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 immuno-oncology technologies addressing difficult to treat cancers. Our proprietary DNase technology is designed to improve
outcomes of existing treatments, including immunotherapies, by targeting 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 U.S. by the Food and Drug Administration
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 years ended December 31, 2025 and 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 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.
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 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 exploratory studies and clinical trials; and
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 exploratory studies and 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.
Recent Developments
We and our board of directors (“Board”)
have initiated a formal strategic review process with the assistance of outside financial and legal advisors. We are considering a wide
range of alternatives to maximize shareholder value, including, but not limited to, the sale of all or part of the Company or its assets
or a business combination, including a “reverse merger”, share exchange or similarly structured transaction. An independent
committee of the Board has engaged in preliminary discussions with third parties regarding potential transactions. Any such completed
transaction could have a significant impact on our stockholders, including if the transaction would result in the current investors of
the counterparty holding a substantial majority of our outstanding common stock following consummation of the potential transaction. Given
the preliminary stage of such discussions, at this time there is no way to quantify the potential impact of a transaction, if any. There
is no deadline or definitive timetable set for the completion of the strategic alternatives process, and there can be no assurance any
proposal will be made or accepted, any agreement will be executed, or any transaction will be consummated in connection with this review.
In addition, if we do enter into definitive agreements with respect to a potential transaction, we expect that consummation of the potential
transaction would be subject to a number of conditions, including approval by our stockholders and Nasdaq, and other customary conditions,
which would be out of our control and may never be satisfied. We remain committed to advancing our DNase technology and do not intend
to make further announcements regarding the review process unless and until the Board approves a specific transaction or otherwise determines
that further disclosure is appropriate.
Impact of Global Conflicts on Operations
The short and long-term implications of geopolitical
events and global conflicts, including those in Ukraine and 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, 2025 to the year ended December 31, 2024.
Description 2025 2024 Increase (Decrease) Percentage Change
Revenue:
Operating costs and expenses:
Other income (expense):
Revenue
Revenue for the year ended December 31, 2025 increased
by approximately $0.5 million, or 19.0%, to approximately $3.0 million from approximately $2.5 million for the year ended December 31,
2024. This increase represented an increase in royalty revenue related to our sublicense agreement with Takeda as compared to the same
period in 2024, primarily due to royalties recognized from certain countries during the year ended December 31, 2025 compared to the same
period in 2024.
Research and Development Expense
Overall, R&D expenses for the year ended December
31, 2025 decreased by approximately $0.2 million, or 6.8%, to $3.1 million from $3.3 million in the comparable period in 2024 primarily
due to approximately $0.7 million of expense related to the impairment of long-lived assets associated with our legacy PSA technology
incurred in 2024. There was no similar expense in 2025. 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, 2025 increased approximately $0.5
million, or 18.6%, to $3.1 million, from $2.6 million for the year ended December 31, 2024. The table below sets forth the R&D costs
incurred by us, by category of expense, for the years ended December 31, 2025 and 2024:
Year ended December 31,
Impairment of long-lived assets $ – $ 704,431
Outside services and contract research organizations 3,018,568 1,898,121
Share-based expense – 11,434
The increase in outside services
and contract research organizations expense was primarily due to increased consulting, pre-clinical and manufacturing development efforts
as well as costs incurred in connection with the commencement of DNase exploratory studies during the year ended December 31, 2025. The
decrease in salaries and wages and share-based expense during the year ended December 31, 2025 was related to certain severance and benefits
expensed during the year ended December 31, 2024 in connection with a separation agreement entered into during the second quarter of 2024
with our former Chief Scientific Officer, for which there were none in 2025.
General and Administrative Expense
General and administrative expenses for the year ended
December 31, 2025 decreased by approximately $0.7 million, or 19.6%, to approximately $2.7 million from approximately $3.4 million in
the comparable period in 2024. The decrease was primarily due to certain severance and benefits expensed during the year ended December
31, 2024 in connection with a separation agreement entered into during the second quarter of 2024 with our former Chief Executive Officer
and, to a lesser extent, a decrease in board of director fees. This decrease was partially offset by an increase in legal and accounting
costs.
Other Income (Expense)
Other income was approximately $6,000 for the year
ended December 31, 2025 compared to approximately $6,000 of other expense for the comparable period in 2024. This increase in other income
was primarily related to favorable changes in foreign currency exchange rates during the year ended December 31, 2025 as compared to the
same period in 2024.
