Table of Contents
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
For the fiscal year ended December 31, 2020
TRANSITION REPORTS PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
For the transition period from to
Commission File Number: 001-37937
XENETIC BIOSCIENCES, INC.
(Exact name of registrant as specified in its charter)
Nevada
(State or other jurisdiction of
incorporation or organization)
45-2952962
(IRS Employer
Identification No.)
40 Speen Street, Suite 102
Framingham, MA 01701
(Address of principal executive offices and zip code)
781-778-7720
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Common Stock, $0.001 par value per share
Purchase Warrants
Trading Symbol(s)
XBIO
XBIOW
Name of each exchange on which registered
The NASDAQ Capital Market
The NASDAQ Capital Market
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act: Yes ☐ No ☒
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act: Yes ☐ No ☒
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12
months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§
232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files): Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth
company. See the definitions of “large accelerated filer,” “accelerated filer” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
(Check one):
Large accelerated filer
Non-accelerated filer
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☒
Accelerated filer
Smaller reporting company
Emerging growth company
☐
☒
☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial
accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial
reporting under Section 404(b) of the Sarbanes-Oxley Act by the registered public accounting firm that prepared or issued its audit report. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2): Yes ¨ No x
The aggregate market value of the voting and non-voting common stock held by non-affiliates of the registrant as of June 30, 2020, the last business day of the registrant’s most
recently completely second fiscal quarter, based upon the closing price of the registrant’s common stock on the NASDAQ Capital Market on that date of $1.02, was
approximately $6,136,160. For purposes of this computation, all officers, directors, and 10% beneficial owners of the registrant are deemed to be affiliates. Such determination
should not be deemed to be an admission that such officers, directors or 10% beneficial owners are, in fact, affiliates of the registrant.
As of March 11, 2021, the number of outstanding shares of the registrant’s Common Stock was 8,746,692.
DOCUMENTS INCORPORATED BY REFERENCE
Information required in response to Part III of Form 10-K (Items 10, 11, 12, 13 and 14) is hereby incorporated by reference to portions of the registrant's definitive proxy
statement, information statement or an amendment to this Annual Report on Form 10-K for its 2021 Annual Meeting of Stockholders. The registrant intends to file a definitive
proxy statement, information statement or an amendment to this Annual Report on Form 10-K with the Securities and Exchange Commission no later than 120 days after the
end of the registrant's fiscal year ended December 31, 2020.
XENETIC BIOSCIENCES, INC.
2020 ANNUAL REPORT ON FORM 10-K
TABLE CONTENTS
PART I
Item 1
Business
Item 1A
Risk Factors
Item 1B
Unresolved Staff Comments
Item 2
Properties
Item 3
Legal Proceedings
Item 4
Mine Safety Disclosures
PART II
Item 5
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Item 6
Selected Financial Data
Item 7
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 7A
Quantitative and Qualitative Disclosures About Market Risk
Item 8
Financial Statements and Supplementary Data
Item 9
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A
Controls and Procedures
Item 9B
Other Information
PART III
Item 10
Directors, Executive Officers and Corporate Governance
Item 11
Executive Compensation
Item 12
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Item 13
Certain Relationships and Related Transactions, and Director Independence
Item 14
Principal Accounting Fees and Services
PART IV
Item 15
Exhibits and Financial Statement Schedules
Item 16
Form 10-K Summary
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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K (“Annual 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 Annual Report other than statements of
historical fact, including statements regarding our future results of operations and financial position, our business strategy and plans, future revenues, projected costs, prospects
and our objectives for future operations, are forward-looking statements. These forward-looking statements include, but are not limited to, statements concerning the anticipated
effects and duration of the novel coronavirus, or COVID-19, global pandemic and the responses thereto, including the pandemic’s impact on general economic and market
conditions, as well as on our business, results of operations and financial condition; our plans to develop our proposed drug candidates; our expectations regarding the nature,
timing and extent of clinical trials and proposed clinical trials including the timing of generating clinical data from these trials; our expectations regarding the timing for
proposed submissions of regulatory filings, including but not limited to any Investigational New Drug (“IND”) filing or any New Drug Application (“NDA”); 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, and the
likelihood and extent of competition to our drug candidates; the development of the XCART™ CAR T (“Chimeric Antigen Receptor T Cell”) technology; our plans to apply the
XCART technology to advance cell-based therapeutics by targeting the unique B cell receptor on the surface of an individual patient’s malignant tumor cells for the treatment
of B-cell lymphomas; our beliefs regarding the expected results of the XCART technology, including its potential to significantly enhance the safety and efficacy of cell therapy
for B-cell lymphomas by generating patient- and tumor-specific CAR T cells; and our anticipation that our primary focus will now be on advancing the XCART technology
regulatory approval and commercialization technology.
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.
Some factors that could cause actual results to differ materially include without limitation:
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our need to raise additional working capital in the future for the purpose of further developing our XCART technology 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, including integration of the acquisition of the XCART technology;
product development and commercialization risks, including our ability to successfully develop the XCART technology;
the impact of adverse safety outcomes and clinical trial results for CAR T cell therapies;
our ability to secure and maintain a manufacturer for the XCART technology;
our ability to successfully commercialize our current and future drug candidates;
our ability to achieve milestone and other payments associated with our current and future co-development collaborations and strategic arrangements;
the impact of new technologies on our drug candidates and our competition;
changes in laws or regulations of governmental agencies;
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interruptions or cancellation of existing contracts;
impact of competitive products and pricing;
product demand and market acceptance and risks;
the presence of competitors with greater financial resources;
continued availability of supplies or materials used in manufacturing at the current prices;
the ability of management to execute plans and motivate personnel in the execution of those plans;
our ability to attract and retain key personnel;
adverse publicity related to our products or the Company itself;
adverse claims relating to our intellectual property;
the adoption of new, or changes in, accounting principles;
the costs inherent with complying with statutes and regulations applicable to public reporting companies, such as the Sarbanes-Oxley Act of 2002;
other new lines of business that the Company may enter in the future;
general economic and business conditions, as well as inflationary trends;
the impact of natural disasters or public health emergencies, such as the COVID-19 global pandemic, 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 Annual 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 Annual Report are made only as of the date of this Annual 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.
As used in this Annual Report, unless otherwise indicated, all references herein to “Xenetic,” the “Company,” “we” or “us” refer to Xenetic Biosciences, Inc. and its
wholly-owned subsidiaries.
Our brand and product names, including but not limited to XCART™, OncoHist™, PolyXen®, ErepoXen™ and ImuXen™ contained in this Annual Report are
trademarks, registered trademarks or service marks of Xenetic Biosciences, Inc. and/or its subsidiaries in the United States of America (“USA” or “U.S.”) and certain other
countries. All other company and product names may be trademarks of the respective companies with which they are associated.
Summary Risk Factors
Our business is subject to numerous risks. In addition to the summary below, you should carefully review the “Risk Factors” section of this Annual Report on Form 10-K. We
may be subject to additional risks and uncertainties not presently known to us or that we currently deem immaterial. These risks should be read in conjunction with the other
information in this Annual Report on Form 10-K. Some of the principal risks relating to our business include:
· We have never been profitable and may never achieve or sustain profitability. If we are unable to generate sufficient revenue from our operations to pay expenses or
we are unable to obtain additional financing on commercially reasonable terms, our business, financial condition and results of operations may be materially and
adversely affected.
· We will require substantial additional funding to achieve our goals. Failure to obtain this necessary capital when needed on acceptable terms, or at all, may force us to
delay, limit or terminate our product development efforts, other operations or commercialization efforts.
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Raising additional capital may cause dilution to our stockholders, restrict our operations or require us to relinquish rights to our technologies or drug candidates.
Our business is substantially dependent on the success of XCART.
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· We are an early stage company in the business of developing pharmaceutical products including drug candidates and technologies. Given the uncertainty of such
development, our business operations may never fully materialize and create value for investors.
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· We may find it difficult to enroll patients in our clinical studies, which could delay or prevent clinical studies of our pharmaceutical products.
· We may encounter substantial delays in commencement, enrollment or completion of our clinical trials or we may fail to demonstrate safety and efficacy to the
satisfaction of applicable regulatory authorities, which could prevent us from commercializing our current and future drug candidates on a timely basis, if at all.
If we complete the necessary preclinical and clinical studies, we cannot predict when or if we will obtain regulatory approval to commercialize a drug candidate or the
approval may be for a more narrow indication than we expect.
If we obtain regulatory approval for a drug candidate, our drug candidate will remain subject to regulatory scrutiny.
The commercial success of any current or future pharmaceutical products will depend upon the degree of market acceptance by physicians, patients, third-party payors
and others in the medical community.
The commercial potential of a pharmaceutical candidate in development is difficult to predict. If the market size for a new drug candidate or technology is significantly
smaller than we anticipate, it could significantly and negatively impact our revenue, results of operations and financial condition.
Failure to obtain or maintain adequate coverage and reimbursement for our drug candidates, if approved, could limit our ability to market those products and decrease
our ability to generate revenue.
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· We may use our financial and human resources to pursue a particular research program or drug candidate and fail to capitalize on programs or drug candidates that
may be more profitable or for which there is a greater likelihood of success.
· We may not be successful in our efforts to identify or discover additional pharmaceutical products.
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The market opportunities for our drug candidates may be limited to those patients who are ineligible for or have failed prior treatments and may be small.
If conflicts arise between us and our collaborators or strategic partners, these parties may act in their self-interest, which may limit our ability to implement our
strategies.
· We expect to rely on third-parties to conduct, supervise and monitor our clinical studies, and if these third-parties perform in an unsatisfactory manner, it may harm our
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business.
Our collaborators or strategic partners may decide to adopt alternative technologies or may be unable to develop commercially viable products with our technology,
which would negatively impact our revenues and our strategy to develop these products.
· We may seek to establish additional collaborations and, if we are not able to establish them on commercially reasonable terms, we may have to alter our development
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and commercialization plans.
If we enter into one or more collaborations, we may be required to relinquish important rights to and control over the development of our drug candidates or otherwise
be subject to unfavorable terms.
· We have no manufacturing, sales, marketing or distribution capabilities, and we may have to invest a significant amount of resources to develop these capabilities.
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Our reliance on third-parties requires us to share our trade secrets, which increases the possibility that a competitor will discover them or that our trade secrets will be
misappropriated or disclosed.
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If we fail to adequately protect or enforce our intellectual property rights, we may be unable to operate effectively.
Issued patents covering our drug candidates could be found invalid or unenforceable if challenged in court.
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· We may not be able to protect our intellectual property rights throughout the world.
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If we infringe on the intellectual property rights of others, our business and profitability may be adversely affected.
If we fail to comply with our obligations in the agreements under which we license intellectual property rights from third-parties or otherwise experience disruptions to
our business relationships with our licensors, we could lose license rights that are important to our business.
· We may be subject to claims that our employees, consultants or independent contractors have wrongfully used or disclosed confidential information of third-parties or
that our employees have wrongfully used or disclosed alleged trade secrets of their former employers.
Our inability to protect our confidential information and trade secrets would harm our business and competitive position.
· We may be subject to claims challenging the inventorship or ownership of our patents and other intellectual property.
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· We operate in an extremely competitive environment and there can be no assurances that competing technologies would not harm our business development.
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Our future success depends on our ability to retain principal members of our executive team, consultants and advisors and to attract, retain and motivate qualified
personnel.
· We will need to expand our organization and we may experience difficulties in managing this growth, which could disrupt our operations.
· We are a party to collaboration agreements and other significant agreements which contain complex commercial terms that could result in disputes, litigation or
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indemnification liability that could adversely affect our business, results of operations and financial condition.
An active, liquid and orderly market for our Common Stock or Purchase Warrants may not develop.
The market price of our securities may be highly volatile, and you may not be able to sell our securities.
Our preferred stock has rights, preferences and privileges that are not held by, and are preferential to, the rights of our common stockholders, which could result in the
interests of the holders of our preferred stock differing from those of our common stockholders.
· We have, in the past, failed to satisfy certain continued listing requirements on Nasdaq and could fail to satisfy those requirements again in the future which could
affect the market price of our Common Stock and liquidity and reduce our ability to raise capital.
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ITEM 1 – BUSINESS
Overview
PART I
We are a biopharmaceutical company focused on progressing XCART, a personalized CAR T platform technology engineered to target patient- and tumor-specific neoantigens.
We are initially advancing cell-based therapeutics targeting the unique B-cell receptor on the surface of an individual patient’s malignant tumor cells, for the treatment of B-cell
lymphomas. XCART has the potential to fuel a robust pipeline of the therapeutic assets targeting high-value oncology indications. The XCART technology, developed by the
Scripps Research Institute (the “Scripps Research”) in collaboration with the Shemyakin-Ovchinnikov Institute of Bioorganic Chemistry (“IBCH”), is believed to have the
potential to significantly enhance the safety and efficacy of cell therapy for B-cell lymphomas by generating patient- and tumor-specific CAR T cells. We are currently
advancing XCART preclinical efforts through strategic collaborations with Scripps Research and PJSC Pharmsynthez (“Pharmsynthez”).
More than 70,000 new cases of non-Hodgkin Lymphoma (“NHL”) are diagnosed each year in the United States, and more than 19,000 patients die of this group of diseases
annually. Most forms of NHL, including follicular lymphoma, mantle cell lymphoma, marginal zone lymphoma, lymphoplasmacytic lymphoma, and small lymphocytic
lymphoma, which account collectively for ~45% of all cases of NHL, are incurable with available therapies, except for allogeneic stem cell therapy (“allo-SCT”). However,
many NHL patients are not suitable candidates for allo-SCT, and this treatment is also limited by significant rates of morbidity and mortality due to graft versus host disease.
Aggressive B-cell lymphomas such as diffuse large B-cell lymphoma account for 30-35% of NHL. The majority of patients with aggressive B-NHL are successfully treated
with combination chemotherapy, but a significant portion relapse or have refractory disease, and the outcome of these patients is poor.
CAR T cell therapies are an innovative approach in which a patient’s T cells are genetically modified to carry chimeric antigen receptors (“CARs”). High objective response
rates have been reported in some hematological malignancies, but patients treated with CAR T cell therapies can have serious and sometimes fatal toxicities, which include
instances in which the CAR T cells have caused high levels of cytokines due to over-activation, referred to as “cytokine release syndrome,” or CRS, neurologic toxicities and
cases in which CAR T cells have attacked healthy organs. In each case, these toxicities have sometimes resulted in death. Hematopoietic Stem Cell Transplant (“HSCT”), also
known as bone marrow transplantation, has for decades been curative for many patients with hematological cancers or orphan inherited blood disorders. However, adoption of
HSCT to date has been limited by the risks of transplant-related morbidity and mortality from graft-versus-host-disease, or GvHD, and the potential for serious infections or
cancer recurrence due to the lack of an effective immune system following a transplant.
The XCART technology platform was designed by its originators to utilize an established screening technique to identify peptide ligands that bind specifically to the unique B-
cell receptor (“BCR”) on the surface of an individual patient’s malignant tumor cells. The peptide is then inserted into the antigen-binding domain of a CAR T cell, and a
subsequent transduction/transfection process is used to engineer the patient’s T cells into a CAR T format which redirects the patient’s T cells to attack the tumor. Essentially,
the XCART screening platform is the inverse of a typical CAR T screening protocol wherein libraries of highly specific antibody domains are screened against a given target.
