Xenetic Biosciences, Inc. 10-K

ITEM 8 – FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Report of Independent Registered Public Accounting Firm (PCAOB ID 688 ) F-1 Consolidated Balance Sheets as of December 31, 2022 and 2021 F-3 Consolidated Statements of Comprehensive Loss for the years ended December 31, 2022 and 2021 F-4 Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2022 and 2021 F-5 Consolidated Statements of Cash Flows for the years ended December 31, 2022 and 2021 F-6 Notes to Consolidated Financial Statements F-7 67 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Shareholders and Board of Directors of Xenetic Biosciences, Inc. Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of Xenetic Biosciences, Inc. (the “Company”) as of December 31, 2022 and 2021, the related consolidated statements of comprehensive loss, stockholders’ equity and cash flows for each of the two years in the period ended December 31, 2022, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2022 and 2021, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2022, in conformity with accounting principles generally accepted in the United States of America. Basis for Opinion These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matters The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate. Going Concern Assessment Description of the Matter We identified the Company’s assessment of its ability to continue as a going concern and related disclosures as a critical audit matter. The Company prepared future cash flow forecasts which involves judgement and estimation of key variables such as future expected revenue royalty proceeds and costs associated with progressing DNase technology. Auditing the Company’s going concern assessment described above involves a high degree of auditor judgment to assess the reasonableness of the cash flow forecasts and other assumptions used in the Company’s going concern analysis. As described in Note 1 to the consolidated financial statements, management believes that the Company has sufficient funding available to it at the date of approval of these financial statements and that it will be able to continue as a going concern for a period of at least twelve months from the date of these financial statements. In making this assessment, management has considered the Company’s existing resources. F- 1 How We Addressed the Matter in Our Audit We evaluated the assumptions used in the model to estimate the future cash flows for the next twelve months from the date of our opinion by comparing assumptions used by management against historical performance, budgets, and the Company’s strategic plans. We also assessed the key assumptions including those pertaining to revenue royalty proceeds and the timing of significant payments in the cash flow forecast by comparing them to historical data and the underlying agreements. We performed sensitivity analyses on key assumptions such as future expected costs to determine their impact on the projections of future cash flows. Further, we assessed the Company’s disclosures with respect to its going concern assessment. Revenue Recognition over Royalty Revenue Description of the Matter As described in Note 3 to the consolidated financial statements, the Company’s sources of revenue include royalty proceeds from a royalty agreement with a third-party based on potential net sales of approved commercial pharmaceutical products which is based on estimated variable consideration. The Company must use significant judgment to determine when the reported sales are reliably measurable, the Company has no remaining performance obligations, and all other revenue recognition criteria are met. The Company’s policy is to recognize expected royalties as revenue when they are reliably measurable, which is upon receipt of reports from the third-party. The Company typically receives these reports in the quarter subsequent to the actual sublicensee sales. The principal consideration for our determination that performing procedures relating to revenue recognition, specifically related to management’s estimate of the potential net sales as expected variable consideration, is a critical audit matter that requires significant judgment by management in determining the best estimate of the amount of expected variable consideration. This in turn led to a high degree of auditor judgment, subjectivity and effort in performing procedures and evaluating audit evidence related to management’s identification of expected variable consideration within the royalty contract with the third-party and the judgments made by management used to estimate the best estimate of variable consideration. How We Addressed the Matter in Our Audit Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included evaluating management’s best estimate of the potential net sales by the third-party to determine variable consideration. These procedures also included, among others, (i) evaluating and testing the reasonableness of the significant assumptions used by management, (ii) consideration of both historical or current trends, noting a relative lack of historical experience available in relation to expected amounts and (iii) obtaining and vouching evidence including reports received from the third-party. Marcum LLP We have served as the Company’s auditor since 2015. Boston, Massachusetts March 22, 2023 F- 2 XENETIC BIOSCIENCES, INC. CONSOLIDATED BALANCE SHEETS December 31, 2022 December 31, 2021 ASSETS Current assets: Cash $ 13,097,265 $ 18,244,030 Prepaid expenses and other 556,094 479,399 Total current assets 13,653,359 18,723,429 Other assets 1,066,931 1,091,931 Total assets $ 14,720,290 $ 19,815,360 LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 287,360 $ 362,470 Accrued expenses and other current liabilities 785,796 1,058,633 Total current liabilities 1,073,156 1,421,103 Total liabilities 1,073,156 1,421,103 Commitments and contingencies (Note 14) – – Stockholders' equity: Preferred stock, 10,000,000 shares authorized Series B, $ 0.001 par value: 1,804,394 shares issued and outstanding as of December 31, 2022 and December 31, 2021 1,804 1,804 Series A, $ 0.001 par value: 970,000 shares issued and outstanding as of December 31, 2022 and December 31, 2021 970 970 Common stock, $ 0.001 par value; 100,000,000 and 50,000,000 shares authorized as of December 31, 2022 and December 31, 2021; 15,193,587 and 13,466,603 shares issued as of December 31, 2022 and December 31, 2021, respectively; 15,166,596 and 13,439,612 shares outstanding as of December 31, 2022 and December 31, 2021, respectively 15,192 13,465 Additional paid in capital 207,756,232 205,952,729 Accumulated deficit ( 189,099,618 ) ( 182,547,265 ) Accumulated other comprehensive income 253,734 253,734 Treasury stock ( 5,281,180 ) ( 5,281,180 ) Total stockholders' equity 13,647,134 18,394,257 Total liabilities and stockholders' equity $ 14,720,290 $ 19,815,360 The accompanying notes are an integral part of these consolidated financial statements. F- 3 XENETIC BIOSCIENCES, INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS FOR THE YEARS ENDED DECEMBER 31, 2022 2021 Revenue Royalty revenue $ 1,706,925 $ 1,160,692 Total revenue 1,706,925 1,160,692 Operating costs and expenses: Research and development ( 4,770,834 ) ( 3,163,485 ) General and administrative ( 3,653,999 ) ( 3,743,972 ) Total operating costs and expenses ( 8,424,833 ) ( 6,907,457 ) Loss from operations ( 6,717,908 ) ( 5,746,765 ) Other income (expense): Other income (expense) ( 1,597 ) 1,119 Interest income, net 167,152 100,467 Total other income, net 165,555 101,586 Net loss $ ( 6,552,353 ) $ ( 5,645,179 ) Basic and diluted net loss per share $ ( 0.46 ) $ ( 0.55 ) Weighted-average shares of common stock outstanding, basic and diluted 14,224,430 10,279,408 The accompanying notes are an integral part of these consolidated financial statements. F- 4 XENETIC BIOSCIENCES, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY Preferred Stock Common Stock Accumulated Number of Shares Par Value ($0.001) Number of Shares Par Value ($0.001) Additional Paid in Capital Accumulated Deficit Other Comprehensive Income Treasury Stock Total Stockholders' Equity Balance as of January 1, 2021 2,774,394 $ 2,774 8,772,198 $ 8,771 $ 194,133,511 $ ( 176,902,086 ) $ 253,734 $ ( 5,281,180 ) $ 12,215,524 Issuance of common stock and warrants, net of issuance costs – – 950,000 950 11,449,916 – – – 11,450,866 Exercise of pre-funded warrants – – 3,679,630 3,679 – – – – 3,679 Exercise of purchase warrants – – 5,988 6 ( 6 ) – – – – Share-based expense – – – – 410,437 – – – 410,437 Issuance of common stock to vendor – – 7,153 7 ( 7 ) – – – – Issuance of common stock in connection with warrant buyout – – 51,634 52 ( 41,122 ) – – – ( 41,070 ) Net loss – – – – – ( 5,645,179 ) – – ( 5,645,179 ) Balance as of December 31, 2021 2,774,394 $ 2,774 13,466,603 $ 13,465 $ 205,952,729 $ ( 182,547,265 ) $ 253,734 $ ( 5,281,180 ) $ 18,394,257 Issuance of common stock in connection with purchase of in-process research and development – – 1,725,000 1,725 1,292,025 – – – 1,293,750 Exercise of purchase warrants – – 1,984 2 ( 2 ) – – – – Share-based expense – – – – 511,480 – – – 511,480 Net loss – – – – – ( 6,552,353 ) – – ( 6,552,353 ) Balance as of December 31, 2022 2,774,394 $ 2,774 15,193,587 $ 15,192 $ 207,756,232 $ ( 189,099,618 ) $ 253,734 $ ( 5,281,180 ) $ 13,647,134 The accompanying notes are an integral part of these consolidated financial statements. F- 5 XENETIC BIOSCIENCES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2022 2021 CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $ ( 6,552,353 ) $ ( 5,645,179 ) Adjustments to reconcile net loss to net cash used in operating activities: Acquired in-process research and development 1,793,750 – Amortization of right of use asset 27,043 35,482 Share-based expense 511,480 410,437 Changes in operating assets and liabilities: Prepaid expenses and other ( 103,738 ) 286,007 Other long-term assets 25,000 ( 281,946 ) Accounts payable, accrued expenses and other liabilities ( 347,947 ) 457,132 Net cash used in operating activities ( 4,646,765 ) ( 4,738,067 ) CASH FLOWS FROM INVESTING ACTIVITIES: Net cash paid to acquire in-process research and development ( 500,000 ) – Net cash used in investing activities ( 500,000 ) – CASH FLOWS FROM FINANCING ACTIVITIES: Net proceeds from issuance of common stock and warrants – 11,450,866 Proceeds from exercise of warrants – 3,679 Net cash provided by financing activities – 11,454,545 Net change in cash ( 5,146,765 ) 6,716,478 Cash at beginning of period 18,244,030 11,527,552 Cash at end of period $ 13,097,265 $ 18,244,030 SUPPLEMENTAL CASH FLOW INFORMATION: Cash paid for interest $ – $ – SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES: Issuance of common stock to acquire in-process research and development $ 1,293,750 $ – Issuance of common stock to vendor $ – $ 7 Issuance of common stock in connection with warrant buyout $ – $ 41,070 Issuance of common stock from cashless exercise of purchase warrants $ 2 $ 6 The accompanying notes are an integral part of these consolidated financial statements. F- 6 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 hard to treat cancers. The Company’s proprietary Deoxyribonuclease (“DNase”) platform is designed to improve outcomes of existing treatments, including immunotherapies, by targeting neutrophil extracellular traps (“NETs”), which have been implicated in cancer progression and resistance to cancer treatments. 