important rights or control over drug candidates, or being subject to unfavorable terms[217] - The company has no internal manufacturing, sales, marketing, or distribution capabilities and relies on third-party manufacturers, which are subject to significant regulation (cGMP) and capacity limitations[218][223] - Reliance on third-parties necessitates sharing trade secrets, increasing the risk of discovery by competitors or misappropriation/disclosure[227][228] Risks Related to Our Intellectual Property Failure to adequately protect or enforce intellectual property rights, including patents and trade secrets, could significantly damage commercial prospects and lead to costly litigation or loss of critical license rights - Failure to adequately protect or enforce intellectual property rights (patents, proprietary formulations, trademarks) could significantly damage commercial prospects, as patents may be challenged, invalidated, or circumvented[229][230] - Patent applications may not be issued or may have reduced coverage, and the company may not be the first inventor or filer, impacting licensing and royalty potential[231] - Issued patents covering drug candidates could be found invalid or unenforceable if challenged in court or administrative bodies, leading to loss of patent protection[234] - Protecting intellectual property rights globally is expensive and challenging, as foreign laws may offer less protection, allowing competitors to use inventions in other jurisdictions[235][236] - Infringement on the intellectual property rights of others could lead to substantial costs, litigation, or the inability to develop/commercialize infringing technology[238] - Failure to comply with obligations in license agreements with third-parties could result in loss of critical license rights[239] - Lawsuits to protect or enforce patents are expensive, time-consuming, and may be unsuccessful, potentially invalidating patents or narrowly interpreting claims[244][245] - Changes in U.S. patent law (e.g., Leahy-Smith America Invents Act, Supreme Court rulings) could diminish the value of patents and weaken the ability to obtain or enforce them[248][249] - Claims that employees or consultants wrongfully used or disclosed confidential information or trade secrets of third-parties could lead to litigation, loss of IP rights, or personnel[250][251] - Inability to protect confidential information and trade secrets, despite non-disclosure agreements, would harm the company's competitive position[252] Risks Related to Our Business Operations The company operates in a highly competitive environment, faces challenges in retaining key personnel, and may be impacted by new accounting standards, organizational expansion, or collaboration disputes - The company operates in an extremely competitive environment, facing numerous pharmaceutical and biotechnology companies with greater resources and experience, which could render its products obsolete[254] - Future success depends on retaining key executive team members, consultants, and advisors, and attracting qualified personnel in a competitive market[255] - Potential new accounting standards or legislative actions may adversely impact future financial position or results of operations, requiring additional expenses for compliance[256][257] - Expansion of the organization may lead to difficulties in managing growth, diverting management attention and potentially disrupting operations[258] - Collaboration agreements contain complex commercial terms that could result in disputes, litigation, or indemnification liability, adversely affecting business and financial condition[259][260] Risks Related to Our Common Stock The market for the company's Common Stock may lack liquidity and experience high volatility, while future stock issuances could dilute existing stockholders and anti-takeover provisions may depress stock price - An active, liquid, and orderly market for the company's Common Stock or Purchase Warrants may not develop or be sustained, making it difficult for investors to sell securities[262] - The market price of the company's securities may be highly volatile due to various factors, including clinical trial results, funding issues, regulatory decisions, competition, and economic conditions[263][264] - Preferred stock has preferential rights (e.g., liquidation preference, conversion rights) over common stockholders, which could reduce common stock value or cause dilution[266] - Future issuance of Common Stock, including the 50,000,000 authorized shares, may result in dilution to existing stockholders and depress the market