In the case of XCART screening, the target is itself an antibody domain, and hence highly specific by its nature. The XCART technology creates the possibility of personalized
treatment of lymphomas utilizing a CAR with an antigen-binding domain that should only recognize, and only be recognized by, the unique BCR of a particular patient’s B-cell
lymphoma. An expected result for XCART is limited off-tumor toxicities, such as B-cell aplasia. Our clinical development program will seek to confirm the early preclinical
results, and to demonstrate a more attractive safety profile than existing therapies. We anticipate that our primary focus will now be on advancing this technology through
regulatory approval and commercialization.
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Additionally, we are leveraging our proprietary drug delivery platform, PolyXen, by partnering with biotechnology and pharmaceutical companies. PolyXen is an enabling
platform technology which can be applied to protein or peptide therapeutics. It employs the natural polymer polysialic acid to prolong a drug's circulating half-life and
potentially improve other pharmacological properties.
We incorporate our patented and proprietary technologies into a number of drug candidates currently under development with biotechnology and pharmaceutical industry
collaborators with the goal of creating what we believe will be the next-generation biologic drugs with improved pharmacological properties over existing therapeutics. Our
drug candidates have resulted from our research activities or that of our collaborators and are in the development stage. As a result, we continue to commit a significant amount
of our resources to our research and development activities and anticipate continuing to do so for the near future. To date, none of our drug candidates have received regulatory
marketing authorization in the U.S. by the Food and Drug Administration (“FDA”) nor in any other territories by any applicable agencies. We are receiving ongoing royalties
pursuant to a license of our PolyXen technology to an industry partner.
We also have oncology therapeutic investigational drug candidate XBIO-101 (sodium cridanimod) for the treatment of progestin resistant endometrial cancer. We commenced a
Phase 2 trial under an IND in 2017 for the potential treatment of progesterone receptor negative endometrial cancer in conjunction with progesterone therapy, with the first
patient dosed in October 2017. We closed patient enrollment in the trial in March 2019 as a result of slower than expected progress on the trial resulting from patient enrollment
and retention challenges and have suspended further development of XBIO-101. We currently have no plans to continue development of XBIO-101.
Although we hold a broad patent portfolio, the focus of our internal development efforts in 2020 was limited to winding down the XBIO-101 Phase 2 trial and preliminary
development efforts associated with the XCART technology.
We were incorporated under the laws of the State of Nevada in August 2011. We, directly or indirectly, through our wholly-owned subsidiaries, Hesperix S.A. (“Hesperix”) and
Xenetic Biosciences (U.K.) Limited (“Xenetic U.K.”), and its wholly-owned subsidiaries, Lipoxen Technologies Limited (“Lipoxen”), Xenetic Bioscience, Incorporated
(“XTI”) and SymbioTec, GmbH (“SymbioTec”), own various U.S. federal trademark registrations and applications, and unregistered trademarks and service marks, including
but not limited to XCART, OncoHist, PolyXen, ErepoXen and ImuXen.
Our Strategy
In July 2019 we acquired the XCART platform, a novel CAR T technology engineered to target patient- and tumor-specific neoantigens (see “Our Technology and Drug
Candidates” for a description of the technology). We believe these personalized T cell therapies have the potential to offer cancer patients substantial benefits over the existing
standard of care and currently approved CAR T therapies. We plan to initially apply the XCART technology to develop cell-based therapeutics for the treatment of B-cell
Lymphomas with our primary focus to advance this technology through regulatory approval and commercialization. We also intend to pursue industry collaborations and
potential licenses to develop XCART for other uses and indications.
We plan to opportunistically advance our PolyXen platform technology by entering into collaborative out-license arrangements with pharmaceutical companies who could
apply the necessary resources for advancing drug candidates through to commercialization. These arrangements would provide support to us in the form of access to partner-
generated clinical data, which is informative when contemplating potential monetization of our proprietary technology in other markets. One aim of these efforts would be to
drive incremental shareholder value and generate working capital to assist in providing the funding required to support our XCART development efforts.
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We intend to pursue orphan drug designations and accelerated approval pathways for relevant oncology indications as appropriate in both the U.S. and Europe. If our orphan
oncology drug candidates are granted orphan drug designation, then we may benefit from certain key advantages of orphan status including certain market exclusivities.
We intend to advance development of our drug candidates primarily through the use of contract manufacturing and contract research organizations (“CROs”) in order to
efficiently manage our resources. Continuous pipeline growth and advancement of out-licensed drug candidates is dependent, in part, on our ability to raise sufficient capital
and to advance our existing co-development collaborations and strategic arrangements as well as enter into new such arrangements.
Business Developments
XCART Technology
On May 15, 2020, we entered into a Research Funding and Option Agreement with Scripps Research (the “Scripps Agreement”), pursuant to which we have 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 is payable by us to
Scripps Research on a quarterly basis in accordance with a negotiated budget, which provides 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 has granted us 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, we have 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.
On June 12, 2020, we entered into a Master Services Agreement with Pharmsynthez (“MSA”) to advance the development of our XCART technology for B-cell malignancies.
Under the 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 our primary contract research organization to assist in managing collaborations with multiple academic institutions in Russia and Belarus. We are 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 provides for milestone payments, we are 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 our sole discretion, in cash or shares of our
common stock, par value $0.001 (the “Common Stock”).
We executed a work order with Pharmsynthez on June 12, 2020 (the “Work Order”) under the MSA pursuant to which Pharmsynthez agreed to conduct a Stage 1 study of our
XCART technology under the research program as set forth in the Work Order. The activities to be performed under the Work Order are expected to take approximately 20
months unless earlier terminated in accordance with the MSA. Under the terms of the Work Order, we paid Pharmsynthez $51,000 as an initial payment for trial startup costs,
which amount was credited against the amounts paid under the Sponsored Research Agreement entered into with Pharmsynthez in the third quarter of 2019 (the “SRA”). The
Work Order provides for additional pass-through costs to be invoiced by Pharmsynthez upon execution of contracts with third party sites, which will be further credited against
the SRA. The total cost under the Work Order is currently estimated to be approximately $1.8 million. Additionally, the Work Order provides for milestone payments of up to
an aggregate of $1,050,000, or, in our sole discretion, up to an aggregate of 1,000,000 shares of our Common Stock, to be paid or issued, as applicable, by us upon achievement
of milestones associated with completion of early stages of the research program as set forth in the Work Order.
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Increase in Authorized Shares
On December 4, 2020, our shareholders voted to approve an amendment to our Articles of Incorporation to increase the authorized shares of Common Stock to 50,000,000
shares (the “Authorized Share Increase”). We 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 4, 2020.
Registered Direct Offering
On December 10, 2020, we entered into a Securities Purchase Agreement with certain institutional and accredited investors named therein, pursuant to which we agreed to issue
and sell, in a registered direct offering, 2,448,980 shares of our Common Stock, par value $0.001 per share, at an offering price of $2.45 per share. The offering resulted in
gross proceeds of approximately $6.0 million before deducting the placement agent’s fees and related offering expenses. The shares were offered by us pursuant to a prospectus
supplement to our effective shelf registration statement on Form S-3 (Registration No. 333-227572), which was initially filed with the Securities and Exchange Commission
(“SEC”) on September 27, 2018, and was declared effective on October 12, 2018. The offering closed on December 14, 2020.
Our Technology and Drug Candidates
The Technologies
We incorporate our patented and proprietary technologies into a number of drug candidates which are currently under development internally or with our biotechnology and
pharmaceutical collaborators, with the goal of creating what we believe will be the next generation of biologic drugs and therapeutics. While we primarily focus on researching
and developing oncology drugs, we also have ownership and other economic interests in drugs being developed by our collaborators to treat other conditions. Our patent
portfolio spans five core proprietary technologies including three platforms, small molecules and biologics covering multiple drug candidates and indications including
XCART, XBIO-101, PolyXen, OncoHist and ImuXen.
During the year ended December 31, 2020, the focus of our internal development efforts was limited to winding down the XBIO-101 Phase 2 trial and preliminary development
efforts associated with the XCART technology. We have not been actively pursuing development efforts for PolyXen, OncoHist and ImuXen and impaired our In-Process
Research and Development asset, OncoHist, in 2020. As a result, we anticipate that the focus of our future internal development efforts will be limited to research and
development of our XCART technology.
XCART
The XCART technology platform was designed by its originators to utilize an established screening technique to identify peptide ligands that bind
specifically to the unique BCR on the surface of an individual patient’s malignant tumor cells. The peptide is then inserted into the antigen-binding
domain of a CAR T cell, and a subsequent transduction/transfection process is used to engineer the patient’s T cells into a CAR T format which
redirects the patient’s T cells to attack the tumor. Essentially, the XCART screening platform is the inverse of a typical CAR T screening protocol
wherein libraries of highly specific antibody domains are screened against a given target. In the case of XCART screening, the target is itself an
antibody domain, and hence highly specific by its nature. The XCART technology creates the possibility of personalized treatment of lymphomas
utilizing a CAR with an antigen-binding domain that should only recognize, and only be recognized by, the unique BCR of a particular patient’s B-
cell lymphoma. An expected result for XCART is limited off-tumor toxicities, such as B-cell aplasia. Our clinical development program will seek to
confirm the early preclinical results, and to demonstrate a more attractive safety profile than existing therapies to support our preliminary discussions
with the FDA in advance of an IND filing.
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PolyXen
OncoHist
ImuXen
An enabling biological platform technology designed to extend the circulation time of drug molecules in the human body by chemically attaching
polysialic acid, or PSA, to the drug molecule by a process termed polysialylation, thereby creating potentially superior next generation therapeutic
candidates. PSA, a biopolymer, comprising a chain of sialic acid molecules, is a natural constituent of the human body, although we obtain our PSA
from a bacterial source.
A novel therapeutic platform technology that utilizes the properties of modified human histone H1.3 for targeted cell apoptosis (programmed cell
death), which may enable OncoHist to treat a broad range of cancer indications. OncoHist, unlike many competing oncology therapies, is based on a
molecule occurring naturally in the human body, primarily in the cell nucleus, and is therefore hypothesized to be better tolerated and less
immunogenic than other oncology therapies.
A novel liposomal co-entrapment encapsulation technology designed to maximize both cell and immune system mediated responses. The technology
is based on the co-entrapment of the nominated antigen(s) in a liposomal vesicle. The technology when applied may create new vaccines and
improve the use and efficacy of certain existing human vaccines.
Research, Outside Services and Collaborations
Through partner efforts, we are developing our pipeline of next-generation bio-therapeutics and novel oncology drugs based on our XCART and PolyXen proprietary
technologies. In order to do this while efficiently managing our overhead, we rely on the services of contract manufacturers and CROs and our strategic collaborations. We
currently do not have in-house research facilities to pursue these initiatives. Accordingly, continuous pipeline growth and advancement of our technologies and drug candidates
is dependent on several important collaborations and strategic arrangements including our arrangements with:
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Pharmsynthez, including its wholly-owned subsidiary SynBio LLC (“SynBio”), a beneficial owner of approximately 5.1% of our Common Stock;
Serum Institute of India Limited (“Serum Institute”), one of the world’s largest vaccine manufacturers and one of India’s largest biotech companies; and
Takeda Pharmaceuticals Co. Ltd (together with its wholly owned subsidiaries, “Takeda”), a global biopharmaceutical leader.
Accordingly, in addition to pursuing our development of the XCART technology, we also have significant interests in drug candidates being developed by our collaborators to
treat other conditions. We may collect some combination of milestone payments and royalties pursuant to these collaborations to the extent that these drugs are successfully
developed and marketed. However, other than royalty payments under a sublicense with Takeda and potential royalty payments from SynBio under our collaboration
agreement, we do not anticipate any milestone or royalty payments in the near term, if at all. For further detail, please read the section titled “Significant Collaborations and
Strategic Arrangements” below.
Our Drug Candidate Pipeline
Our product pipeline contains a number of drug candidates under development internally and with our biotechnology and pharmaceutical collaborators. The following
discussion summarizes key information regarding our current drug candidates, organized by our internal programs and our collaborators’ programs:
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XCART
XCART is a personalized CAR T cell platform technology engineered to target patient-specific tumor neoantigens. We believe XCART has the potential to offer cancer patients
substantial benefits over the existing standard of care and currently approved CAR T therapies including enhanced safety and efficacy of cell therapy for B-cell lymphomas. We
are initially advancing cell-based therapeutics targeting the unique B-cell receptor on the surface of an individual patient’s malignant tumor cells, for the treatment of B-cell
lymphomas.
The XCART platform was designed to target personalized, patient-specific tumor neoantigens and has demonstrated proof of mechanism in B-cell lymphoma, an area of
significant unmet medical need. The acquisition of XCART fits with our current strategy of focusing on research addressing unmet needs in oncology. Our R&D efforts will
focus initially on leveraging the XCART platform to develop cell-based therapeutics for the treatment of B-cell Non-Hodgkin lymphomas, an initial global market opportunity
estimated to exceed $5 billion per year.
ErepoXen
ErepoXen, or polysialylated erythropoietin (“PSA-EPO”), uses our PolyXen platform technology for the treatment of anemia in chronic kidney disease (“CKD”) patients. It is
designed to reduce the dosing frequency by extending the circulating half-life of the therapeutic in the body. We are not pursuing clinical development of ErepoXen but
continue to entertain out-license opportunities for the drug candidate in our licensed territories.
We have collaboration agreements with SynBio and Serum Institute to develop and launch ErepoXen in limited markets pursuant to which we will collect royalties if they are
successful in these efforts.
SynBio received regulatory approval and commenced a Phase II(b)/III human clinical trial of ErepoXen (also known as Epolong) in Russia with patient recruitment completed
in 2020. In December 2020, Pharmsynthez reported positive data from this clinical trial and filed a registration dossier to obtain approval of Epolong in Russia. In February
2021, Pharmsynthez reported in a press release that it expects that the Russian stage of registration activities will be completed in 2021 and that it will be able to start
production of the product as early as the first quarter of 2022.
Serum Institute conducted Phase I and Phase II clinical trials of ErepoXen in 95 human subjects. These safety trials, which had no significant drug-related adverse events,
provided us with the data to commence a Phase II, repeat dosing, International Conference on Harmonisation of Technical Requirements for Pharmaceuticals for Human Use
compliant clinical trial for ErepoXen in Australia, New Zealand and South Africa for CKD patients not on dialysis. We completed three cohorts of this study and then
terminated the study.
In addition, Serum Institute finished Phase I/II clinical trials in India of ErepoXen for in-center-dialysis patients. Serum Institute may seek to leverage SynBio’s trial data and
potential Russian marketing authorization to request a waiver for a Phase III clinical trial in India, subject to local regulatory authority approval.
Pipeline Expansion Opportunities
Operating under licenses from us within their home markets, our collaborators can potentially generate preclinical and clinical data related to our technologies across a wide
spectrum of therapeutic areas. Under these agreements, we retain all rights for major markets and co-own the clinical data. We therefore have the opportunity to utilize the data
in our decision-making process regarding development and commercialization in major markets. We expect to be able to utilize the results from substantially all of the clinical
toxicity data and other clinical data generated in the development of PolyXen for a variety of orphan oncology indications and next generation biologic drugs.