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. XCART ™ is the Company’s personalized Chimeric Antigen Receptor (“CAR”) T platform technology engineered to target patient specific tumor neoantigens with a demonstrated proof of mechanism in B-cell lymphomas. Additionally, Xenetic has partnered with biotechnology and pharmaceutical companies to develop its proprietary drug delivery platform, PolyXen ® , and receives royalty payments under an exclusive license arrangement in the field of blood coagulation disorders. The Company, directly or indirectly, through its wholly-owned subsidiaries, Hesperix S.A. (“Hesperix”) and Xenetic Biosciences (U.K.) Limited (“Xenetic UK”), and the wholly-owned subsidiaries of Xenetic UK, Lipoxen Technologies Limited (“Lipoxen”), Xenetic Bioscience, Incorporated and SymbioTec, GmbH (“SymbioTec”), own various United States (“U.S.”) federal trademark registrations and applications along with unregistered trademarks and service marks, including but not limited to XCART, OncoHist™, PolyXen, ErepoXen™, and ImuXen™, which are used throughout this Annual Report. All other company and product names may be trademarks of the respective companies with which they are associated. Going Concern and Management’s Plan Management evaluates whether there are conditions or events, considered in the aggregate that raise substantial doubt about the Company’s ability to continue as a going concern within one year after the date that the financial statements are issued. The Company has incurred substantial losses since its inception and expects to continue to incur operating losses in the near-term. These factors raise substantial doubt about its ability to continue as a going concern. The Company believes that it has access to capital resources through possible public or private equity offerings, debt financings, corporate collaborations, related party funding, or other means to continue as a going concern. 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 these financial statements. However, the Company anticipates it may need additional capital in the long-term to pursue its business initiatives. The terms, timing and extent of any future financing will depend upon several factors, including the achievement of progress in its 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. On June 3, 2022, the Company received a written notification (the “Notice”) from the Listing Qualifications Department of Nasdaq notifying the Company that the closing bid price for its common stock had been below $1.00 for 30 consecutive business days and that the Company therefore was not in compliance with the minimum bid price requirement for continued inclusion on the Nasdaq Capital Market under Nasdaq Listing Rule 5550(a)(2) (the “Bid Price Requirement”). The Notice has no immediate effect on the listing of the Company’s common stock on the Nasdaq Capital Market. Under the Nasdaq Listing Rules, the Company had a period of 180 calendar days from the date of the Notice to regain compliance with the Bid Price Requirement. Accordingly, the Company had until November 30, 2022 to regain compliance with the Bid Price Requirement and was eligible for an additional 180 calendar day compliance period if certain other criteria were met. On December 1, 2022, the Company received a letter from Nasdaq informing it that although the Company’s common stock had not regained compliance with the minimum $1.00 bid price per share requirement, Nasdaq had determined that the Company was eligible for an additional 180 calendar day period, or until May 29, 2023, to regain compliance. Nasdaq’s determination was based on the Company meeting the continued listing requirement for market value of publicly held shares and all other applicable requirements for initial listing on the Nasdaq Capital Market with the exception of the bid price requirement, and the Company’s written notice of its intention to cure the deficiency during the second compliance period by effecting a reverse stock split, if necessary. F- 7 2. Risks and Uncertainties Effects of the COVID-19 Pandemic During March 2020, a global pandemic was declared by the World Health Organization related to the 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 2022, as federal, state and local governments reacted to the public health crisis with mitigation measures, creating significant uncertainties in the U.S. economy. The Company continues to evaluate the effects of the COVID-19 pandemic on its business and while there has been no significant impact to the Company’s operations to date, the Company at this time remains uncertain of the impact this event may have on the Company’s future operations. The extent to which the COVID-19 pandemic affects our business, operations and financial results will depend on numerous evolving factors that we may not be able to accurately predict, and such uncertainty is expected to continue for some time. Impact of the conflict in Ukraine on 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. 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. All material intercompany balances and transactions have been eliminated in consolidation. Certain prior period amounts have been reclassified to conform to the presentation for the current period. 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. F- 8 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 comprehensive loss. 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 comprehensive loss. 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, 2022 and 2021, the carrying amount of certain of the Company’s financial instruments approximates fair value due to their short maturities. See Note 9, 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 frequently exceed federally insured limits. 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. The Company’s cash consisted primarily of money market funds held at 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 a result, the Company does not anticipate any losses with respect to such balances. Property and Equipment The Company records property and equipment at cost less accumulated depreciation. Expenditures for major renewals and improvements which extend the life or usefulness of the asset are capitalized. Items of an ordinary repair or maintenance nature are charged directly to operating expense as incurred. The Company calculates depreciation using the straight-line method over the estimated useful lives of the assets: Schedule of Estimated Useful Life of Assets Asset Classification Estimated Useful Life Office and computer equipment 3 years Leasehold improvements 5 years or the remaining term of the lease, if shorter Furniture and fixtures 5 years The Company eliminates the cost of assets retired or otherwise disposed of, along with the corresponding accumulated depreciation, from the related accounts, and the resulting gain or loss is reflected in the results of operations. F- 9 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, we generally determine 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. IPR&D is not amortized but is reviewed for impairment at least annually or when events or changes in the business environment indicate 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 IPR&D is impaired. If the Company chooses to first assess the qualitative factors and it is determined that it is not more likely than not acquired IPR&D is 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, IPR&D impairment charges are likely to occur in future periods. Estimating the fair value of IPR&D for potential impairment is highly sensitive to changes in projections and assumptions and changes 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 fully 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. No such impairments were recorded during the years ended December 31, 2022 and 2021. F- 10 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 significant judgment to determine: a) the number of performance obligations based on the determination under step (ii) above; b) the transaction price under step (iii) above; and c) the stand-alone selling price for each performance obligation identified in the contract for the allocation of transaction price in step (iv) above. 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 IP 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. F- 11 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. 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 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: · · Collaborative partners performing research and development and pre-clinical activities; Program managers in connection with overall program management of clinical trials; · CMOs in connection with cGMP manufacturing; · CROs in connection with clinical trials; and · Investigative sites in connection with clinical trials. The Company bases its expenses related to research and development, pre-clinical activities, manufacturing and clinical trials on its estimates of the services received and efforts expended pursuant to quotes and contracts with multiple research institutions, CMOs and CROs that conduct and manage clinical trials on the Company’s behalf. The financial terms of these agreements are subject to negotiation, vary from contract to contract and may result in uneven payment flows. There may be instances in which payments made to vendors will exceed the level of services provided and result in a prepayment of the expense. In accruing service fees, the Company estimates the time period over which services will be performed and the level of effort to be expended in each period. If the actual timing of the performance of services or the level of effort varies from the estimate, the Company adjusts the accrual or prepaid accordingly. Although it does not expect its estimates to be materially different from amounts actually incurred, the Company’s understanding of the status and timing of services performed relative to the actual status and timing of services performed may vary and may result in reporting amounts that are too high or too low in any particular period. To date, there have not been any material adjustments to the Company’s prior estimates of accrued research and development expenses. As of each of December 31, 2022 and 2021, the Company has recorded accrued program expense of approximately $ 0.1 million and $ 0.2 million as a component of accrued expenses as of December 31, 2022 and 2021, respectively. In addition, the Company has recorded approximately $ 0.3 million of prepayments as a component of prepaid expenses and other current assets as of December 31, 2022 and 2021, respectively. F- 12 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, Joint Share Ownership Plan (“JSOP”) awards to employees and agreements to issue common stock in exchange for services provided by non-employees. Share-based expense is based on the estimated fair value of the option or calculated using the Black-Scholes option pricing model. Determining the appropriate fair value model and related assumptions requires judgment, including estimating share price volatility and expected terms of the awards. The expected volatility rates are estimated based on the historical volatility of the Company. To the extent Company data is not available for the full expected term of the awards the Company uses a weighted-average of the historical volatility of the Company and of a peer group of comparable publicly traded companies over the expected term of the option. The expected term represents the time that options are expected to be outstanding. The Company accounts for forfeitures as they occur and not at the time of grant. The Company has not paid dividends and does not anticipate paying cash dividends in the foreseeable future and, accordingly, uses an expected dividend yield of zero. The risk-free interest rate is based on the rate of U.S. Treasury securities with maturities consistent with the estimated expected term of the awards. Upon exercise, stock options are redeemed for newly issued shares of common stock. RSUs are redeemed for newly issued shares of common stock as the vesting and settlement provisions of the grant are met. For employee options that vest based solely on service conditions, the fair value measurement date is generally on the date of grant and the related compensation expense is recognized on a straight-line basis over the requisite vesting period of the awards. For non-employee options issued in exchange for goods or services consumed in the Company’s operations, the fair value measurement date is the earlier of the date the performance of services is complete or the date the performance commitment has been reached. The Company generally determines that the fair value of the stock options is more reliably measurable than the fair value of the services received. Compensation expense related to stock options granted to non-employees is recognized on a straight-line basis over requisite vesting periods of the awards. Warrants In connection with certain financing, consulting and collaboration arrangements, the Company has issued warrants to purchase shares of its common stock. The outstanding warrants are standalone instruments that are not puttable or mandatorily redeemable by the holder and are classified as equity awards. The Company measures the fair value of the awards using the Black-Scholes option pricing model as of the measurement date. Warrants issued to collaboration partners in conjunction with the issuance of common stock are initially recorded at fair value as a reduction in additional paid-in capital of the common stock issued. All other warrants are recorded at fair value as expense on a straight-line basis over the requisite service period or at the date of issuance if there is not a service period or if service has already been rendered. Warrants granted in connection with ongoing arrangements are more fully described in Note 11, Stockholders’ Equity . Income Taxes The Company accounts for income taxes using the asset and liability method. Under this method, deferred tax assets and liabilities are determined based on temporary differences resulting from the different treatment of items for tax and financial reporting purposes. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to reverse. Additionally, the Company must assess the likelihood that deferred tax assets will be recovered as deductions from future taxable income. The Company evaluates the recoverability of its deferred tax assets on a quarterly basis. F- 13 Basic and Diluted Net Loss per Share The Company computes basic net loss per share by dividing net loss applicable to common stockholders by the weighted-average number of shares of the Company’s common stock outstanding during the period. The Company computes diluted net loss per share after giving consideration to the dilutive effect of stock options that are outstanding during the period, except where such non-participating securities would be anti-dilutive. The Company’s JSOP awards, prior to exercise, are considered treasury shares by the Company and thus do not impact the Company’s net loss per share calculation. As of each of December 31, 2022 and 2021, there were approximately 27,000 JSOP awards issued. For the years ended December 31, 2022 and 2021, basic and diluted net loss per share are the same for each year due to the Company’s net loss position. Potentially dilutive, non-participating securities have not been included in the calculations of diluted net loss per share, as their inclusion would be anti-dilutive. As of December 31, 2022 and 2021, approximately 0.1 million and 0.5 million potentially dilutive securities, respectively, were deemed anti-dilutive. Segment Information Operating segments are identified as components of an enterprise about which separate discrete financial information is available for evaluation by the chief operating decision maker, who is the Company’s Chief Executive Officer, in making decisions on how to allocate resources and assess performance. The Company views its operations and manages its business in one operating segment. Leases The Company leases administrative facilities under operating leases. Lease agreements may include rent holidays, rent escalation clauses and tenant improvement allowances. The Company accounts for leases in accordance with ASU 2016-02, Leases (Topic 842) . ASU 2016-02 requires lessees to recognize a lease liability and a right-of-use asset for all leases, with the exception of short-term leases, at the commencement date. See Note 14, Commitments and Contingencies for further information. Acquisitions The Company has a history of engaging in acquisition transactions that require the Company to evaluate whether the transaction meets the criteria of a business combination. If the transaction does not meet the business combination requirements, the transaction is accounted for as an asset acquisition or recapitalization and no goodwill is recognized. If the acquisition meets the definition of a business combination, the Company allocates the purchase price, including any contingent consideration, to the assets acquired and the liabilities assumed at their estimated fair values as of the date of the acquisition with any excess of the purchase price paid over the estimated fair value of net assets acquired recorded as goodwill. The fair value of the assets acquired and liabilities assumed is typically determined by using either estimates of replacement costs or discounted cash flow valuation methods. When determining the fair value of tangible assets acquired, the Company estimates the cost to replace the asset with a new asset, taking into consideration such factors as age, condition and the economic useful life of the asset. When determining the fair value of intangible assets acquired, the Company uses judgment to estimate the applicable discount rate, growth rates and the timing and amount of future cash flows. The fair value of assets acquired and liabilities assumed is typically determined using the assistance of an independent third-party specialist. Business combination related costs are expensed in the period in which the costs are incurred. Asset acquisition related costs are generally capitalized as a component of cost of the assets acquired. F- 14 Recent Accounting Standards In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments . The guidance modifies the measurement and recognition of credit losses for most financial assets and certain other instruments. The amendment updates the guidance for measuring and recording credit losses on financial assets measured at amortized cost by replacing the “incurred loss” model with an “expected loss” model. This may result in earlier recognition of allowance for losses. ASU 2016-13 is effective for smaller reporting public entities for fiscal years beginning after December 15, 2022, but early adoption is permitted. The Company continues to evaluate the impact of adoption, but we do not anticipate that it will have a material effect on our consolidated financial statements. 4. Significant Strategic Collaborations Takeda Pharmaceutical Co. Ltd. ( together with its wholly-owned subsidiaries, “Takeda”) In October 2017, the Company granted to Takeda the right to grant a non-exclusive sublicense to certain patents related to the Company’s PolyXen technology that were previously exclusively licensed to Takeda in connection with products related to the treatment of blood and bleeding disorders. Royalty payments of approximately $ 1.7 million and $ 1.2 million were recorded as revenue by the Company during the years ended December 31, 2022 and 2021, respectively, and are based on single digit royalties on net sales of certain covered products. The Company’s policy is to recognize royalty payments as revenue when they are reliably measurable, which is upon receipt of reports from Takeda. The Company receives these reports in the quarter subsequent to the actual sublicensee sales. At the time the revenue was received, there were no remaining performance obligations and all other revenue recognition criteria were met. Catalent Pharma Solutions LLC (“Catalent”) On June 30, 2022, the Company entered into a Statement of Work (the “SOW”) with Catalent to outline the general scope of work, timeline, and pricing pursuant to which Catalent will provide certain services to the Company to perform cGMP manufacturing of the Company’s recombinant protein, Human DNase I. The parties agreed to enter into a Master Services Agreement (“MSA”) that will contain terms and conditions to govern the project contemplated by the SOW and that will supersede the addendum to the SOW containing Catalent's standard terms and conditions. In addition, in the event of any conflict between the project-specific terms and conditions set forth in the SOW and the MSA, the MSA terms and conditions shall govern. The estimated total cost of the project contemplated by the SOW is expected to be up to approximately $5 million (exclusive of certain fees and potential alternatives) for the manufacturing services over the course of the term of the project with each phase of the project invoiced separately in connection with the commencement of such phase. Unless earlier amended or terminated, the manufacturing services contemplated by the SOW are currently targeted to be completed by the first half of 2024. The SOW is terminable by the Company at any time with 30 days' prior written notice to Catalent. The SOW also contains customary provisions related to, among other things, confidentiality, warranties, intellectual property and indemnification. During the year ended December 31, 2022, the Company paid Catalent approximately $ 0.7 million , of which $ 0.3 million has been recognized as an advance payment and is included in prepaid expenses and other as of December 31, 2022. F- 15 Scripps Research On May 15, 2020, the Company and the Scripps Research Institute (“Scripps Research”) entered into a Research Funding and Option Agreement (the “Scripps Agreement”), pursuant to which the Company had agreed to provide Scripps Research an aggregate of up to $3.0 million to fund research relating to advancing the pre-clinical development of XCART. The research funding was payable by the Company to Scripps Research on a quarterly basis in accordance with a negotiated budget, which provided for an initial payment of approximately $300,000 on the date of the Scripps Agreement and subsequent quarterly payments of approximately $300,000 over a 27-month period. Under the Scripps Agreement, Scripps Research had granted the Company a license within the Field (as defined in the Scripps Agreement) to any Patent Rights or Technology (as defined in the Scripps Agreement) under the terms of that certain license agreement with Scripps Research, dated February 25, 2019, assigned to the Company on March 1, 2019. Additionally, the Company had the option to acquire a worldwide exclusive license to Scripps Research’s rights in the Technology or Patent Rights not already licensed to the Company, as well as a non-exclusive, royalty-free, non-transferrable license to make and use Scripps Research Technology (as defined in the Scripps Agreement) solely for the Company’s internal research purposes during the performance of the research program contemplated by the Scripps Agreement. During the second quarter of 2022, the parties mutually agreed to terminate additional funding under the Scripps Agreement. As a result, Scripps Research agreed to continue to perform work under the agreement until funding previously advanced was expended. The Company paid $ 2.4 million to Scripps Research under this agreement through December 31, 2022. There were no amounts recognized as an advance payment or accrued under this agreement as of December 31, 2022. As of December 31, 2021, approximately $ 0.2 million had been recognized as an advance payment under this agreement and was included in prepaid expenses and other. PJSC Pharmsynthez In November 2009, the Company entered into a collaborative research and development license agreement with Pharmsynthez (the “Pharmsynthez Arrangement”) pursuant to which the Company granted an exclusive license to Pharmsynthez to develop, commercialize and market six product candidates based on the Company’s PolyXen and ImuXen technology in certain territories. In exchange, Pharmsynthez granted an exclusive license to the Company to use any preclinical and clinical data developed by Pharmsynthez, within the scope of the Pharmsynthez Arrangement, and to engage in further research, development and commercialization of drug candidates outside of certain territories at the Company’s own expense. Pharmsynthez directly, and indirectly through its wholly-owned subsidiary, SynBio, LLC (“SynBio”), had a share ownership in the Company of