Interest Income, net
Interest income, net decreased to approximately $148,000
during the year ended December 31, 2025 as compared to approximately $250,000 for the same period in the prior year. This decrease is
primarily due to lower average invested funds during the year ended December 31, 2025 as compared to the same period in 2024.
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 $2.7 million for the year ended December 31, 2025. We had an accumulated deficit of approximately $199.9 million at December
31, 2025, as compared to an accumulated deficit of approximately $197.2 million at December 31, 2024. Working capital was approximately
$7.1 million at December 31, 2025, and approximately $5.7 million at December 31, 2024, respectively. During the year ended December 31,
2025, our working capital increased by approximately $1.4 million primarily due to net proceeds of approximately $4.0 million from our
October 2025 underwritten public offering substantially offset by our net loss for the year ended December 31, 2025.
Our principal source of liquidity
consists of cash. At December 31, 2025, we had approximately $7.9 million in cash and approximately $1.0 million in current liabilities.
At December 31, 2024, we had approximately $6.2 million in cash and approximately $0.9 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. In addition, the Company raised net
proceeds of approximately $4.0 million in an underwritten public offering of common stock in October 2025. However, we anticipate we will
need additional capital in the long-term to pursue our business initiatives. While we believe that we will continue to 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 product development programs, our ability to identify and enter into licensing or other strategic
arrangements, our continued listing on 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, 2025 totaled approximately $2.3 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 $0.3 million and
accounts payable, accrued expenses and other current liabilities increased approximately $0.1 million during the year ended December 31,
2025 compared to the prior year. 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 from Investing Activities
There were no cash flows from investing activities
for each of the years ended December 31, 2025 and 2024.
Cash Flows from Financing Activities
Cash flows from financing activities for the year
ended December 31, 2025 totaled approximately $4.0 million representing net proceeds from our underwritten public common stock offering
in October 2025. There were no cash flows from financing activities for the year ended December 31, 2024.
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 exploratory study 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, 2025, aggregated by type:
Payments Due by Period As of December 31, 2025
Total Less than 1 year 1-3 years 3-5 years More than 5 years
Lease obligations $ 6,655 $ 6,655 $ – $ – $ –
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 199) F-1
Report of Independent Registered Public Accounting Firm (PCAOB ID 688) F-2
Consolidated Balance Sheets as of December 31, 2025 and 2024 F-3
Notes to Consolidated Financial Statements F-7
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 sheet of Xenetic Biosciences, Inc. (the “Company”) as of December 31, 2025, the related consolidated statements of
operations, stockholders’ equity and cash flows for the year ended December 31, 2025, and the related notes (collectively referred
to as the “financial statements”). In our opinion, based on our audit, the financial statements present fairly, in all material
respects, the financial position of the Company as of December 31, 2025, and the results of its operations and its cash flows for the
year ended December 31, 2025, in conformity with accounting principles generally accepted in the United States of America.
Retrospective Application of a Change in Accounting Principle
We also have audited the adjustments to the 2024
financial statements to retrospectively apply the change in accounting due to the adoption of ASU 2023-09 – Income Taxes (Topic
740): Improvements to Income Tax Disclosures, as described in Note 3. In our opinion, such adjustments are appropriate and have been properly
applied. We were not engaged to audit, review, or apply any procedures to the 2024 financial statements of the Company other than with
respect to the adjustments and, accordingly, we do not express an opinion or any other form of assurance on the 2024 financial statements
taken as a whole.
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 audit. 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 audit in accordance with the
standards of the PCAOB. Those standards require that we plan and perform the audit 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 audit 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 audit 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 audit 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 audit provides 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/ CBIZ CPAs P.C.
We have served as the Company’s auditor since 2015 (such date
takes into account the acquisition of the attest business of Marcum LLP by CBIZ CPAs P.C. effective November 1, 2024).
Hartford, CT
March 12, 2026
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, before the effects of the adjustments
to retrospectively apply the change in accounting described in Note 3, the accompanying consolidated balance sheet of Xenetic Biosciences,
Inc. (the “Company”) as of December 31, 2024, the related consolidated statements of operations, stockholders’ equity
and cash flows for the year ended December 31, 2024, and the related notes (collectively referred to as the “financial statements”)
and the 2024 financial statements before the effects of the adjustments discussed in Note 3 are not presented herein). In our opinion,
based on our audit, the 2024 financial statements, before the effects of the adjustments to retrospectively apply the change in accounting
described in Note 3, present fairly, in all material respects, the financial position of the Company as of December 31, 2024, and the
results of its operations and its cash flows for the year ended December 31, 2024, in conformity with accounting principles generally
accepted in the United States of America.