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Significant Collaborations and Strategic Arrangements
Takeda
We are a party to an exclusive research, development and license agreement with Takeda, related to the development of a novel series of polysialylated blood coagulation
factors. This collaboration with Takeda relies on our PolyXen technology to conjugate PSA to therapeutic blood-clotting factors, with the goal of improving the
pharmacokinetic profile and extending the active half-life of these biologic molecules. The agreement grants Takeda a worldwide, exclusive, royalty-bearing license to our PSA
patented and proprietary technology in combination with Takeda’s proprietary molecules designed for the treatment of blood and bleeding disorders. The first program under
this agreement was a next generation Factor VIII protein product candidate (“SHP656”).
In May 2017, we announced that Takeda had terminated further development of SHP656, its polysialylated rFVIII drug candidate for the treatment of hemophilia, being
developed using our proprietary PolyXen technology. While Takeda’s Phase I/II trial demonstrated SHP656’s efficacy and pharmacokinetic data commensurate with the profile
of an extended half-life rFVIII product, the pre-defined once-weekly dosing criterion set forth in the research, development, license and supply agreement was not met. Based
on Takeda’s published research, there were no treatment-emergent adverse events reported. Though the trial’s pre-defined once-weekly dosing criterion was not met, we
continue to explore the potential for future collaborations with Takeda and Takeda has commenced a new, undisclosed internal project under the agreement.
In October 2017, we entered into a Right of Sublicense Agreement (the “Sublicense Agreement”) with Takeda that granted to Takeda the right to grant a nonexclusive
sublicense to certain patents related to our PolyXen technology that were previously exclusively licensed to Takeda in connection with products related to the treatment of
blood and bleeding disorders (“Covered Products”). Pursuant to the Sublicense Agreement, Takeda (i) paid us a one-time payment of seven million five hundred thousand
dollars ($7,500,000) in November 2017 and (ii) agreed to pay us single digit royalty payments based upon net sales of the Covered Products throughout the term. Royalty
payments on net sales of the Covered Products commenced in late 2019.
SynBio LLC
In August 2011, we entered into a stock subscription and collaborative development agreement with SynBio (the “Co-Development Agreement”), pursuant to which we granted
SynBio an exclusive license to develop, market and commercialize certain drug candidates utilizing molecules based on SynBio’s technology and our PolyXen, OncoHist and
ImuXen platform technologies in Russia and the CIS, collectively referred to herein as the SynBio Market. In exchange for our granting to SynBio those certain license rights,
SynBio granted an exclusive license to us to use any preclinical and clinical data generated by SynBio and to engage in the development and commercialization of drug
candidates that may arise from the collaboration in any territory outside of the SynBio Market based upon the Co-Development Agreement.
We hope and expect to mitigate certain technical and commercial risks of drug development by working in collaboration with SynBio. Under the Co-Development Agreement,
SynBio is responsible for progressing six new product candidates through human proof of concept trials in Russia as primary validation for the initiation of European
Medicines Agency (“EMA”) or FDA clinical trials by us.
The primary goal of the Co-Development Agreement is to research and develop drug candidates for planned commercialization using SynBio and our combined respective
expertise and technologies. Drug candidates must meet the success criteria as decided upon by a joint steering committee, which includes representation from both SynBio and
us, where we have the right to appoint the chair who has the casting vote. Once a potential drug candidate is selected, clinical trials will be separately conducted by each
company in their respective territories with the goal to achieve regulatory approval of the products for commercial sale.
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SynBio is wholly responsible for funding and conducting their own research and clinical development activities in Russia, and we are wholly responsible for funding and
conducting our own research and clinical development activities in the U.S., Europe and elsewhere outside the SynBio Market. There are no milestones or other research-
related payments provided for under the Co-Development Agreement other than fees for the provision of each party’s respective research supplies based on their technology.
Upon successful commercialization of any resultant products, we are entitled to receive low double digit royalties 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. For the years ended December 31, 2020 and 2019, there were no supply service
revenues in connection with the Co-Development Agreement. The Co-Development Agreement continues until it is terminated in accordance with the terms and conditions set
forth therein. SynBio is a wholly-owned subsidiary of Pharmsynthez and all ownership percentages held by SynBio are combined with Pharmsynthez.
PJSC Pharmsynthez
In November 2009, we entered into a collaborative research and development license agreement with Pharmsynthez (the “Pharmsynthez Arrangement”) pursuant to which we
granted an exclusive license to Pharmsynthez to develop, commercialize and market six drug candidates based on our PolyXen and ImuXen technology anywhere within Russia
and the CIS, as well as certain clinical and research data developed by us on the six product candidates. In exchange, Pharmsynthez granted us an exclusive license 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 in any territory outside of Russia and the CIS at our own expense.
We expect to mitigate certain risks of drug development by reviewing human clinical data arising out of this collaboration with Pharmsynthez before we take a particular drug
candidate into FDA and EMA trials. Under the Pharmsynthez Arrangement, Pharmsynthez is responsible for progressing six new drug candidates through human proof of
concept trials in Russia as primary validation prior to the initiation of EMA/FDA clinical trials by us outside of Russia. A joint steering committee, where we have the right to
appoint the chair who has the casting vote, was established to facilitate the communication of scientific data and to assist generally with each party’s research decisions and to
monitor research and development progress under the Pharmsynthez Arrangement.
Pharmsynthez is wholly responsible for funding and conducting its own research and clinical development activities in Russia. We are wholly responsible for funding and
conducting our own research and clinical development activities in the U.S., Europe and the rest of the world outside of Russia and the ex-CIS regions. There are no milestones
or other research related payments provided for under the Pharmsynthez Arrangement other than royalties. The Pharmsynthez Arrangement shall continue until it is terminated
in accordance with the terms and conditions set forth therein.
Pharmsynthez directly, and indirectly through SynBio, has a share ownership in us of approximately 5.1% of the total outstanding Common Stock as of December 31, 2020. In
addition to its Common Stock ownership, Pharmsynthez holds outstanding warrants to purchase our Common Stock, 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.
During the third quarter of 2019, we entered into the SRA with Pharmsynthez related to experiments identified by us to support our efforts for the initial tech transfer of the
XCART methods to a future academic collaborator. On June 12, 2020, we entered into the MSA and Work Order with Pharmsynthez to advance the development of our
XCART technology for B-cell malignancies. The MSA terminated and superseded the SRA. For further detail, please read the section titled “Recent Developments” above.
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During the fourth quarter of 2019, we entered into a loan agreement with Pharmsynthez (the “Pharmsynthez Loan”), pursuant to which we advanced Pharmsynthez an
aggregate principal amount of up to $500,000 to be used for the development of a specific product under the Co-Development Agreement. 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 equity interests of the Company owned by Pharmsynthez and SynBio. Effective January 23, 2021, we 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 call 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 installments from January 31, 2021 through June 30, 2021. In
addition, the Pharmsynthez Loan Extension requires monthly interest payments and the repayment of the remaining principal amount in six (6) equal monthly installments from
July 2021 through January 2022. All other terms of the Pharmsynthez Loan remain in effect.
Serum Institute
In August 2011, we entered into a collaborative research and development agreement with Serum Institute (the “Serum Agreement”) providing Serum Institute an exclusive
license to use our PolyXen technology to research and develop one potential commercial product, PSA-EPO. Serum Institute is responsible for conducting all preclinical and
clinical trials required to achieve regulatory approvals within certain predetermined territories at Serum Institute’s own expense. Royalty payments are payable by Serum
Institute to us for net sales to certain customers in the Serum Institute sales territory. Royalty payments are payable by us to Serum Institute for net sales received by us over the
term of the license. There are no milestone or other research-related payments due under the collaborative arrangement. The Serum Agreement continues until it is terminated
in accordance with the terms and conditions set forth therein. Through December 31, 2020, we and Serum Institute continued to engage in research and development activities
with no resultant commercial products. No royalty revenue or expense was recognized by us related to the Serum Institute arrangement during the years ended December 31,
2020 and 2019. Serum Institute had a share ownership of less than 1% of our total outstanding Common Stock as of December 31, 2020.
Our Intellectual Property
We strive to protect and enhance the proprietary technology, inventions, and improvements that are commercially important to our business, including seeking, maintaining and
defending patent rights, whether developed internally or licensed from our collaborators or other third-parties. Our policy is to seek to protect our proprietary position by,
among other methods, filing patent applications in the U.S. and in jurisdictions outside of the U.S. covering our proprietary technology, inventions, improvements and product
candidates that are important to the development and implementation of our business. We also rely on trade secrets and know-how relating to our proprietary technology and
product candidates, continuing innovation, and in-licensing opportunities to develop, strengthen and maintain our proprietary position in the field of oncology. We also plan to
rely on data exclusivity, market exclusivity, and patent term extensions when available. Our commercial success will depend in part on our ability to obtain and maintain patent
and other proprietary protection for our technology, inventions, and improvements; to preserve the confidentiality of our trade secrets; to obtain and maintain licenses to use
intellectual property owned by third-parties; to defend and enforce our proprietary rights, including any patents that we may own in the future; and to operate without infringing
on the valid and enforceable patents and other proprietary rights of third-parties.
Our drug candidates are in various stages of development, each protected by patent and pending patent applications in the U.S. with the U.S. Patent and Trademark Office
(“USPTO”) and in certain other developed countries. Our first issued patents begin to expire starting in 2021 with the majority of the existing issued patents expiring between
2025 and 2030.
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Our patent strategy is to file patent applications on innovations and improvements in those jurisdictions that comprise the major pharmaceutical markets in the world or
locations where a pharmaceutical may be manufactured. These jurisdictions include, but are not limited to, the U.S., U.K., Australia, Japan, Canada, South Korea, China, India,
Russia and certain other countries in the European Union (“E.U.”) and Asia, though we do not necessarily file a patent application in each of these jurisdictions for every patent
family.
As of February 3, 2021, we directly or indirectly own, through our wholly-owned subsidiaries, Hesperix and Xenetic U.K., and Xenetic U.K.’s wholly-owned subsidiaries,
Lipoxen, XTI and SymbioTec, more than 170 U.S. and international patents and pending patent applications that cover various aspects of our technologies. We have acquired or
filed patent applications, and plan to file additional patent applications, covering various aspects of our XCART platform technology including all rights throughout the world
in and to patents and patent applications related to “Articles And Methods Directed To Personalized Therapy Of Cancer,” and our PolyXen platform technology covering
polysialylation and advanced polymer conjugate technologies, respectively, as well as our other product candidates. More specifically, our patents and patent applications cover
polymer architecture, drug conjugates, formulations, methods of manufacturing polymers and polymer conjugates and methods of administering polymer conjugates.
We have received patent protection for certain therapeutics that use our PolyXen technology linking the specific therapeutic to a PSA. These include, but are not limited to,
PSA-EPO, PSA-insulin and PSA-insulin like protein, SHP656 (PSA-rFVIII), PSA-DNase I and PSA-granulocyte colony stimulating factor (PSA-GCSF). Further patents cover
methods to prepare proteins that are linked to a PSA. These method patents include those that link a PSA to a protein in a high pH solution as well as patents that use a process
for producing an aldehyde derivative of a sialic acid through the opening and oxidation of a sialic acid unit. For instance, we have patent protection for a PSA linkage that can
be at the N-terminus.
We have received patent protection for the production of PSA and the removal of endotoxin during the purification process. The removal of endotoxin occurs through the
addition of a high pH solution to the PSA and a process to separate a polydisperse ionically charged polysaccharide, such as PSA, into fractions of different average molecular
weight. This is accomplished through the use of a column and elution buffers with different and constant ionic strength and pH, resulting in a fractionated polysaccharide that
has a molecular weight polydispersity of 1.1 or lower.
Issued patents can provide protection for varying periods of time, depending upon the date of filing of the patent application, the date of patent issuance, and the legal term of
patents in the countries in which they are obtained. In general, patents issued for applications filed in the U.S. can provide exclusionary rights for 20 years from the earliest
effective filing date. In addition, in certain instances, the term of an issued U.S. patent that covers or claims an FDA approved product can be extended to recapture a portion of
the term effectively lost as a result of the FDA regulatory review period, which is called patent term extension. The restoration period cannot be longer than five years and the
total patent term, including the restoration period, must not exceed 14 years following FDA approval. The term of patents outside of the U.S. varies in accordance with the laws
of the foreign jurisdiction, but typically is also 20 years from the earliest effective filing date. However, the actual protection afforded by a patent varies on a product-by-
product basis, from country-to-country, and depends upon many factors, including the type of patent, the scope of its coverage, the availability of regulatory-related extensions,
the availability of legal remedies in a particular country, and the validity and enforceability of the patent.
In certain situations, where we work with drugs covered by one or more patents, our ability to develop and commercialize our technologies may be affected by limitations of
our access to these proprietary drugs. Even if we believe we are free to work with a proprietary drug, we cannot guarantee that we will not be accused of, or be determined to
be, infringing on a third-party’s rights and be prohibited from working with the drug or found liable for damages. Any such restriction on access or liability for damages would
have a material adverse effect on our business, results of operations and financial condition.
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The patent positions of pharmaceutical and biotechnology companies, such as ours, are uncertain and involve complex legal and factual issues. There can be no assurance that
patents that have been issued will be held valid and enforceable in a court of law. Even for patents that are held valid and enforceable, the legal process associated with
obtaining such a judgment is time consuming and costly. Additionally, issued patents can be subject to opposition or other proceedings that can result in the revocation of the
patent or maintenance of the patent in amended form (and potentially in a form that renders the patent without commercially relevant and/or broad coverage). Further, our
competitors may be able to circumvent and otherwise design around our patents. Even if a patent is issued and enforceable, because development and commercialization of
pharmaceutical products can be subject to substantial delays, patents may expire early and provide only a short period of protection, if any, following the commercialization of
products encompassed by our patent(s). We may have to participate in interference proceedings declared by the USPTO, which could result in a loss of the patent and/or
substantial cost to us. Further, we understand that if any of our pending patent applications do not issue, or are deemed invalid following issuance, we may lose valuable IP
protection.
U.S. and foreign patent rights and other proprietary rights exist that are owned by third-parties and relate to pharmaceutical compositions and reagents, medical devices and
equipment and methods for preparation, packaging and delivery of pharmaceutical compositions. We cannot predict with any certainty which, if any, of these rights will be
considered relevant to our technology by authorities in the various jurisdictions where such rights exist, nor can we predict with certainty which, if any, of these rights will or
may be asserted against us by third-parties. We could incur substantial costs in defending ourselves and our partners against any such claims. Furthermore, parties making such
claims may be able to obtain injunctive or other equitable relief, which could effectively block our ability to develop or commercialize some or all of our products in the U.S.
and in other countries and could result in the award of substantial damages. In the event of a claim of infringement, we or our partners may be required to obtain one or more
licenses from third-parties. There can be no assurance that we can obtain a license to any technology that we determine we require on reasonable terms, if at all, or that we
could develop or otherwise obtain alternative technology. The failure to obtain licenses, if required, may have a material adverse effect on our business, results of operations
and financial condition. Further, we may not be able to obtain IP licenses related to the development of our drug candidates on a commercially reasonable basis, if at all.