approximately 2.9 % and 3.3 % of the total outstanding common stock as of December 31, 2022 and 2021, respectively. In addition to its common stock ownership, Pharmsynthez owns approximately 1.5 million shares of our outstanding Series B Preferred Stock (as defined in Note 11, Stockholders’ Equity ), and all of our issued and outstanding Series A Preferred Stock (as defined in Note 11, Stockholders’ Equity ) through SynBio. On June 12, 2020, the Company and Pharmsynthez entered into a Master Services Agreement (“Pharmsynthez MSA”) to advance the development of the Company’s XCART technology for B-cell malignancies. Under the Pharmsynthez MSA, Pharmsynthez agreed to provide services pursuant to work orders agreed upon by the parties from time to time, which services include, but are not limited to, acting as the Company’s primary contract research organization to assist in managing collaborations with multiple academic institutions in Russia and Belarus. The Company was required to pay reasonable fees, expenses and pass-through costs incurred by Pharmsynthez in providing the services in accordance with a budget and payment terms set forth in each work order. Additionally, in the event that a work order provided for milestone payments, the Company was required to make such payments to Pharmsynthez, or third party service providers designated by Pharmsynthez, in accordance with the terms set forth in the work order, which milestone payments may be made, at the sole discretion of the Company, in cash or shares of the Company’s common stock. F- 16 The Company and Pharmsynthez executed a work order on June 12, 2020 (the “Work Order”) under the Pharmsynthez MSA pursuant to which Pharmsynthez agreed to conduct a Stage 1 study of the Company’s XCART technology under the research program as set forth in the Work Order. The activities to be performed under the Work Order were expected to take approximately 20 months unless earlier terminated in accordance with the Pharmsynthez MSA. The Work Order provided for additional pass-through costs to be invoiced by Pharmsynthez upon execution of contracts with third party sites. Additionally, the Work Order provided for milestone payments of up to an aggregate of $1,050,000, or, in the Company’s sole discretion, up to an aggregate of 1,000,000 shares of the Company’s common stock, to be paid or issued, as applicable, by the Company upon achievement of milestones associated with completion of early stages of the research program as set forth in the Work Order. As of December 31, 2022, approximately $ 0.1 million of milestone payments had been made and no further milestone payments are expected. On October 12, 2021, the Company entered into Amendment Number One to the Pharmsynthez MSA (the “MSA Amendment”) with Pharmsynthez to, among other things, terminate all work orders under the Pharmsynthez MSA. As a result, no further services were to be performed under the Work Order and any additional services will be covered by new work orders. In exchange, the Company entered into a new work order (the “Second Work Order”) simultaneously with the MSA Amendment. Under the terms of the Second Work Order, Pharmsynthez shall provide certain enumerated services to support the Company’s development of its XCART technology upon the written request of the Company, which work may be requested by the Company from time to time. Pursuant to the MSA Amendment and Second Work Order, upon entry into the Second Work Order, the Company made a one-time $ 40,000 payment to Pharmsynthez, of which $21,000 was a one-time payment in full for all money and other compensation owed by the Company under the Work Order, and the remaining $19,000 will be creditable against any out of pocket costs and expenses incurred by Pharmsynthez on behalf of the Company pursuant to any new work orders initiated after the effective date of the MSA Amendment, including the Second Work Order. There was no work performed and expense recognized under these agreements during the year ended December 31, 2022. The Company expensed approximately $ 0.1 million related to work performed under these agreements during the year ended December 31, 2021. There were no amounts recorded on the consolidated balance sheet as of December 31, 2022 and December 31, 2021, respectively. In August 2011, SynBio and the Company entered into a stock subscription and collaborative development agreement (the “Co-Development Agreement”). The Company granted an exclusive license to SynBio to develop, market and commercialize certain drug candidates utilizing molecules based on SynBio’s technology and the Company’s proprietary technologies (PolyXen, OncoHist and ImuXen) in Russia and CIS, collectively referred to herein as the SynBio Market. In return, SynBio granted an exclusive license to the Company to use the preclinical and clinical data generated by SynBio in certain agreed products and to engage in the development of commercial candidates in any territory outside of the SynBio Market. SynBio is solely responsible for funding and conducting their own research and clinical development activities. There are no milestone or other research-related payments provided for under the Co-Development Agreement other than fees for the supply of each company’s respective research supplies based on their technology, which, when provided, are due to mutual convenience and not representative of an ongoing or recurring obligation to supply research supplies. Upon successful commercialization of any resultant products, the Company is entitled to receive a 10% royalty on sales in certain territories and pay royalties to SynBio for sales outside those certain territories, subject to the terms of the Co-Development Agreement. Effective December 20, 2021, SynBio assigned the Co-Development Agreement to Pharmsynthez. Through December 31, 2022, Pharmsynthez continued to engage in research and development activities with no resultant commercial products. In December 2020, Pharmsynthez reported positive data from its Phase 3 clinical study of Epolong, a treatment for anemia in patients with chronic kidney disease leveraging the Company’s PolyXen technology. In February 2021, Pharmsynthez reported in a press release that it had started the registration phase of Epolong by filing a registration dossier to obtain approval in Russia. Pharmsynthez had reported in its press release that it expected that the Russian stage of registration activities would be completed in 2021 and that it would be able to start production of the product as early as the first quarter of 2022. Pharmsynthez has informed the Company that it had received a response letter indicating certain deficiencies in the dossier and intends to refile the registration upon correction. The Company did no t recognize revenue in connection with the Co-Development Agreement during the years ended December 31, 2022 and 2021. F- 17 Serum Institute of India Limited In August 2011, the Company entered into a collaborative research and development agreement with Serum Institute of India Limited (“Serum Institute”) providing Serum Institute an exclusive license to use the Company’s PolyXen technology to research and develop one potential commercial product, Polysialylated Erythropoietin. Serum Institute is responsible for conducting all preclinical and clinical trials required to achieve regulatory approvals within the certain predetermined territories at Serum Institute’s own expense. Royalty payments are payable by Serum Institute to the Company for net sales to certain customers in the Serum Institute sales territory. There are no milestone or other research-related payments due under the collaborative arrangement. Through December 31, 2022, no commercial products were developed and no royalty revenue or expense was recognized by the Company related to the arrangement. Serum Institute had a share ownership of less than 1% of the total outstanding common stock of the Company as of December 31, 2022 and 2021, respectively. 5. Licensing Arrangements Exclusive Sublicense Agreement On April 26, 2022, the Company entered into an Exclusive Sublicense Agreement (the “Sublicense Agreement”) with CLS Therapeutics Ltd. (“CLS”) pursuant to which the Company received an exclusive license, under certain patent rights and know-how owned or controlled by CLS, to develop and commercialize pharmaceutical products and methods incorporating DNase enzyme for use in treatment of cancer (the “Sublicensed Products”). Under the terms of the Sublicense Agreement, the Company will have sole responsibility for, and shall use commercially reasonable efforts to, among other things, research, develop and obtain marketing approval for the Sublicensed Products in the U.S. and certain European markets, and to commercialize such Sublicensed Products in the relevant market once marketing approval is obtained. In consideration for the license and other rights granted to the Company under the Sublicense Agreement, the Company issued to CLS 375,000 shares of the Company’s common stock (the “Sublicense Agreement Shares”), of which 250,000 Sublicense Agreement Shares were issued directly to OPKO Health, Inc. (“OPKO”) in lieu of transfer indirectly from CLS to EirGen Pharma Ltd. (“EirGen”), a wholly owned subsidiary of OPKO, in satisfaction of certain third-party contractual obligations between CLS and EirGen. Additionally, the Company is obligated to pay to CLS up to $13,000,000 in cash in potential milestone payments for the achievement of certain clinical and regulatory milestones, as well as issue an additional 950,000 shares of the Company’s common stock to CLS based on the achievement of certain regulatory milestones. In addition, the Company is obligated to pay tiered royalties ranging from the mid-single to low-double digits on net sales of licensed products falling within the scope of the license during the Royalty Term (as defined in the Sublicense Agreement), as well as pay a percentage share in the low-to-mid teens of certain consideration received by the Company from any sublicensees. Exclusive License Agreement On April 26, 2022, the Company entered into an Exclusive License Agreement (the “License Agreement”) with CLS, pursuant to which the Company received an exclusive license under certain patent rights and know-how owned or controlled by CLS to develop and commercialize pharmaceutical products and methods incorporating DNase in conjunction with CAR T therapies (the “Licensed Products”). Under the terms of the License Agreement, the Company will have sole responsibility for, and shall use commercially reasonable efforts to, among other things, research, develop and obtain marketing approval for the Licensed Products in the U.S. and certain European markets, and to commercialize such Licensed Products in the relevant market once marketing approval is obtained. In consideration for the license and other rights granted to the Company under the License Agreement, the Company paid CLS a one-time fee of $ 500,000 in cash, issued to CLS 500,000 shares of the Company’s common stock, and is obligated to pay up to $13,000,000 in cash in potential milestone payments for the achievement of certain clinical and regulatory milestones for each Licensed Product. In addition, the Company is obligated to pay tiered royalties ranging from the mid-single to low-double digits on net sales of licensed products falling within the scope of the license during the Royalty Term (as defined in the License Agreement), as well as pay a percentage share in the mid-teens to low double digits of certain consideration received by the Company from any sublicensees. F- 18 The total consideration for the Sublicense and License Agreements was approximately $ 1.3 million , which consisted of a $ 0.5 million cash payment and the fair value of the 875,000 common shares issued of $ 0.8 million utilizing the closing market price of the Company’s stock price at the closing date. As there was no future alternative use for the sublicense and license, the Company recorded an expense of $ 1.3 million to research and development expense during the year ended December 