Xenetic Biosciences, Inc. 10-Q

ITEM 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS This report contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and Section 27A of the Securities Act of 1933, as amended. All statements contained in this Quarterly Report other than statements of historical fact, including statements regarding our future results of operations and financial position, our business strategy and plans, future revenues, projected costs, prospects and our objectives for future operations, are forward-looking statements. These forward-looking statements include, but are not limited to, statements concerning: anticipated effects of geopolitical events, including the conflicts in the Ukraine and the Middle East and associated sanctions imposed by the U.S. and other countries in response; our plans to develop our proposed drug candidates; our expectations regarding the nature, timing and extent of clinical trials and proposed clinical trials; our expectations regarding the timing for proposed submissions of regulatory filings; our expectations regarding the nature, timing and extent of collaboration arrangements; the expected results pursuant to collaboration arrangements, including the receipts of future payments that may arise pursuant to collaboration arrangements; the outcome of our plans to obtain regulatory approval of our drug candidates; the outcome of our plans for the commercialization of our drug candidates; our plans to address certain markets, engage third party manufacturers, and evaluate additional drug candidates for subsequent commercial development along with the likelihood and extent of competition to our drug candidates; our plans to advance innovative immune-oncology technologies addressing hard to treat oncology indications; expectations regarding our Deoxyribonuclease (“DNase”) platform, such as regarding the DNase platform being in development for the treatment of solid tumors and being aimed at improving outcomes of existing treatments, including immunotherapies, by targeting neutrophil extracellular traps (“NETs”); our expectations to focus our efforts and resources on advancing the DNase platform into the clinic as an adjunctive therapy for pancreatic carcinoma and locally advanced or metastatic solid tumors; and our expectations regarding our PolyXen ® platform, including concerning our plans to leverage the platform. In some cases, these statements may be identified by terminology such as “may,” “will,” “would,” “could,” “should,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “seek,” “approximately,” “intend,” “predict,” “potential,” “projects,” or “continue,” or the negative of such terms and other comparable terminology. Although we believe that the expectations reflected in the forward-looking statements contained herein are reasonable, we cannot guarantee future results, the levels of activity, performance or achievements. These statements involve known and unknown risks and uncertainties that may cause our or our industry's results, levels of activity, performance or achievements to be materially different from those expressed or implied by forward-looking statements. The Management’s Discussion and Analysis of Financial Condition and Results of Operations (the “MD&A”) should be read together with our condensed consolidated financial statements and related notes included elsewhere in this Quarterly Report. This Quarterly Report, including the MD&A, contains trend analysis and other forward-looking statements. Any statements in this Quarterly Report that are not statements of historical facts are forward-looking statements. These forward-looking statements made herein are based on our current expectations, involve a number of risks and uncertainties and should not be considered as guarantees of future performance. 13 Some factors that could cause actual results to differ materially include without limitation: · uncertainty of the expected financial performance of the Company; · failure to realize the anticipated potential of the DNase or PolyXen technologies; · our ability to implement our business strategy; · our failure to maintain compliance with the continued listing requirements of the Nasdaq Stock Market (“Nasdaq”); · our need to raise additional working capital in the future for the purpose of further developing our pipeline and to continue as a going concern; · our ability to finance our business; · our ability to successfully execute, manage and integrate key acquisitions and mergers; · product development and commercialization risks, including our ability to successfully develop the DNase technology; · the impact of adverse safety outcomes and clinical trial results for our therapies; · our ability to secure and maintain a manufacturer for our technologies; · the impact of new therapies and new uses of existing therapies on the competitive environment; · our ability to successfully commercialize our current and future drug candidates; · our ability to achieve milestone and other payments associated with our current and future co-development collaborations and strategic arrangements; · our reliance on consultants, advisors, vendors and business partners to conduct work on our behalf; · the impact of new technologies on our drug candidates and our competition; · changes in laws or regulations of governmental agencies; · interruptions or cancellation of existing contracts; · impact of competitive products and pricing; · product demand and market acceptance and risks; · the presence of competitors with greater financial resources; · continued availability of supplies or materials used in manufacturing at the current prices; · the ability of management to execute plans and motivate personnel in the execution of those plans; · our ability to attract and retain key personnel; · costs, diversion and other adverse effects of the actions of activist shareholders; · adverse publicity related to our products or the Company itself; · adverse claims relating to our intellectual property; · the adoption of new, or changes in, accounting principles; · the costs inherent with complying with statutes and regulations applicable to public reporting companies, such as the Sarbanes-Oxley Act of 2002; · other new lines of business