Xenetic Biosciences, Inc.: Form 10-Q for the period ended Jun 30, 2023

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This report contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and Section 27A of the Securities Act of 1933, as amended. All statements contained in this Quarterly Report other than statements of historical fact, including statements regarding our future results of operations and financial position, our business strategy and plans, future revenues, projected costs, prospects and our objectives for future operations, are forward-looking statements. These forward-looking statements include, but are not limited to, statements concerning: the lingering effects of the coronavirus, or COVID-19, global pandemic and the responses thereto, including the pandemic’s impact on general economic and market conditions, as well as on our business, results of operations and financial condition; anticipated effects of geopolitical events, including the conflict between Russia and Ukraine and associated sanctions imposed by the United States (“U.S.”) and other countries in response; our plans to develop our proposed drug candidates; our expectations regarding the nature, timing and extent of clinical trials and proposed clinical trials; our expectations regarding the timing for proposed submissions of regulatory filings, including but not limited to, any Investigational New Drug filing or any New Drug Application; the nature, timing and extent of collaboration arrangements; the expected results pursuant to collaboration arrangements, including the receipts of future payments that may arise pursuant to collaboration arrangements; the outcome of our plans to obtain regulatory approval of our drug candidates; the outcome of our plans for the commercialization of our drug candidates; our plans to address certain markets, engage third party manufacturers, and evaluate additional drug candidates for subsequent commercial development along with the likelihood and extent of competition to our drug candidates; our plans to advance innovative immune-oncology technologies addressing hard to treat oncology indications; expectations regarding our Deoxyribonuclease (“DNase”) platform, such as regarding the DNase platform being in development for the treatment of solid tumors and being aimed at improving outcomes of existing treatments, including immunotherapies, by targeting Neutrophil Extracellular Traps (“NETs”) and our expectations to prioritize our efforts and resources on this newly licensed technology; the development of the XCART™ Chimeric Antigen Receptor (“CAR”) T cell (“XCART”) technology; and our expectations regarding our PolyXen® platform.

In some cases, these statements may be identified by terminology such as “may,” “will,” “would,” “could,” “should,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “seek,” “approximately,” “intend,” “predict,” “potential,” “projects,” or “continue,” or the negative of such terms and other comparable terminology. Although we believe that the expectations reflected in the forward-looking statements contained herein are reasonable, we cannot guarantee future results, the levels of activity, performance or achievements. These statements involve known and unknown risks and uncertainties that may cause our or our industry's results, levels of activity, performance or achievements to be materially different from those expressed or implied by forward-looking statements.

The Management’s Discussion and Analysis of Financial Condition and Results of Operations (the “MD&A”) should be read together with our condensed consolidated financial statements and related notes included elsewhere in this Quarterly Report. This Quarterly Report, including the MD&A, contains trend analysis and other forward-looking statements. Any statements in this Quarterly Report that are not statements of historical facts are forward-looking statements. These forward-looking statements made herein are based on our current expectations, involve a number of risks and uncertainties and should not be considered as guarantees of future performance.

Some factors that could cause actual results to differ materially include without limitation:

• unexpected costs, charges or expenses resulting from the transaction with CLS Therapeutics LTD (“CLS”) and the licensing of the DNase platform;
• uncertainty of the expected financial performance of the Company following completion of the transaction with CLS and the licensing of the DNase platform;
• failure to realize the anticipated potential of the DNase, XCART or PolyXen technologies;
• our ability to implement our business strategy;
• our failure to meet the continued listing requirements of the Nasdaq Capital Market (“Nasdaq”);
• our need to raise additional working capital in the future for the purpose of further developing our pipeline and to continue as a going concern;
• our ability to finance our business;
• our ability to successfully execute, manage and integrate key acquisitions and mergers;
• product development and commercialization risks, including our ability to successfully develop the DNase technology;
• the impact of adverse safety outcomes and clinical trial results for our therapies;
• our ability to secure and maintain a manufacturer for our technologies;
• the impact of new therapies and new uses of existing therapies on the competitive environment;
• our ability to successfully commercialize our current and future drug candidates;
• our ability to achieve milestone and other payments associated with our current and future co-development collaborations and strategic arrangements;
• our reliance on consultants, advisors, vendors and business partners to conduct work on our behalf;
• the impact of new technologies on our drug candidates and our competition;
• changes in laws or regulations of governmental agencies;
• interruptions or cancellation of existing contracts;
• impact of competitive products and pricing;
• product demand and market acceptance and risks;
• the presence of competitors with greater financial resources;
• continued availability of supplies or materials used in manufacturing at the current prices;
• the ability of management to execute plans and motivate personnel in the execution of those plans;
• our ability to attract and retain key personnel;
• adverse publicity related to our products or the Company itself;
• adverse claims relating to our intellectual property;
• the adoption of new, or changes in, accounting principles;
• the costs inherent with complying with statutes and regulations applicable to public reporting companies, such as the Sarbanes-Oxley Act of 2002;
• other new lines of business that the Company may enter in the future;
• general economic and business conditions, as well as inflationary trends and financial market instability or disruptions to the banking system due to bank failures;
• the impact of natural disasters or public health emergencies, such as the COVID-19 global pandemic, and geopolitical events, such as the Russian invasion of Ukraine, and related sanctions and other economic disruptions or concerns, on our financial condition and results of operations; and
• other factors set forth in the Risk Factors section of our Annual Report on Form 10-K and in subsequent filings with the Securities and Exchange Commission (“SEC”).

These factors are not necessarily all of the important factors that could cause actual results to differ materially from those expressed in the forward-looking statements in this Quarterly Report. Other unknown or unpredictable factors also could have material adverse effects on our future results, including, but not limited to, those discussed in the section titled “Risk Factors.” The forward-looking statements in this Quarterly Report are made only as of the date of this Quarterly Report, and we do not undertake any obligation to publicly update any forward-looking statements to reflect subsequent events or circumstances. We intend that all forward-looking statements be subject to the safe-harbor provisions of the Private Securities Litigation Reform Act of 1995.

BUSINESS OVERVIEW

We are a biopharmaceutical company focused on advancing innovative immune-oncology technologies addressing hard to treat cancers. We are focused on advancing our DNase platform, which is designed to improve outcomes of existing treatments, including immunotherapies, by targeting NETs, which have been implicated in cancer progression and resistance to cancer treatments. We licensed the DNase oncology platform in April 2022 and are focusing the majority of our resources on advancing our systemic DNase program into the clinic as an adjunctive therapy for pancreatic carcinoma and locally advanced or metastatic solid tumors. We also have a personalized CAR T platform technology, XCART™, to develop cell-based therapeutics targeting the unique B-cell receptor on the surface of an individual patient’s malignant tumor cells, for the treatment of B-cell lymphomas. Additionally, we have partnered with biotechnology and pharmaceutical companies to develop our proprietary drug delivery platform, PolyXen, and receive royalty payments under an exclusive license arrangement in the field of blood coagulation disorders.

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 PolyXen technology to an industry partner. Although we hold a broad patent portfolio, the focus of our internal efforts during the three and six months ended June 30, 2023, was on the advancement of our DNase platform.

Impact of the Conflict in Ukraine on Our Operations

The short and long-term implications of Russia’s invasion of Ukraine are difficult to predict at this time. The imposition of 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

Comparison of Quarter Ended June 30, 2023 and 2022

The comparison of our historical results of operations for the fiscal quarter ended June 30, 2023 to the fiscal quarter ended June 30, 2022 is as follows:

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Revenue

Revenue for the three months ended June 30, 2023 increased by approximately $0.2 million, or 56.2%, to approximately $0.7 million from approximately $0.4 million for the three months ended June 30, 2022. This increase represents an increase in royalty revenue related to our sublicense agreement with Takeda Pharmaceuticals Co. Ltd. (“Takeda”) as compared to the same period in 2022.

Research and Development Expenses

Overall, research & development (“R&D”) expenses for the three months ended June 30, 2023 decreased by $1.2 million, or 56.5% to $0.9 million from $2.1 million in the comparable quarter in 2022 primarily due to in-process research and development (“IPR&D”) expense of $1.3 million in the prior period. During the three months ended June 30, 2022, the Company expensed $1.3 million of IPR&D associated with the Company’s licensing of the DNase oncology platform. There was no similar expense in 2023. Excluding the $1.3 million of IPR&D expense from total R&D expense of approximately $2.1 million for the three months ended June 30, 2022, R&D expense for the three months ended June 30, 2023 increased by approximately $0.1 million, or 16.9%, to approximately $0.9 million from approximately $0.8 million in the comparable quarter in 2022. The table below sets forth the R&D costs incurred by us by category of expense for the quarters ended June 30, 2023 and 2022:

The increase in outside services and contract research organizations expense was primarily due to increased spending in connection with our pre-clinical development efforts associated with our DNase platform. We licensed the DNase platform in April 2022 and expect to continue to direct our efforts and resources on the development of this newly acquired technology. As a result, we suspended development of our XCART technology platform.

General and Administrative Expenses

General and administrative expenses for the three months ended June 30, 2023 decreased by approximately $0.1 million, or 7.8%, to approximately $0.9 million from approximately $1.0 million in the comparable quarter in 2022. The decrease was primarily due to a decrease in legal fees and share-based expense during the three months ended June 30, 2023 compared to the same period in 2022.

Other Income (Expense)

Other income was approximately $21,000 for the three months ended June 30, 2023 compared to approximately $1,100 of other expense for the same period in 2022. This increase in other income was primarily related to fees associated with the Pharmsynthez Loan recognized during the three months ended June 30, 2023. There were no similar fees received in the same period in 2022.

Interest Income

Interest income increased to approximately $126,000 during the three months ended June 30, 2023 as compared to approximately $16,000 for the same period in the prior year. This increase is due to higher interest rates on invested funds during the three months ended June 30, 2023 compared to the same period in 2022 as well as an increase in interest income on the Pharmsynthez Loan.

Comparison of Six Months Ended June 30, 2023 and 2022

The comparison of our historical results of operations for the six months ended June 30, 2023 to the six months ended June 30, 2022 is as follows:

Revenue

Revenue for the six months ended June 30, 2023 increased by $0.5 million, or 56.0%, to $1.3 million from approximately $0.8 million for the six months ended June 30, 2022. This increase represents an increase in royalty revenue related to our sublicense agreement with Takeda as compared to the same period in 2022.

Research and Development Expenses

Overall, R&D expenses for the six months ended June 30, 2023 decreased by $1.7 million, or 52.9% to $1.5 million from $3.2 million in the comparable period in 2022 primarily due to IPR&D expense of $1.3 million. During the six months ended June 30, 2022, the Company expensed $1.3 million of IPR&D associated with the Company’s licensing of the DNase oncology platform. There was no similar expense in 2023. Excluding the $1.3 million of IPR&D expense from total R&D expense of approximately $3.2 million for the six months ended June 30, 2022, R&D expenses for the six months ended June 30, 2023 decreased approximately $0.4 million, or 20.0% to $1.5 million, from approximately $1.9 million for the six months ended June 30, 2022. The table below sets forth the R&D costs incurred by us, by category of expense, for the six months ended June 30, 2023 and 2022:

The decrease in outside services and contract research organizations expense was primarily due to decreased spending in connection with our XCART platform technology which was partially offset by increased costs related to our initial development efforts associated with our DNase platform. We licensed the DNase platform in April 2022 and expect to continue to direct our efforts and resources on the development of this newly acquired technology. As a result, we suspended development of our XCART technology platform. The decrease in other expense was due to lower consulting costs incurred in the first six months of 2023 compared to the same period in 2022. Consulting costs during the six months ended June 30, 2022 were related to the licensing of the DNase oncology platform from CLS.

General and Administrative Expenses

General and administrative expenses for the six months ended June 30, 2023 was $1.9 million, decreasing approximately $62,000, or 3.2%, compared to the same period in the prior year. The decrease was primarily due to a decrease in legal costs partially offset by increases in accounting and consulting costs during the six months ended June 30, 2023 as compared to the same period in 2022.

Other Income (Expense)

Other income was approximately $26,000 for the six months ended June 30, 2023 compared to approximately $1,000 of other expense for the same period in 2022. This increase in other income was primarily related to fees associated with the Pharmsynthez Loan recognized during the six months ended June 30, 2023. There were no similar fees received in the same period in 2022.

Interest Income

Interest income increased to approximately $180,000 during the six months ended June 30, 2023 as compared to approximately $42,000 for the same period in the prior year. This increase is due to higher interest rates on invested funds during the six months ended June 30, 2023 compared to the same period in 2022 as well as an increase in interest income on the Pharmsynthez Loan.