31, 2022. No milestone or other contingent consideration was recognized in 2022 as there were no development, regulatory or sales milestones that were probable of being achieved as of December 31, 2022. Patent Assignment and Volition Collaboration On October 4, 2022, the Company completed a patent assignment related to its collaboration with Belgian Volition SARL Limited (“Volition”) and CLS. In connection with the patent assignment, the Company entered into a Subscription Agreement with CLS Therapeutics, LLC, a Delaware limited liability company (“CLS LLC ”) on October 12, 2022, pursuant to which the Company agreed to issue to CLS LLC, and CLS LLC agreed to subscribe for, 850,000 shares of the Company’s common stock (the “Shares”) as consideration for the assignment by CLS and its affiliates to the Company of certain patent rights owned by CLS and its affiliates. On August 2, 2022, the Company announced a research and development collaboration with Volition to develop NETs-targeted adoptive cell therapies for the treatment of cancer. The collaboration is an early exploratory program to evaluate the potential combination of Volition’s Nu.Q ® technology Test and the Company’s DNase-Armored CAR T platform to develop proprietary adoptive cell therapies potentially targeting multiple types of solid cancers. Under the terms of the collaboration agreement, Volition will fund a research program and the two parties will share proceeds from commercialization or licensing of any products arising from the collaboration. The total consideration for the patent assignment was approximately $0.5 million, representing the fair value of the 850,000 common shares issued utilizing the closing market price of the Company’s stock price at the closing date. As there was no future alternative use for the patent rights, the Company recorded an expense of approximately $ 0.5 million to research and development expense for the year ended December 31, 2022. No milestone or other contingent consideration was recognized in 2022 as there were no development, regulatory or sales milestones that were probable of being achieved as of December 31, 2022. The Company incurred approximately $ 0.6 million related to consulting, transaction and development costs in connection with the DNase technology for the year ended December 31, 2022. 6. Property and Equipment, net Property and equipment, net consists of the following: Schedule of property and equipment December 31, 2022 December 31, 2021 Office and computer equipment $ – $ 35,505 Furniture and fixtures – 14,738 Property and equipment – at cost – 50,243 Less accumulated depreciation – ( 50,243 ) Property and equipment, net $ – $ – There was no depreciation expense for the years ended December 31, 2022 and 2021, respectively. In October 2022, the Company retired its fully depreciated assets as a result of the relocation of its corporate office. F- 19 7. Other Assets In 2016, the Company entered into an agreement with Serum Institute for the prepayment of clinical PSA supply in exchange for the Company’s common stock . As of December 31, 2022 and 2021, the Company has classified $ 0.7 million of prepaid clinical supply as long-term as it does not anticipate utilizing the majority of the PSA supply within the next 12 months. No clinical supply was utilized during the years ended December 31, 2022 and 2021. See also Note 15, Related Party Transactions for a description of the Pharmsynthez Loan. 8. Accrued Expenses Accrued expenses consist of the following: Schedule of accrued expenses December 31, 2022 December 31, 2021 Accrued payroll and benefits $ 353,539 $ 436,207 Accrued professional fees 288,808 378,985 Accrued research costs 103,500 177,240 Other 39,949 39,158 Total accrued expenses $ 785,796 $ 1,031,590 9. Fair Value Measurements 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, 2022 and December 31, 2021, the carrying amounts of the Company’s financial instruments approximate fair value due to their short maturities. There were no financial instruments classified as Level 3 in the fair value hierarchy during the years ended December 31, 2022 and 2021. 10. Income Taxes Deferred tax assets and liabilities are determined based on temporary differences resulting from the different treatment of items for tax and financial reporting purposes. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to reverse. Additionally, the Company must assess the likelihood that deferred tax assets will be recovered as deductions from future taxable income. The Company has provided a full valuation allowance on the Company’s deferred tax assets because the Company believes it is more likely than not that its deferred tax assets will not be realized. The Company evaluates the recoverability of its deferred tax assets on a quarterly basis. There was no income tax provision (benefit) for the years ended December 31, 2022 and 2021, as the Company has incurred losses to date. F- 20 The components of loss before income taxes are as follows: Components of loss before income taxes Year ended December 31, 2022 2021 Domestic (U.S.) $ ( 7,905,676 ) $ ( 6,349,632 ) Foreign (U.K.) 1,488,938 862,248 Foreign (Germany) ( 124,279 ) ( 128,869 ) Foreign (Switzerland) ( 11,336 ) ( 28,926 ) Loss before income taxes $ ( 6,552,353 ) $ ( 5,645,179 ) The reconciliation of income tax benefit at the U.S. corporation tax rate, being the rate applicable to the country of domicile of the Company to net income tax benefit, is as follows: Reconciliation of income tax provision (benefit) Year ended December 31, 2022 2021 Federal $ ( 1,375,995 ) $ ( 1,185,488 ) State ( 476,802 ) ( 376,463 ) Change in valuation allowance 7,233,525 1,839,716 Permanent differences, net 197,151 110,821 Foreign rate differential ( 39,041 ) ( 27,240 ) Share-based payments, net 19,087 14,827 Enhanced research and development tax credits ( 109,792 ) ( 101,416 ) Rate change ( 5,120,196 ) – Other items ( 327,937 ) ( 274,757 ) Net benefit for income taxes $ – $ – F- 21 Deferred tax assets and liabilities reflect the net tax effect of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company’s deferred tax assets are as follows: Schedule of deferred tax assets and liabilities Year ended December 31, 2022 2021 Deferred tax assets: U.K. net operating loss carryforwards $ 14,812,743 $ 11,361,647 U.K. capital loss carryforwards 1,545,934 1,545,934 U.S. federal net operating loss carryforwards 6,085,858 5,709,292 Switzerland net operating loss carryforwards 22,722 21,758 IPR&D 8,546,593 6,537,654 Share-based payments 2,169,480 2,052,590 Enhanced research and development tax credits 1,820,269 1,519,074 Germany net operating loss carryforwards 627,780 628,574 Capitalized research and experimental expenditure 735,702 – U.S. state net operating loss carryforwards 1,913,128 1,730,756 Other 288,887 268,309 Lease liability – 7,388 Total deferred tax assets before valuation allowance 38,569,096 31,382,975 Valuation allowance for deferred tax assets ( 38,569,096 ) ( 31,375,587 ) Net deferred tax assets 7,388 Deferred tax liabilities: Right of use asset – leases – ( 7,388 ) Total deferred tax liabilities – ( 7,388 ) Net deferred liability $ – $ – For the years ended December 31, 2022 and 2021, the Company had U.K. net operating loss carryforwards of approximately $ 61.9 million and $ 59.8 million , respectively, U.S. federal net operating loss carryforwards of approximately $ 29 .0 million and $ 27.2 million , respectively, U.S. state net operating loss carryforwards of approximately $ 30.3 million and $ 27.4 million , respectively, Germany net operating loss carryforwards of approximately $ 2 .0 million and $ 2 .0 million, respectively, and Switzerland net operating loss carryforwards of approximately $ 0.3 million and $ 0.3 million , respectively. The U.K. and Germany net operating loss carryforwards can be carried forward indefinitely. $15.6 million of the U.S. federal net operating loss carryforwards can be carried forward indefinitely, and the remaining U.S. federal and state net operating loss carryforwards begin to expire in 2031 . The Switzerland net operating loss carryforwards begin to expire in 2026 . The Company’s ability to use its operating loss carryforwards and tax credits generated in the U.S. to offset future taxable income is subject to restrictions under Section 382 of the U.S. Internal Revenue Code (the “Code”). These restrictions may limit the future use of the operating loss carryforwards and tax credits if certain ownership changes described in the Code occur. Future changes in stock ownership may occur that would create further limitations on the Company’s use of the operating loss carryforwards and tax credits. In such a situation, the Company may be required to pay income taxes, even though significant operating loss carryforwards and tax credits exist. F- 22 The Company’s ability to use its operating loss carryforwards and tax credits generated in the U.K. are subject to restrictions under U.K. tax legislation. These regulations may limit the future use of operating loss carryforwards (i) if there is a change in ownership and a change in the nature or conduct of the business carried on by the Company, and (ii) in certain circumstances where there is a change in the nature or conduct of the business only. In such cases the carryforwards would cease to be available to set against future income. The Company’s ability to use its operating loss carryforwards and tax credits generated in Germany and Switzerland are also subject to restrictions under German and Swiss tax legislation. These regulations may limit the future use of operating loss carryforwards if there is a change in ownership. In such cases the carryforwards would cease to be available to set against future income. As of December 31, 2022 and 2021, the Company did no t record any uncertain tax positions. The Company files income tax returns in the U.S. federal tax jurisdiction, Massachusetts state tax jurisdiction, and certain foreign tax jurisdictions. The Company is subject to examination by the U.S. federal, state, foreign, and local income tax authorities for calendar tax years through 2022 due to available net operating loss carryforwards and research and development tax credits arising in those years. The Company has not been notified of any examinations by the Internal Revenue Service or any other tax authorities as of December 31, 2022. The Company has no t recorded any interest or penalties for unrecognized tax benefits since its inception. Potential 382 Limitation The Company’s net operating loss and tax credit carryforwards are subject to review and possible adjustment by the Internal Revenue Service. The Company’s ability to utilize its net operating loss (“NOL”) and research and development credit (“R&D”) carryforwards may be substantially limited due to ownership changes that may have occurred or that could occur in the future, as required by Section 382 of the Code, as well as similar state provisions. These ownership changes may limit the amount of NOL and R&D credit carryforwards that can be utilized annually to offset future taxable income and tax, respectively. In general, an ownership change, as defined in Section 382 of the Code, results from a transaction or series of transactions over a three-year period resulting in an ownership change of more than 50% of the outstanding stock of a company by certain stockholders or public groups. The Company has not completed a study to assess whether one or more ownership changes have occurred since it became a loss corporation as defined in Section 382 of the Code, but the Company believes that it is likely that an ownership change has occurred. If the Company has experienced an ownership change, utilization of the NOL and R&D credit carryforwards would be subject to an annual limitation, which is determined by first multiplying the value of the Company’s common stock at the time of the ownership change by the applicable long-term, tax-exempt rate, and then could be subject to additional adjustments, as required. Any such limitation may result in the expiration of a portion of the NOL or R&D