It is our policy to require our employees and consultants, outside scientific collaborators, sponsored researchers and other advisors who receive confidential information from
us to execute confidentiality agreements upon the commencement of employment or consulting relationships with us. These agreements provide that all confidential
information developed or made known to the individual during the course of the individual’s relationship with us is to be kept confidential and not disclosed to third-parties
except in specific circumstances. The agreements provide that all inventions conceived by an employee shall be our property. There can be no assurance, however, that these
agreements will provide meaningful protection or adequate remedies for our trade secrets in the event of unauthorized use or disclosure of such information.
Manufacturing and Supply
We do not have the capability to manufacture our own materials necessary to support our drug candidate development programs nor do we intend to acquire such capability as
part of our present business strategy. We currently have agreements in place with Serum Institute whereby Serum Institute would produce clinical materials for use in the
development of drug candidates involving our PolyXen technology, including candidates developed by our partners. We do not have any agreements in place to manufacture
clinical materials for use in the development of our XCART technology and anticipate seeking a third party manufacturer, including potentially an academic collaborator
pursuant to the Pharmsynthez MSA, for our clinical supply needs.
Government Regulation
General
Government authorities in the U.S., at the federal, state and local level, and other countries extensively regulate, among other things, the research, development, testing,
manufacture, quality control, approval, labeling, packaging, storage, record-keeping, promotion, advertising, distribution, marketing and export and import of products such as
those we are developing. Generally, a new drug must be approved by the FDA through the NDA process and a new biologic must be licensed by the FDA through the biologics
license application (“BLA”) process before it may be legally marketed in the U.S.
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U.S. Regulation
Drug Development Process
In the U.S., the FDA regulates drugs under the Federal Food, Drug, and Cosmetic Act (“FDCA”), and in the case of biologics, also under the Public Health Service Act, and
their implementing regulations. The process of obtaining regulatory approvals and the subsequent compliance with appropriate federal, state, local and foreign statutes and
regulations require the expenditure of substantial time and financial resources. Failure to comply with the applicable U.S. requirements at any time during the product
development process, approval process or after approval may subject an applicant to administrative or judicial sanctions. These sanctions could include the FDA’s refusal to
approve pending applications, withdrawal of an approval, license revocation, a clinical hold, warning letters or untitled letters, product recalls, product seizures, total or partial
suspension of production or distribution, injunctions, fines, refusals of government contracts, restitution, disgorgement or civil or criminal penalties. Any agency or judicial
enforcement action could have a material adverse effect on us.
The process required by the FDA before a drug or biologic may be marketed in the U.S. generally involves the following:
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completion of preclinical laboratory tests, animal studies and formulation studies in accordance with Good Laboratory Practices (“GLP”) regulations and other
applicable regulations;
submission to the FDA of an IND, which must become effective before human clinical trials may begin;
performance of adequate and well-controlled human clinical trials in accordance with Good Clinical Practice (“GCP”) regulations to establish the safety and efficacy
of the proposed drug for its intended use;
submission to the FDA of an NDA or BLA;
satisfactory completion of an FDA inspection of the manufacturing facility or facilities at which the drug is produced to assess compliance with current Good
Manufacturing Practices (“cGMP”) requirements to assure that the facilities, methods and controls are adequate to preserve the drug’s identity, strength, quality and
purity; and
FDA review and approval of the NDA or BLA.
Once a pharmaceutical candidate is identified for development, it enters the preclinical testing stage. Preclinical tests include laboratory evaluations of product chemistry,
toxicity and formulation, as well as animal studies. An IND sponsor must submit the results of the preclinical tests, together with manufacturing information and analytical
data, to the FDA as part of the IND. The sponsor will also include a protocol detailing, among other things, the objectives of the first phase of the clinical trial, the parameters
to be used in monitoring safety, and the effectiveness criteria to be evaluated, if the first phase lends itself to an efficacy evaluation. Some preclinical testing may continue even
after the IND is submitted. The IND automatically becomes effective 30 days after receipt by the FDA, unless the FDA, within the 30-day time period, places the clinical trial
on a clinical hold. In such a case, the IND sponsor and the FDA must resolve any outstanding concerns before the clinical trial can begin. Clinical holds also may be imposed
by the FDA at any time before or during clinical trials due to safety concerns about ongoing or proposed clinical trials or noncompliance with specific FDA requirements, and
the trials may not begin or continue until the FDA notifies the sponsor that the hold has been lifted.
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All clinical trials must be conducted under the supervision of one or more qualified investigators in accordance with GCP regulations. They must be conducted under protocols
detailing the objectives of the trial, dosing procedures, subject selection and exclusion criteria and the safety and effectiveness criteria to be evaluated. Each protocol must be
submitted to the FDA as part of the IND, and timely safety reports must be submitted to the FDA and the investigators for serious and unexpected adverse events. An
institutional review board (IRB) at each institution participating in the clinical trial must review and approve each protocol before a clinical trial commences at that institution
and must also approve the information regarding the trial and the consent form that must be provided to each trial subject or his or her legal representative, monitor the study
until completed and otherwise comply with IRB regulations.
Human clinical trials are typically conducted in three sequential phases that may overlap or be combined:
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Phase 1: The drug candidate is initially introduced into healthy human subjects and tested for safety, dosage tolerance, absorption, metabolism, distribution and
excretion. In the case of some products for severe or life-threatening diseases, such as cancer, especially when the product may be too inherently toxic to ethically
administer to healthy volunteers, the initial human testing is often conducted in patients.
Phase 2: This phase involves clinical trials in a limited patient population to identify possible adverse effects and safety risks, to preliminarily evaluate the efficacy of
the product for specific targeted diseases and to determine dosage tolerance and appropriate dosage.
Phase 3: Clinical trials are undertaken to further evaluate dosage, clinical efficacy and safety in an expanded patient population at geographically dispersed clinical
study sites. These clinical trials are intended to establish the overall risk-benefit ratio of the drug candidate and provide, if appropriate, an adequate basis for product
labeling.
Post-approval trials, sometimes referred to as Phase IV studies, may be conducted after initial marketing approval. These trials are used to gain additional experience from the
treatment of patients in the intended therapeutic indication. In certain instances, the FDA may mandate the performance of Phase IV clinical trials as a condition of approval of
an NDA or BLA.
The FDA or the sponsor may suspend a clinical trial at any time on various grounds, including a finding that the research subjects or patients are being exposed to an
unacceptable health risk. Similarly, an IRB can suspend or terminate approval of a clinical trial at its institution if the clinical trial is not being conducted in accordance with the
IRB’s requirements or if the drug has been associated with unexpected serious harm to patients. In addition, some clinical trials are overseen by an independent group of
qualified experts organized by the sponsor, known as a data safety monitoring board or committee. Depending on its charter, this group may determine whether a trial may
move forward at designated check points based on access to certain data from the trial.
Concurrent with clinical trials, companies usually complete additional animal studies and must also develop additional information about the chemistry and physical
characteristics of the drug and finalize a process for manufacturing the product in commercial quantities in accordance with cGMP requirements. The manufacturing process
must be capable of consistently producing quality batches of the drug candidate and, among other things, the manufacturer must develop methods for testing the identity,
strength, quality and purity of the final drug. In addition, appropriate packaging must be selected and tested and stability studies must be conducted to demonstrate that the drug
candidate does not undergo unacceptable deterioration over its shelf life.
While the IND is active and before approval, progress reports summarizing the results of the clinical trials and nonclinical studies performed since the last progress report must
be submitted at least annually to the FDA, and written IND safety reports must be submitted to the FDA and investigators for serious and unexpected suspected adverse events,
findings from other studies suggesting a significant risk to humans exposed to the same or similar drugs, findings from animal or in-vitro testing suggesting a significant risk to
humans, and any clinically important increased incidence of a serious suspected adverse reaction compared to that listed in the protocol or investigator brochure.
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There are also requirements governing the reporting of ongoing clinical trials and completed trial results to public registries. Sponsors of certain clinical trials of FDA-regulated
products are required to register and disclose specified clinical trial information, which is publicly available at www.clinicaltrials.gov. Information related to the product, patient
population, phase of investigation, trial sites and investigators and other aspects of the clinical trial is then made public as part of the registration. Sponsors are also obligated to
discuss the results of their clinical trials after completion. Disclosure of the results of these trials can be delayed until the new product or new indication being studied has been
approved.
U.S. Market Approval Process
The results of product development, preclinical and other non-clinical studies and clinical trials, along with descriptions of the manufacturing process, analytical tests
conducted on the chemistry of the drug, proposed labeling and other relevant information are submitted to the FDA as part of an NDA or BLA requesting approval to market
the product. The submission of an NDA or BLA is subject to the payment of user fees; a waiver of such fees may be obtained under certain limited circumstances. The FDA
reviews all NDAs and BLAs submitted to ensure that they are sufficiently complete for substantive review before it accepts them for filing. The FDA may request additional
information rather than accept an NDA or BLA for filing. In this event, the NDA or BLA must be resubmitted with the additional information. The resubmitted application also
is subject to review before the FDA accepts it for filing.
Once the submission is accepted for filing, the FDA begins an in-depth substantive review. The FDA may refer the NDA or BLA to an advisory committee for review,
evaluation and recommendation as to whether the application should be approved and under what conditions. The FDA is not bound by the recommendation of an advisory
committee, but it generally follows such recommendations. The approval process is lengthy and often difficult, and the FDA may refuse to approve an NDA or BLA if the
applicable regulatory criteria are not satisfied or may require additional clinical or other data and information. Even if such data and information are submitted, the FDA may
ultimately decide that the NDA or BLA does not satisfy the criteria for approval. The FDA reviews an NDA to determine, among other things, whether a product is safe and
effective for its intended use and whether its manufacturing is cGMP-compliant to assure and preserve the product’s identity, strength, quality and purity. The FDA reviews a
BLA to determine, among other things whether the product is safe, pure and potent and the facility in which it is manufactured, processed, packed or held meets standards
designed to assure the product’s continued safety, purity and potency. Before approving an NDA or BLA, the FDA will inspect the facility or facilities where the product is
manufactured.
After the FDA evaluates an NDA or BLA, it will issue an approval letter or a Complete Response Letter. An approval letter authorizes commercial marketing of the drug with
prescribing information for specific indications. A Complete Response Letter indicates that the review cycle of the application is complete and the application will not be
approved in its present form. A Complete Response Letter usually describes the specific deficiencies in the NDA or BLA identified by the FDA and may require additional
clinical data, such as an additional pivotal Phase 3 trial or other significant and time-consuming requirements related to clinical trials, nonclinical studies or manufacturing. If a
Complete Response Letter is issued, the sponsor must resubmit the NDA or BLA, addressing all of the deficiencies identified in the letter, or withdraw the application. Even if
such data and information are submitted, the FDA may decide that the NDA or BLA does not satisfy the criteria for approval.
If a product receives regulatory approval, the approval may be significantly limited to specific diseases and dosages or the indications for use may otherwise be limited, which
could restrict the commercial value of the product. In addition, the FDA may require a sponsor to conduct Phase 4 testing, which involves clinical trials designed to further
assess a drug’s safety and effectiveness after NDA or BLA approval, and may require testing and surveillance programs to monitor the safety of approved products which have
been commercialized. The FDA may also place other conditions on approval including the requirement for a risk evaluation and mitigation strategy (REMS) to assure the safe
use of the drug. If the FDA concludes a REMS is needed, the sponsor of the NDA or BLA must submit a proposed REMS. The FDA will not approve the NDA or BLA without
an approved REMS, if required. A REMS could include medication guides, physician communication plans or elements to assure safe use, such as restricted distribution
methods, patient registries and other risk minimization tools. Any of these limitations on approval or marketing could restrict the commercial promotion, distribution,
prescription or dispensing of products. Marketing approval may be withdrawn for noncompliance with regulatory requirements or if problems occur following initial marketing.
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Orphan Drug Act
The Orphan Drug Act provides incentives to manufacturers to develop and market drugs or biologics for rare diseases and conditions affecting fewer than 200,000 persons in
the U.S. at the time of application for orphan drug designation, or for a patient population greater than 200,000 in the U.S. where there is no reasonable expectation that the cost
of developing the drug or biologic will be recovered from sales in the U.S. The first developer to receive FDA marketing approval for an orphan drug is entitled to a seven-year
exclusive marketing period in the U.S. for that product. However, a drug that the FDA considers to be clinically superior to, or different from, another approved orphan drug,
even though for the same indication, may also obtain approval in the U.S. during the seven-year exclusive marketing period. In addition, holders of exclusivity for orphan drugs
are expected to assure the availability of sufficient quantities of their orphan drugs to meet the needs of patients. Failure to do so could result in the withdrawal of marketing
exclusivity for the drug.
Pediatric Information
Under the Pediatric Research Equity Act of 2007 (“PREA”), NDAs or BLAs or supplements to NDAs or BLAs must contain data to assess the safety and effectiveness of the
drug for the claimed indication(s) in all relevant pediatric sub-populations and to support dosing and administration for each pediatric sub-population for which the drug is safe
and effective. The FDA may grant deferrals for submission of data or full or partial waivers. Unless otherwise required by regulation, PREA does not apply to any drug for an
indication for which orphan drug designation has been granted. The Best Pharmaceuticals for Children Act (“BPCA”) provides sponsors of NDAs with an additional six-month
period of market exclusivity for all unexpired patent or non-patent exclusivity on all forms of the drug containing the active moiety if the sponsor submits results of pediatric
studies specifically requested by the FDA under BPCA within required timeframes. The Biologics Price Competition and Innovation Act provides sponsors of BLAs an
additional six-month extension for all unexpired non-patent market exclusivity on all forms of the biologic containing the active moiety pursuant to the BPCA if the conditions
under the BPCA are met.
The Food and Drug Administration Safety and Innovation Act (“FDASIA”), which was signed into law on July 9, 2012, amended the FDCA. FDASIA requires that a sponsor
who is planning to submit a marketing application for a drug or biological product that includes a new active ingredient, new indication, new dosage form, new dosing regimen
or new route of administration submit an initial Pediatric Study Plan (“PSP”) within sixty days of an end-of-Phase II meeting or as may be agreed between the sponsor and
FDA. The initial PSP must include an outline of the pediatric study or studies that the sponsor plans to conduct, including study objectives and design, age groups, relevant
endpoints and statistical approach, or a justification for not including such detailed information, and any request for a deferral of pediatric assessments or a full or partial waiver
of the requirement to provide data from pediatric studies along with supporting information. FDA and the sponsor must reach agreement on the PSP. A sponsor can submit
amendments to an agreed-upon initial PSP at any time if changes to the pediatric plan need to be considered based on data collected from nonclinical studies, early phase
clinical trials, and/or other clinical development programs.
Expedited Development and Review Programs
The FDA has a Fast Track program that is intended to expedite or facilitate the process for reviewing new drugs and biological products that meet certain criteria. Specifically,
new drugs and biological products are eligible for Fast Track designation if they are intended to treat a serious or life-threatening condition and demonstrate the potential to
address unmet medical needs for the condition. Fast Track designation applies to the combination of the product and the specific indication for which it is being studied. The
sponsor of a new drug or biologic may request the FDA to designate the drug or biologic as a Fast Track product at any time during the clinical development of the product.
