Item 7 –
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
BUSINESS OVERVIEW
We are a biopharmaceutical company focused
on progressing XCARTTM, a personalized Chimeric Antigen Receptor (“CAR”) T platform technology engineered
to target patient- and tumor-specific neoantigens. We are 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. XCART has
the potential to fuel a robust pipeline of the therapeutic assets targeting high-value oncology indications. The XCART technology,
developed by the Scripps Research Institute (“Scripps Research”) 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. We are currently advancing XCART preclinical efforts through
strategic collaborations with Scripps Research and PJSC Pharmsynthez (“Pharmsynthez”).
Additionally, we are leveraging our 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.
We incorporate our patented and proprietary
technologies into a number of drug candidates currently under development with biotechnology and pharmaceutical industry collaborators
to create what we believe will be the next-generation biologic drugs with improved pharmacological properties over existing therapeutics.
Our drug candidates have resulted from our research activities or that of our collaborators and are in the development stage. As
a result, we continue to commit a significant amount of our resources to our research and development activities and anticipate
continuing to do so for the near future. To date, none of our drug candidates have received regulatory marketing authorization
in the United States (“U.S.”) by the Food and Drug Administration (“FDA”) nor in any other territories
by any applicable agencies. We are receiving ongoing royalties pursuant to a license of our PolyXen technology to an industry partner.
We also have oncology
therapeutic investigational drug candidate XBIO-101TM (sodium cridanimod) for the treatment of progestin resistant
endometrial cancer. We commenced a Phase 2 trial under an Investigational New Drug filing in 2017, for the potential treatment
of progesterone receptor negative endometrial cancer in conjunction with progesterone therapy, with the first patient dosed in
October 2017. We closed patient enrollment in the trial in March 2019 as a result of slower than expected progress on the trial
resulting from patient enrollment and retention challenges and have suspended further development of XBIO-101. We currently have
no plans to continue development of XBIO-101.
Although we hold a broad patent portfolio,
the focus of our internal development efforts during the year ended December 31, 2020 was limited to winding down the XBIO-101
Phase 2 trial and preliminary development efforts associated with our XCART technology.
Critical Accounting Estimates
The preparation of our financial statements
in conformity with U.S. generally accepted accounting principles (“U.S. GAAP”) requires us to make estimates, judgments
and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported
amounts of revenue, costs and expenses during the reporting period. On an ongoing basis, we evaluate our estimates that are based
on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. The result
of these evaluations forms the basis for making judgments about the carrying values of assets and liabilities and the reported
amount of expenses that are not readily apparent from other sources. Because future events and their effects cannot be determined
with certainty, actual results and outcomes could differ materially from our estimates, judgments and assumptions.
Management believes that the following
accounting estimates are the most critical to aid in fully understanding and evaluating our reported financial results, and they
require management’s most difficult subjective or complex judgments, resulting from the need to make estimates about the
effect of matters that are inherently uncertain. The following narrative describes these critical accounting estimates, judgments
and assumptions and the effect if actual results differ from these assumptions.
Revenue Recognition
We enter into supply, license and collaboration
arrangements with pharmaceutical and biotechnology partners, some of which include royalty agreements based on potential net sales
of approved commercial pharmaceutical products.
We recognize revenue in accordance with
Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers (“ASC 606”).
This standard applies to all contracts with customers, except for contracts that are within the scope of other standards, such
as leases, insurance, collaboration arrangements and financial instruments. Under ASC 606, an entity recognizes revenue when its
customer obtains control of promised goods or services, in an amount that reflects the consideration which the entity expects to
receive in exchange for those goods or services. To determine revenue recognition for arrangements that an entity determines are
within the scope of ASC 606, the entity performs the following five steps: (i) identify the contract(s) with a customer; (ii) identify
the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the
performance obligations in the contract; and (v) recognize revenue at a point in time, or over time, as it satisfies a performance
obligation. We only apply the five-step model to contracts when it is probable that it will collect the consideration it is entitled
to in exchange for the goods or services it transfers to the customer. At contract inception, once the contract is determined to
be within the scope of ASC 606, we assess the goods or services promised within each contract, determine those that are performance
obligations, and assess whether each promised good or service is distinct. We then recognize as revenue the amount of the transaction
price that is allocated to the respective performance obligation when (or as) the performance obligation is satisfied.