credit carryforwards before utilization. Until a study is completed, and any limitation known, no amounts are being considered as an uncertain tax position or disclosed as an unrecognized tax benefit. Any carryforwards that expire prior to utilization as a result of such limitations will be removed from deferred tax assets with a corresponding adjustment to the valuation allowance. Due to the existence of the valuation allowance, it is not expected that any potential limitation will have a material impact on the Company’s operating results. From time to time the Company may be assessed interest or penalties by major tax jurisdictions, namely the Commonwealth of Massachusetts. As of December 31, 2022, the Company had no material unrecognized tax benefits and no adjustments to liabilities or operations were required. No interest and penalties have been recognized by the Company to date. F- 23 11. Stockholders’ Equity Common Stock Each share of the Company’s common stock entitles the holder to one vote on all matters submitted to a vote of the Company’s stockholders. Common stockholders are entitled to dividends when and if declared by the Board of Directors. In the event of any voluntary or involuntary liquidation, dissolution or winding-up of the Company, the holders of common stock are entitled to share ratably in the assets of the Company available for distribution. Authorized Share Increase On December 21, 2022, shareholders of the Company voted to approve an amendment to the Company’s Articles of Incorporation to increase the authorized shares of common stock to 100,000,000 shares (the “Authorized Share Increase”). The Company filed a Certificate of Amendment to the Company’s Articles of Incorporation with the Secretary of the State of Nevada to effect the Authorized Share Increase as of December 21, 2022. At the Market (“ATM”) Offering On November 19, 2021, the Company entered into an ATM Offering Agreement (the “ATM Agreement”) with H.C. Wainwright & Co., LLC, as the exclusive sales agent (“Wainwright”), pursuant to which the Company may offer and sell, from time to time through Wainwright, shares of its common stock, par value $ 0.001 per share. The offer and sale of the shares will be made pursuant to a shelf registration statement on Form S-3 (File No. 333-260201) and the related prospectus, filed with the SEC on October 12, 2021 and declared effective on October 22, 2021, and is currently limited to a number of securities it can sell under the ATM Agreement of up to $4 million, provided that the Company may be limited in the amount of securities that it can sell pursuant to General Instruction I.B.6 of Form S-3. Pursuant to the ATM Agreement, Wainwright may sell the shares in sales deemed to be “at-the-market” equity offerings as defined in Rule 415 promulgated under the Securities Act, including sales made directly on or through the Nasdaq Capital Market. If agreed to in a separate terms agreement, the Company may sell shares to Wainwright as principal, at a purchase price agreed upon by Wainwright and the Company. Wainwright may also sell shares in privately negotiated transactions with the Company’s prior approval. Sales of the shares through Wainwright, if any, will be made in amounts and at times to be determined by the Company from time to time, but the Company has no obligation to sell any of the shares and either the Company or Wainwright may at any time suspend offers under the agreement or terminate the agreement. Actual sales will depend on a variety of factors to be determined by the Company from time to time, including (among others) market conditions, the trading price of the Company’s common stock and determinations by the Company of the appropriate sources of funding for the Company. The offer and sale of the shares pursuant to the ATM Agreement will terminate upon the earlier of (a) the issuance and sale of all of the shares subject to the ATM Agreement or (b) the termination of the ATM Agreement by Wainwright or the Company pursuant to the terms thereof. No shares were sold under the ATM Agreement during the years ended December 31, 2022 and 2021. The Company incurred $ 0.2 million and $ 0.1 million of costs associated with the ATM during the twelve months ended December 31, 2022 and 2021, respectively, which have been recorded within prepaid expenses and other on the December 31, 2022 and 2021 consolidated balance sheet. F- 24 Private Placement On July 26, 2021, the Company entered into a securities purchase agreement in connection with a private placement pursuant to which the Company issued and sold in a private placement priced at-the-market under Nasdaq rules, (i) 950,000 shares of the Company’s common stock, par value $ 0.001 per share, (ii) warrants to purchase an aggregate of 4,629,630 shares of the Company’s common stock, with an exercise price of $ 3.30 per share (the “Series A Warrants”), which expire three and one half years from the earlier of (a) the six month anniversary of the initial exercise date and (b) the date that the registration statement registering all of the warrant shares underlying the Series A Warrants is declared effective, and (iii) pre-funded warrants to purchase up to 3,679,630 shares of the Company’s common stock, with an exercise price of $ 0.001 per share (the “Series B Warrants”) with no expiration (the “Private Placement”), at a purchase price of $2.70 per one share and one Series A Warrant and $2.699 per one Series B Warrant and one Series A Warrant. The Private Placement closed on July 28, 2021 resulting in gross proceeds from the Private Placement of approximately $ 12.5 million , before deducting placement agent fees and offering expenses, and excluding the exercise of any such warrants. Net proceeds from the Private Placement were $ 11.5 million . The Series B Warrants were immediately exercisable at a price of $0.001 per share of common stock. The holders of the Series B Warrants did not have the right to exercise any portion of the Series B Warrants if the holder (together with its affiliates) would beneficially own in excess of 4.99% of the number of shares of our common stock outstanding immediately after giving effect to the exercise, as such percentage ownership was determined in accordance with the terms of the Series B Warrants. The holder, upon notice to the Company, could increase or decrease the beneficial ownership limitation provisions, provided that the beneficial ownership limitation in no event exceeds 9.99% of the number of shares of the common stock outstanding immediately after giving effect to the issuance of shares of common stock upon exercise of a warrant held by the holder. Any increase in the beneficial ownership limitation would not be effective until the 61st day after notice is delivered to the Company. The Series B Warrants had an intrinsic value of approximately $ 9.3 million . During the year ended December 31, 2021, all of the Series B Warrants to purchase 3,679,630 shares of common stock were exercised resulting in $ 3,679 of net proceeds to the Company. As a result, no Series B Warrants were outstanding as of December 31, 2022 and 2021. The Series A Warrants are immediately exercisable at a price of $3.30 per share of common stock. The holders of the Series A Warrants will not have the right to exercise any portion of the Series A Warrants if the holder (together with its affiliates) would beneficially own in excess of 4.99% of the number of shares of our common stock outstanding immediately after giving effect to the exercise, as such percentage ownership is determined in accordance with the terms of the Series A Warrants. The holder, upon notice to the Company, may increase or decrease the beneficial ownership limitation provisions, provided that the beneficial ownership limitation in no event exceeds 9.99% of the number of shares of the common stock outstanding immediately after giving effect to the issuance of shares of common stock upon exercise of a warrant held by the holder. Any increase in the beneficial ownership limitation will not be effective until the 61st day after notice is delivered to the Company. The Company evaluated the terms of the warrants issued and determined that they should be classified as equity instruments. The grant date fair value of these warrants was estimated to be $ 1.98 per share, for a total of approximately $ 9.2 million . The fair value of these warrants was estimated using a Black-Scholes model utilizing the following key valuation assumptions: the Company’s stock price, a risk free rate of 0.49 %, an expected life of 3.6 years and an expected volatility of 138.76 %. Series A Preferred Stock The Company has designated 1,000,000 shares as Series A preferred stock with each share having a par value of $0.001 and stated value of $ 4.80 (the “Series A Preferred Stock”). The following is a summary of the material terms of the Series A Preferred Stock. Liquidation . Upon any dissolution, liquidation or winding up, whether voluntary or involuntary, holders of Series A Preferred Stock will be entitled to receive distributions out of the Company’s assets, of an amount equal to the stated value per share of Series A Preferred Stock (as adjusted for stock splits, combinations, reorganizations and the like) plus any accrued and unpaid dividends thereon before any distributions shall be made on the common stock or any series of preferred stock ranked junior to the Series A Preferred Stock. F- 25 Dividends . Holders of the Series A Preferred Stock are entitled to receive a non-cumulative cash dividend at an annual rate of 5 % of the stated value per share of Series A Preferred Stock, when and if declared by the Company’s Board, out of the Company’s assets legally available therefor. No dividends or other distribution will be made on the common stock or any series of preferred stock ranked junior to the Series A Preferred Stock unless the dividend on the Series A Preferred Stock has been paid current and a reserve has been made for the next calendar year. The Company’s ability to pay dividends on Series A Preferred Stock is subject to restrictions in the Company’s Series B Preferred Stock, which ranks senior to the Series A Preferred Stock in right of payment. Conversion . Series A Preferred Stock is convertible, at any time and from time to time at the option of the holder thereof, with a minimum of 61 days’ advance notice to the Company, at a rate of twelve shares of Series A Preferred Stock to one share of common stock basis. Redemption . Upon 30 days’ prior written notice, the Company may require the holder of any Series A Preferred Stock to convert any or all of such holder’s Series A Preferred Stock to common stock at a rate of twelve shares of Series A Preferred Stock to one share of common stock basis. The Series A Preferred Stock has additional terms covering stock dividends and splits, voting rights, fractional shares and fundamental transactions. As of December 31, 2022 and 2021, there were approximately 1.0 million shares of Series A Preferred Stock issued and outstanding which are convertible into approximately 0.1 million shares of common stock. There were no Series A Preferred Stock conversions during the years ended December 31, 2022 and 2021. Series B Preferred Stock The Company has designated 2,500,000 shares as Series B preferred stock with each share having a stated value of $ 4.00 per share (the “Series B Preferred Stock”). The following is a summary of the material terms of the Company’s Series B Preferred Stock. Liquidation . Upon any dissolution, liquidation or winding up, whether voluntary or involuntary, holders of Series B Preferred Stock will be entitled to receive distributions out of the Company’s assets of an amount equal to the stated value per share of Series B Preferred Stock (as adjusted for stock splits, combinations, reorganizations and the like) plus any accrued and unpaid dividends thereon and any other fees or liquidated damages then due and owing thereon under the amended and restated certificate of designation before any distributions shall be made on the common stock or any series of preferred stock