that we may enter in the future; · general economic and business conditions, as well as inflationary trends and financial market instability or disruptions to the banking system due to bank failures; · the impact of natural disasters or public health emergencies, such as the COVID-19 global pandemic, and geopolitical events, such as the Russian invasion of Ukraine and conflict in the Middle East, and related sanctions and other economic disruptions or concerns, on our financial condition and results of operations; and · other factors set forth in the Risk Factors section of our Annual Report on Form 10-K and in subsequent filings with the Securities and Exchange Commission (“SEC”). These factors are not necessarily all of the important factors that could cause actual results to differ materially from those expressed in the forward-looking statements in this Quarterly Report. Other unknown or unpredictable factors also could have material adverse effects on our future results, including, but not limited to, those discussed in the section titled “Risk Factors.” The forward-looking statements in this Quarterly Report are made only as of the date of this Quarterly Report, and we do not undertake any obligation to publicly update any forward-looking statements to reflect subsequent events or circumstances. We intend that all forward-looking statements be subject to the safe-harbor provisions of the Private Securities Litigation Reform Act of 1995. 14 BUSINESS OVERVIEW We are a biopharmaceutical company focused on advancing innovative immune-oncology technologies addressing hard to treat cancers. Our DNase platform is designed to improve outcomes of existing treatments, including immunotherapies, by targeting NETs, which have been implicated in cancer progression and resistance to cancer treatments. We are currently focused on advancing our systemic DNase program into the clinic as an adjunctive therapy for pancreatic carcinoma and locally advanced or metastatic solid tumors. Additionally, we have partnered with biotechnology and pharmaceutical companies to develop our proprietary drug delivery platform, PolyXen, and receive royalty payments under an exclusive license arrangement in the field of blood coagulation disorders. We incorporate our patented and proprietary technologies into drug candidates currently under development with biotechnology and pharmaceutical industry collaborators to create what we believe will be the next-generation biologic drugs with improved pharmacological properties over existing therapeutics. Our drug candidates have resulted from our research activities or that of our collaborators and are in the development stage. As a result, we have committed a significant amount of our resources to our research and development activities and anticipate continuing to do so for the near future. To date, none of our drug candidates have received regulatory marketing authorization or approval in the U.S. by the Food and Drug Administration nor in any other countries or territories by any applicable agencies. We are receiving ongoing royalties pursuant to a license of our PolyXen technology to an industry partner. Although we hold a broad patent portfolio, the focus of our internal efforts during the three months ended March 31, 2024, was on the advancement of our DNase technology. Impact of the Global Conflicts on Our Operations The short and long-term implications of Russia’s invasion of Ukraine and conflict in the Middle East are difficult to predict at this time. The imposition of current and future sanctions and counter sanctions may have an adverse effect on the economic markets generally and could impact our business, financial condition, and results of operations. RESULTS OF OPERATIONS Comparison of Quarter Ended March 31, 2024 and 2023 The comparison of our historical results of operations for the fiscal quarter ended March 31, 2024 to the fiscal quarter ended March 31, 2023 is as follows: Description Quarter Ended March 31, 2024 Quarter Ended March 31, 2023 Increase (Decrease) Percentage Change Revenue: Royalty revenue $ 510,817 $ 605,844 $ (95,027 ) (15.7 ) Operating costs and expenses: Research and development (944,321 ) (595,276 ) 349,045 58.6 General and administrative (834,910 ) (925,743 ) (90,833 ) (9.8 ) Total operating costs and expenses (1,779,231 ) (1,521,019 ) 258,212 17.0 Loss from operations (1,268,414 ) (915,175 ) 353,239 38.6 Other income: Other income 52 4,520 (4,468 ) (98.8 ) Interest income, net 73,249 54,101 19,148 35.4 Net loss $ (1,195,113 ) $ (856,554 ) $ 338,559 39.5 15 Revenue Revenue for the three months ended March 31, 2024 decreased by $0.1 million, or 15.7%, to $0.5 million from approximately $0.6 million for the three months ended March 31, 2023. This decrease represents a decrease in royalty revenue resulting from the timing of rebates related to our sublicense agreement with Takeda Pharmaceuticals Co. Ltd. as compared to the same period in 2023. Research and Development Expenses Research & development (“R&D”) expenses for the three months ended March 31, 2024 increased by approximately $0.3 million, or 58.6%, to approximately $0.9 million from approximately $0.6 million in the comparable quarter in 2023. The table below sets forth the R&D costs incurred by the Company by category of expense for the quarters ended March 31, 2024 and 2023: Quarter Ended Category of Expense March 31, 2024 March 31, 2023 Outside services and contract research organizations $ 745,672 $ 423,868 Personnel costs 145,805 124,793 Share-based expense 15,237 13,688 Other 37,607 32,927 Total research and development expense $ 944,321 $ 595,276 The increase in outside services and contract research organizations expense was primarily due to increased spending in connection with our pre-clinical development efforts related to our DNase platform. General and Administrative Expenses General and administrative expenses for the three months ended March 31, 2024 decreased by approximately $0.1 million, or 9.8%, to approximately $0.8 million from approximately $0.9 million in the comparable quarter in 2023. The decrease was primarily due to a decrease in accounting and legal fees during the three months ended March 31, 2024 compared to the same period in 2023. Other Income Other income was approximately $52 for the three months ended March 31, 2024 compared to approximately $4,500 of other income for the comparable quarter in 2023. This decrease in other income was primarily related to unfavorable changes in foreign currency exchange rates during the three months ended March 31, 2024 as compared to the same period in 2023. Interest Income Interest income increased to approximately $73,000 during the three months ended March 31, 2024 as compared to approximately $54,000 for the same period in the prior year. This increase is primarily due to higher interest rates on invested funds during the three months ended March 31, 2024 compared to the same period in 2023. 