Unique to a Fast Track product, the FDA may consider for review sections of the marketing application on a rolling basis before the complete application is submitted, if the
sponsor provides a schedule for the submission of the sections of the application, the FDA agrees to accept sections of the application and determines that the schedule is
acceptable, and the sponsor pays any required user fees upon submission of the first section of the application.
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Any product submitted to the FDA for marketing, including under a Fast Track program, may be eligible for other types of FDA programs intended to expedite development
and review, such as priority review and accelerated approval. Fast Track designation, priority review and accelerated approval do not change the standards for approval but may
expedite the development or approval process. Any product is eligible for priority review if it has the potential to provide safe and effective therapy where no satisfactory
alternative therapy exists or a significant improvement in the treatment, diagnosis or prevention of a disease compared to marketed products. The FDA will attempt to direct
additional resources to the evaluation of an application for a new drug or biological product designated for priority review in an effort to facilitate the review. Additionally, a
product may be eligible for accelerated approval. Drug or biological products studied for their safety and effectiveness in treating serious or life-threatening illnesses and that
provide meaningful therapeutic benefit over existing treatments may receive accelerated approval, which means that they may be approved on the basis of adequate and well-
controlled clinical trials establishing that the product has an effect on a surrogate endpoint that is reasonably likely to predict a clinical benefit, or on the basis of an effect on a
clinical endpoint other than survival or irreversible morbidity. As a condition of approval, the FDA may require that a sponsor of a drug or biological product receiving
accelerated approval perform adequate and well-controlled post-marketing clinical trials. In addition, the FDA currently requires as a condition for accelerated approval pre-
approval of promotional materials, which could adversely impact the timing of the commercial launch of the product. If the FDA concludes that a drug shown to be effective
can be safely used only if distribution or use is restricted, it will require such post-marketing restrictions as it deems necessary to assure safe use of the drug, such as distribution
restricted to certain facilities or physicians with special training or experience; or distribution conditioned on the performance of specified medical procedures.
FDASIA established a new category of drugs and biologics referred to as “breakthrough therapies” that may be eligible to receive Breakthrough Therapy Designation. A
sponsor may seek FDA designation of a drug or biologic candidate as a “breakthrough therapy” if the product is intended, alone or in combination with one or more other
products, to treat a serious or life-threatening disease or condition and preliminary clinical evidence indicates that the product may demonstrate substantial improvement over
existing therapies on one or more clinically significant endpoints, such as substantial treatment effects observed early in clinical development. The designation includes all of
the Fast Track program features, as well as more intensive FDA interaction and guidance. The Breakthrough Therapy Designation is a distinct status from both accelerated
approval and priority review, which can also be granted to the same drug if relevant criteria are met. If a product is designated as breakthrough therapy, the FDA will expedite
the development and review of such drug. All requests for breakthrough therapy designation will be reviewed within 60 days of receipt, and the FDA will either grant or deny
the request.
Post-Approval Requirements
Once an approval is granted, the FDA may withdraw the approval if compliance with regulatory requirements or standards is not maintained or if problems occur after the
product reaches the market. Later discovery of previously unknown problems with a product may result in restrictions on the product or even complete withdrawal of the
product from the market. After approval, some types of changes to the approved product, such as adding new indications, certain manufacturing changes and additional labeling
claims, are subject to further FDA review and approval. Drug and biologics manufacturers and other entities involved in the manufacture and distribution of approved drugs
and biologics are required to register their establishments with the FDA and certain state agencies, and are subject to periodic unannounced inspections by the FDA and certain
state agencies for compliance with cGMP regulations and other laws and regulations.
U.S. Patent Term Restoration and Marketing Exclusivity
The Biologics Price Competition and Innovation Act, or BPCIA, amended the Public Health Service Act to authorize the FDA to approve similar versions of innovative
biologics, commonly known as biosimilars. A competitor seeking approval of a biosimilar must file an application to establish its molecule as highly similar to an approved
innovator biologic, among other requirements. The BPCIA, however, bars the FDA from approving biosimilar applications for 12 years after an innovator biological product
receives initial marketing approval. This 12-year period of data exclusivity may be extended by six months, for a total of 12.5 years, if the FDA requests that the innovator
company conduct pediatric clinical investigations of the product.
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Depending upon the timing, duration and specifics of the FDA approval of our drug candidates, some of our U.S. patents may be eligible for limited patent term extension
under the Drug Price Competition and Patent Term Restoration Act of 1984, commonly referred to as the Hatch-Waxman Amendments. The Hatch-Waxman Amendments
permit a patent restoration term of up to five years as compensation for patent term lost during product development and the FDA regulatory review process. However, patent
term extension cannot extend the remaining term of a patent beyond a total of 14 years from the product’s approval date. The patent term extension period is generally one-half
the time between the effective date of an IND and the submission date of an NDA or BLA plus the time between the submission date of an NDA or BLA and the approval of
that application up to a maximum of five years extension. Only one patent applicable to an approved drug is eligible for the extension and the application for the extension must
be submitted prior to the expiration of the patent. The USPTO, in consultation with the FDA, reviews and approves the application for any patent term extension or restoration.
In the future, we intend to apply for extension of the patent term for one of our currently owned or licensed patents to add patent life beyond its current expiration date where
reasonably obtainable and depending on the expected length of the clinical trials and other factors involved in the filing of the relevant NDA or BLA.
Marketing exclusivity provisions under the FDCA can also delay the submission or the approval of certain marketing applications. The FDCA provides a five-year period of
non-patent marketing exclusivity within the U.S. to the first applicant to obtain approval of an NDA for a new chemical entity. A drug is a new chemical entity if the FDA has
not previously approved any other new drug containing the same active moiety, which is the molecule or ion responsible for the action of the drug substance. During the
exclusivity period, the FDA may not accept for review an abbreviated new drug application (ANDA), or a 505(b)(2) NDA submitted by another company for another drug
based on the same active moiety, regardless of whether the drug is intended for the same indication as the original innovator drug or for another indication, where the applicant
does not own or have a legal right of reference to all the data required for approval. However, an application may be submitted after four years if it contains a certification of
patent invalidity or non-infringement to one of the patents listed with the FDA by the innovator NDA holder. The FDCA also provides three years of marketing exclusivity for
an NDA, or supplement to an existing NDA if new clinical investigations, other than bioavailability studies, that were conducted or sponsored by the applicant are deemed by
the FDA to be essential to the approval of the application, for example new indications, dosages or strengths of an existing drug. This three-year exclusivity covers only the
modification for which the drug received approval on the basis of the new clinical investigations and does not prohibit the FDA from approving ANDAs for drugs containing
the active agent for the original indication or condition of use. Five-year and three-year exclusivity will not delay the submission or approval of a full NDA. However, an
applicant submitting a full NDA would be required to conduct or obtain a right of reference to all of the preclinical studies and adequate and well-controlled clinical trials
necessary to demonstrate safety and effectiveness.
Pediatric exclusivity is another type of regulatory market exclusivity in the U.S. under the BPCA. Pediatric exclusivity provides for an additional six months of marketing
exclusivity if a sponsor conducts clinical trials in children as addressed in the section named “Pediatric Information” above. In addition, orphan drug exclusivity, as described
above, may offer a seven-year period of marketing exclusivity, except in certain circumstances.
Foreign Regulation
In addition to regulations in the U.S., we will be subject to a variety of regulations in other jurisdictions governing, among other things, clinical trials and any commercial sales
and distribution of our drug candidates.
Whether or not we obtain FDA approval for our drug candidates, we must obtain the requisite approvals from regulatory authorities in foreign countries prior to the
commencement of clinical trials or marketing of the drug candidates in those countries. Certain countries outside of the U.S. have a similar process that requires the submission
of a clinical trial application much like the IND prior to the commencement of human clinical trials. In the European Union, for example, a CTA must be submitted to each
country’s national health authority and an independent ethics committee, much like the FDA and the IRB, respectively. Once the CTA is approved in accordance with a
country’s requirements, clinical study development may proceed.
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The requirements and process governing the conduct of clinical trials, product approval and licensing, pricing and reimbursement vary from country to country. In all cases, the
clinical trials are conducted in accordance with GCP and the applicable regulatory requirements and the ethical principles that have their origin in the Declaration of Helsinki.
To obtain regulatory approval of an investigational drug or biological product under European Union regulatory systems, we must submit a marketing authorization application.
The application used to file the NDA or BLA in the U.S. is similar to that required in the European Union, with the exception of, among other things, country-specific
document requirements. The European Union also provides opportunities for market exclusivity. For example, in the European Union, upon receiving marketing authorization,
new chemical entities generally receive eight years of data exclusivity and an additional two years of market exclusivity. If granted, data exclusivity prevents regulatory
authorities in the European Union from referencing the innovator’s data to assess a generic application. During the additional two-year period of market exclusivity, a generic
marketing authorization can be submitted, and the innovator’s data may be referenced, but no generic product can be marketed until the expiration of the market exclusivity.
However, there is no guarantee that a product will be considered by the European Union’s regulatory authorities to be a new chemical entity, and products may not qualify for
data exclusivity. Products receiving orphan designation in the European Union can receive ten years of market exclusivity, during which time no similar medicinal product for
the same indication may be placed on the market. An orphan product can also obtain an additional two years of market exclusivity in the European Union for pediatric studies.
No extension to any supplementary protection certificate can be granted on the basis of pediatric studies for orphan indications.
The criteria for designating an “orphan medicinal product” in the European Union are similar in principle to those in the U.S. Under Article 3 of Regulation (EC) 141/2000, a
medicinal product may be designated as orphan if (1) it is intended for the diagnosis, prevention or treatment of a life-threatening or chronically debilitating condition; (2)
either (a) such condition affects no more than five in 10,000 persons in the European Union when the application is made, or (b) the product, without the benefits derived from
orphan status, would not generate sufficient return in the European Union to justify investment; and (3) there exists no satisfactory method of diagnosis, prevention or treatment
of such condition authorized for marketing in the European Union, or if such a method exists, the product will be of significant benefit to those affected by the condition, as
defined in Regulation (EC) 847/2000. Orphan medicinal products are eligible for financial incentives such as reduction of fees or fee waivers and are, upon grant of a marketing
authorization, entitled to ten years of market exclusivity for the approved therapeutic indication. The application for orphan drug designation must be submitted before the
application for marketing authorization. The applicant will receive a fee reduction for the marketing authorization application if the orphan drug designation has been granted,
but not if the designation is still pending at the time the marketing authorization is submitted. Orphan drug designation does not convey any advantage in, or shorten the
duration of, the regulatory review and approval process.
The 10-year market exclusivity may be reduced to six years if, at the end of the fifth year, it is established that the product no longer meets the criteria for orphan designation,
for example, if the product is sufficiently profitable not to justify maintenance of market exclusivity. In addition, marketing authorization may be granted to a similar product
for the same indication at any time if:
·
·
·
the second applicant can establish that its product, although similar, is safer, more effective or otherwise clinically superior;
the applicant consents to a second orphan medicinal product application; or
the applicant cannot supply enough orphan medicinal product.
For other countries outside of the European Union, such as countries in Eastern Europe, Latin America or Asia, the requirements governing the conduct of clinical studies,
product licensing or approval, pricing and reimbursement vary from country to country. In all cases, again, the clinical studies are conducted in accordance with GCP and the
applicable regulatory requirements and the ethical principles that have their origin in the Declaration of Helsinki.
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If we fail to comply with applicable foreign regulatory requirements, we may be subject to, among other things, fines, suspension or withdrawal of regulatory approvals,
product recalls, seizure of products, operating restrictions and criminal prosecution.
Other Regulatory Matters
Manufacturing, sales, promotion and other activities following product approval are also potentially subject to regulation by numerous regulatory authorities in addition to the
FDA, including, in the U.S., the Centers for Medicare & Medicaid Services, other divisions of the Department of Health and Human Services, the Drug Enforcement
Administration, the Consumer Product Safety Commission, the Federal Trade Commission, the Occupational Safety & Health Administration, the Environmental Protection
Agency and state and local governments. In the U.S., sales, marketing and scientific/educational programs must also comply with state and federal fraud and abuse laws,
including state and federal anti-kickback, false claims, data privacy and security and physician payment transparency laws. Pricing and rebate programs must comply with the
Medicaid rebate requirements of the U.S. Omnibus Budget Reconciliation Act of 1990 and more recent requirements in the Patient Protection and Affordable Care Act, as
amended by the Health Care and Education Reconciliation Act of 2010, collectively the Affordable Care Act. If products are made available to authorized users of the Federal
Supply Schedule of the General Services Administration, additional laws and requirements apply. The handling of any controlled substances must comply with the U.S.
Controlled Substances Act and Controlled Substances Import and Export Act. Products must meet applicable child-resistant packaging requirements under the U.S. Poison
Prevention Packaging Act. Manufacturing, sales, promotion and other activities are also potentially subject to federal and state consumer protection and unfair competition
laws.
The distribution of pharmaceutical products is subject to additional requirements and regulations, including extensive record-keeping, licensing, storage and security
requirements intended to prevent the unauthorized sale of pharmaceutical products.
The failure to comply with regulatory requirements may subject us to possible legal or regulatory action. Depending on the circumstances, failure to meet applicable regulatory
requirements can result in criminal prosecution, fines or other penalties, injunctions, recall or seizure of products, total or partial suspension of production, denial or withdrawal
of product approvals, or refusal to allow a firm to enter into supply contracts, including government contracts. In addition, even if a firm complies with FDA and other
requirements, new information regarding the safety or efficacy of a product could lead the FDA to modify or withdraw product approval. Prohibitions or restrictions on sales or
withdrawal of future products marketed by us could materially affect our business in an adverse way.
Changes in regulations, statutes or the interpretation of existing regulations could impact our business in the future by requiring, for example: (i) changes to our manufacturing
arrangements; (ii) additions or modifications to product labeling; (iii) the recall or discontinuation of our products; or (iv) additional record-keeping requirements. If any such
changes were to be imposed, they could adversely affect the operation of our business.
Reimbursement
In both domestic and foreign markets, sales and reimbursement of any approved products will depend, in part, on the extent to which the costs of such products will be covered
by third-party payors, such as government health programs, commercial insurance and managed healthcare organizations. These third-party payors are increasingly challenging
the prices charged for medical products and services and imposing controls to manage costs. The containment of healthcare costs has become a priority of federal and state
governments and the prices of drugs have been a focus in this effort. Governments have shown significant interest in implementing cost-containment programs, including price
controls, restrictions on reimbursement and requirements for substitution of generic products. For example, in the U.S. there have been several recent Congressional inquiries
and proposed and enacted federal and state legislation designed to, among other things, bring more transparency to drug pricing, review the relationship between pricing and
manufacturer patient programs, reduce the cost of drugs under Medicare, and reform government program reimbursement methodologies for drugs. Additionally, in May 2018,
the U.S. presidential administration laid out a “Blueprint” to lower drug prices and reduce out of pocket costs of drugs that contains additional proposals to increase
manufacturer competition, increase the negotiating power of certain federal healthcare programs, incentivize manufacturers to lower the list price of their products and reduce
the out of pocket costs of drug products paid by consumers. The Department of Health and Human Services, or HHS, has started the process of soliciting feedback on some of
these measures and, at the same time, is immediately implementing others under its existing authority.