ranked junior to the Series B Preferred Stock, which includes Series A Preferred Stock. A fundamental transaction or change of control under the amended and restated certificate of designation shall constitute a liquidation for purposes of this right. Xenetic will give each holder of Series B Preferred Stock written notice of any liquidation at least 30 days before any meeting of stockholders to approve such liquidation or at least 45 days before the date of such liquidation if no meeting is to be held. Dividends . Subject to any preferential rights of any outstanding series of preferred stock created by the Company’s Board from time to time, the holders of shares of the Company’s Series B Preferred Stock will be entitled to such cash dividends, non-cumulative, as may be declared from time to time by the Company’s Board on shares of the Company’s common stock (on an as-converted basis) from funds available therefore. The Company shall not directly or indirectly pay or declare any dividend or make any distribution upon, nor shall any distribution be made in respect of, any junior securities, including Series A Preferred Stock, as long as any dividends due on the Series B Preferred Stock remain unpaid, nor shall any monies be set aside for or applied to the purchase or redemption of any junior securities or shares pari passu with the Series B Preferred Stock. Conversion . Series B Preferred Stock is convertible, at any time and from time to time at the option of the holder thereof, at a rate of one preferred share to approximately 0.33 common share basis, subject to an issuable maximum and the adjustments described below. There were no Series B Preferred Stock conversions during the years ended December 31, 2022 and 2021. F- 26 Subsequent Equity Sales . The Series B Preferred Stock has ratchet price based anti-dilution protection, subject to customary carve outs, in the event of a down-round financing at a price per share below the stated value of the Series B Preferred Stock. There is no bifurcation of the embedded conversion option being clearly and closely related to the host instrument. The Series B Preferred Stock has additional terms covering stock dividends and splits, voting rights, fractional shares and fundamental transactions. As of December 31, 2022 and 2021, there were approximately 1.8 million shares of Series B Preferred Stock issued and outstanding which are convertible into approximately 0.6 million shares of common stock in each year, respectively, which represents the issuable maximum that can be issued upon the conversion of the currently outstanding Series B Preferred Stock. Warrants Related to Collaboration and Consulting Agreements In connection with certain of the Company’s collaboration agreements and consulting arrangements, the Company had issued warrants to purchase shares of common stock as payment for services. No collaboration or consulting service warrants were granted or exercised and all of the outstanding collaboration warrants expired during the year ended December 31, 2021. As a result, no collaboration or consulting service warrants were outstanding as of December 31, 2022 and 2021. Warrants Related to Financing Arrangements In connection with the July 2021 Private Placement, the Company issued Series A Warrants to purchase an aggregate of 4,629,630 shares as described above. No Series A Warrants were exercised during the years ended December 31, 2022 and 2021. In addition, the Company has publicly traded warrants to purchase approximately 21,000 and 23,000 shares of common stock outstanding as of December 31, 2022 and 2021, respectively. These warrants have an exercise price of $ 13.00 per share and expire on July 17, 2024 . The warrants trade on Nasdaq under the symbol “XBIOW.” The warrants also provide that if the weighted-average price of common stock on any trading day on or after 30 days after issuance is lower than the then-applicable exercise price per share, each warrant may be exercised, at the option of the holder, on a cashless basis for one share of common stock. Warrants to purchase approximately 2,000 shares and 6,000 shares of common stock were exercised on a cashless, one-for-one basis during the years ended December 31, 2022 and 2021, respectively. None of these warrants were forfeited during the years ended December 31, 2022 and 2021. The Company also has outstanding warrants to purchase approximately 8,000 shares of the Company’s common stock as of December 31, 2022 and 2021. These warrants have an exercise price of $ 2.91 per share and expire on July 3, 2026 . None of these warrants were exercised or forfeited during the years ended December 31, 2022 and 2021. Warrants to purchase approximately 129,000 shares of the Company’s common stock at an exercise price of $ 27.00 per share were outstanding as of December 31, 2020. On November 15, 2021, the Company entered into a letter agreement with the holders of these warrants to exchange such warrants for an aggregate of approximately 52,000 shares of the Company’s common stock. The Company recorded a gain of approximately $ 41,000 as a result of this exchange as the fair value of the warrants immediately before the exchange was more than the fair value of the shares issued in the exchange. As a result, all of these warrants were cancelled and none were outstanding as of December 31, 2022 and 2021. The Company had additional outstanding debt and equity financing warrants to purchase an aggregate of approximately 0.2 million shares of common stock as of December 31, 2020. All of these debt and equity financing warrants expired unexercised during the year ended December 31, 2021. As a result, none of these debt and equity warrants were outstanding as of December 31, 2022 and 2021. F- 27 12. Share-Based Expense Total share-based expense related to stock options, RSUs and common stock awards was approximately $ 0.5 million and $ 0.4 million for the years ended December 31, 2022 and 2021, respectively. Share-based expense is classified in the consolidated statements of comprehensive loss as follows: Schedule of Share-Based Compensation Expense Year Ended December 31, 2022 2021 Research and development expenses $ 86,305 $ 68,208 General and administrative expenses 425,175 342,229 $ 511,480 $ 410,437 Stock Options The Company grants stock option awards and RSUs to employees and non-employees with varying vesting terms under the Xenetic Biosciences, Inc. Amended and Restated Equity Incentive Plan (“Stock Plan”). The Company measures the fair value of stock option awards using the Black-Scholes option pricing model, which uses the assumptions noted in the tables below, including the risk-free interest rate, expected term, share price volatility, dividend yield and forfeiture rate. The risk-free interest rate is based upon the U.S. Treasury yield curve in effect at the time of grant, with a term that approximates the expected life of the option. For stock options issued in 2022 and 2021 that qualify as “plain vanilla” stock options, the expected term is based on the simplified method. The Company has a limited history of stock option exercises, which does not provide a reasonable basis for the Company to estimate the expected term of employee and non-employee stock options. For all other stock options, the Company estimates the expected life using judgment based on the anticipated research and development milestones of the Company’s clinical projects and behavior of the Company’s employees and non-employees. The expected life of non-employee options is the contractual life of the option. The expected volatility rates are estimated based on the actual volatility of the Company. To the extent Company data is not available for the full expected term of the awards the Company uses a price volatility based on a blended rate of the Company’s historical volatility with that of comparable publicly traded companies with drug candidates in similar therapeutic areas and stages of nonclinical and clinical development to the Company’s drug candidates. The Company has applied an expected dividend yield of 0% as the Company has not historically declared a dividend and does not anticipate declaring a dividend during the expected life of the options. The Company accounts for forfeitures as they occur. Employee Stock Options During the years ended December 31, 2022 and 2021, 350,000 and 325,000 total stock options to purchase shares of common stock were granted by the Company, respectively. The weighted average grant date fair value per option was $ 0.73 and $ 1.93 , respectively. No stock options were exercised and none expired during the years ended December 31, 2022 and 2021. During the years ended December 31, 2022 and 2021, 375,027 and 258,315 total stock options vested, respectively, with total fair values of approximately $ 0.6 million and $ 0.3 million , respectively. As of December 31, 2022, there was approximately $ 0.4 million of unrecognized share-based payments related to employee stock options that are expected to vest. The Company expects to recognize this expense over a weighted-average period of approximately 1.6 years. F- 28 Key assumptions used in the Black-Scholes option pricing model for options granted to employees during the years ending December 31, 2022 and 2021 are as follows: Assumptions used Year Ended December 31, 2022 2021 Weighted-average expected dividend yield (%) – – Weighted-average expected volatility (%) 126.51 132.64 Weighted-average risk-free interest rate (%) 2.90 1.16 Weighted-average expected life of option (years) 5.72 5.73 Weighted-average exercise price ($) 0.83 2.15 The following is a summary of employee stock option activity for the years ended December 31, 2022 and 2021: Schedule of option activity Number of shares Weighted- average exercise price Weighted- average remaining life (years) Aggregate intrinsic value Outstanding as of January 1, 2021 763,722 $ 8.01 8.68 $ 498,625 Granted 325,000 2.15 Expired – – Outstanding as of December 31, 2021 1,088,722 $ 6.26 8.22 $ 23,750 Granted 350,000 0.83 Expired – – Outstanding as of December 31, 2022 1,438,722 $ 4.94 7.78 $ – Vested or expected to vest as of December 31, 2022 1,438,722 $ 4.94 7.78 $ – Exercisable as of December 31, 2021 630,357 $ 9.42 7.63 $ 23,750 Exercisable as of December 31, 2022 1,005,384 $ 6.56 7.14 $ – F- 29 A summary of the status of the Company’s non-vested employee stock option shares as of December 31, 2022, and the changes during the year ended December 31, 2022, is as follows: Schedule of non-vested options Number of shares Weighted- average grant date fair value Balance as of January 1, 2022 458,365 $ 1.73 Granted 350,000 $ 0.73 Forfeited – $ – Vested ( 375,027 ) $ 1.59 Balance as of December 31, 2022 433,338 $ 1.04 Restricted Stock Units There are 4,167 RSUs outstanding as of December 31, 2022 and 2021, respectively. The RSUs are fully vested and had a grant date fair value of $ 25.37 per share. No RSUs were granted or expired during the years ended December 31, 2022 and 2021. Non-Employee Stock Options Share-based expense related to stock options granted to non-employees is recognized as the services are rendered on a straight-line basis. The Company determined that the fair value of the stock options is more reliably measurable than the fair value of the services received. No stock options to purchase shares of common stock were granted by the Company to non-employees during the years ended December 31, 2022 and 2021. No non-employee stock options were exercised during the years ended December 31, 2022 and 2021. No compensation expense related to non-employee options during the years ended December 31, 2022 and December 31, 2021 as all non-employee stock options were fully vested as of December 31, 2020. The following is a summary of non-employee stock option activity for the years ended December 31, 2022 and 2021: Schedule of option activity Number of shares Weighted- average exercise price Weighted- average remaining life (years) Aggregate intrinsic value Outstanding as of January 1, 2021 20,318 $ 14.61 3.79 $ 14,880 Granted – – Expired ( 243 ) 225.72 Outstanding as of