price[267][268] - The company does not intend to pay dividends on its Common Stock or Preferred Stock, limiting returns to stock appreciation[270] - Certain provisions in the Articles of Incorporation, Bylaws, and Nevada Revised Statutes may have an anti-takeover effect, potentially causing the common stock price to decline[272] - Past failures to satisfy Nasdaq listing requirements and potential future non-compliance could affect the market price and liquidity of Common Stock, and reduce the ability to raise capital[273] General Risk Factors General risks include the uncertain impact of the COVID-19 pandemic, limitations on NOL carryforwards, potential price controls, misconduct by personnel, product liability claims, and cybersecurity failures - The COVID-19 pandemic has created significant volatility and uncertainty, and its ultimate impact on the company's business, operations, and financial results is uncertain and could be materially adverse[274][275] - The use of potential future operating losses and federal/state NOL carryforwards to offset taxable income could be limited by ownership changes or tax law reforms (e.g., TCJA), potentially leading to income tax liabilities despite existing NOLs[277][278][279] - Governments may impose price controls on pharmaceutical products, particularly in foreign jurisdictions, which could adversely affect future profitability and ability to achieve or sustain profitability[281] - Potential misconduct by employees, principal investigators, consultants, and commercial partners, including non-compliance with regulatory standards or fraud, could result in regulatory sanctions, reputational harm, or significant fines[282] - The use of drug candidates in clinical studies and commercial sale exposes the company to product liability claims, which could result in substantial liability, costs, and damage to business reputation[283][284] - Failure to comply with environmental, health, and safety laws and regulations could lead to fines, penalties, or significant costs[285][286] - Non-cash charges like share-based payments may materially impact results of operations[287] - Varying interpretations of accounting standards could lead to restatement of previously reported results[289] - Failures in information technology systems, including cybersecurity attacks, could disrupt operations, lead to data misappropriation, and result in reputational damage or regulatory fines[291][292] - As a smaller reporting company (SRC), reduced reporting requirements may make its Common Stock less attractive to investors, potentially leading to a less active trading market and increased stock price volatility[293] ITEM 1B – UNRESOLVED STAFF COMMENTS The company has no unresolved staff comments from the SEC ITEM 2 – PROPERTIES Xenetic Biosciences occupies approximately 1,700 square feet of office space in Framingham, Massachusetts, under a lease through September 2022, and leases 360 square feet of office space in Miami, Florida, extended through November 2021 - The company leases approximately 1,700 square feet of office space in Framingham, Massachusetts, with a lease term through September 2022[296] - An additional 360 square feet of office space is leased in Miami, Florida, with the lease extended through November 30, 2021[297] ITEM 3 – LEGAL PROCEEDINGS As of December 31, 2020, Xenetic Biosciences was not a party to any legal proceedings that management believes would have a material adverse effect on its financial position, results of operations, or cash flows - As of December 31, 2020, there were no legal matters that management believed would have a material adverse effect on the company's financial position, results of operations, or cash flows[299] ITEM 4 – MINE SAFETY DISCLOSURES This item is not applicable to Xenetic Biosciences, Inc PART II ITEM 5 – MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES Xenetic Biosciences' Common Stock is listed on The NASDAQ Capital Market under the symbol "XBIO," with 425 holders of record as of March 11, 2021, and the company has never paid cash dividends, prioritizing earnings for business development - Common Stock is listed on The NASDAQ Capital Market under the symbol "XBIO"[303] - As of March 11, 2021, there were 425 holders of record of the Common Stock[303] - The company has never declared or paid cash dividends on its Common Stock and does not intend to in the foreseeable future, planning to retain earnings for business development[304][270] - No repurchases of equity securities were made during the quarter ended December 31, 2020[307] ITEM 6 – SELECTED FINANCIAL DATA As a smaller reporting