Non-GAAP Measures

In our narrative discussion of operations above, we exclude the impact of non-cash expenses from certain operating measures, which narrative discussion includes reconciliation of such adjusted financial measures to the directly comparable GAAP financial measure. We believe these adjusted operating measures may provide investors with useful information regarding our underlying performance from period to period and allow investors to better understand our results of operations. Management uses these adjusted measures when assessing the performance of the business.

Liquidity and Capital Resources

We incurred a net loss of approximately $1.9 million for the six months ended June 30, 2023. We had an accumulated deficit of approximately $191.0 million at June 30, 2023, as compared to an accumulated deficit of approximately $189.1 million at December 31, 2022. Working capital was approximately $11.2 million at June 30, 2023, and $12.6 million at December 31, 2022. During the six months ended June 30, 2023, our working capital decreased by $1.4 million primarily due to our net loss for the six months ended June 30, 2023 partially offset by proceeds from the repayment of the Pharmsynthez Loan.

Our principal source of liquidity consists of cash. At June 30, 2023, we had approximately $10.7 million in cash and $0.9 million in current liabilities. At December 31, 2022, we had approximately $13.1 million in cash and $1.1 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. These factors raise substantial doubt about our ability to continue as a going concern. We believe that we have access to capital resources through possible public or private equity offerings, debt financings, corporate collaborations, related party funding, or other means to continue as a going concern. 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 these financial statements. However, we anticipate we may need additional capital in the long-term to pursue our business initiatives. The terms, timing and extent of any future financing will depend upon several factors, including the achievement of progress in our clinical development programs, our ability to identify and enter into licensing or other strategic arrangements, 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. On June 3, 2022, we received a written notification (the “Notice”) from the Listing Qualifications Department of Nasdaq notifying us that the closing bid price for our common stock had been below $1.00 for 30 consecutive business days and that we therefore were not in compliance with the minimum bid price requirement for continued inclusion on Nasdaq under Nasdaq Listing Rule 5550(a)(2) (the “Bid Price Requirement”). The Notice had no immediate effect on the listing of our common stock on Nasdaq. On May 15, 2023, we effected a reduction, on a 1-for-10 basis, in our authorized common stock, par value $0.001, along with a corresponding and proportional decrease in the number of shares issued and outstanding. On May 30, 2023, the Company received a letter from Nasdaq notifying us that we had regained compliance with the Bid Price Requirement as a result of the closing bid price of our common stock being at $1.00 per share or greater for the 10 consecutive business days from May 15, 2023 through May 26, 2023 and that this matter is now closed.

On March 10, 2023, Silicon Valley Bank (“SVB”) was closed by the California Department of Financial Protection and Innovation, which appointed the Federal Deposit Insurance Corporation (“FDIC”) as receiver. We maintained our cash primarily with SVB. On March 12, 2023, the U.S. Treasury, Federal Reserve and FDIC rolled out emergency measures to fully protect all depositors of SVB and, on March 13, 2023, we had full access to our cash on deposit with SVB. As of June 30, 2023, we have transferred our primary banking relationship to a large financial institution and all cash on deposit is covered under federally insured limits.

Cash Flows from Operating Activities

Cash flows used in operating activities for the six months ended June 30, 2023 totaled approximately $2.4 million, which was primarily due to our net loss for the period as well as advance payments made in accordance with our statement of work with Catalent, partially offset by cash received from the repayment of the Pharmsynthez Loan. Cash flows used in operating activities for the six months ended June 30, 2022 totaled approximately $2.8 million, which was primarily due to our net loss for the period, partially offset by non-cash charges associated with acquired IPR&D and share-based expense. In addition, current liabilities decreased during each of the six months ended June 30, 2023 and 2022.

Cash Flows from Investing Activities

Cash flows used in investing activities for the six months ended June 30, 2022 totaled $500,000, which represented cash paid to license the DNase oncology platform. There were no cash flows from investing activities for the six months ended June 30, 2023.

Cash Flow from Financing Activities

There were no cash flows from financing activities for the six months ended June 30, 2023 and 2022.

Contractual Obligations and Commitments

As of June 30, 2023, there were no material changes in our contractual obligations and commitments from those disclosed in our Annual Report on Form 10-K for the year ended December 31, 2022, filed with the SEC on March 22, 2023, as amended on April 28, 2023.

Off Balance Sheet Arrangements

We do not have any off-balance sheet financing arrangements that have or are reasonably likely to have a current or future material effect on our financial condition, change in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures, or capital resources.

Recent Accounting Standards

See Note 3 in our Annual Report on Form 10-K for the year ended December 31, 2022, filed with the SEC on March 22, 2023, as amended on April 28, 2023, for a discussion of recent accounting standards.

Critical Accounting Policies and Estimates

Our condensed consolidated financial statements are prepared in accordance with U.S. generally accepted accounting principles. The preparation of our condensed consolidated financial statements requires us to make estimates, assumptions and judgments that affect the reported amounts of assets, liabilities, revenue, costs and expenses. We base our estimates and assumptions on historical experience and other factors that we believe to be reasonable under the circumstances. We evaluate our estimates and assumptions on an ongoing basis. 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. There have been no material changes in our critical accounting estimates from those disclosed in our Annual Report on Form 10-K for the year ended December 31, 2022, filed with the SEC on March 22, 2023, as amended on April 28, 2023.

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).

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our Chief Executive Officer (principal executive officer) and Chief Financial Officer (principal financial officer), evaluated the effectiveness of our disclosure controls and procedures as defined in Rules 13a-15(e) or 15d-15(e) under the Exchange Act, as of the end of the period covered by this Quarterly Report.

Based on this evaluation, our management, including our Chief Executive Officer and Chief Financial Officer, concluded that as of the end of the period covered by this Quarterly Report, our disclosure controls and procedures are designed at a reasonable assurance level and are effective to provide reasonable assurance that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting that occurred during the period covered by this Quarterly Report that would have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

There have been no material changes to the risk factors previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2022 filed with the SEC on March 22, 2023, as amended on April 28, 2023, other than the risks set forth below.

Risks Related to the Reverse Stock Split

The Reverse Stock Split may decrease the liquidity of our common shares.

The liquidity of our common stock may be adversely affected by the reduced number of shares outstanding after the Reverse Stock Split. In addition, the Reverse Stock Split may have increased the number of shareholders who own odd lots (less than 100 shares) of our common shares, creating the potential for such shareholders to experience an increase in the cost of selling their shares and greater difficulty effecting such sales.

We may not continue to meet the continued listing requirements of Nasdaq, which could result in a delisting of our common shares.

Our common shares are listed on Nasdaq. While we are currently in compliance, we have in the past been, and may in the future be, unable to comply with certain of the listing standards that we are required to meet to maintain the listing of our common shares on Nasdaq. For instance, on June 3, 2022, we received the Notice from the Listing Qualifications Department of Nasdaq notifying us that the closing bid price for our common stock had been below $1.00 for 30 consecutive business days and that we, therefore, were not in compliance with the Bid Price Requirement. Our Board of Directors and the Financing Committee of the Board approved the Reverse Stock Split on May 11, 2023, and on May 15, 2023, we effected the Reverse Stock Split. On May 30, 2023, we received a letter from Nasdaq notifying us that we had regained compliance with the Bid Price Requirement as a result of the closing bid price of our common stock being at $1.00 per share or greater for the 10 consecutive business days from May 15, 2023 through May 26, 2023 and that this matter was now closed.

The primary intent for the Reverse Stock Split was that the anticipated increase in the price of our common shares immediately following and resulting from a reverse stock split due to the reduction in the number of issued and outstanding common shares would help us meet the minimum bid price requirement. It cannot be assured that the Reverse Stock Split will result in any sustained proportionate increase in the market price of our common shares, which is dependent upon many factors, including the business and financial performance of the company, general market conditions, and prospects for future success, which are unrelated to the number of shares of our common shares outstanding. It is not uncommon for the market price of a company’s common shares to decline in the period following a reverse stock split. Thus, while we have regained compliance with the continued listing requirements for Nasdaq, it cannot be assured that we will continue to do so. If Nasdaq delists our common shares from trading on its exchange for failure to meet the listing standards, an investor would likely find it significantly more difficult to dispose of or obtain our shares, and our ability raise future capital through the sale of our shares could be severely limited. Delisting could also have other negative results, including the potential loss of confidence by employees, the loss of institutional investor interest and fewer business development opportunities.