December 31, 2021 20,075 12.06 2.83 $ 3,255 Granted – – Expired – – Outstanding as of December 31, 2022 20,075 $ 12.06 1.83 $ – Vested or expected to vest as of December 31, 2022 20,075 $ 12.06 1.83 $ – Exercisable as of December 31, 2021 20,075 $ 12.06 2.83 $ 3,255 Exercisable as of December 31, 2022 20,075 $ 12.06 1.83 $ – F- 30 Common Stock Awards The Company granted common stock awards to non-employees in exchange for services provided. The Company measures the fair value of these awards using the fair value of the services provided or the fair value of the awards granted, whichever is more reliably measurable. The fair value measurement date of these awards is generally the date the performance of services is complete. The fair value of the awards is recognized as services are rendered on a straight-line basis. A summary of the Company’s common stock awards granted and issued during the years ended December 31, 2022 and 2021 are as follows: Common stock awards granted and issued Number of shares Balance as of January 1, 2021 7,406 Granted – Issued ( 7,153 ) Balance as of December 31, 2021 253 Granted – Issued – Balance as of December 31, 2022 253 No common stock awards were granted during the years ended December 31, 2022 and 2021. The balance of the common stock awards has not been issued as of December 31, 2022. Joint Share Ownership Plan As of December 31, 2022 and 2021, there were approximately 27,000 JSOP awards issued and outstanding to two former senior executives. Under the JSOP, shares in the Company are jointly purchased at fair market value by the participating executives and the trustees of the JSOP trust, with such shares held in the JSOP trust. For U.S. GAAP purposes the awards were valued as employee options and recorded as a reduction in equity as treasury shares until they are exercised by the employee. The JSOP awards are fully vested and have no expiration date. There were no compensation charges during the years ended December 31, 2022 and 2021. 13. Employee Benefit Plans The Company has a defined contribution 401(k) savings plan (the “401(k) Plan”). The 401(k) Plan covers substantially all U.S. employees, and allows participants to defer a portion of their annual compensation on a pre-tax basis or make post-tax contributions. Company contributions to the 401(k) Plan may be made at the discretion of the Board of Directors. During the years ended December 31, 2022 and 2021, the Company made contributions of approximately $ 38,000 and $ 28,000 to the 401(k) Plan, respectively. F- 31 14. Commitments and Contingencies Leases The Company determines whether an arrangement is a lease at inception. On October 1, 2020 , the Company entered into a 2 two-year lease for its corporate headquarters in Framingham, Massachusetts. This lease called for total future minimum rent payments of approximately $ 78,000 at inception and had a termination date of September 30, 2022 . The Company recorded a right-of-use (“ROU”) asset and corresponding lease liability on the consolidated balance sheet. The Company did not have options to extend, termination options or material residual value guarantees. The lease was not renewed and the Company entered into a 12-month lease for office space in a shared office location effective October 1, 2022. As this lease has a term of 12 -months at inception, the Company did not apply the provisions of ASU 2016-02 and will account for it as an operating lease. As of December 31, 2022, total minimum lease payments on this lease was approximately $ 14,000 . Supplemental cash flow information and non-cash activity related to our operating leases are as follows: Cash flow information regarding leases Year Ended December 31, Year Ended December 31, 2022 2021 Operating cash flow information: Cash paid for amounts included in the measurement of lease liabilities $ 27,043 $ 35,482 Supplemental balance sheet information related to our operating leases is as follows: Supplemental information related to operating leases Balance Sheet Classification December 31, 2022 December 31, 2021 Right-of-use assets - ST Prepaid expenses and other $ – $ 27,043 Current lease liabilities Accrued expenses and other current liabilities $ – $ 27,043 The Company did not apply the provisions of ASU 2016-02 to the lease of its office space in Miami, Florida. Effective November 1, 2022 , the Company renewed its Miami office lease for twelve-months to November 2023. As this lease has a term of 12 -months at inception, the Company will account for it as an operating lease. As of December 31, 2022, total minimum lease payments on this lease was approximately $ 24,000 . 15. Related Party Transactions The Company has entered into various research, development, license and supply agreements with Serum Institute and Pharmsynthez, each a related party whose relationship, ownership, and nature of transactions is disclosed within other sections of these footnotes. Please refer to Note 4, Significant Strategic Collaborations, and Note 7, Other Assets , for details on arrangements with collaboration partners that are also related parties. F- 32 During the fourth quarter of 2019, the Company entered into a loan agreement with Pharmsynthez (the “Pharmsynthez Loan”), pursuant to which the Company advanced Pharmsynthez an aggregate principal amount of up to $ 500,000 to be used for the development of a specific product under the Company’s Co-Development Agreement with Pharmsynthez. The Pharmsynthez Loan had a term of 15-months and accrued interest at a rate of 10 % per annum. The Pharmsynthez Loan is guaranteed by all of the operating subsidiaries of Pharmsynthez, including SynBio and AS Kevelt (“Kevelt”), and is secured by all of the common and preferred stock of the Company owned by Pharmsynthez and SynBio. The Company recognized approximately $ 9,000 and $ 48,000 of interest income related to this loan during the twelve-months ended December 31, 2022 and 2021, respectively. Effective January 23, 2021, the Company entered into a First Amendment to Loan Agreement and Other Loan Documents with Pharmsynthez, Kevelt and SynBio (the “Pharmsynthez Loan Extension”) to modify the repayment terms and maturity of the Pharmsynthez Loan to January 2022. The terms of the Pharmsynthez Loan Extension called for two (2) equal monthly principal payments of $ 25,000 in each of January 23, 2021 and February 28, 2021 and the payment of all outstanding accrued interest in six (6) equal monthly installments from January 31, 2021 through June 30, 2021. In addition, the Pharmsynthez Loan Extension required monthly interest payments and the repayment of the remaining principal amount in six (6) equal monthly installments from August 2021 through January 2022. Effective August 31, 2021, the Company entered into a Second Amendment to Loan Agreement and Other Loan Documents with Pharmsynthez, Kevelt and SynBio (the “Second Pharmsynthez Loan Extension”) to modify the repayment terms and maturity of the Pharmsynthez Loan to July 2022. The terms of the Second Pharmsynthez Loan Extension called for an upfront fee of $ 12,500 and two (2) equal monthly principal payments of $ 25,000 on September 30, 2021 and October 31, 2021. In addition, the Second Pharmsynthez Loan Extension required monthly interest payments and the repayment of the remaining principal amount in six (6) equal monthly installments from February 2022 through July 2022. All other terms of the Pharmsynthez Loan, as amended, remained in effect. All required payments under the Second Pharmsynthez Loan Extension had been made through January 31, 2022. In February 2022, the Company received a request from Pharmsynthez to further extend the principal repayments and the maturity of the loan. The Company entered into a Third Amendment to Loan Agreement and Other Loan Documents with Pharmsynthez, Kevelt and SynBio dated October 31, 2022 (the “Third Pharmsynthez Loan Extension”) primarily to modify the repayment terms and maturity of the Pharmsynthez Loan to May 31, 2023. The terms of the Third Pharmsynthez Loan Extension require certain payments of principal, interest and fees at the signing of the Third Pharmsynthez Loan Extension. In addition, the Third Pharmsynthez Loan Extension requires the repayment of the remaining principal amount, plus interest, in seven (7) monthly installments from November 30, 2022 through May 31, 2023 as well as certain other terms and conditions. All other terms of the Pharmsynthez Loan, as amended, remained in effect. While Pharmsynthez has made certain payments in accordance with the Third Pharmsynthez Loan Extension, all principal and interest payments required to date under the Third Pharmsynthez Loan Extension have not been made. As a result, the Company has classified the loan receivable as long-term as of December 31, 2022 and 2021. The Company assessed the collectability of the loan and determined that the U.S.-based collateral held by the Company, consisting of all of the common and preferred stock of the Company owned by Pharmsynthez and SynBio, was adequate to support the repayment of the outstanding principal balance. As of December 31, 2022 and 2021, approximately $ 0.4 million was included in other assets on the consolidated balance sheet. In April 2022, the Company entered into certain agreements with CLS as described in Note 5. One of the Company’s directors, Roger Kornberg, is a member of the scientific advisory board of CLS. However, Mr. Kornberg does not own any equity of CLS and is not receiving any economic benefit as a result of the transactions contemplated by such agreements. Mr. Adam Logal, one of our directors, is Senior Vice President, Chief Financial Officer, Chief Accounting Officer and Treasurer of OPKO. F- 33 16. Subsequent Events The Company performed a review of events subsequent to the balance sheet date through the date the financial statements were issued and determined that there were no such events requiring recognition or disclosure in the financial statements except as described below. Scripps Research On March 17, 2023, the Company and Scripps Research entered into a Research Funding and Option Agreement (the “Agreement”), pursuant to which the Company has agreed to provide Scripps Research an aggregate of up to $938,000 to fund research relating to advancing the pre-clinical development of the Company’s DNase oncology platform technology. The research funding is payable by the Company to Scripps Research on a monthly basis in accordance with a negotiated budget, which provides for an initial payment of approximately $78,000 on the date of the Agreement and subsequent monthly payments of approximately $78,000 over a 12-month period. Under the Agreement, the Company has the option to acquire a worldwide exclusive license to Scripps Research’s rights in the Technology or Patent Rights (as defined in the Agreement), as well as a non-exclusive, royalty-free, non-transferrable license to make and use TSRI Technology (as defined in the Agreement) solely for the Company’s internal research purposes during the performance of the research program contemplated by the Agreement. Unless earlier terminated, the term of the Agreement continues from the date of the Agreement for fifteen (15) months. The Agreement may be terminated by the Company with 30 days advance written notice to Scripps Research beginning six (6) months after the Effective Date (as defined in the Agreement) or by Scripps Research if the Company fails to make timely payments due under the Agreement, subject to 30 days’ written notice to cure such nonpayment. The Agreement may further be terminated by either party in the event of the other party’s uncured failure to perform any obligations under the Agreement or the bankruptcy of the other party. Silicon Valley Bank SVB was closed on March 10, 2023 by the California Department of Financial Protection and Innovation, which appointed the FDIC as receiver. The Company maintained 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 a result, the Company does not anticipate any losses with respect to such balances . F- 34 ITEM 9 – CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable.