Item 7 –
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
BUSINESS OVERVIEW
We are a biopharmaceutical company focused on
advancing innovative immune-oncology technologies addressing difficult to treat cancers. Our Deoxyribonuclease (“DNase”) technology
is designed to improve outcomes of existing treatments, including immunotherapies, by targeting neutrophil extracellular traps (“NETs”),
which are involved in cancer progression. We are currently focused on advancing our systemic DNase program into the clinic as an adjunctive
therapy for pancreatic carcinoma and locally advanced or metastatic solid tumors.
We incorporate our patented and proprietary technologies
into 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 or approval in the United States (“U.S.”)
by the Food and Drug Administration (“FDA”) nor in any other countries or territories by any applicable agencies. We are receiving
ongoing royalties pursuant to a license of our legacy PolyXen technology to an industry partner. Although we hold a broad patent portfolio,
the focus of our internal efforts during the year ended December 31, 2024, was on the advancement of our DNase 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 may 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.
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,
pre-clinical development, clinical trial and related clinical manufacturing expenses, fees paid to contract research organizations (“CROs”)
and contract manufacturing organizations (“CMOs”) 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, except when
deposits are made for specifically identified services. 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. Upfront payments under license agreements are expensed upon
receipt of the license. Milestone payments under license agreements are accrued, with a corresponding expense being recognized, in the
period in which the milestone is determined to be probable of achievement and the related amount is reasonably estimable.
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 and consultants 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:
· CMOs in connection with cGMP manufacturing;
· 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, manufacturing and clinical trials on our estimates of the services received and efforts expended pursuant to
quotes and contracts with multiple research institutions, CMOs 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.
Warrants
In connection with certain financing, consulting
and collaboration arrangements, we issued warrants to purchase shares of our common stock. The 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).
Impact of Global Conflicts on Operations
The short and long-term implications of Russia’s
invasion of Ukraine and conflict in the Middle East are difficult to predict at this time. The imposition of current and future sanctions
and counter sanctions may have an adverse effect on the economic markets generally and could impact our business, financial condition,
and results of operations.
Results of Operations
The table below sets forth the comparison of our
historical results of operations for the year ended December 31, 2024 to the year ended December 31, 2023.
Description 2024 2023 Increase (Decrease) Percentage Change
Revenue:
Operating costs and expenses:
Other income (expense):
Revenue
Revenue for the year ended December 31, 2024 was
relatively flat with that of the year ended December 31, 2023.
Research and Development Expense
Overall, R&D expenses for the year ended December
31, 2024 decreased by approximately $0.2 million, or 5.9%, to $3.3 million from $3.5 million in the comparable period in 2023 primarily
due to decreased spending in connection with our DNase process development efforts. During the year ended December 31, 2024, the Company
expensed approximately $0.7 million related to the impairment of long-lived assets associated with our legacy PSA technology. There was
no similar expense in 2023. Excluding the $0.7 million impairment charge from total R&D expense of $3.3 million for the year ended
December 31, 2024, adjusted R&D expenses for the year ended December 31, 2024 decreased approximately $0.9 million, or 26.1%, to $2.6
million, from $3.5 million for the year ended December 31, 2023. The table below sets forth the R&D costs incurred by us, by category
of expense, for the years ended December 31, 2024 and 2023:
Year ended December 31,
Impairment of long-lived assets $ 704,431 $ –
Outside services and contract research organizations 1,898,121 2,886,985
The decrease in outside
services and contract research organizations expense was primarily due to the aforementioned decreased spending in connection with our
process development efforts, partially offset by increased third-party pre-clinical development efforts related to our DNase technology.
The increase in personnel costs is due to certain severance and benefits expensed in connection with a separation agreement entered into
during the second quarter of 2024 with our former Chief Scientific Officer.
General and Administrative Expense
General and administrative expenses for the year
ended December 31, 2024 was $3.4 million, decreasing by approximately $0.1 million, or 4.1%, compared to the same period in the prior
year. The decrease was primarily due to a reduction in legal and accounting costs during the year ended December 31, 2024 compared to
the prior year. These decreases were substantially offset by certain severance and benefits expensed in connection with a separation agreement
entered into during the second quarter of 2024 with our former Chief Executive Officer.