As part of the accounting for these arrangements,
we must use significant judgment to determine: a) the number of performance obligations based on the determination under step (ii)
above; b) the transaction price under step (iii) above; and c) the stand-alone selling price for each performance obligation identified
in the contract for the allocation of transaction price in step (iv) above. We use judgment to determine whether milestones or
other variable consideration should be included in the transaction price as described further below. The transaction price is allocated
to each performance obligation on a relative stand-alone selling price basis, for which we recognize revenue as or when the performance
obligations under the contract are satisfied. In developing the stand-alone price for a performance obligation, we consider applicable
market conditions and relevant entity-specific factors, including factors that were contemplated in negotiating the agreement with
the customer and estimated costs. We validate the stand-alone selling price for performance obligations by evaluating whether changes
in the key assumptions used to determine the stand-alone selling prices will have a significant effect on the allocation of transaction
price between multiple performance obligations. We recognize a contract asset or liability for the difference between our performance
(i.e., the goods or services transferred to the customer) and the customer’s performance (i.e., the consideration paid by,
and unconditionally due from, the customer).
The terms of our license agreements may
include delivery of an IP license to a collaboration partner. We may be compensated under license arrangements through a combination
of non-refundable upfront receipts, development and regulatory objective receipts and royalty receipts on future product sales
by partners. We anticipate recognizing non-refundable upfront license payments and development and regulatory milestone payments
received by us in license and collaboration arrangements that include future obligations, such as supply obligations, ratably over
our expected performance period under each respective arrangement. We make our best estimate of the period over which we expect
to fulfill our performance obligations, which may include technology transfer assistance, research activities, clinical development
activities, and manufacturing activities from development through the commercialization of the product. Given the uncertainties
of these collaboration arrangements, significant judgment is required to determine the duration of the performance period.
When we enter into an arrangement to sublicense
some of our patents, we will consider the performance obligations to determine if there is a single element or multiple elements
to the arrangement as we determine the proper method and timing of revenue recognition. We consider the terms of the license or
sublicense for such elements as price adjustments or refund clauses in addition to any performance obligations for us to provide
such as services, patent defense costs, technology support, marketing or sales assistance or any other elements to the arrangement
that could constitute an additional deliverable to it that could change the timing of the revenue recognition. Non-refundable upfront
license and sublicense fees received, whereby continued performance or future obligations are considered inconsequential or perfunctory
to the relevant licensed technology, are recognized as revenue upon delivery of the technology.
We expect to recognize royalty revenue
in the period of sale, based on the underlying contract terms, provided that the reported sales are reliably measurable, we have
no remaining performance obligations, and all other revenue recognition criteria are met. We anticipate reimbursements for research
and development services completed by us related to the collaboration agreements to be recognized in operations as revenue on a
gross basis. Our license and collaboration agreements with certain collaboration partners could also provide for future milestone
receipts to us based solely upon the performance of the respective collaboration partner in consideration of deadline extensions
or upon the achievement of specified sales volumes of approved drugs. For such receipts, we expect to recognize the receipts as
revenue when earned under the applicable contract terms on a performance basis or ratably over the term of the agreement. These
receipts may also be recognized as revenue when continued performance or future obligations by us are considered inconsequential
or perfunctory.
Research and Development Expenses
Research and development expenses consist
of expenses incurred in performing research and development activities, including compensation and benefits, facilities expenses,
overhead expenses, clinical trial and related clinical manufacturing expenses, fees paid to contract research organizations (“CROs”)
and contract manufacturing organizations and other outside expenses. We expense research and development costs as incurred. We
expense upfront, non-refundable payments made for research and development services as obligations are incurred. The value ascribed
to intangible assets acquired but which have not met capitalization criteria is expensed as research and development at the time
of acquisition.
We are required to estimate accrued research
and development expenses at each reporting period. This process involves reviewing open contracts and purchase orders, communicating
with our personnel to identify services that have been performed on our behalf and estimating the level of service performed and
the associated cost incurred for the service when we have not yet been invoiced or otherwise notified of actual costs. The majority
of our service providers invoice us in arrears for services performed, on a pre-determined schedule or when contractual milestones
are met. However, some require advanced payments. We make estimates of accrued expenses as of each balance sheet date in the financial
statements based on facts and circumstances known at that time. We periodically confirm the accuracy of the estimates with the
service providers and make adjustments, if necessary. Examples of estimated accrued research and development expenses include fees
paid to:
· CROs in connection with clinical trials; and
· Investigative sites in connection with clinical trials.