We were not engaged to audit, review, or apply
any procedures to the adjustments to retrospectively apply the change in accounting described in Note 3 and, accordingly, we do not express
an opinion or any other form of assurance about whether such adjustments are appropriate and have been properly applied. Those adjustments
were audited by CBIZ CPAs.
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 audit. 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 audit in accordance with the
standards of the PCAOB. Those standards require that we plan and perform the audit 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 audit 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 audit 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 audit 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 audit provides 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 from 2015 through 2025.
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 709,916 610,648
Commitments and contingencies (Note 11) – –
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 $ (1.58 ) $ (2.57 )
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:
Other long-term assets – 704,431
Accounts payable, accrued expenses and other current liabilities 73,762 84,678
CASH FLOWS FROM FINANCING ACTIVITIES:
Net cash provided by financing activities 4,004,715 –
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
Conversion of Series B preferred stock to common stock $ 350 $ –
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 or 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 XCARTTM, OncoHistTM, PolyXen®, ErepoXenTM,
and ImuXenTM, which may be 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.
In addition, the Company raised $4.0 million in an underwritten offering of common stock as more fully described in Note 8, Stockholders’
Equity, to the consolidated financial statements. However, the Company anticipates it will need additional capital in the long-term
to pursue its business initiatives. While the Company believes it will continue to 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 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.
Recent Developments
The Company and its board of directors (the “Board”)
have initiated a formal strategic review process with the assistance of outside financial and legal advisors. The Company is considering
a wide range of alternatives to maximize shareholder value, including, but not limited to, the sale of all or part of the Company or its
assets or a business combination, including a “reverse merger”, share exchange or similarly structured transaction. An independent
committee of the Board has engaged in preliminary discussions with third parties regarding potential transactions. Any such completed
transaction could have a significant impact on the Company’s stockholders, including if the transaction would result in the current
investors of the counterparty holding a substantial majority of the Company’s outstanding common stock following consummation of
the potential transaction. Given the preliminary stage of such discussions, at this time there is no way to quantify the potential impact
of a transaction, if any. There is no deadline or definitive timetable set for the completion of the strategic alternatives process, and
there can be no assurance any proposal will be made or accepted, any agreement will be executed, or any transaction will be consummated
in connection with this review. In addition, if the Company does enter into definitive agreements with respect to a potential transaction,
the Company expects that consummation of the potential transaction would be subject to a number of conditions, including approval by the
Company’s stockholders and Nasdaq, and other customary conditions, which would be out of the Company’s control and may never
be satisfied. The Company remains committed to advancing its DNase technology and does not intend to make further announcements regarding
the review process unless and until the Board approves a specific transaction or otherwise determines that further disclosure is appropriate.
2. Risks and Uncertainties
Impact of Global Conflicts
on Operations
The short and long-term implications
of geopolitical events and global conflicts, including those in Ukraine and 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 the Company’s business, financial condition, and results of operations.
3. Summary of Significant Accounting Policies
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 income (expense)” 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, 2025 and 2024, the carrying amount of certain of the Company’s
financial instruments approximates fair value due to their short maturities. See Note 6, 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 banking relationships with two
large financial institutions 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.
Impairment of Long-Lived Assets
The Company reviews long-lived assets to be held and
used, including property and equipment, for impairment whenever events or changes in circumstances indicate that the carrying amount of
the assets or asset group may not be recoverable. Evaluation of recoverability is based on an estimate of undiscounted future cash flows
resulting from the use of the asset or asset group and its eventual disposition. Impairment, if any, is calculated as the amount by which
an asset’s carrying value exceeds its fair value, typically using discounted cash flows to determine fair value. During the year
ended December 31, 2024, the Company recorded an asset impairment charge of $0.7 million, which is presented within research and development
expenses in the consolidated statements of operations, representing the excess of the long-lived asset’s carrying value over its
estimated fair value.
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 exploratory studies and clinical trials; and
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 exploratory studies and 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 $0.1 million and $0.3 million of prepayments as a component of prepaid expenses and other
current assets as of December 31, 2025 and 2024, respectively. In addition, the Company had recorded accrued research costs of approximately
$0.4 million and $0.2 million as a component of accrued expenses and other current liabilities as of each of December 31, 2025 and 2024,
respectively.
Share-based Expense
The Company grants share-based payments in the form
of options and restricted stock units (“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