company, Xenetic Biosciences is not required to provide selected financial data under this item ITEM 7 – MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Xenetic Biosciences, a biopharmaceutical company focused on XCART technology, reported a net loss of $10.9 million in 2020, an improvement from $12.8 million in 2019, driven by increased Takeda royalties and decreased R&D and G&A expenses, partly offset by a substantial asset impairment charge related to IPR&D BUSINESS OVERVIEW Xenetic Biosciences is a biopharmaceutical company focused on its XCART platform for B-cell lymphomas and leveraging its PolyXen drug delivery platform, with drug candidates in development and ongoing royalties from a PolyXen license - Xenetic Biosciences is a biopharmaceutical company focused on XCART, a personalized CAR T platform technology for B-cell lymphomas, and leveraging its PolyXen drug delivery platform[309][310] - The company's drug candidates are in development, with no regulatory marketing authorization to date, but it receives ongoing royalties from a PolyXen license[311] - Development of XBIO-101 for endometrial cancer has been suspended since March 2019[312] - In 2020, internal development efforts focused on winding down XBIO-101 and preliminary XCART development[313] Critical Accounting Estimates Critical accounting estimates involve revenue recognition for license and collaboration arrangements, expensing research and development costs, valuing share-based compensation and warrants, and annually testing goodwill and indefinite-lived intangible assets for impairment - Revenue recognition for license and collaboration arrangements involves significant judgment in identifying performance obligations, determining transaction price, and allocating it based on stand-alone selling prices, with upfront payments recognized ratably over the expected performance period[318][319][320] - Royalty revenue is recognized in the period of sale upon receipt of reports from third-parties, provided sales are reliably measurable and no remaining performance obligations exist[323] - Research and development expenses are expensed as incurred, including upfront non-refundable payments and the value of acquired in-process R&D (IPR&D) that does not meet capitalization criteria[324] - Accrued R&D expenses are estimated based on open contracts, services performed, and communication with personnel, with periodic adjustments[325] - Share-based expense for options and RSUs is calculated using the Black-Scholes model, requiring judgment for volatility and expected terms. Common stock awards to non-employees are valued based on services provided[328][330] - Warrants are classified as equity awards and measured at fair value using the Black-Scholes model, with expense recognized over the service period or at issuance[331][332] - Goodwill and indefinite-lived intangible assets (IPR&D) are not amortized but tested annually for impairment using qualitative or quantitative analysis (income and market valuation methods)[335][336] - In 2019, a $3.3 million asset impairment charge was recorded for Goodwill due to a significant decline in market capitalization. In 2020, a $9.2 million asset impairment charge was recorded for IPR&D (OncoHist) due to management's decision to indefinitely delay further development and failure to sell/license[337][338] Effects of the COVID-19 Pandemic The COVID-19 pandemic has created significant economic uncertainties, but the company's operations were not materially affected during 2020, though the ultimate impact on future results remains uncertain - The COVID-19 pandemic has created significant economic uncertainties, but the company's operations were not materially affected during 2020. The ultimate impact on future results remains uncertain[341] Results of Operations In 2020, the company reported a reduced net loss compared to 2019, driven by significantly increased royalty revenue and decreased R&D and G&A expenses, despite higher asset impairment charges Consolidated Statements of Comprehensive Loss Summary | Description | 2020 ($) | 2019 ($) | Increase (Decrease) ($) | Percentage Change (%) | | :---------------------------------- | :--------- | :--------- | :---------------------- | :-------------------- | | Royalty revenue | 436,942 | 17,066 | 419,876 | 2,460.3% | | Research and development | (1,731,406) | (4,889,340) | (3,157,934) | (64.6)% | | General and administrative | (3,400,071) | (4,731,176) | (1,331,105) | (28.1)% | | Asset impairment charges | (9,243,128) | (3,283,379) | 5,959,749 | 181.5% | | Total operating costs and expenses | (14,374,605) | (12,903,895) | 