Xenetic Biosciences, Inc. 10-Q

ITEM 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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 anticipated effects and duration of the novel 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; the uncertainty due to 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”) oncology 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 acquired technology; the development of the XCART ™ Chimeric Antigen Receptor (“CAR”) T cell technology and plans to develop cell-based therapeutics by targeting the unique B cell receptor on the surface of an individual patient’s malignant tumor cells for the treatment of B-cell lymphomas; and our expectations regarding our PolyXen ® platform, including concerning our plans to leverage the platform by partnering with biotechnology and pharmaceutical companies and its application to protein or peptide therapeutics and its application to improve the half-life and other pharmaceutical properties of next-generation biologic drugs. 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. 16 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 need to raise additional working capital in the future for the purpose of further developing our DNase and XCART technologies 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 and XCART technologies; · 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; · 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; · 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. 17 BUSINESS OVERVIEW We are a biopharmaceutical company focused on advancing innovative immune-oncology technologies addressing hard to treat oncology indications. The Company’s DNase oncology platform, in development for the treatment of solid tumors, is aimed at improving outcomes of existing treatments, including immunotherapies, by targeting NETs. The Company is also developing its 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. We acquired the DNase oncology platform in April 2022 and expect to prioritize our efforts and resources on the development of this newly acquired technology. Additionally, we are leveraging our proprietary drug delivery platform, PolyXen, by partnering with biotechnology and pharmaceutical companies. PolyXen is an enabling platform technology which can be applied to protein or peptide therapeutics. It employs the natural polymer polysialic acid (“PSA”) to prolong a drug’s circulating half-life and potentially improve other pharmacological properties. 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 in the U.S. by the Food and Drug Administration (“FDA”) nor in any other territories by any applicable agencies. We are receiving ongoing royalties pursuant to a license of our PolyXen technology to an industry partner. Although we hold a broad patent portfolio, the focus of our internal development efforts during the three months ended March 31, 2022, was on advancing the development of our XCART platform technology. Effects of the COVID-19 Pandemic During March 2020, a global pandemic was declared by the World Health Organization related to the rapidly growing outbreak of a novel strain of coronavirus, or COVID-19. The pandemic has significantly affected economic conditions in the U.S., accelerating during the first half of March 2020 and continuing throughout 2021 and into 2022, as federal, state and local governments react to the public health crisis with mitigation measures, creating significant uncertainties in the U.S. economy. We continue to evaluate the effects of the COVID-19 pandemic on our business, and while our operations were not materially affected during the year ended December 31, 2021 despite social distancing and other measures taken in response to the pandemic, the ultimate impact of the COVID-19 pandemic on our results of operations and financial condition is dependent on future developments, including the duration of the pandemic and the related extent of its severity, the pace and rate at which vaccines are administered, and the continued emergence of new strains of COVID-19, such as the Delta and Omicron variants, as well as its impact on macroeconomic conditions, which are uncertain and cannot be predicted at this time. If the global response to contain the COVID-19 pandemic escalates further or is unsuccessful, or if governmental decisions to ease pandemic related restrictions are ineffective, premature or counterproductive, we could experience a material adverse effect on our business, financial condition, results of operations and cash flows. 18 RESULTS OF OPERATIONS Comparison of Quarter Ended March 31, 2022 and 2021 The comparison of our historical results of operations for the fiscal quarter ended March 31, 2022 to the fiscal quarter ended March 31, 2021 is as follows: Description Quarter Ended March 31, 2022 Quarter Ended March 31, 2021 Increase (Decrease) Percentage Change Revenue: Royalty revenue $ 388,993 $ 191,216 $ 197,777 103.4 Operating costs and expenses: Research and development (1,101,399 ) (629,729 ) 471,670 74.9 General and administrative (907,309 ) (930,578 ) (23,269 ) (2.5 ) Total operating costs and expenses (2,008,708 ) (1,560,307 ) 448,401 28.7 Loss from operations (1,619,715 ) (1,369,091 ) 250,624 18.3 Other income: Other income 199 884 (685 ) (77.5 ) Interest income 25,905 22,262 3,643 16.4 Net loss $ (1,593,611 ) $ (1,345,945 ) $ 247,666 18.4 Revenue Revenue for the three months ended March 31, 2022 increased by $0.2 million, or 103.4%, to $0.4 million from approximately $0.2 million for the three months ended March 31, 2021. 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 2021 as Takeda’s sublicensee continued its worldwide launch of the product. Research and Development Expenses Research & development (“R&D”) expenses for the three months ended March 31, 2022 increased by $0.5 million, or 74.9%, to approximately $1.1 million from approximately $0.6 million in the comparable quarter in 2021. The table below sets forth the R&D costs incurred by the Company by category of expense for the quarters ended March 31, 2022 and 2021: Quarter Ended Category of Expense March 31, 2022 March 31, 2021 Outside services and contract research organizations $ 833,670 $ 452,625 Personnel costs 111,984 130,047 Share-based expense 19,178 10,710 Other 136,567 36,347 Total research and development expense $ 1,101,399 $ 629,729 The increase in outside services and contract research organizations expense was primarily due to increased spending related to our XCART platform technology during the three months ended March 31, 2022 as compared to the same period in the prior year. Costs related to our XCART program were significantly higher in 2022 as compared to the same period in 2021 as we continued to invest in our U.S. pre-clinical developments efforts to advance the technology. The increase in other expense was due to consulting costs incurred during the first quarter of 2022 in connection with the licensing of the DNase oncology platform from CLS. 19 General and Administrative Expenses General and administrative expenses for the three months ended March 31, 2022 decreased by approximately $23,000, or 2.5%, to approximately $0.9 million from approximately $0.9 million in the comparable quarter in 2021. The decrease was primarily due to lower consulting costs offset by an increase in legal costs related to the licensing of the DNase oncology platform from CLS during the three months ended March 31, 2022 compared to the same period in 2021. Other Income Other income was approximately $200 for the three months ended March 31, 2022 compared to approximately $900 of other income for the same period in 2021. This decrease in other income was primarily related to changes in foreign currency exchange rates during the three months ended March 31, 2022 as compared to the same period in 2021. Interest Income Interest income increased to approximately $26,000 during the three months ended March 31, 2022 as compared to approximately $22,000 for the same period in the prior year. This increase is primarily due to a higher cash balance during the first quarter of 2022 compared to the same period in 2021. Liquidity and Capital Resources We incurred a net loss of approximately $1.6 million for the three months ended March 31, 2022. We had an accumulated deficit of approximately $184.1 million at March 31, 2022, as compared to an accumulated deficit of approximately $182.5 million at December 31, 2021. Working capital was approximately $15.8 million at March 31, 2022, and $17.3 million at December 31, 2021, respectively. During the three months ended March 31, 2022, our working capital decreased by $1.5 million due to our net loss for the three months ended March 31, 2022. We expect to continue incurring losses for the foreseeable future and may need to raise additional capital or pursue other strategic alternatives in the long-term in order to continue the pursuit of our business plan. Our principal source of liquidity consists of cash. At March 31, 2022, we had approximately $16.2 million in cash and $1.1 million in current liabilities. At December 31, 2021, we had approximately $18.2 million in cash and $1.4 million in current liabilities. We have historically relied upon sales of our equity securities to fund our operations. We expect the majority of our funding through equity or equity-linked instruments, debt financings, corporate collaborations, related party funding and/or licensing agreements to continue as a trend for the foreseeable future. Management evaluates whether there are conditions or events, considered in the aggregate that raise substantial doubt about our ability to continue as a going concern within one year after the date that the financial statements are issued. We have incurred substantial losses since our inception, and we expect to continue to incur operating losses in the near-term. These factors raise substantial doubt about our ability to continue as a going concern. We believe that we have access to capital resources through possible public or private equity offerings, debt financings, corporate collaborations, related party funding, or other means to continue as a going concern. We believe that our existing resources will be adequate to fund our operations into the second quarter of 2023. However, we anticipate we may need additional capital in the long-term to pursue our business initiatives. The terms, timing and extent of any future financing will depend upon several factors, including the achievement of progress in our clinical development programs, our ability to identify and enter into licensing or other strategic arrangements, and factors related to financial, economic, 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. 20 Cash Flows from Operating Activities Cash flows used in operating activities for the three months ended March 31, 2022 totaled approximately $2.1 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 increased and current liabilities decreased during the three months ended March 31, 2022. Cash flows used in operating activities for the three months ended March 31, 2021 totaled approximately $1.5 million, which was primarily due to our net loss for the period, offset by non-cash charges associated with share-based expense. Cash Flows from Investing Activities There were no cash flows from investing activities for the three months ended March 31, 2022 and 2021. Cash Flow from Financing Activities There were no cash flows from financing activities for the three months ended March 31, 2022 and 2021. Contractual Obligations and Commitments As of March 31, 2022, 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, 2021, filed with the SEC on March 22, 2022, as amended on April 28, 2022. 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, 2021, filed with the SEC on March 22, 2022, as amended on April 28, 2022, for a discussion of recent accounting standards. Critical Accounting 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, 2021, filed with the SEC on March 22, 2022, as amended on April 28, 2022. 21 ITEM 3 – 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).