16 Liquidity and Capital Resources We incurred a net loss of approximately $1.2 million for the three months ended March 31, 2024. We had an accumulated deficit of approximately $194.4 million at March 31, 2024, as compared to an accumulated deficit of approximately $193.2 million at December 31, 2023. Working capital was approximately $7.7 million at March 31, 2024 and $8.8 million at December 31, 2023. During the three months ended March 31, 2024, our working capital decreased by $1.1 million primarily due to our net loss for the three months ended March 31, 2024. Our principal source of liquidity consists of cash. At March 31, 2024, we had approximately $7.8 million in cash and $0.7 million in current liabilities. At December 31, 2023, we had approximately $9.0 million in cash and $0.8 million in current liabilities. We have historically relied upon sales of our equity securities to fund our operations. We evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about our ability to continue as a going concern within one year after the date that the financial statements are issued. We have incurred substantial losses since our inception, and we expect to continue to incur operating losses in the near-term. These factors raise substantial doubt about our ability to continue as a going concern. We believe that we have access to capital resources through possible public or private equity offerings, debt financings, corporate collaborations, related party funding, or other means to continue as a going concern. We believe that our existing resources will be adequate to fund our operations for a period of at least twelve months from the date of the issuance of these financial statements. However, we anticipate we may need additional capital in the long-term to pursue our business initiatives. The terms, timing and extent of any future financing will depend upon several factors, including the achievement of progress in our clinical development programs, our ability to identify and enter into licensing or other strategic arrangements, our continued listing on Nasdaq, and factors related to financial, economic, geo-political, industry and market conditions, many of which are beyond our control. The capital markets for the biotech industry can be highly volatile, which make the terms, timing and extent of any future financing uncertain. Cash Flows from Operating Activities Cash flows used in operating activities for the three months ended March 31, 2024 totaled approximately $1.2 million, which was primarily due to our net loss for the period, partially offset by non-cash charges associated with share-based expense. Cash flows used in operating activities for the three months ended March 31, 2023 totaled approximately $1.1 million, which was primarily due to our net loss for the period, partially offset by non-cash charges associated with share-based expense and principal repayments on the Pharmsynthez Loan. In addition, prepaid expenses increased and current liabilities decreased during the three months ended March 31, 2023. Cash Flows from Investing Activities There were no cash flows from investing activities for the three months ended March 31, 2024 and 2023. Cash Flow from Financing Activities There were no cash flows from financing activities for the three months ended March 31, 2024 and 2023. Contractual Obligations and Commitments As of March 31, 2024, there were no material changes in our contractual obligations and commitments from those disclosed in our Annual Report on Form 10-K for the year ended December 31, 2023, filed with the SEC on March 21, 2024, as amended on April 26, 2024. 17 Off Balance Sheet Arrangements We do not have any off-balance sheet financing arrangements that have or are reasonably likely to have a current or future material effect on our financial condition, change in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures, or capital resources. Recent Accounting Standards See Note 3 in our Annual Report on Form 10-K for the year ended December 31, 2023, filed with the SEC on March 21, 2024, as amended on April 26, 2024, for a discussion of recent accounting standards. Critical Accounting Estimates Our condensed consolidated financial statements are prepared in accordance with U.S. generally accepted accounting principles. The preparation of our condensed consolidated financial statements requires us to make estimates, assumptions and judgments that affect the reported amounts of assets, liabilities, revenue, costs and expenses. We base our estimates and assumptions on historical experience and other factors that we believe to be reasonable under the circumstances. We evaluate our estimates and assumptions on an ongoing basis. The result of these evaluations forms the basis for making judgments about the carrying values of assets and liabilities and the reported amount of expenses that are not readily apparent from other sources. Because future events and their effects cannot be determined with certainty, actual results and outcomes may differ materially from our estimates, judgments and assumptions. There have been no material changes in our critical accounting estimates from those disclosed in our Annual Report on Form 10-K for the year ended December 31, 2023, filed with the SEC on March 21, 2024, as amended on April 26, 2024. ITEM 3 – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We are not required to provide the information required by this Item because we are a “smaller reporting company” (as defined in Rule 12b-2 of the Exchange Act).