1,470,710 | 11.4% | | Loss from operations | (13,937,663) | (12,886,829) | 1,050,834 | 8.2% | | Other income (expense) | (492) | 3,315 | (3,807) | (114.8)% | | Interest income, net | 126,171 | 108,489 | 17,682 | 16.3% | | Loss before income taxes | (13,811,984) | (12,775,025) | 1,036,959 | 8.1% | | Income tax benefit | 2,918,518 | – | 2,918,518 | 100.0% | | Net loss | (10,893,466) | (12,775,025) | (1,881,559) | (14.7)% | | Basic and diluted loss per share | (1.70) | (6.33) | | | | Weighted-average shares outstanding | 6,392,381 | 2,852,464 | | | - Royalty revenue increased by $0.4 million (2,460.3%) to $0.4 million in 2020, representing a full year of royalties from the Takeda sublicense agreement, compared to three months in 2019[344] - Total R&D expenses decreased by $3.2 million (64.6%) to $1.7 million in 2020, primarily due to a $3.0 million IPR&D expense in 2019 not recurring in 2020. Excluding this, R&D decreased by $127,000 (6.8%)[345] Research and Development Expenses by Category | Category of Expense | 2020 ($) | 2019 ($) | | :----------------------------------- | :--------- | :--------- | | IPR&D expense | – | 3,031,226 | | Outside services and CROs | 1,203,582 | 1,357,820 | | Share-based expense | 49,191 | 156,964 | | Personnel costs | 342,883 | 297,651 | | Other | 135,750 | 45,679 | | Total R&D expense | 1,731,406 | 4,889,340 | - Decrease in outside services and CROs was due to reduced spending on the XBIO-101 trial, partially offset by increased XCART preclinical development costs[347] - General and administrative expenses decreased by $1.3 million (28.1%) to $3.4 million in 2020, mainly due to $1.1 million in XCART acquisition transaction costs in 2019 not recurring[348] - Asset impairment charges increased to $9.2 million in 2020 (related to IPR&D) from $3.3 million in 2019 (related to Goodwill)[350] - An income tax benefit of $2.9 million was recognized in 2020 due to the IPR&D impairment, with no similar benefit in 2019[353] Liquidity and Capital Resources The company incurred a net loss of $10.9 million in 2020, increasing its accumulated deficit to $176.9 million, with existing resources expected to fund operations through Q1 2022, but additional capital will be needed long-term - The company incurred a net loss of $10.9 million in 2020 and had an accumulated deficit of $176.9 million as of December 31, 2020[355] - Working capital increased by $1.8 million to $11.4 million in 2020, primarily due to $5.4 million in net proceeds from a December 2020 registered direct Common Stock offering, offset by the net loss[355] - Cash balance was $11.5 million at December 31, 2020, compared to $10.4 million at December 31, 2019[357] - Management believes existing resources and the December 2020 financing will fund operations through Q1 2022, but additional capital will be needed long-term[358] - Cash flows used in operating activities were $4.3 million in 2020, an improvement from $6.4 million in 2019[359] - Cash flows from financing activities totaled $5.4 million in 2020 (from the registered direct offering), compared to $16.1 million in 2019 (from two stock offerings)[361] - The company has no off-balance sheet arrangements with a material effect on its financial condition[362] Contractual Obligations The company's contractual obligations primarily consist of property leases for office space, excluding variable and cancelable payments for CRO services Contractual Obligations as of December 31, 2020 | | Total ($) | Less than 1 year ($) | 1-3 years ($) | 3-5 years ($) | More than 5 years ($) | | :---------------- | :-------- | :------------------- | :------------ | :------------ | :-------------------- | | Lease obligations | 83,649 | 54,532 | 29,117 | – | – | - Contractual obligations primarily consist of property leases for office space, excluding potential payments for CRO services due to variable timing and cancelability[364] ITEM 7A – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK As a smaller reporting company, Xenetic Biosciences is not required to provide quantitative and qualitative disclosures about market risk ITEM 8 – FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Report of Independent Registered Public Accounting Firm Marcum LLP issued an unqualified opinion on Xenetic Biosciences' consolidated financial statements for 2020 and 2019, with critical audit matters including the company's going concern assessment and revenue recognition for royalty income - Marcum LLP issued an unqualified opinion on the consolidated financial statements for the years ended December 31, 2020 and 2019[373] - Critical audit matters included