Other (Expense) Income
Other expense was approximately $6,000 for the
year ended December 31, 2024 compared to other income of approximately $25,400 for the same period in 2023. This decrease in other income
was primarily related to fees associated with the Pharmsynthez Loan recognized during the year ended December 31, 2023 for which there
were no similar fees received in the same period in 2024.
Interest Income, net
Interest income, net decreased to approximately
$250,000 during the year ended December 31, 2024 as compared to approximately $356,000 in the prior year. This decrease is primarily due
to lower average invested funds during the year ended December 31, 2024 compared to the prior year, as well as a decrease in interest
income received on the Pharmsynthez Loan.
Non-GAAP Measures
In our narrative discussion of operations above,
we exclude the impact of certain non-cash expenses from R&D expenses, 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 $4.0 million for the year ended December 31, 2024. We had an accumulated deficit of approximately $197.2 million at December
31, 2024, as compared to an accumulated deficit of approximately $193.2 million at December 31, 2023. Working capital was approximately
$5.7 million at December 31, 2024, and approximately $8.8 million at December 31, 2023, respectively. During the year ended December 31,
2024, our working capital decreased by approximately $3.1 million primarily due to our net loss for the year ended December 31, 2024.
Our principal source
of liquidity consists of cash. At December 31, 2024, we had approximately $6.2 million in cash and approximately $0.9 million in current
liabilities. At December 31, 2023, we had approximately $9.0 million in cash and approximately $0.8 million in current liabilities. We
have historically relied upon sales of our equity securities to fund our operations.
We evaluate 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. We believe that our existing resources will be adequate to fund our operations
for a period of at least twelve months from the date of the issuance of these financial statements. However, we anticipate we will need
additional capital in the long-term to pursue our business initiatives. While 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, 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, our continued
listing on the Nasdaq Stock Market (“Nasdaq”), and factors related to financial, economic, geo-political, industry and market
conditions, many of which are beyond our control. The capital markets for the biotech industry can be highly volatile, which make the
terms, timing and extent of any future financing uncertain.
Cash Flows from Operating Activities
Cash flows used in operating activities for the
year ended December 31, 2024 totaled approximately $2.8 million, which was primarily due to our net loss for the period, partially offset
by non-cash charges associated with share-based expense. In addition, prepaid expenses and other decreased approximately $0.2 million,
other assets decreased by approximately $0.7 million due to the impairment of long-lived assets and accounts payable, accrued expenses
and other current liabilities increased approximately $0.1 million during the year ended December 31, 2024 compared to the prior year.
Cash flows used in operating activities for the year ended December 31, 2023 totaled approximately $4.1 million, which was primarily due
to our net loss for the period, partially offset by non-cash charges associated with share-based expense and, to a lesser extent, a decrease
in accounts payable, accrued expenses and other current liabilities.
Cash Flows from Investing Activities
There were no cash flows from investing activities
for each of the years ended December 31, 2024 and 2023.
Cash Flows from Financing Activities
There were no cash flows from financing activities
for each of the years ended December 31, 2024 and 2023.
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 a property lease for office space. Although we do have obligations for CMO and
CRO services, the table below excludes potential payments we may be required to make under our agreements with CMOs and 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 may 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, 2024, aggregated by type:
Payments Due by Period As of December 31, 2024
Total Less than 1 year 1-3 years 3-5 years More than 5 years
Lease obligations $ 3,036 $ 3,036 $ – $ – $ –
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” (as
defined in Rule 12b-2 of the Exchange Act).
ITEM 8 – FINANCIAL STATEMENTS
AND SUPPLEMENTARY DATA
Report of Independent Registered Public Accounting Firm (PCAOB ID 688) F-1
Consolidated Balance Sheets as of December 31, 2024 and 2023 F-2
Notes to Consolidated Financial Statements F-6
Report of Independent Registered Public Accounting
Firm
To the Stockholders 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, 2024 and 2023, the related consolidated statements
of operations, stockholders’ equity and cash flows for each of the two years in the period ended December 31, 2024, 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, 2024 and 2023, and the results of its operations and its
cash flows for each of the two years in the period ended December 31, 2024, 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
Critical audit matters 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. We determined that there are no critical audit matters.
/s/ Marcum LLP
We have served as the Company’s auditor since 2015.
Hartford, CT
March 18, 2025
XENETIC BIOSCIENCES, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
Current assets:
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accrued expenses and other current liabilities 610,648 568,753
Commitments and contingencies (Note 12) – –
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 OPERATIONS
FOR THE YEARS ENDED DECEMBER 31,
Revenue
Operating costs and expenses:
Other income (expense):
Basic and diluted net loss per share $ (2.57 ) $ (2.71 )
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
Exercise of purchase warrants – – 1,038 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:
Changes in operating assets and liabilities:
Accounts payable, accrued expenses and other liabilities 84,678 (263,571 )
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest $ – $ –
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Issuance of common stock from cashless exercise of purchase warrants $ 1 $ –
Issuance of common stock to adjust for Reverse Stock Split $ – $ 16
Conversion of Series A preferred stock to common stock $ – $ 970
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 advancing innovative immune-oncology technologies addressing difficult to treat cancers. The Company’s proprietary Deoxyribonuclease
(“DNase”) technology is designed to improve outcomes of existing treatments, including immunotherapies, by targeting neutrophil
extracellular traps (“NETs”), which are involved in cancer progression. Xenetic is currently focused on advancing its systemic
DNase program into the clinic as an adjunctive therapy for pancreatic carcinoma and locally advanced or metastatic solid tumors.
The Company, directly or indirectly, through its
wholly-owned subsidiaries, Hesperix S.A. (“Hesperix”) and Xenetic Biosciences (U.K.) Limited (“Xenetic UK”), and
the wholly-owned subsidiaries of Xenetic UK, Lipoxen Technologies Limited (“Lipoxen”), Xenetic Bioscience, Incorporated and
SymbioTec, GmbH (“SymbioTec”), own various United States (“U.S.”) federal trademark registrations and applications
along with unregistered trademarks and service marks, including but not limited to XCART, 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. The Company believes that its existing resources will be adequate
to fund the Company’s operations for a period of at least twelve months from the date of the issuance of these financial statements.
However, the Company anticipates it will need additional capital in the long-term to pursue its business initiatives. While the Company
believes that it has access to capital resources through possible public or private equity offerings, debt financings, corporate collaborations,
related party funding, or other means to continue as a going concern, the terms, timing and extent of any future financing will depend
upon several factors, including the achievement of progress in its product development programs, its ability to identify and enter into
licensing or other strategic arrangements, its continued listing on the Nasdaq Stock Market (“Nasdaq”), and factors related
to financial, economic, geo-political, industry and market conditions, many of which are beyond its control. The capital markets for the
biotech industry can be highly volatile, which make the terms, timing and extent of any future financing uncertain.
2. Risks and Uncertainties
Impact of Global
Conflicts on Operations
The short and long-term
implications of the conflicts in the Ukraine and Middle East are difficult to predict at this time. The imposition of current and future
sanctions and counter sanctions may have an adverse effect on the economic markets generally and could impact our business, financial
condition, and results of operations.
3. Summary of Significant Accounting Policies
Preparation of Financial Statements
On May 15, 2023, the Company effected a reduction,
on a 1-for-10 basis, in its authorized common stock, par value $0.001, along with a corresponding and proportional decrease in the number
of shares issued and outstanding (the “Reverse Stock Split”). On the effective date of the Reverse Stock Split, (i) every
10 shares of common stock were reduced to one share of common stock, with any fractional amounts rounded up to one share; (ii) the number
of shares of common stock into which each outstanding warrant, restricted stock unit (“RSU”), or option to purchase common
stock was convertible into was proportionately reduced on the same basis as the common stock; (iii) the exercise price of each outstanding
warrant or option to purchase common stock was proportionately increased on a 1-to-10 basis; and (iv) the number of shares of common stock
into which each share of preferred stock was convertible into was proportionately reduced on the same basis as the common stock. Unless
otherwise indicated, all of the share numbers, share prices, and exercise prices have been adjusted in this Annual Report, on a retroactive
basis, to reflect this 1-for-10 Reverse Stock Split.
Principles of Consolidation
The consolidated financial statements of the Company
include the accounts of Hesperix, Xenetic UK and Xenetic UK’s wholly-owned subsidiaries: Lipoxen, Xenetic Bioscience, Incorporated,
and SymbioTec. Certain of the Company’s subsidiaries require guarantees of support from Xenetic. While all intercompany balances
and transactions have been eliminated in consolidation, the Company has $0.2 million of cash collateralizing these guarantees.
Use of Estimates
The consolidated financial statements and accompanying
notes are prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”). The preparation of the
financial statements in accordance with U.S. GAAP requires management to make estimates, judgments and assumptions that affect the reported
amounts of assets and liabilities, the reported amounts of revenue, costs and expenses in the financial statements and disclosures in
the accompanying notes. Actual results and outcomes may differ materially from management’s estimates, judgments and assumptions.
Functional Currency Change
The functional currency for the Company’s
foreign subsidiaries is the U.S. dollar. The functional currency of the Company’s UK-based subsidiaries changed from the British
Pound Sterling to the U.S. dollar when the Company relocated to the U.S. in 2014. The change in functional currency was applied on a prospective
basis. Therefore, any gains and losses that were previously recorded in accumulated other comprehensive income remain unchanged.
Foreign Currency Transactions
Realized and unrealized gains and losses resulting
from foreign currency transactions arising from exchange rate fluctuations on balances denominated in currencies other than the functional
currencies are recognized in “Other (expense) income” in the consolidated statements of operations. Monetary assets and liabilities
that are denominated in a currency other than the functional currency are re-measured to the functional currency using the exchange rate
at the balance sheet date and gains or losses are recorded in the consolidated statements of operations.
Fair Value of Financial Instruments
Accounting Standards Codification (“ASC”)
Topic 820, Fair Value Measurement, defines fair value as the price that would be received to sell an asset or be paid to transfer
a liability in an orderly transaction between market participants at the measurement date. The Company applies the following fair value
hierarchy, which prioritizes the inputs used to measure fair value into three levels and bases the categorization within the hierarchy
upon the lowest level of input that is available and significant to the fair value measurement. Level 1 inputs are quoted prices in active
markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date. Level 2 utilizes
quoted market prices in markets that are not active, broker or dealer quotations or alternative pricing sources with reasonable levels
of price transparency. Level 3 inputs are unobservable inputs for the asset or liability in which there is little, if any, market activity
for the asset or liability at the measurement date. As of December 31, 2024 and 2023, the carrying amount of certain of the Company’s
financial instruments approximates fair value due to their short maturities. See Note 7, Fair Value Measurements, for discussion
of the Company’s fair value measurements.
Cash and Concentrations of Credit Risk
The Company considers all highly liquid investments
with an original maturity of 90 days or less from the date of purchase to be cash equivalents. Investments with original maturities of
greater than 90 days from the date of purchase but less than one year from the balance sheet date are classified as short-term investments,
while investments with maturities of one year or beyond from the balance sheet date are classified as long-term investments. Management
determines the appropriate classification of its cash equivalents and investment securities at the time of purchase and re-evaluates such
determination as of each balance sheet date. The carrying amount of cash equivalents approximate their fair value due to the short-term
nature of these instruments.
Financial instruments that potentially subject
the Company to credit risk consist primarily of cash on deposit with financial institutions, the balances of which may exceed federally
insured limits. The Company has not experienced any losses on such accounts, and does not believe it is exposed to any unusual credit
risk beyond the normal credit risk currently associated with commercial banking relationships. The Company maintains its primary banking
relationship with one large financial institution and all cash on deposit is covered under federally insured limits.
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. At
acquisition, the Company generally determines the fair value of intangible assets, including in-process research and development (“IPR&D”),
using the “income method.” Acquired IPR&D intangible assets are considered indefinite-lived intangible assets and are
not amortized until completion or abandonment of the associated research and development efforts. Substantial additional research and
development may be required before the Company’s IPR&D reaches technological feasibility. Upon completion of the IPR&D project,
the IPR&D assets will be amortized over their estimated useful lives.
Indefinite-lived intangible assets are not amortized
but are reviewed for impairment at least annually or when events or changes in the business environment indicate that it is more likely
than not that the carrying value may be impaired. The Company also has the option to first assess qualitative factors to determine whether
the existence of events or circumstances leads the Company to determine that it is more likely than not (that is, a likelihood of more
than 50%) that the acquired indefinite-lived intangible assets are impaired. If the Company chooses to first assess the qualitative factors
and it is determined that it is not more likely than not acquired indefinite-lived intangible assets are impaired, the Company is not
required to take further action to test for impairment. The Company also has the option to bypass the qualitative assessment and perform
only the quantitative impairment test, which the Company may choose to perform in some periods but not in others. The impairment loss,
if any, is measured as the excess of the carrying value of the intangible asset over its fair value.
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, indefinite-lived intangible asset impairment charges are likely to occur in
future periods. Estimating the fair value of indefinite-lived intangible assets for potential impairment is highly sensitive to changes
in projections and assumptions and changes to assumptions could potentially lead to impairment. The Company believes its estimates and
assumptions are reasonable and otherwise consistent with assumptions market participants would use in their estimates of fair value. However,
if future results are not consistent with the Company’s estimates and assumptions, then the Company may be exposed to an impairment
charge, which could be material. Use of different estimates and judgments could yield materially different results in the Company’s
analysis and could result in materially different asset values or expense.
Revenue Recognition
The Company enters 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.
The Company recognizes revenue in accordance with
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. The Company only applies 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, the Company assesses the goods or services promised within each contract, determines
those that are performance obligations and assesses whether each promised good or service is distinct. The Company then recognizes 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,
the Company must use 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. The Company uses 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 the Company recognizes revenue as or when the performance
obligations under the contract are satisfied. In developing the stand-alone price for a performance obligation, the Company considers
applicable market conditions and relevant entity-specific factors, including factors that were contemplated in negotiating the agreement
with the customer and estimated costs. The Company validates 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. The Company recognizes a contract asset or liability for the difference between the Company’s
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 the Company’s license agreements
may include delivery of an intellectual property license to a collaboration partner. The Company 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. The Company anticipates recognizing non-refundable upfront license payments and development and regulatory
milestone payments received by the Company in license and collaboration arrangements that include future obligations, such as supply obligations,
ratably over the Company’s expected performance period under each respective arrangement. The Company makes its best estimate of
the period over which the Company expects to fulfill the Company’s 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 the Company enters into an arrangement to
sublicense some of its patents, it will consider the performance obligations to determine if there is a single element or multiple elements
to the arrangement as it determines the proper method and timing of revenue recognition. The Company considers the terms of the license
or sublicense for such elements as price adjustments or refund clauses in addition to any performance obligations for it 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.
The Company expects to recognize royalty revenue
in the period of sale, based on the underlying contract terms, provided that the reported sales are reliably measurable, the Company has
no remaining performance obligations, and all other revenue recognition criteria are met. The Company anticipates reimbursements for research
and development services completed by the Company related to the collaboration agreements to be recognized in operations as revenue on
a gross basis. The Company’s license and collaboration agreements with certain collaboration partners could also provide for future
milestone receipts to the Company 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, the Company expects 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 the Company are considered inconsequential
or perfunctory.
See also Note 4, Significant Strategic Collaborations.
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,
pre-clinical development, clinical trial and related clinical manufacturing expenses, fees paid to contract research organizations (“CROs”)
and contract manufacturing organizations (“CMOs”) and other outside expenses. The Company expenses research and development
costs as incurred. The Company expenses upfront, non-refundable payments made for research and development services as obligations are
incurred, except when deposits are made for specifically identified future services. 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. Upfront payments under
license agreements are expensed upon receipt of the license. Milestone payments under license agreements are accrued, with a corresponding
expense being recognized, in the period in which the milestone is determined to be probable of achievement and the related amount is reasonably
estimable.
The Company is required to estimate accrued research
and development expenses at each reporting period. This process involves reviewing open contracts and purchase orders, communicating with
Company personnel and consultants to identify services that have been performed on its behalf and estimating the level of service performed
and the associated cost incurred for the service when the Company has not yet been invoiced or otherwise notified of actual costs. The
majority of the Company’s service providers invoice in arrears for services performed, on a pre-determined schedule or when contractual
milestones are met. However, some require advanced payments. The Company makes estimates of accrued expenses as of each balance sheet
date in the financial statements based on facts and circumstances known at that time. The Company periodically confirms the accuracy of
the estimates with the service providers and makes adjustments, if necessary. Examples of estimated accrued research and development expenses
include fees paid to:
· CMOs in connection with cGMP manufacturing;
· CROs in connection with clinical trials; and
· Investigative sites in connection with clinical trials.
The Company bases its expenses related to research
and development, pre-clinical activities, manufacturing and clinical trials on its estimates of the services received and efforts expended
pursuant to quotes and contracts with multiple research institutions, CMOs and CROs that conduct and manage clinical trials on the Company’s
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, the Company estimates 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,
the Company adjusts the accrual or prepaid accordingly. Although it does not expect its estimates to be materially different from amounts
actually incurred, the Company’s 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 the Company’s prior estimates of accrued research and development expenses. The
Company has recorded approximately $0.3 million and $0.5 million of prepayments as a component of prepaid expenses and other current assets
as of December 31, 2024 and 2023, respectively. In addition, the Company had recorded accrued program expense of approximately $0.2 million
and $0.1 million as a component of accrued expenses as of each of December 31, 2024 and 2023, respectively.
Share-based Expense
The Company grants share-based payments in the
form of options and RSUs to employees and non-employees to purchase shares of the Company’s common stock. In addition, prior to
the Company relocating to the U.S. in 2014, the Company had issued Joint Share Ownership Plan (“JSOP”) awards to employees
and entered into 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 the Company uses a weighted-average of the historical volatility of the Company 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.
The Company accounts for forfeitures as they occur and not at the time of grant. The Company has not paid dividends and does not anticipate
paying cash dividends in the foreseeable future and, accordingly, uses 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. The Company generally determines 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.
Warrants
In connection with certain financing, consulting
and collaboration arrangements, the Company has issued warrants to purchase shares of its common stock. The outstanding warrants are standalone
instruments that are not puttable or mandatorily redeemable by the holder and are classified as equity awards. The Company measures 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. Warrant arrangements are
more fully described in Note 9, Stockholders’ Equity.
Income Taxes
The Company accounts for income taxes using the
asset and liability method. Under this method, deferred tax assets and liabilities are determined based on temporary differences resulting
from the different treatment of items for tax and financial reporting purposes. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to reverse. Additionally,
the Company must assess the likelihood that deferred tax assets will be recovered as deductions from future taxable income. The Company
evaluates the recoverability of its deferred tax assets on a quarterly basis.
Basic and Diluted Net Loss per Share
The Company computes basic net loss per share
by dividing net loss applicable to common stockholders by the weighted-average number of shares of the Company’s common stock outstanding
during the period. The Company computes diluted net loss per share after giving consideration to the dilutive effect of stock options
that are outstanding during the period, except where such non-participating securities would be anti-dilutive. The Company’s JSOP
awards, prior to exercise, are considered treasury shares by the Company and thus do not impact the Company’s net loss per share
calculation.
For the years ended December 31, 2024 and 2023,
basic and diluted net loss per share are the same for each year due to the Company’s net loss position. Potentially dilutive, non-participating
securities have not been included in the calculations of diluted net loss per share, as their inclusion would be anti-dilutive. As of
December 31, 2024 and 2023, approximately 3,000 and 5,000 potentially dilutive securities were deemed anti-dilutive for each period.
Segment Information
In November 2023, the Financial Accounting Standards
Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2023-07, to improve reportable segment disclosure
requirements, primarily through enhanced disclosures about significant expenses. Under this ASU, a company is required to enhance its
segment disclosures to include significant segment expenses that are regularly provided to the chief operating decision maker (CODM),
a description of other segment items by reportable segment, and any additional measures of a segment's profit or loss used by the CODM
when deciding how to allocate resources. This ASU was adopted effective for the Company’s fiscal year ending December 31, 2024 and
the adoption did not have a material impact on the Company’s consolidated financial statements.
The Company is principally engaged in
pre-clinical research and development activities to advance its DNase technology. Operating segments are identified as components of
an enterprise about which separate discrete financial information is available for evaluation by the CODM, who is the
Company’s Chief Executive Officer, in making decisions on how to allocate resources and assess performance. The Company views
its operations and manages its business as a single operating segment. The Company’s measure of segment profit or loss is net
loss. The CODM manages and allocates to the operations of the Company on a total company basis. Managing and allocating resources on
a consolidated basis enables the CODM to assess the overall level of resources available and how best to deploy these resources
across functions, therapeutic areas and research and development projects that are in line with the Company’s long-term
company-wide strategic goals. Consistent with this decision-making process, the CODM uses consolidated financial information for
purposes of evaluating performance, forecasting future period financial results, allocating resources and setting incentive targets.
The following table is representative of the significant expense categories regularly provided to the CODM when managing the
Company’s single reporting segment. A reconciliation to the consolidated net loss for the years ended December 31, 2024 and
2023 is as follows:
Schedule of consolidated net loss
Year Ended December 31,
(1) Includes external research and development.
Leases
The Company leases administrative facilities under
operating leases. The Company recognizes a lease liability and a right-of-use asset for all leases, with the exception of short-term leases,
at the commencement date. See Note 12, Commitments and Contingencies for further information.
Recent Accounting Standards
Income Taxes - Improvements to Income Tax Disclosures
(Topic 740). In December 2023, the FASB issued ASU No. 2023-09, to improve income tax disclosure requirements, primarily through enhanced
disclosures related to the income tax rate reconciliation and income taxes paid. This ASU is effective for fiscal 2025, with early adoption
permitted, and may be applied retrospectively. The Company is currently evaluating the effects that the adoption of this ASU will have
on its consolidated financial statements.
4. Significant Strategic Collaborations
Takeda Pharmaceutical Co. Ltd. ( together
with its wholly-owned subsidiaries, “Takeda”)
In October 2017, the Company granted to Takeda
the right to grant a non-exclusive sublicense to certain patents related to the Company’s PolyXen technology that were previously
exclusively licensed to Takeda in connection with products related to the treatment of blood and bleeding disorders. Royalty payments
of approximately $2.5 million were recorded as revenue for each year by the Company during the years ended December 31, 2024 and 2023
and are based on single digit royalties on net sales of certain covered products. The Company’s policy is to recognize royalty payments
as revenue when they are reliably measurable, which is upon receipt of reports from Takeda. The Company receives these reports in the
quarter subsequent to the actual sublicensee sales. At the time the revenue was received, there were no remaining performance obligations
and all other revenue recognition criteria were met.
Belgian Volition SARL Limited (“Volition”)
Collaboration
On August 2, 2022, the Company announced a research
and development collaboration with Volition to develop NETs-targeted adoptive cell therapies for the treatment of cancer. The collaboration
is an early exploratory program to evaluate the potential combination of Volition’s Nu.Q® Technology Test and the
Company’s DNase-Armored CAR T platform to develop proprietary adoptive cell therapies potentially targeting multiple types of solid
cancers. Under the terms of the collaboration agreement, Volition will fund a research program and the two parties will share proceeds
from commercialization or licensing of any products arising from the collaboration. To date, Volition has funded $26,000 under this agreement.
Catalent Pharma Solutions LLC (“Catalent”)
On June 30, 2022, the Company entered into a Statement
of Work (the “SOW”) with Catalent to outline the general scope of work, timeline, and pricing pursuant to which Catalent will