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In December of 2020, the Trump administration issued interim final rules focused on attempting to lower drug prices, including permitting the importation of certain drugs from
Canada, most-favored nation pricing for certain drug categories under Medicare Part B and modifications to the Medicare Part D drug rebate program by modifying the U.S.
federal Anti-Kickback Statute. This rule was blocked from taking effect on January 4, 2021 by a Federal judge stating that the rule was rushed and the public was not provided
time to give comment as required by the Administrative Procedures Act. There is also pending litigation to stay the changes to the Medicare Part D and Anti-Kickback Statute.
The Biden administration has delayed the implementation of this rule until January of 2023, if it is not otherwise stayed.
At the state level, legislatures have increasingly passed legislation and implemented regulations designed to control pharmaceutical and biological product pricing, including
price or patient reimbursement constraints, discounts, restrictions on certain product access and marketing cost disclosure and transparency measures, and, in some cases, to
encourage importation from other countries and bulk purchasing.
Within the U.S., if we obtain appropriate approval in the future to market any of our product candidates, we may seek approval and coverage for those products under
Medicaid, Medicare and the Public Health Service, or PHS, pharmaceutical pricing program and also seek to sell the products to federal agencies. Medicaid is a joint federal
and state program that is administered by the states for low income and disabled beneficiaries. Under the Medicaid Drug Rebate Program, manufacturers are required to pay a
rebate for each unit of product reimbursed by the state Medicaid programs. The amount of the rebate for each product is set by law and may be subject to an additional discount
if certain pricing increases more than inflation. Medicare is a federal program administered by the federal government that covers individuals age 65 and over as well as those
with certain disabilities. Medicare Part D provides coverage to enrolled Medicare patients for self-administered drugs (i.e., drugs that do not need to be administered by a
physician). Medicare Part D is administered by private prescription drug plans approved by the U.S. government and each drug plan establishes its own Medicare Part D
formulary for prescription drug coverage and pricing, which the drug plan may modify from time-to-time. Medicare Part B covers most injectable drugs given in an in-patient
setting, and some drugs administered by a licensed medical provider in hospital outpatient departments and doctors’ offices. Medicare Part B is administered by Medicare
Administrative Contractors, which generally have the responsibility of making coverage decisions. Subject to certain payment adjustments and limits, Medicare generally pays
for Part B covered drugs based on a percentage of manufacturer-reported average sales price. Drug products are subject to discounted pricing when purchased by federal
agencies via the Federal Supply Schedule, or FSS. FSS participation is required for a drug product to be covered and paid for by certain federal agencies and for coverage under
Medicaid, Medicare Part B and the PHS pharmaceutical pricing program. FSS pricing is negotiated periodically with the Department of Veterans Affairs. FSS pricing is
intended to not exceed the price that a manufacturer charges its most-favored non-federal customer for its product. In addition, prices for drugs purchased by the Veterans
Administration, Department of Defense (including drugs purchased by military personnel and dependents through the TRICARE retail pharmacy program), Coast Guard, and
PHS are subject to a cap on pricing (known as the “federal ceiling price”) and may be subject to an additional discount if pricing increases more than inflation. To maintain
coverage of drugs under the Medicaid Drug Rebate Program, manufacturers are required to extend discounts to certain purchasers under the PHS pharmaceutical pricing
program. Purchasers eligible for discounts include hospitals that serve a disproportionate share of financially needy patients, community health clinics and other entities that
receive health services grants from the PHS.
In March 2010, the U.S. Congress enacted the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act, or the Affordable Care Act,
which included changes to the coverage and payment for drug products under government health care programs. Since its enactment, there have been judicial and
Congressional challenges to numerous elements of the Affordable Care Act, as well as efforts by both the executive and legislative branches of the federal government to repeal
or replace certain aspects of the Affordable Care Act. For example, the former President Trump signed Executive Orders designed to delay the implementation of certain
provisions of the Affordable Care Act or otherwise circumvent some of the requirements for health insurance mandated by the Affordable Care Act. In addition, the U.S.
Congress has considered legislation that would repeal or repeal and replace all or part of the Affordable Care Act. While Congress has not passed comprehensive repeal
legislation, it has enacted laws that modify certain provisions of the Affordable Care Act, such as removing penalties, starting January 1, 2019, for not complying with the
Affordable Care Act’s individual mandate to carry health insurance, delaying the implementation of certain mandated fees, and increasing the point-of-sale discount that is
owed by pharmaceutical manufacturers who participate in Medicare Part D. In December 2018, a Texas U.S. District Court Judge ruled that the Affordable Care Act is
unconstitutional in its entirety because the “individual mandate” was repealed by Congress as part of the Tax Cuts and Jobs Act of 2017, or the Tax Act. This case is currently
being considered by the Supreme Court after oral arguments. The Texas U.S. District Court Judge, as well as the presidential administration and the Centers for Medicare and
Medicaid Services, or CMS, have stated that the ruling will have no immediate effect pending appeal of the decision, but it is unclear how this decision, subsequent appeals,
and other efforts to repeal and replace the Affordable Care Act will impact the Affordable Care Act and our business. Any other executive, legislative or judicial action to
“repeal and replace” all or part of the Affordable Care Act may have the effect of limiting the amounts that government agencies will pay for healthcare products and services,
which could result in reduced demand for our products or additional pricing pressure, or may lead to significant deregulation, which could make the introduction of competing
products and technologies much easier.
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Environmental Regulation
In addition to being subject to extensive regulation by the FDA, we must also comply with environmental regulation insofar as such regulation applies to us or our drug
candidates. Our costs of compliance with environmental regulation as applied to similar pharmaceutical companies are minimal, since we do not currently, nor do we intend to,
engage in the manufacturing of any of our drug candidates. We currently use unaffiliated manufacturers to produce all of our drug candidate material and receive final material
from such manufacturer, without any involvement on our part in the manufacturing process at any stage of the process.
Although we believe that our safety procedures for using, handling, storing and disposing of our drug candidate materials comply with the environmental standards required by
state and federal laws and regulations, we cannot completely eliminate the risk of accidental contamination or injury from these materials. We do not carry a specific insurance
policy to mitigate this risk to us or to the environment.
Employees
At December 31, 2020, we employed four full-time employees. We are not a party to any collective bargaining agreement with our employees; nor are any of our employees a
member of any labor unions.
To complement our own professional staff, we utilize specialists in regulatory affairs, pharmacovigilance, process engineering, manufacturing, quality assurance, preclinical
and clinical development, accounting and business development. These individuals include scientific advisors as well as independent consultants.
Competition
The pharmaceutical and biotechnology industries are characterized by intense competition and rely heavily on the ability to move quickly, adapt to changing medical and
market needs, and to develop and maintain strong intellectual property positions. We believe that the development experience of our Scientific Advisory Board and our
scientific and management team, as well as the strength and promise of our drug candidates, provide us with a competitive advantage; nevertheless, we face potential
competition from a myriad of sources many of which operate with greater resources and more mature products. These include pharmaceutical and biotechnology companies,
academic institutions, governmental agencies and public and private research institutions. Competition is intense and is expected to increase.
Product and Technology Specific Competition
XCART for B-cell lymphomas
Should any product candidate incorporating the XCART platform technology be approved for use, we will face substantial competition. In addition to the current standard of
care for patients, commercial and academic clinical studies are being pursued by a number of parties in the field of immunotherapy. Early results from these studies have fueled
continued interest in T-cell immunotherapy. In addition, if approved, our CAR T cell programs would compete with currently marketed drugs and therapies used for treatment
of the indications we are addressing, and potentially with drug candidates currently in development for the same indications.
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There are currently four CAR T therapies approved in the U.S. and EU: Novartis’ Kymriah (tisagenlecleucel); Gilead Sciences, Inc.’s and Kite Pharma’s Yescarta (axicabtagene
ciloleucel) and Tecartus (brexucabtagene autoleucel); and Bristol Myers Squibb Breyanzi (lisocabtagene maraleucel). However, there are over 100 CAR T therapy products in
development with more than 35 being allogeneic and off-the-shelf cell therapies. In addition, depending on the diseases that our CAR T therapies target, we may face
competition in the indication of interest from both CAR T therapies and other modalities such as small molecules and antibodies.
T-cell based treatments for cancer, such as CAR T and TCR therapies, have recently been an area of significant research and development by academic institutions and
biopharmaceutical companies. XCART therapies may compete with product candidates from a number of companies that are currently focused on this therapeutic modality,
which we estimate to include over 20 other companies.
PSA for Drug Delivery
Current competing platforms include PEGylation, Fc-fusion, albumin-fusion, HESylation, PASylation, and CTP-fusion, among others.
We also expect to compete with academic institutions and other smaller pharmaceutical companies during the drug development stage of our progress. In addition to competing
with universities and other research institutions in the development of drug products, therapies, technologies and processes, we may compete with other companies in acquiring
rights to products or technologies from universities. There can be no assurance that our products or drug candidates will be more effective or achieve greater market acceptance
than competitive products, or that these companies will not succeed in developing products and technologies that are more effective than those being developed for us or that
would render our products and technologies less competitive or obsolete.
Available Information
Our website address is www.xeneticbio.com. The information on, or that can be accessed through, our website is not part of this Annual Report on Form 10-K. Our Annual
Reports on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K and amendments to those reports are available, free of charge, on or through our
website as soon as practicable after we electronically file such forms, or furnish them to, the SEC. The SEC maintains an internet site that contains reports, proxy and
information statements and other information regarding our filings at www.sec.gov.
In addition to disclosing current information pursuant to Section 13 or 15(d) of the Exchange Act and for reports of information required to be disclosed by Regulation FD
through our SEC filings, we also intend to disclose such current information through our investor relations website, press releases, public conference calls and webcasts.
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ITEM 1A – RISK FACTORS
Our business is subject to numerous risks. You should consider carefully the risks and uncertainties described below, in addition to other information contained in this Annual
Report as well as our other public filings with the Securities and Exchange Commission. Any of the following risks could have a material adverse effect on our business,
financial condition, results of operations and prospects and cause the trading price of our Common Stock to decline.
Risks Related to Our Financial Condition and Capital Requirements
We have never been profitable and may never achieve or sustain profitability. If we are unable to generate sufficient revenue from our operations to pay expenses or we are
unable to obtain additional financing on commercially reasonable terms, our business, financial condition and results of operations may be materially and adversely
affected.
We are a clinical stage biopharmaceutical company with a limited operating history. Pharmaceutical product and technology development is a highly speculative undertaking
and involves a substantial degree of risk. To date, we have focused primarily on developing our drug candidates, XCART, XBIO-101 and PolyXen, our biological platform
technology, and researching additional drug candidates. We have no products approved for commercial sale and have generated only limited revenue to date. Due to capital
constraints in 2020 we focused solely on winding down the XBIO-101 Phase 2 trial and preliminary development efforts associated with the XCART technology. Our primary
focus is on advancing the XCART technology through regulatory approval and commercialization and that we will continue to incur significant research and development and
other expenses related to our ongoing operations. As a result, we have never been profitable and we may not achieve profitability in the foreseeable future, if at all. Our ability
to generate profits in the future will depend on a number of factors, including:
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Funding the costs relating to the research and development, regulatory approval, commercialization and sale and marketing of our drug candidates and
technologies;
Market acceptance of our drug candidates and technologies;
Costs of acquiring and developing new drug candidates and technologies;
Ability to bring our drug candidates to market;
General and administrative costs relating to our operations;
Increases in our research and development costs;
Charges related to purchases of technology or other assets;
Establishing, maintaining and protecting our intellectual property rights;
Attracting, hiring and retaining qualified personnel; and
Our ability to raise additional capital.
As of December 31, 2020, we had an accumulated deficit of approximately $176.9 million. We expect to incur additional significant operating losses as we expand our research
and development activities and our commercialization, marketing and sales efforts. We may also encounter unforeseen expenses, difficulties, complications, delays and other
unknown factors that may adversely affect our business. In addition, because of the numerous risks and uncertainties associated with pharmaceutical product development,
including that our current drug candidates may not achieve the clinical endpoints of applicable trials, we are unable to predict the timing or amount of increased expenses, and if
or when we will achieve or maintain profitability. If we are unable to generate sufficient revenue from our operations to pay expenses or we are unable to obtain additional
financing on commercially reasonable terms, our business, financial condition and results of operations may be materially and adversely affected.
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We will require substantial additional funding to achieve our goals. Failure to obtain this necessary capital when needed on acceptable terms, or at all, may force us to
delay, limit or terminate our product development efforts, other operations or commercialization efforts.
Developing drug candidates is an expensive, risky and lengthy process, and we expect our expenses to increase in connection with our ongoing activities, particularly as we
continue the research and development of, initiate clinical trials of, and seek marketing approval for, our drug candidates.
As of December 31, 2020, we had cash of approximately $11.5 million. We expect that we will require additional capital to commence and complete clinical trials, obtain
regulatory approval for, and to commercialize, our drug candidates, including our other preclinical drug candidates and our future drug candidates. However, our operating plan
may change as a result of many factors currently unknown to us, and we may need to seek additional funds sooner than planned, through public or private equity or debt
financings, third-party funding, marketing and distribution arrangements, as well as other collaborations, strategic alliances and licensing arrangements, or a combination of
these approaches. In any event, we will require additional capital to pursue preclinical and clinical activities, pursue regulatory approval for, and to commercialize, our longer
term pipeline drug candidates. Even if we believe we have sufficient funds for our current or future operating plans, we may seek additional capital if market conditions are
favorable or if we have specific strategic considerations.
Any additional fundraising efforts may divert our management from their day-to-day activities, which may adversely affect our ability to develop and commercialize our drug
candidates. In addition, we cannot guarantee that future financing will be available in sufficient amounts or on terms acceptable to us, if at all. Moreover, the terms of any
financing may negatively impact the holdings or the rights of our stockholders, and the issuance of additional securities, whether equity or debt, by us or the possibility of such
issuance may cause the market price of our shares to decline. The incurrence of indebtedness could result in increased fixed payment obligations and we may be required to
agree to certain restrictive covenants, such as limitations on our ability to incur additional debt, limitations on our ability to acquire, sell or license intellectual property rights
and other operating restrictions that could adversely impact our ability to conduct our business.
If we are unable to obtain funding on a timely basis, we may be required to significantly curtail, delay or discontinue our pre-clinical development program or the
commercialization of any drug candidates. We may also be unable to expand our operations or otherwise capitalize on our business opportunities, as desired, which could harm
our business, financial condition and results of operations.
Raising additional capital may cause dilution to our stockholders, restrict our operations or require us to relinquish rights to our technologies or drug candidates.
Until such time, if ever, as we can generate substantial product revenues, we expect to finance our cash needs through a combination of equity and debt financings, as well as
selectively continuing to enter into collaborations, strategic alliances and licensing arrangements. For example, on December 14, 2020, we completed the registered direct
Common Stock offering, which resulted in gross proceeds of approximately $6.0 million before deducting the placement agent’s fees and related offering expenses. We do not
currently have any committed external source of funds. To the extent that we raise additional capital through the sale of equity or convertible debt securities, equity interests
will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect the rights of our stockholders. Debt financing, if available,
may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or
declaring dividends, and may be secured by all or a portion of our assets.
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If we raise funds by selectively continuing to enter into collaborations, strategic alliances or licensing arrangements with third-parties, we may have to relinquish additional
valuable rights to our technologies, future revenue streams, research programs or drug candidates, or grant licenses on terms that may not be favorable to us. If we are unable to
raise additional funds through equity or debt financings when needed, we may be required to delay, limit, reduce or terminate our product development or future
commercialization efforts or grant rights to develop and market drug candidates that we would otherwise prefer to develop and market ourselves. If we are unable to raise
additional funds through collaborations, strategic alliances or licensing arrangements, we may be required to terminate product development or future commercialization efforts
or to cease operations altogether.
Risks Related to the Discovery and Development of our Pharmaceutical Products
Our business is substantially dependent on the success of XCART.
Our business will substantially depend on the successful clinical development, regulatory approval and commercialization of the XCART platform technology. It will require
substantial clinical development and regulatory approval efforts before we are permitted to commence its commercialization, if ever. We have, and plan to continue to, pursue
our clinical development strategy through academic and strategic collaborations. For example, in 2020, we entered into the Scripps Agreement and the MSA with
Pharmsynthez to advance the development of the XCART technology. If we have difficulty maintaining these collaborations, or obtaining, or are unable to obtain, and
maintaining additional academic collaborations as planned, we may need to delay, limit or terminate any ongoing or planned clinical development, which would have an
adverse effect on our business. The clinical trials and manufacturing and marketing of XCART and any other product candidates will be subject to extensive and rigorous
review and regulation by numerous government authorities in the United States, the European Union and other jurisdictions where we intend to test and, if approved, market
our product candidates. Before obtaining regulatory approvals for the commercial sale of any product candidate, we must demonstrate through preclinical testing and clinical
trials that the product candidate is safe and effective for use in each target indication, and potentially in specific patient populations. This process can take many years and may
include post-marketing studies and surveillance, which would require the expenditure of substantial resources beyond the proceeds we have currently raised. Of the large
number of drugs in development for approval in the United States and the European Union, only a small percentage successfully complete the FDA or EMA regulatory
approval processes, as applicable, and are commercialized. Accordingly, even if we are able to obtain the requisite financing or identify an academic collaboration partner to
continue to fund our research, development and clinical programs, we cannot assure you that XCART or any of our other product candidates will be successfully developed or
commercialized.
We are an early stage company in the business of developing pharmaceutical products including drug candidates and technologies. Given the uncertainty of such
development, our business operations may never fully materialize and create value for investors.
We currently do not have any products that have gained marketing approval. We have invested substantially all of our efforts and financial resources developing ErepoXen,
OncoHist, XBIO-101 and, more recently XCART. Our revenues to date consist primarily of collaboration and royalty revenue from a single partner and not from product sales.
Our ability to generate product revenues, which may not occur for several years, if ever, will depend on the successful development and eventual commercialization of our drug
candidates. We currently generate royalty revenue under a sub-license agreement but do not have revenue from sales of any drugs, and we may never be able to develop or
commercialize a marketable drug. Each of our drug candidates will require development, management of development and manufacturing activities, marketing approval in
multiple jurisdictions, obtaining manufacturing supply, building of a commercial organization, substantial investment and significant marketing efforts before we generate any
revenues from drug sales. We have not yet demonstrated an ability to successfully overcome many of the risks and uncertainties frequently encountered by companies in new
and rapidly evolving fields, particularly in the pharmaceutical area. For example, to execute our business plan we will need to successfully:
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Execute development activities for our drug candidates, including successful enrollment in and completion of clinical trials;
Obtain required marketing approvals for the development and commercialization of our drug candidates;
Obtain and maintain patent and trade secret protection or regulatory exclusivity for our drug candidates;
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Protect, leverage and expand our intellectual property portfolio;
Establish and maintain clinical and commercial manufacturing capabilities or make arrangements with third-party manufacturers for clinical and commercial
manufacturing;
Build and maintain robust sales, distribution and marketing capabilities, either on our own or in collaboration with strategic partners, if our drug candidates are
approved;
Gain acceptance for our drug candidates, if approved, by patients, the medical community and third party payors;
Effectively compete with other therapies;
Obtain and maintain healthcare coverages and adequate reimbursement;
Maintain a continued acceptable safety profile for our drug candidates following approval;
Develop and maintain any strategic relationships we elect to enter into, if any;
Enforce and defend intellectual property rights and claims; and
Manage our spending as costs and expenses increase due to preclinical development, clinical trials, marketing approvals and commercialization.
We may find it difficult to enroll patients in our clinical studies, which could delay or prevent clinical studies of our pharmaceutical products.
Identifying and qualifying patients to participate in clinical studies of our pharmaceutical products is critical to our success. The timing of our clinical studies depends on the
speed at which we can recruit patients to participate in testing our pharmaceutical products. We may experience delays. If patients are unwilling to participate in our clinical
studies because of negative publicity from adverse events in the biopharmaceutical industries or for other reasons, including competitive clinical studies for similar patient
populations, the timeline for recruiting patients, conducting studies and obtaining regulatory approval of potential products may be delayed. These delays could result in
increased costs, delays in advancing our product development, delays in testing the effectiveness of our technology or termination of the clinical studies altogether.
We may not be able to identify, recruit and enroll a sufficient number of patients, or those with required or desired characteristics to achieve diversity in a study, to complete our
clinical studies in a timely manner. Patient enrollment is affected by many factors including:
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Severity of the disease under investigation;
Real or perceived availability of alternative treatments;
Size and nature of the patient population;
Eligibility criteria for and design of the trial in question;
Perceived risks and benefits of the drug candidate under study;
Proximity and availability of clinical sites for prospective patients;
Ongoing clinical trials of potentially competitive agents;
Physicians’ and patients’ perceptions as to the potential advantages of our drug candidates being studied in relation to available therapies or other products under
development;
Our CRO’s and our trial sites’ efforts to facilitate timely enrollment in clinical trials;
Patient referral practices of physicians; and
The need to monitor patients and collect patient data adequately during and after treatment.
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We may not be able to initiate or continue clinical studies if we cannot enroll a sufficient number of eligible patients to participate in the clinical studies required by the FDA or
other regulatory agencies. Our ability to successfully initiate, enroll and complete a clinical study in any foreign country is subject to numerous risks unique to conducting
business in foreign countries, including:
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Difficulty in establishing or managing relationships with CROs and physicians;
Different standards for the conduct of clinical studies;
Our inability to locate qualified local consultants, physicians and partners; and
The potential burden of complying with a variety of foreign laws, medical standards and regulatory requirements, including the regulation of pharmaceutical
and biotechnology products and treatment.
If we have difficulty enrolling a sufficient number of patients to conduct our clinical studies as planned, we may need to delay, limit or terminate ongoing or planned clinical
studies, any of which would have an adverse effect on our business.
We may encounter substantial delays in commencement, enrollment or completion of our clinical trials or we may fail to demonstrate safety and efficacy to the satisfaction
of applicable regulatory authorities, which could prevent us from commercializing our current and future drug candidates on a timely basis, if at all.
Before obtaining marketing approval from regulatory authorities for the sale of our current and future drug candidates, we must conduct extensive clinical trials to demonstrate
the safety and efficacy of the drug candidates. We cannot guarantee that any clinical studies will be conducted as planned or completed on schedule, if at all. A failure of one or
more clinical studies can occur at any stage of testing. Events that may prevent successful or timely completion of clinical development include:
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Delays in reaching a consensus with regulatory agencies on study design;
Delays in reaching agreement on acceptable terms with prospective CROs and clinical study sites;
Delays in obtaining required IRB, or Independent Ethics Committee approval at each clinical study site;
Delays in recruiting suitable patients to participate in our clinical studies;
Imposition of a clinical hold by regulatory agencies, including after an inspection of our clinical study operations or study sites;
Failure by our CROs, other third-parties or us to adhere to clinical study requirements;
Failure to perform in accordance with the FDA’s GCP, or applicable regulatory requirements in other countries;
Delays in the testing, validation, manufacturing and delivery of our drug candidates to the clinical sites;
Delays in having patients complete participation in a study or return for post-treatment follow-up;
Clinical study sites or patients dropping out of a study;
Occurrence of serious adverse events associated with the drug candidate that are viewed to outweigh its potential benefits; or
Changes in regulatory requirements and guidance that require amending or submitting new clinical protocols.
Any inability to successfully complete preclinical studies and clinical trials could result in additional costs to us or impair our ability to generate revenues from product sales,
regulatory and commercialization milestones and royalties. In addition, if we make manufacturing or formulation changes to our drug candidates, we may need to conduct
additional studies to bridge our modified drug candidates to earlier versions. Clinical trial delays also could shorten any periods during which we may have the exclusive right
to commercialize our drug candidates or allow our competitors to bring products to market before we do, which could impair our ability to successfully commercialize our drug
candidates and may harm our business, financial condition, results of operations and prospects.
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If the results of our clinical studies are inconclusive or if there are safety concerns or adverse events associated with our pharmaceutical products, we may:
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Be delayed in obtaining marketing approval or licenses for our drug candidates, if at all;
Obtain approval for indications or patient populations that are not as broad as intended or desired;
Obtain approval with labeling that includes significant use or distribution restrictions or safety warnings;
Be subject to changes with the way the product is administered;
Be required to perform additional clinical studies to support approval or be subject to additional post-marketing testing requirements;
Have regulatory authorities withdraw their approval of the product or impose restrictions on its distribution in the form of a modified risk evaluation and
mitigation strategy;
Be subject to the addition of labeling statements, such as warnings or contraindications;
Be sued; or
Experience damage to our reputation.
As described above, any of these events could prevent us from achieving or maintaining market acceptance of our pharmaceutical products and impair our ability to generate
revenues.
Clinical trials may fail to demonstrate the safety and efficacy of our pharmaceutical drug candidates and could prevent or significantly delay regulatory approval.
Before receiving NDA or BLA approval to commercialize a drug candidate, we must demonstrate to the FDA, with substantial evidence from well-controlled clinical trials, that
the drug candidate is both safe and effective or the biologic is safe, pure and potent. If these trials or future clinical trials are unsuccessful, our business and reputation could be
harmed and our stock price could be adversely affected.
Clinical failure can occur at any stage of clinical development. Clinical trials may produce negative or inconclusive results, and we or any of our current and future
collaborators may decide, or regulators may require us, to conduct additional clinical or preclinical testing. We will be required to demonstrate with substantial evidence
through well-controlled clinical trials that our drug candidates are as safe and effective for use in a specific patient population as the respective reference products before we can
seek regulatory approvals for their commercial sale. Success in early clinical trials does not mean that future larger registration clinical trials will be successful because drug
candidates in later-stage clinical trials may fail to demonstrate equivalent safety and efficacy to the satisfaction of the FDA and foreign regulatory agencies despite having
progressed through initial clinical trials. Drug candidates that have shown promising results in early clinical trials may still fail in subsequent confirmatory clinical trials.
Similarly, the outcome of preclinical testing and early clinical trials may not be predictive of the success of later clinical trials, and interim results of a clinical trial do not
necessarily predict final results. A number of companies in the pharmaceutical industry, including those with greater resources and experience than us, have suffered significant
setbacks in advanced clinical trials, even after obtaining promising results in earlier clinical trials.
In addition, the design of a clinical trial can determine whether its results will support approval of a product and flaws in the design of a clinical trial may not become apparent
until the clinical trial is well advanced. We may be unable to design and execute a clinical trial to support regulatory approval. In some instances, there can be significant
variability in safety or efficacy results between different trials of the same drug candidate due to numerous factors, including but not limited to changes in trial protocols,
differences in size and type of the patient populations, adherence to the dosing regimen and the rate of dropout among clinical trial participants.
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Because of these risks, our research and development efforts, and those of our collaborative partners, may not result in any commercially viable products. If a significant
portion of these development efforts is not successfully completed, or if required regulatory approvals are not obtained by us or our partners, or any approved products are not
commercially successful, we may not generate significant revenues or become profitable.
If we complete the necessary preclinical and clinical studies, we cannot predict when or if we will obtain regulatory approval to commercialize a drug candidate or the
approval may be for a more narrow indication than we expect.
A drug candidate cannot be commercialized until the appropriate regulatory authorities have reviewed and approved the drug candidate. Even if our drug candidates
demonstrate safety and efficacy in clinical studies, the regulatory agencies may not complete their review processes in a timely manner, or we may not be able to obtain
regulatory approval. Additional delays may result if an FDA Advisory Committee or other regulatory advisory group or authority recommends non-approval or restrictions on
approval. In addition, we may experience delays or rejections based upon additional government regulation from future legislation or administrative action, or changes in
regulatory agency policy during the period of product development, clinical studies and the review process. Regulatory agencies also may approve a drug candidate for fewer or
more limited indications than requested or may grant approval subject to the performance of post-marketing studies. In addition, regulatory agencies may not approve the
labeling claims that are necessary or desirable for the successful commercialization of our drug candidates. Failure to obtain, or a delay in obtaining, regulatory approval to
commercialize a drug candidate will impair our ability to generate revenues and harm our business prospects.
If we obtain regulatory approval for a drug candidate, our drug candidate will remain subject to regulatory scrutiny.
If our drug candidates are approved, they will be subject to ongoing regulatory requirements for manufacturing, labeling, packaging, storage, advertising, promotion, sampling,
record-keeping, conduct of post-marketing studies and submission of safety, efficacy and other post-market information, including both federal and state requirements in the
United States and requirements of comparable foreign regulatory authorities.
Manufacturers and manufacturing facilities are required to comply with extensive FDA, and comparable foreign regulatory authority requirements, including ensuring that
quality control and manufacturing procedures conform to cGMP regulations. As such, we will be subject to continual review and inspections to assess compliance with cGMP
and adherence to commitments made in any, BLA or marketing authorization application, or MAA. Accordingly, we and our collaborators and suppliers must continue to
expend time, money and effort in all areas of regulatory compliance, including manufacturing, production and quality control.
Any regulatory approvals that we or our collaboration partners receive for our drug candidates may be subject to limitations on the approved indicated uses for which the
product may be marketed or to the conditions of approval or may contain requirements for potentially costly additional clinical trials and surveillance to monitor the safety and
efficacy of the drug candidate. We will be required to report certain adverse reactions and production problems, if any, to the FDA and comparable foreign regulatory
authorities. Any new legislation addressing drug safety issues could result in delays in product development or commercialization, or increased costs to assure compliance. We
will have to comply with requirements concerning advertising and promotion for our products. Promotional communications with respect to prescription drugs are subject to a
variety of legal and regulatory restrictions and must be consistent with the information in the product’s approved label. As such, we are not allowed to promote our products for
indications or uses for which they do not have approval. If our drug candidates are approved, we must submit new or supplemental applications and obtain approval for certain
changes to the approved products, product labeling or manufacturing process. We could also be asked to conduct post-marketing clinical trials to verify the safety and efficacy
of our products in general or in specific patient subsets. An unsuccessful post-marketing study or failure to complete such a study could result in the withdrawal of marketing
approval.
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If a regulatory agency discovers previously unknown problems with an approved product, such as adverse events of unanticipated severity or frequency or problems with our
manufacturing facilities, or if a regulatory agency disagrees with the promotion, marketing or labeling of a product, such regulatory agency may impose restrictions on that
product or us, including requiring withdrawal of the product from the market. If we fail to comply with applicable regulatory requirements, a regulatory agency or enforcement
authority may, among other things:
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Issue untitled and warning letters;
Impose civil or criminal penalties;
Suspend or withdraw regulatory approval or revoke a license;
Suspend any of our ongoing clinical trials;
Refuse to approve pending applications or supplements to approved applications submitted by us;
Impose restrictions on our operations, including closing our manufacturing facilities; or
Seize or detain products or require a product recall.