the company's going concern assessment, requiring high auditor judgment to assess the reasonableness of cash flow forecasts and assumptions[378][379] - Another critical audit matter was revenue recognition over royalty revenue, specifically management's estimate of potential net sales as expected variable consideration[381][382] Consolidated Balance Sheets As of December 31, 2020, total assets decreased to $13.18 million from $21.55 million in 2019, primarily due to asset impairments, while cash increased to $11.53 million, and total liabilities and stockholders' equity also decreased Consolidated Balance Sheet Summary | ASSETS | Dec 31, 2020 ($) | Dec 31, 2019 ($) | | :---------------------------------- | :--------------- | :--------------- | | Cash | 11,527,552 | 10,367,920 | | Total current assets | 12,369,510 | 11,089,999 | | Property and equipment, net | – | 757 | | Goodwill and indefinite-lived intangible assets | – | 9,243,128 | | Other assets | 809,985 | 1,213,042 | | Total assets | 13,179,495 | 21,546,926 | | LIABILITIES AND STOCKHOLDERS' EQUITY | | | | Total current liabilities | 936,928 | 1,415,157 | | Deferred tax liability and other long-term liabilities | 27,043 | 2,918,518 | | Total liabilities | 963,971 | 4,333,675 | | Total stockholders' equity | 12,215,524 | 17,213,251 | | Total liabilities and stockholders' equity | 13,179,495 | 21,546,926 | - Goodwill and indefinite-lived intangible assets decreased from $9.24 million in 2019 to $0 in 2020 due to impairment charges[386] - Deferred tax liability decreased significantly from $2.92 million in 2019 to $27,043 in 2020[386] Consolidated Statements of Comprehensive Loss Xenetic Biosciences reported a net loss of $10.89 million for the year ended December 31, 2020, an improvement from a $12.78 million net loss in 2019, driven by increased royalty revenue and decreased operating expenses, despite higher asset impairment charges Consolidated Statements of Comprehensive Loss Summary | Description | 2020 ($) | 2019 ($) | | :---------------------------------- | :--------- | :--------- | | Royalty revenue | 436,942 | 17,066 | | Total revenue | 436,942 | 17,066 | | Research and development | (1,731,406) | (4,889,340) | | General and administrative | (3,400,071) | (4,731,176) | | Asset impairment charges | (9,243,128) | (3,283,379) | | Total operating costs and expenses | (14,374,605) | (12,903,895) | | Loss from operations | (13,937,663) | (12,886,829) | | Other income (expense) | (492) | 3,315 | | Interest income, net | 126,171 | 108,489 | | Total other income | 125,679 | 111,804 | | Loss before income taxes | (13,811,984) | (12,775,025) | | Income tax benefit | 2,918,518 | – | | Net loss | (10,893,466) | (12,775,025) | | Net loss applicable to common stockholders | (10,893,466) | (18,059,404) | | Basic and diluted loss per share | (1.70) | (6.33) | | Weighted-average shares outstanding | 6,392,381 | 2,852,464 | - Net loss applicable to common stockholders improved from $(18.06) million in 2019 to $(10.89) million in 2020, partly due to a deemed dividend related to Series B Preferred Stock in 2019[388][513] Consolidated Statements of Stockholders' Equity Total stockholders' equity decreased from $17.21 million in 2019 to $12.22 million in 2020, primarily due to the net loss of $10.89 million, partially offset by $5.43 million in net proceeds from the December 2020 common stock offering, which also significantly increased common stock shares outstanding Consolidated Statements of Stockholders' Equity Summary | Description | Dec 31, 2020 ($) | Dec 31, 2019 ($) | | :----------------------------------- | :--------------- | :--------------- | | Preferred Stock (Par Value) | 2,774 | 2,774 | | Common Stock (Par Value) | 8,771 | 6,092 | | Additional Paid in Capital | 194,133,511 | 188,240,451 | | Accumulated Deficit | (176,902,086) | (166,008,620) | | Accumulated Other Comprehensive Income | 253,734 | 253,734 | | Treasury Stock | (5,281,180) | (5,281,180) | | Total Stockholders' Equity | 12,215,524 | 17,213,251 | - Net proceeds from the December 2020 registered direct offering contributed $5.43 million to additional paid-in capital[391] - The accumulated deficit increased by $10.89 million in 2020[391] Consolidated Statements of Cash Flows Cash used in operating activities decreased to $4.27 million in 2020 from $6.40 million in 2019, primarily due to non-cash adjustments, while cash provided by financing activities decreased to $5.43 million from $16.13 million Consolidated Statements of Cash Flows Summary | Cash Flow Activity | 2020 ($) | 2019 ($) | | :----------------------------------- | :--------- | :--------- | | Net cash used in operating activities | (4,267,193) | (6,399,404) | | Net cash provided by investing activities | – | 2,000 | | Net cash provided by financing activities | 5,426,825 | 16,127,209 | | Net change in cash | 1,159,632 | 9,729,805 | | Cash at end of period | 11,527,552 | 10,367,920 | - Cash used in operating activities in 2020 was primarily due to net loss, offset by non-cash charges for asset impairment, deferred income taxes, and share-based expense[359] - Financing activities in 2020 were driven by $5.43 million in net proceeds from the December 2020 registered direct Common Stock offering[361] Notes to Consolidated Financial Statements The notes provide detailed information on the company's background, going concern status, and the impact of COVID-19, outlining significant accounting policies, key collaborations, and specifics on the XCART acquisition, stockholders' equity, income tax positions, commitments, contingent liabilities, and related party transactions 1. The Company Xenetic Biosciences is a biopharmaceutical company focused on its XCART platform and PolyXen drug delivery technology, facing substantial losses since inception, but management believes recent financing will fund operations through Q1 2022 - Xenetic Biosciences is a biopharmaceutical company focused on XCART, a personalized CAR T platform for B-cell lymphomas, and leveraging its PolyXen drug delivery platform[395][396] - The company has incurred substantial losses since inception, raising substantial doubt about its ability to continue as a going concern. However, management believes recent financing ($5.4 million net proceeds from December 2020 offering) and existing resources will fund operations through Q1 2022, with additional capital needed long-term[398] 2. Impact of COVID-19 The COVID-19 pandemic has created significant economic uncertainties, but as of the financial statement issuance date, it has not materially impacted the company's operations - The COVID-19 pandemic has created significant economic uncertainties, but as of the financial statement issuance date, there has been no significant impact on the company's operations[400] 3. Summary of Significant Accounting Policies This section details the company's accounting policies, including a 1-for-12 reverse stock split, U.S. dollar as functional currency, revenue recognition under ASC Topic 606, expensing R&D, fair value measurement for share-based compensation and warrants, annual impairment testing for goodwill and IPR&D, income tax accounting, and lease accounting under ASU 2016-02 - The company effected a 1-for-12 reverse stock split on June 25, 2019, retroactively adjusting all share numbers and prices[401] - The functional currency for foreign subsidiaries is the U.S. dollar, a change applied prospectively since 2014[405] - Revenue recognition follows ASC Topic 606, requiring a five-step model to identify performance obligations, determine transaction price, allocate it, and recognize revenue as obligations are satisfied[420] - Non-refundable upfront license payments and milestone payments with future obligations are recognized ratably over the expected performance period[423] - Royalty revenue is recognized in the period of sale upon reliable measurement and satisfaction of all criteria[425] - Research and development expenses are expensed as incurred, including upfront non-refundable payments and acquired IPR&D that does not meet capitalization criteria[427] - Share-based expense for options and RSUs is based on fair value using the Black-Scholes model, recognized over the vesting period. Common stock awards to non-employees are valued based on services provided[432][433][434] - Warrants are classified as equity awards and measured at fair value using the Black-Scholes model, with expense recognized over the service period[435] - Goodwill and IPR&D are indefinite-lived intangible assets, not amortized but tested for impairment at least annually. IPR&D is amortized upon completion or abandoned[411][412][415] - The company accounts for income taxes using the asset and liability method, with deferred tax assets and liabilities determined by temporary differences[436] - Leases are accounted for under ASU 2016-02 (Topic 842), requiring recognition of a right-of-use asset and lease liability for all non-short-term leases[440] 4. Significant Strategic Collaborations Xenetic's significant strategic collaborations include agreements with Takeda for polysialylated blood coagulation factors, Scripps Research for XCART development, Pharmsynthez (SynBio) for PolyXen and ImuXen licenses, and Serum Institute for PSA-EPO development - Takeda pays single-digit royalty payments based on net sales of Covered Products under a sublicense agreement, with $437,000 and $17,000 recognized as revenue in 2020 and 2019, respectively[450] - Xenetic agreed to provide Scripps Research up to $3.0 million to fund preclinical XCART development, with $0.9 million paid through December 31, 2020[451] - Pharmsynthez (and its subsidiary SynBio) holds approximately 5.1% of Xenetic's outstanding Common Stock as of December 31, 2020, and has exclusive licenses for PolyXen and ImuXen technology in certain territories[452][453] - A Master Services Agreement (MSA) with Pharmsynthez for XCART development, signed June 12, 2020, superseded a prior Sponsored Research Agreement (SRA). The Work Order under MSA has an estimated total cost of $1.8 million and potential milestone payments up to $1,050,000[454][455][456] - SynBio reported positive Phase 3 clinical study data for Epolong (ErepoXen) in December 2020 and filed for Russian approval, expecting production by Q1 2022[459] - Serum Institute has an exclusive license for PolyXen technology to develop PSA-EPO, responsible for trials in predetermined territories, with royalty payments based on net sales[460] 5. Acquisitions On March 1, 2019, Xenetic acquired the XCART technology platform from Hesperix and OPKO Pharmaceuticals LLC, accounted for as an asset acquisition with total consideration of approximately $4.1 million expensed to R&D and G&A - On March 1, 2019, Xenetic acquired the XCART technology platform from Hesperix and OPKO Pharmaceuticals LLC. The acquisition was accounted for as an asset acquisition, not a business combination[462][468] - Total consideration for the IPR&D was approximately $4.1 million, including $3.0 million in common shares and $1.1 million in transaction costs, all expensed to R&D and G&A in 2019[468] - The acquisition involved issuing 406,246 shares of Common Stock to Hesperix sellers, and 164,062 shares to OPKO and 54,687 shares to Scripps Research[463][467] 6. Property and Equipment, net As of December 31, 2020, the net book value of property and equipment was zero due to accumulated depreciation, with minimal depreciation expense incurred in 2020 and 2019 Property and Equipment, net | | December 31, 2020 ($) | 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 | (57,027) | (56,270) | | Property and equipment, net | – | 757 | - Depreciation expense was approximately $1,000 in 2020 and $4,000 in 2019[469] 7. Goodwill, Indefinite-Lived Intangible Assets and Other Long-Term Assets Goodwill and the indefinite-lived intangible asset (OncoHist IPR&D) were fully impaired in 2019 and 2020, respectively, reducing their carrying values to zero, while other long-term assets include prepaid clinical PSA supply and a loan to Pharmsynthez - Goodwill was fully impaired in 2019, resulting in a $3.3 million asset impairment charge, reducing its carrying value to zero[470] - The indefinite-lived intangible asset (OncoHist IPR&D) was fully impaired in 2020, resulting in a $9.2 million asset impairment charge, reducing its carrying value to zero[471] - Other long-term assets include $0.7 million of prepaid clinical PSA supply from Serum Institute, classified as long-term as of December 31, 2020 and 2019[472] - A $500,000 loan to Pharmsynthez (Pharmsynthez Loan) from Q4 2019, accruing 10% interest, was extended to January 2022. Approximately $0.1 million was classified as long-term within Other Assets as of December 31, 2020[473][474] 8. Accrued Expenses Accrued expenses increased from $463,987 in 2019 to $574,050 in 2020, primarily driven by increases in accrued payroll and benefits and professional fees Accrued Expenses | | December 31, 2020 ($) | December 31, 2019 ($) | | :-------------------------- | :-------------------- | :-------------------- | | Accrued payroll and benefits | 126,615 | 68,016 | | Accrued professional fees | 375,694 | 306,413 | | Accrued research costs | 62,607 | 80,519 | | Other | 9,134 | 9,039 | | Total | 574,050 | 463,987 | 9. Fair Value Measurements The carrying amounts of the company's financial instruments approximate fair value due to their short maturities, with no financial instruments classified as Level 3 in the fair value hierarchy during 2020 and 2019 - 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 during 2020 and 2019[477] 10. Income Taxes A deferred tax benefit of $2.9 million was recognized in 2020 due to the reversal of a deferred tax liability related to IPR&D impairment, with significant NOL carryforwards subject to potential limitations - A deferred tax benefit of $2.9 million was recognized in 2020 due to the reversal of a deferred tax liability related to IPR&D impairment; no benefit was recognized in 2019[478] Components of Loss Before Income Taxes | | Year ended December 31, 2020 ($) | Year ended December 31, 2019 ($) | | :------------------ | :----------------------------- | :----------------------------- | | Domestic (U.S.) | (4,368,330) | (4,317,585) | | Foreign (U.K.) | (61,867) | (2,302,131) | | Foreign (Germany) | (9,357,256) | (3,389,473) | | Foreign (Switzerland) | (24,531) | (2,765,836) | | Loss before income taxes | (13,811,984) | (12,775,025) | Reconciliation of Income Tax Benefit | | Year ended December 31, 2020 ($) | Year ended December 31, 2019 ($) | | :----------------------------------- | :----------------------------- | :----------------------------- | | Federal | (2,900,517) | (2,682,755) | | State | (230,238) | (284,724) | | Change in valuation allowance | 3,089,617 | 1,878,033 | | Permanent differences, net | 1,399 | 1,323 | | Goodwill impairment | – | 689,510 | | Foreign rate differential | (985,231) | 381,190 | | Share-based payments, net | 22,267 | 11,084 | | Enhanced research and development tax credits | (56,564) | (54,148) | | Rate change | (2,015,683) | – | | Other items | 156,432 | 60,487 | | Net benefit for income taxes | (2,918,518) | – | Deferred Tax Assets and Liabilities | | December 31, 2020 ($) | December 31, 2019 ($) | | :----------------------------------- | :-------------------- | :-------------------- | | U.K. net operating loss carryforwards | 10,733,568 | 8,984,851 | | U.S. federal net operating loss carryforwards | 4,671,789 | 3,857,973 | | Total deferred tax assets before valuation allowance | 29,661,323 | 25,878,322 | | Valuation allowance for deferred tax assets | (29,644,241) | (25,872,847) | | Net deferred tax assets | 17,082 | 5,475 | | Indefinite-lived intangible asset (Deferred tax liabilities) | – | (2,918,518) | | Net deferred liability | – | (2,918,518) | - The company has significant NOL carryforwards in the U.K. ($56.5 million), U.S. federal ($22.2 million), U.S. state ($22.3 million), Germany ($2.0 million), and Switzerland ($0.9 million)[481] - A full valuation allowance has been provided on deferred tax assets, as their realization is not considered more likely than not[478] - The ability to use NOLs and tax credits is subject to limitations under Section 382 of the U.S. Internal Revenue Code and similar foreign legislation due to potential ownership changes[482][483][484][487] 11. Stockholders' Equity In 2020, the company completed a registered direct offering of Common Stock, increasing authorized shares to 50,000,000, while also detailing the terms of various preferred stock series and outstanding warrants - On December 10, 2020, the company completed a registered direct offering of 2,448,980 Common Stock shares at $2.45 per share, yielding $5.4 million in net proceeds[492] - On December 4, 2020, authorized Common Stock shares were increased to 50,000,000[493] - In July 2019, a public offering of Common Stock, Prefunded Warrants, and Purchase Warrants generated approximately $13.4 million in net proceeds[495] - Purchase Warrants from the July 2019 offering are exercisable at $13.00 per share and expire five years from issuance. Approximately 0.2 million and 2.2 million were exercised on a cashless basis in 2020 and 2019, respectively[496] - Series A Preferred Stock holders are entitled to a liquidation preference and a 5% non-cumulative cash dividend, convertible into Common Stock at a 12-for-1 ratio[502][503][504] - Series B Preferred Stock holders have a senior liquidation preference and are convertible into Common Stock at a 1-for-1.63 ratio, subject to an issuable maximum and full ratchet anti-dilution protection[508][509][510][511] - The 2019 stock offerings triggered a down-round provision in Series B Preferred Stock, resulting in a $5.3 million deemed dividend increasing net loss attributable to common shareholders in 2019[513] - As of December 31, 2020, 30,307 collaboration and consulting warrants were outstanding, with an average weighted exercise price of $124.74 and expiration dates ranging from April to May 2021[514][520] - Approximately 29,000 Purchase Warrants from the July 2019 offering were outstanding as of December 31, 2020[521] - As of December 31, 2020, 212,185 debt and equity financing warrants were outstanding, with a weighted average exercise price of $50.20 and expiration dates ranging from March to November 2021[524] 12. Share-Based Expense Total share-based expense decreased from $0.9 million in 2019 to $0.5 million in 2020, reflecting