We base our expenses related to research
and development, pre-clinical activities and clinical trials on our estimates of the services received and efforts expended pursuant
to quotes and contracts with multiple research institutions and CROs that conduct and manage clinical trials on our behalf. The
financial terms of these agreements are subject to negotiation, vary from contract to contract and may result in uneven payment
flows. There may be instances in which payments made to vendors will exceed the level of services provided and result in a prepayment
of the expense. In accruing service fees, we estimate the time period over which services will be performed and the level of effort
to be expended in each period. If the actual timing of the performance of services or the level of effort varies from the estimate,
we adjust the accrual or prepaid accordingly. Although we do not expect our estimates to be materially different from amounts actually
incurred, our understanding of the status and timing of services performed relative to the actual status and timing of services
performed may vary and may result in reporting amounts that are too high or too low in any particular period. To date, there have
not been any material adjustments to our prior estimates of accrued research and development expenses.
Share-based Expense
Share-based expense includes grants of
options and restricted stock units (“RSUs”) to employees and non-employees to purchase shares of our common stock,
par value $0.001 (the “Common Stock”), Joint Share Ownership Plan awards to employees, as well as agreements to issue
Common Stock in exchange for services provided by non-employees.
Share-based expense is based on the estimated
fair value of the option or calculated using the Black-Scholes option pricing model. Determining the appropriate fair value model
and related assumptions requires judgment, including estimating share price volatility and expected terms of the awards. The expected
volatility rates are estimated based on the historical volatility of the Company. To the extent Company data is not available for
the full expected term of the awards, we use a weighted average of our historical volatility and of a peer group of comparable
publicly traded companies over the expected term of the option. The expected term represents the time that options are expected
to be outstanding. We account for forfeitures as they occur and not at the time of grant. We have not paid dividends and do not
anticipate paying cash dividends in the foreseeable future and, accordingly, we use an expected dividend yield of zero. The risk-free
interest rate is based on the rate of U.S. Treasury securities with maturities consistent with the estimated expected term of the
awards. Upon exercise, stock options are redeemed for newly issued shares of Common Stock. RSUs are redeemed for newly issued shares
of Common Stock as the vesting and settlement provisions of the grant are met.
For employee options that vest based solely
on service conditions, the fair value measurement date is generally on the date of grant and the related compensation expense is
recognized on a straight-line basis over the requisite vesting period of the awards. For non-employee options issued in exchange
for goods or services consumed in the Company’s operations, the fair value measurement date is the earlier of the date the
performance of services is complete or the date the performance commitment has been reached. We generally determine that the fair
value of the stock options is more reliably measurable than the fair value of the services received. Compensation expense related
to stock options granted to non-employees is recognized on a straight-line basis over requisite vesting periods of the awards.
We grant common stock awards to non-employees
in exchange for services provided. The fair value of common stock awards issued in exchange for services provided by non-employees
is generally determined by using the fair value of the services provided, as this provides the most reliable measure of the fair
value of the awards granted. Share-based expense is recognized as services are rendered on a straight-line basis. The assumptions
used in calculating the fair value of the common stock awards represent our best estimates and involve inherent uncertainties and
the application of our judgment. As a result, if factors change and we use different assumptions, share-based expense related to
the Common Stock awards could be materially different in the future.
Warrants
In connection with certain financing, consulting
and collaboration arrangements, we issued warrants to purchase shares of our Common Stock. Outstanding warrants are standalone
instruments that are not puttable or mandatorily redeemable by the holder and are classified as equity awards. We measure the fair
value of the awards using the Black-Scholes option pricing model as of the measurement date. Warrants issued to collaboration partners
in conjunction with the issuance of Common Stock are initially recorded at fair value as a reduction in additional paid-in capital
of the Common Stock issued.
All other warrants are recorded at fair
value as expense on a straight-line basis over the requisite service period or at the date of issuance if there is not a service
period or if service has already been rendered. For warrants that contain vesting triggers based on the achievement of certain
objectives, we apply judgment to estimate the probability and timing of the achievement of those objectives. These estimates involve
inherent uncertainties, and as a result, if the probability or timing of the achievement of those objectives change, expense related
warrants could be materially different in the future.
For warrants issued in connection with
financing arrangements we allocate the proceeds based on the relative fair value of the award and other instrument(s).
Goodwill and Indefinite-lived Intangible
Assets
Assets acquired and liabilities assumed
in business combinations, licensing and other transactions are generally recognized at the date of acquisition at their respective
fair values. Any excess of the purchase price over the estimated fair values of the net assets acquired is recognized as goodwill.
At acquisition, we generally determine the fair value of intangible assets, including in-process research and development (“IPR&D”),
using the “income method.” This method starts with a forecast of net cash flows, risk adjusted for estimated probabilities
of technical and regulatory success (for IPR&D) and adjusted to present value using an appropriate discount rate that reflects
the risk associated with the cash flow streams.
Subsequent to acquisition, goodwill and
indefinite lived intangibles are not amortized but are tested at least annually as of October 1 for impairment, or when events
or changes in circumstances indicate it is more likely than not that the carrying amount of such assets may not be recoverable.
Our annual assessment may consist of a qualitative or quantitative analysis to determine if it is more likely than not that its
fair value exceeds the carrying value. When performing the qualitative method, we determine whether the existence of events or
circumstances leads us to determine that it is more likely than not (that is, a likelihood of more than 50%) that goodwill and
indefinite lived intangibles are impaired. If we choose to first assess qualitative factors and it is determined that it is not
more likely than not that goodwill and intangible assets are impaired, then we are not required to take further action to test
for impairment. We also have the option to bypass the qualitative assessment and perform only the quantitative impairment test,
which we may choose to do in some periods but not in others. As the option to perform the qualitative assessment is not a permanent
election, we reassess this option during each annual impairment review.
When performing quantitative analysis,
we use the income and market valuation methods and may weight outcomes of valuation approaches when estimating fair value. Inputs
and assumptions used to determine fair value are determined from a market participant view, which might be different than our specific
views. The valuation process is complex and requires significant input and judgment using internal and external sources. Market
approaches depend on the availability of guideline companies and representative transactions. When using the income approach, complex
and judgmental matters applicable to the valuation process may include estimated useful life, projections, tax rates and discount
rates.
Goodwill
We compare the fair value of our reporting
unit to its carrying value. An impairment loss, if any, is measured as the excess of the carrying value of goodwill over the fair
value of goodwill. We determine our reporting unit by identifying the components of our operating segment with similar economic
characteristics based on quantitative and qualitative factors that have discrete financial information available. We determined
that we have one reporting unit. We experienced a significant decline in the market price of our stock during 2019 resulting in
a drop in our market capitalization indicating potential impairment. The Company determined the fair value of the reporting unit
using its market capitalization and concluded that the fair value of the reporting unit was less than the carrying amount in excess
of Goodwill. As result, we recorded an asset impairment charge of $3.3 million during the year ended December 31, 2019 and, therefore,
no Goodwill was recorded as of December 31, 2020 and 2019, respectively.
Indefinite-lived Intangible Assets
IPR&D intangible assets are considered
indefinite-lived intangible assets until completion or abandonment of the associated research and development efforts. We compare
the fair value of the intangible asset to its carrying value. An impairment loss, if any, is measured as the excess of the carrying
value of the intangible asset over its fair value. During 2019, we used the quantitative method and determined the fair value of
the indefinite-lived intangible asset exceeded its carrying value as of October 1, 2019. During 2020, we completed an impairment
analysis of the IPR&D and concluded that the following factors indicate that the IPR&D was impaired: a decision by management
to delay indefinitely any further development of the IPR&D and to not support the underlying intellectual property; the failure
to sell or license the IPR&D to a third party; and the reduction in market capitalization. As a result, we recorded an asset
impairment charge of $9.2 million during the year ended December 31, 2020 representing the excess of the IPR&D asset’s
carrying value over its estimated fair value. Indefinite-lived intangible assets were approximately $0 and $9.2 million at December
31, 2020 and 2019, respectively.
Intangible assets are highly vulnerable
to impairment charges, particularly newly acquired assets for IPR&D. Considering the high risk nature of research and development
and the industry’s success rate of bringing developmental compounds to market, IPR&D impairment charges are likely to
occur in future periods. Estimating the fair value of IPR&D for potential impairment is highly sensitive to changes in projections
and assumptions and changes in assumptions could potentially lead to impairment.
We believe our estimates and assumptions
are reasonable and otherwise consistent with assumptions that marketplace participants would use in their estimates of fair value.
However, if future results are not consistent with our estimates and assumptions, then we may be exposed to an impairment charge,
which could be material. Use of different estimates and judgments could yield materially different results in our analysis and
could result in materially different asset values or expense.
Effects of the COVID-19 Pandemic
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 2020 and continuing
into 2021, as federal, state and local governments react to the public health crisis with mitigation measures, creating significant
uncertainties in the U.S. economy. We continue to evaluate the effects of the COVID-19 pandemic on our business, and while our
operations were not materially affected during the year ended December 31, 2020 despite social distancing and other measures taken
in response to the pandemic, the ultimate impact of the COVID-19 pandemic on our results of operations and financial condition
is dependent on future developments, including the duration of the pandemic and the related extent of its severity, as well as
its impact on macroeconomic conditions, which are uncertain and cannot be predicted at this time. If the global response to contain
the COVID-19 pandemic escalates further or is unsuccessful, or if governmental decisions to ease pandemic related restrictions
are ineffective, premature or counterproductive, we could experience a material adverse effect on our business, financial condition,
results of operations and cash flows.
Results of Operations
The table below sets forth the comparison
of our historical results of operations for the year ended December 31, 2020 to the year ended December 31, 2019.
Description 2020 2019 Increase (Decrease) Percentage Change
Revenue:
Operating costs and expenses:
Other income (expense):
Revenue
Revenue for the year ended December 31,
2020 increased by $0.4 million, or 2,460.3%, to $0.4 million from approximately $17,000 for the year ended December 31, 2019. The
increase in revenue represents a full year of royalty revenue related to our sublicense agreement with Takeda Pharmaceuticals Co.
Ltd. (“Takeda”) compared to only three months of royalties in 2019 as sales by the sublicensee of the product generating
the royalty commenced during the third quarter of 2019.
Research and Development Expense
Overall, R&D expenses for the year
ended December 31, 2020 decreased by $3.2 million, or 64.6% to $1.7 million from $4.9 million for the year ended December 31, 2019
primarily due to IPR&D expense of $3.0 million in the prior year. During the year ended December 31, 2019, we expensed $3.0
million of IPR&D associated with our acquisition of the XCART technology. There was no similar expense in 2020. Excluding the
$3.0 million of IPR&D expense for the year ended December 31, 2019 from total R&D expense of $4.9 million, R&D expense
for the year ended December 31, 2019 was $1.9 million compared to $1.7 million for the year ended December 31, 2020, a decrease
of approximately $127,000, or 6.8%.
The table below sets forth the research
and development expenses incurred by category of expense for the year ended December 31, 2020 and 2019.
Year ended December 31,
Outside services and Contract Research Organizations 1,203,582 1,357,820
The decrease in
outside services and contract research organizations expense was primarily due to decreased spending on our XBIO-101 phase 2 clinical
trial during the year ended December 31, 2020 as compared to the prior year. Costs related to the phase 2 clinical trial were significantly
lower as we closed patient enrollment during the first quarter of 2019 and suspended further development of XBIO-101. The decrease
in XBIO-101 costs were substantially offset by increased costs related to our XCART pre-clinical development efforts in 2020. Salaries
and wages increased during the year ended December 31, 2020 due to slightly higher employee related costs, which was partially
offset by lower share-based expense.
General and Administrative Expense
General and administrative expenses
decreased by approximately $1.3 million, or 28.1% for the year ended December 31, 2020, to $3.4 million from $4.7 million in
2019, primarily due to approximately $1.1 million of transaction costs associated with the XCART acquisition incurred during
the year ended December 31, 2019. There was no similar expense for the comparable period in 2020. Excluding the $1.1 million
of transaction costs associated with the XCART acquisition for the year ended December 31, 2019 from total G&A expenses
of $4.7 million, G&A expenses for the year ended December 31, 2019 were $3.6 million, compared to $3.4 million for the
year ended December 31, 2020, a decrease of approximately $228,000, or 6.3%. This decrease was primarily due to lower
share-based expense and a gain on settlement of certain vendor amounts related to the close-out of our XBIO-101 trial. These
decreases were partially offset by increased employee costs during the year ended December 31, 2020 compared to the same
period in the prior year.
Asset Impairment Charges
Asset impairment
charges were $9.2 million for the year ended December 31, 2020 compared to $3.3 million for the year ended December 31, 2019. During
the year ended December 31, 2020, we recorded an asset impairment charge of $9.2 million related to our IPR&D. During the year
ended December 31, 2019, we recorded an asset impairment charge of $3.3 million related to our Goodwill.
Other Income (Expense)
Other expense was approximately $500 for
the year ended December 31, 2020 compared to approximately $3,300 of other income for the same period in 2019. This decrease in
other income was primarily related to changes in foreign currency exchange rates during the year ended December 31, 2020 as compared
to the same period in 2019.
Interest Income, net
Interest income, net increased to approximately $126,000 during
the year ended December 31, 2020 as compared to approximately $108,000 for the same period in the prior year. This increase is
primarily due to interest earned on our loan receivable with Pharmsynthez partially offset by a decrease in interest income on
invested funds.
Income Tax
Benefit
Income tax benefit of $2.9 million for
the year ended December 31, 2020 was due to the impairment of IPR&D in 2020. There was no similar benefit during the same period
in the prior year.
Non-GAAP Measures
In the Company’s narrative discussion
of operations above, we exclude the impact of non-cash expenses and the impact of the Company’s acquisition of the XCART
technology from certain operating measures, which narrative discussion includes reconciliation of such adjusted financial measures
to the directly comparable GAAP financial measure. We believe these adjusted operating measures may provide investors with useful
information regarding our underlying performance from period to period and allow investors to better understand our results of
operations. Management uses these adjusted measures when assessing the performance of the business.
Liquidity and Capital Resources
We incurred
a net loss of approximately $10.9 million for the year ended December 31, 2020. We had an accumulated deficit of
approximately $176.9 million at December 31, 2020 as compared to an accumulated deficit of approximately $166.0 million at
December 31, 2019. Working capital was approximately $11.4 million at December 31, 2020 and $9.7 million at December 31,
2019, respectively. During the year ended December 31, 2020, our working capital increased by $1.8 million due to our
December 2020 registered direct Common Stock offering resulting in $5.4 million in net proceeds to us. This increase in
working capital was substantially offset by our net loss for the year ended December 31, 2020. We expect to continue
incurring losses for the foreseeable future and may need to raise additional capital or pursue other strategic alternatives
in the long-term in order to continue the pursuit of our business plan.
Our principal
source of liquidity consists of cash. At December 31, 2020, we had approximately $11.5 million in cash and $0.9 million in current
liabilities. At December 31, 2019, we had approximately $10.4 million in cash and $1.4 million in current liabilities. We have
historically relied upon sales of our equity securities to fund our operations. We expect the majority of our funding through equity
or equity-linked instruments, debt financings, corporate collaborations, related party funding and/or licensing agreements to continue
as a trend for the foreseeable future.
Management evaluates
whether there are conditions or events, considered in the aggregate, that raise substantial doubt about our ability to continue
as a going concern within one year after the date that the financial statements are issued. We have incurred substantial losses
since our inception, and we expect to continue to incur operating losses in the near-term. These factors raise substantial doubt
about our ability to continue as a going concern. We believe that we have 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. On December 4, 2020, we closed on a $6.0 million registered direct Common Stock offering resulting in $5.4 million of
net proceeds to us. We believe that this financing, coupled with our existing resources, will be adequate to fund our operations
through the first quarter of 2022. However, we anticipate we may need additional capital in the long-term to pursue our business
initiatives. The terms, timing and extent of any future financing will depend upon several factors, including the achievement of
progress in our clinical development programs, our 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 our control.
Cash Flows from Operating Activities
Cash flows used in operating activities
for the year ended December 31, 2020 of approximately $4.3 million was primarily due to our net loss for the period, offset by
non-cash charges associated with asset impairment charges, deferred income taxes, share-based expense, and settlement of certain
amounts payable to a vendor related to the close-out of our XBIO-101 trial. Cash flows used in operating activities for the year
ended December 31, 2019 totaled approximately $6.4 million, which was primarily due to our net loss for the period, offset by non-cash
charges associated with asset impairment charges, acquired IPR&D and share-based expense.
Cash Flows from Investing Activities
There were no cash flows from investing
activities for the year ended December 31, 2020. Cash flows provided by investing activities for the year ended December 31, 2019
totaled $2,000, which represented proceeds from the sale of property and equipment. As of December 31, 2020, there were no material
commitments for capital expenditures.
Cash Flow from Financing Activities
Cash flows from financing activities
for the year ended December 31, 2020 totaled approximately $5.4 million representing net proceeds from our registered direct
Common Stock offering in December 2020. Cash flows from financing activities for the year ended December 31, 2019 totaled
approximately $16.1 million representing net proceeds from our registered direct stock offering in March 2019 and our
underwritten stock offering in July 2019.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements
that have or are reasonably likely to have a current or future material effect on our financial condition, changes in financial
condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.
Contractual Obligations
Contractual obligations represent future
cash commitments and liabilities under agreements with third-parties and exclude contingent liabilities for which we cannot reasonably
predict future payment. Our contractual obligations result from property leases for office space. Although we do have obligations
for CRO services, the table below excludes potential payments we may be required to make under our agreements with CROs because
timing of payments and actual amounts paid under those agreements may be different depending on the timing of receipt of goods
or services or changes to agreed-upon terms or amounts for some obligations, and those agreements are cancelable upon written notice
by the Company and therefore, not long-term liabilities. The contracts also contain variable costs that are hard to predict as
they are based on such things as patients enrolled and clinical trial sites, which can vary and, therefore, are also not included
in the table below. Additionally, the expected timing of payment of the obligations presented below is estimated based on current
information.
The following tables represent our contractual
obligations as of December 31, 2020, aggregated by type:
Payments Due by Period As of December 31, 2020
Total Less than 1 year 1-3 years 3-5 years More than 5 years
Recent Accounting Standards
Refer to Note 3, Summary of Significant Accounting Policies,
of the accompanying financial statements set forth in Item 8.
ITEM 7A –
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are not required to provide the information required by this
Item because we are a smaller reporting company.
ITEM 8 – FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
Report of Independent Registered Public Accounting Firm F-1
Consolidated Balance Sheets as of December 31, 2020 and 2019 F-3
Notes to Consolidated Financial Statements F-7
REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and Board of Directors
of
Xenetic Biosciences, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated
balance sheets of Xenetic Biosciences, Inc. (the “Company”) as of December 31, 2020 and 2019, the related consolidated
statements of comprehensive loss, stockholders’ equity and cash flows for each of the two years in the period ended December
31, 2020, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial
statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and
the results of its operations and its cash flows for each of the two years in the period ended December 31, 2020, in conformity
with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits.
We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB")
and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable
rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with
the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether
the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have,
nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required
to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the
effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures
to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures
that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures
in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made
by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a
reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated
below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated
to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved
our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any
way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below,
providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Going Concern Assessment
Description of the Matter
As described in Note 1 to the consolidated
financial statements, management believes that the Company has sufficient funding available to it at the date of approval of
these financial statements and that it will be able to continue as a going concern for a period of at least twelve months from
the date of these financial statements. In making this assessment, management has considered the recent registered direct common
stock offering that resulted in approximately $5.4 million of net proceeds, coupled with the Company’s existing resources.
We identified the Company’s assessment
of its ability to continue as a going concern and related disclosures as a critical audit matter. The Company prepared future cash
flow forecasts which involves judgement and estimation of key variables such as future expected revenue royalty proceeds and costs
associated with progressing XCART technology. Auditing the Company’s going concern assessment described above involves a
high degree of auditor judgment to assess the reasonableness of the cash flow forecasts and other assumptions used in the Company’s
going concern analysis.
How We Addressed the Matter in Our Audit
We evaluated the assumptions used in the
model to estimate the future cash flows for the next twelve months from the date of our opinion by comparing assumptions used by
management against historical performance, budgets, and the Company’s strategic plans. We also assessed the key assumptions
including those pertaining to revenue royalty proceeds and the timing of significant payments in the cash flow forecast by comparing
them to historical data and the underlying agreements. We performed sensitivity analyses on key assumptions such as future expected
costs to determine their impact on the projections of future cash flows. Further, we assessed the Company’s disclosures with
respect to its going concern assessment.
Revenue Recognition over Royalty Revenue
Description of the Matter
As described in Note 3 to the consolidated
financial statements, the Company’s sources of revenue include royalty proceeds from a royalty agreement with a third-party
based on potential net sales of approved commercial pharmaceutical products which is based on estimated variable consideration.
The Company must use significant judgment to determine when the reported sales are reliably measurable, the Company has no remaining
performance obligations, and all other revenue recognition criteria are met. The Company’s policy is to recognize expected
royalties as revenue when they are reliably measurable, which is upon receipt of reports from the third-party. The Company typically
receives these reports in the quarter subsequent to the actual sublicensee sales.
The principal consideration for our determination
that performing procedures relating to revenue recognition, specifically related to management’s estimate of the potential
net sales as expected variable consideration, is a critical audit matter that requires significant judgment by management in determining
the best estimate of the amount of expected variable consideration. This in turn led to a high degree of auditor judgment, subjectivity
and effort in performing procedures and evaluating audit evidence related to management’s identification of expected variable
consideration within the royalty contract with the third-party and the judgments made by management used to estimate the best estimate
of variable consideration.
How We Addressed the Matter in Our Audit
Addressing the matter involved performing
procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements.
These procedures included evaluating management’s best estimate of the potential net sales by the third-party to determine
variable consideration. These procedures also included, among others, (i) evaluating and testing the reasonableness of the significant
assumptions used by management, (ii) consideration of both historical or current trends, noting a relative lack of historical experience
available in relation to expected amounts and (iii) obtaining and vouching evidence including reports received from the third-party.
Marcum llp
We have served as the Company’s auditor since 2015.
Boston, Massachusetts
March 16, 2021
XENETIC BIOSCIENCES, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
Current assets:
Property and equipment, net – 757
Goodwill and indefinite-lived intangible assets – 9,243,128
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accrued expenses and other current liabilities 609,532 484,029
Deferred tax liability and other long-term liabilities 27,043 2,918,518
Commitments and contingent liabilities (Note 14)
Stockholders' equity:
Preferred stock, 10,000,000 shares authorized
The accompanying notes are an integral part
of these consolidated financial statements.
XENETIC BIOSCIENCES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE
LOSS
FOR THE YEARS ENDED DECEMBER 31,
Revenue
Operating costs and expenses:
Other income (expense):
Basic and diluted loss per share $ (1.70 ) $ (6.33 )
The accompanying notes are an integral part
of these consolidated financial statements.
XENETIC BIOSCIENCES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS'
EQUITY
Preferred Stock Common Stock Accumulated Other
Issuance of common stock to vendor – – 7,836 7 (7 ) – – – –
Common stock awards to vendors – – – – 47,427 – – – 47,427
Issuance of common stock to vendor – – 1,188 1 (1 ) – – – –
The accompanying notes are an integral part
of these consolidated financial statements.
XENETIC BIOSCIENCES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31,
CASH FLOWS FROM OPERATING ACTIVITIES:
Adjustments to reconcile net loss to net cash used in operating activities:
Acquired in-process research and development – 3,031,226
Deferred income taxes (2,918,518 ) –
Gain on sale of property and equipment – (2,000 )
Gain on settlement with vendor (143,639 ) –
Issuance of warrants in connection with reverse stock split – 63,536
Vendor share-based expense – 47,427
Changes in operating assets and liabilities:
Accounts payable, accrued expenses and other liabilities (378,111 ) (227,961 )
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of property and equipment – 2,000
Net cash provided by investing activities – 2,000
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of warrants – 6,209
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest $ – $ 8
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Right of use asset obtained in exchange for lease liability $ 70,564 $ 43,330
Issuance of common stock to vendor $ 1 $ 7
Issuance of common stock to adjust for Reverse Stock Split $ – $ 1
The accompanying notes are an integral part
of these consolidated financial statements.
XENETIC BIOSCIENCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. The Company
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 XCARTTM, 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 (“Scripps Research”) in collaboration
with the Shemyakin-Ovchinnikov Institute of Bioorganic Chemistry (“IBCH”), 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.
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, OncoHistTM, PolyXen, ErepoXenTM,
and ImuXenTM, which are used throughout this Annual 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. On December 4, 2020, the Company closed on a $6.0 million registered direct offering of the Company’s common
stock, par value $0.001 (the “Common Stock”) resulting in $5.4 million of net proceeds to the Company. The
Company believes that this financing, coupled with the Company’s existing resources, will be adequate to fund the Company’s
operations through the first quarter of 2022. 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. Impact of COVID-19
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 2020 and continuing
into 2021, as federal, state and local governments react to the public health crisis with mitigation measures, creating significant
uncertainties in the U.S. economy. The Company continues to evaluate the effects of the COVID-19 pandemic on its business and while
there has been no significant impact to the Company’s operations to date, the Company at this time is uncertain of the impact
this event may have on the Company’s future operations. The extent to which the COVID-19 pandemic affects our business, operations
and financial results will depend on numerous evolving factors that we may not be able to accurately predict, and such uncertainty
is expected to continue for some time.
3. Summary of Significant Accounting Policies
Preparation of Financial Statements
On June 25, 2019, the Company effected