Any government investigation of alleged violations of law could require us to expend significant time and resources in response and could generate negative publicity. Any
failure to comply with ongoing regulatory requirements may significantly and adversely affect our ability to commercialize and generate revenue from our products. If
regulatory sanctions are applied or if regulatory approval is withdrawn, the value of the Company and our operating results will be negatively impacted.
The commercial success of any current or future pharmaceutical products will depend upon the degree of market acceptance by physicians, patients, third-party payors
and others in the medical community.
Even with the requisite approvals, the commercial success of our pharmaceutical products will depend in part on the medical community, patients, and third-party payors
accepting our pharmaceutical products as medically useful, cost-effective, and safe. Any pharmaceutical product that we, or our partners, bring to the market may not gain
market acceptance by physicians, patients, third-party payors or others in the medical community. The degree of market acceptance of these pharmaceutical products, if
approved for commercial sale, will depend on a number of factors, including:
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The effectiveness of our approved drug candidates as compared to currently available products;
Patient willingness to adopt our approved drug candidates in place of current therapies;
Our ability to provide acceptable evidence of safety and efficacy;
Relative convenience and ease of administration;
The prevalence and severity of any adverse side effects;
Restrictions on use in combination with other products;
Availability of alternative treatments;
Pricing and cost-effectiveness assuming either competitive or potential premium pricing requirements, based on the profile of our drug candidates and target
markets;
Effectiveness of our or our partners’ sales and marketing strategy;
Our ability to obtain sufficient third-party coverage or reimbursement; and
Potential product liability claims.
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Even if a potential product displays a favorable efficacy and safety profile in preclinical and clinical studies, market acceptance of the product will not be known until after it is
launched. Our efforts to educate the medical community and third-party payors on the benefits of the pharmaceutical products may require a significant amount of resources
and may never be successful. If these products do not achieve an adequate level of acceptance, we may not generate significant product revenue and may not become profitable.
The commercial potential of a pharmaceutical candidate in development is difficult to predict. If the market size for a new drug candidate or technology is significantly
smaller than we anticipate, it could significantly and negatively impact our revenue, results of operations and financial condition.
It is very difficult to estimate the commercial potential of pharmaceutical products due to important factors, such as safety and efficacy compared to other available
technologies or treatments, including changing standards of care, third-party payor reimbursement standards, patient and physician preferences, the availability of competitive
alternatives that may emerge either during the long drug development process or after commercial introduction, and the availability of generic versions of our successful drug
candidates following approval by government health authorities, based on the expiration of regulatory exclusivity or our inability to prevent generic versions from coming to
market by asserting our patents. If due to these factors, or others, the market potential for a pharmaceutical product is lower than we anticipated, it could significantly and
negatively impact the commercial terms of any collaboration partnership potential for such pharmaceutical product or, if we have already entered into a collaboration for such
pharmaceutical product, the revenue potential from royalty and milestone payments could be significantly diminished which would negatively impact our business, financial
condition and results of operations.
Failure to obtain or maintain adequate coverage and reimbursement for our drug candidates, if approved, could limit our ability to market those products and decrease our
ability to generate revenue.
The success of our drug candidates, if approved, depends on the availability of adequate coverage and reimbursement from third-party payors. In addition, because our drug
candidates represent new approaches to the treatment of certain diseases, we cannot be sure that coverage and reimbursement will be available for, or accurately estimate the
potential revenue from, our drug candidates or assure that coverage and reimbursement will be available for any product that we may develop.
Patients who are provided medical treatment for their conditions generally rely on third-party payors to reimburse all or part of the costs associated with their treatment.
Adequate coverage and reimbursement from governmental healthcare programs, such as Medicare and Medicaid, and commercial payors are critical to new product acceptance.
Government authorities and third-party payors, such as private health insurers and health maintenance organizations, decide which drugs and treatments they will cover and the
amount of reimbursement. Coverage and reimbursement by a third-party payor may depend upon a number of factors, including the third-party payor’s determination that use
of a product is:
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A covered benefit under its health plan;
Safe, effective and medically necessary;
Appropriate for the specific patient;
Cost-effective; and
Neither experimental nor investigational.
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In the United States, no uniform policy of coverage and reimbursement for products exists among third-party payors. As a result, obtaining coverage and reimbursement
approval of a product from a government or other third-party payor is a time-consuming and costly process that could require us to provide to each payor supporting scientific,
clinical and cost-effectiveness data for the use of our products on a payor-by-payor basis, with no assurance that coverage and adequate reimbursement will be obtained. Even if
we obtain coverage for a given product, the resulting reimbursement payment rates might not be adequate for us to achieve or sustain profitability or may require co-payments
that patients find unacceptably high. Additionally, third-party payors may not cover, or provide adequate reimbursement for, long-term follow-up evaluations required
following the use of our gene-modifying products. Patients are unlikely to use our drug candidates unless coverage is provided and reimbursement is adequate to cover a
significant portion of the cost of our drug candidates. There is significant uncertainty related to insurance coverage and reimbursement of newly approved products. It is
difficult to predict at this time what third-party payors will decide with respect to the coverage and reimbursement for our drug candidates.
Moreover, increasing efforts by governmental and third-party payors in the United States and abroad to cap or reduce healthcare costs may cause such organizations to limit
both coverage and the level of reimbursement for newly approved products and, as a result, they may not cover or provide adequate payment for our drug candidates. We expect
to experience pricing pressures in connection with the sale of any of our drug candidates due to the trend toward managed healthcare, the increasing influence of health
maintenance organizations, cost containment initiatives and additional legislative changes.
We intend to seek approval to market our drug candidates in both the United States and in select foreign jurisdictions. If we obtain approval in one or more foreign jurisdictions
for our drug candidates, we will be subject to rules and regulations in those jurisdictions. In some foreign countries, the pricing of pharmaceutical products is subject to
governmental control and other market regulations which could put pressure on the pricing and usage of our drug candidates. In these countries, pricing negotiations with
governmental authorities can take considerable time after obtaining marketing approval of a drug candidate. In addition, market acceptance and sales of our drug candidates
will depend significantly on the availability of adequate coverage and reimbursement from third-party payors for our drug candidates and may be affected by existing and future
health care reform measures. Failure to obtain or maintain adequate coverage and reimbursement for our drug candidates, if approved, could limit our ability to market those
products and decrease our ability to generate revenue.
We may use our financial and human resources to pursue a particular research program or drug candidate and fail to capitalize on programs or drug candidates that may
be more profitable or for which there is a greater likelihood of success.
Because we have limited resources, we may forego or delay pursuit of opportunities with certain programs, drug candidates or for indications that later prove to have greater
commercial potential. Our resource allocation decisions may cause us to fail to capitalize on viable commercial products or profitable market opportunities. Our spending on
current and future research and development programs for drug candidates may not yield any commercially viable products. If we do not accurately evaluate the commercial
potential or target market for a particular drug candidate, we may relinquish valuable rights to that drug candidate through strategic collaboration, licensing or other royalty
arrangements in cases in which it would have been more advantageous for us to retain sole development and commercialization rights to such drug candidate, or we may
allocate internal resources to a drug candidate in a therapeutic area in which it would have been more advantageous to enter into a partnering arrangement. Failure to pursue
opportunities with greater commercial potential or relinquishing valuable rights to drug candidates may adversely impact our business, results of operations and prospects.
We may not be successful in our efforts to identify or discover additional pharmaceutical products.
The success of our business depends primarily upon our ability to identify and develop pharmaceutical products. Our research programs may fail to identify potential
pharmaceutical products for clinical development for a number of reasons. Our research methodology may be unsuccessful in identifying potential pharmaceutical products or
our potential pharmaceutical products may be shown to have harmful side effects or may have other characteristics that may make the products unmarketable or unlikely to
receive marketing approval.
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If any of these events occur, we may be forced to abandon our development efforts for a program or programs, which would have a material adverse effect on our business and
could potentially cause us to cease operations. Research programs to identify new pharmaceutical products require substantial technical, financial and human resources. We
may focus our efforts and resources on potential programs or pharmaceutical products that ultimately prove to be unsuccessful. If we are not successful in our efforts to identify
or discover additional pharmaceutical products, it could adversely affect our business, results of operations and prospects.
We may fail to obtain orphan drug designations from the FDA for our drug candidates, and even if we obtain such designations, we may be unable to maintain the benefits
associated with orphan drug designation, including the potential for market exclusivity.
Under the Orphan Drug Act, the FDA may grant orphan drug designation to a drug or biologic intended to treat a rare disease or condition, which is defined as one occurring in
a patient population of fewer than 200,000 in the United States, or a patient population greater than 200,000 in the United States where there is no reasonable expectation that
the cost of developing the drug or biologic will be recovered from sales in the United States. In the United States, orphan drug designation entitles a party to financial incentives
such as opportunities for grant funding towards clinical trial costs, tax advantages and user-fee waivers. In addition, if a product that has orphan drug designation subsequently
receives the first FDA approval for the disease for which it has such designation, the product is entitled to orphan drug exclusivity, which means that the FDA may not approve
any other applications, including a full NDA or BLA, to market the same drug or biologic for the same indication for seven years, except in limited circumstances, such as a
showing of clinical superiority to the product with orphan drug exclusivity or where the manufacturer is unable to assure sufficient product quantity.
We may seek to obtain orphan drug designation for our active drug candidates for any qualifying indications they may be approved for in the future. Even if we obtain such
designations, we may not be the first to obtain marketing approval of our drug candidate for the orphan-designated indication due to the uncertainties associated with
developing pharmaceutical products. In addition, exclusive marketing rights in the United States may be limited if we seek approval for an indication broader than the orphan-
designated indication, or may be lost if the FDA later determines that the request for designation was materially defective or if the manufacturer is unable to assure sufficient
quantities of the product to meet the needs of patients with the rare disease or condition. Further, even if we obtain orphan drug exclusivity for a product, that exclusivity may
not effectively protect the product from competition because different drugs with different active moieties can be approved for the same condition. Even after an orphan product
is approved, the FDA can subsequently approve the same drug with the same active moiety for the same condition if the FDA concludes that the later drug is safer, more
effective or makes a major contribution to patient care. Orphan drug designation neither shortens the development time or regulatory review time of a drug, nor gives the drug
any advantage in the regulatory review or approval process. In addition, even if we seek orphan drug designation for our drug candidates, we may never receive such
designations.
The market opportunities for our drug candidates may be limited to those patients who are ineligible for or have failed prior treatments and may be small.
Cancer therapies are sometimes characterized as first line, second line or third line, and the FDA often approves new therapies initially only for third line use. When cancer is
detected early enough, first line therapy is sometimes adequate to cure the cancer or prolong life without a cure. Whenever first line therapy, which usually consists of
chemotherapy, hormone therapy, surgery or a combination of these, proves unsuccessful, second line therapy may be administered. Second line therapies often consist of more
chemotherapy, radiation, antibody drugs, tumor targeted small molecules or a combination of these. Third line therapies can include bone marrow transplantation, antibody and
small molecule targeted therapies, more invasive forms of surgery and new technologies. In markets with approved therapies, we expect to initially seek approval of our drug
candidates as a later stage therapy for patients who have failed other approved treatments. Subsequently, for those drugs that prove to be sufficiently beneficial, if any, we
would expect to seek approval as a second line therapy and potentially as a first line therapy, but there is no guarantee that our drug candidates, even if approved, would be
approved for second line or first line therapy. In addition, we may have to conduct additional clinical trials prior to gaining approval for second line or first line therapy.
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Our projections of both the number of people who have the cancers we are targeting, as well as the subset of people with these cancers in a position to receive later stage
therapy and who have the potential to benefit from treatment with our drug candidates, are based on our beliefs and estimates. These estimates have been derived from a variety
of sources, including scientific literature, surveys of clinics, patient foundations or market research and may prove to be incorrect. Further, new studies may change the
estimated incidence or prevalence of these cancers. The number of patients may turn out to be lower than expected. In addition, the potentially addressable patient population
for our drug candidates may be limited or may not be amenable to treatment with our drug candidates. Even if we obtain significant market share for our drug candidates, we
may never achieve profitability without obtaining regulatory approval for additional indications, including use as a first or second line therapy, which may adversely affect our
business and results of operations.
Healthcare legislative reform measures may have a material adverse effect on our business and results of operations.
In both the United States and certain foreign jurisdictions, there have been a number of legislative and regulatory enactments in recent years that change the healthcare system
in ways that could impact our future ability to sell our drug candidates profitably.
Furthermore, there have been and continue to be a number of initiatives at the federal and state level that seek to reduce healthcare costs. Most significantly, in March 2010, the
Patient Protection and Affordable Health Care Act, as amended by the Health Care and Education Reconciliation Act (collectively, the “ACA”), was signed into law, which
includes measures that significantly change the way healthcare is financed by both governmental and private insurers. In January 2017, Congress voted to adopt a budget
resolution for fiscal year 2017, or the Budget Resolution, that authorizes the implementation of legislation that would repeal portions of the ACA. In addition, on January 20,
2017, former President Trump signed an Executive Order directing federal agencies with authorities and responsibilities under the ACA to waive, defer, grant exemptions from,
or delay the implementation of any provision of the ACA that would impose a fiscal or regulatory burden on states, individuals, healthcare providers, health insurers, or
manufacturers of pharmaceuticals or medical devices. Further, on October 12, 2017, former President Trump issued another executive order requiring the Secretaries of HHA
and the Departments of Labor, and Treasury to consider proposing regulations or revising existing guidance to allow more employers to form association health plans that
would be allowed to provide coverage across state lines, increase the availability of short-term, limited duration health insurance plans, which are generally not subject to the
requirements of the ACA, and increase the availability and permitted use of health reimbursement arrangements. On October 13, 2017, the Department of Justice announced
that HHS was immediately stopping its cost sharing reduction payments to insurance companies based on the determination that those payments had not been appropriated by
Congress. Furthermore, on December 22, 2017, former President Trump signed the Tax Cuts and Jobs Act (the “TCJA”) into law that, in addition to overhauling the federal tax
system, also, effective as of January 1, 2019, repeals the penalties associated with the individual mandate. In part, as a result of the repeal of such penalties, there is litigation
pending in various Federal jurisdictions challenging the validity of the ACA and certain cases are now being considered by the United States Supreme Court after oral
arguments. Congress or the President of the United States also could consider subsequent legislation or executive action to replace, eliminate or reaffirm elements of the ACA.
We will continue to evaluate the effect that the ACA and any future measures to modify, repeal, replace or reaffirm the ACA have on our business. We are not able to provide
any assurance that the continued healthcare reform debate will not result in legislation, regulation, litigation, or executive action by the President of the United States that is
adverse to our business.
Laws and other reform and cost containment measures that may be proposed and adopted in the future remain uncertain, but may result in additional reductions in Medicare and
other healthcare funding, which could have a material adverse effect on our future customers and accordingly, our ability to generate revenue, attain profitability, or
commercialize our products.
Risks Related to Our Reliance on Third-Parties
If conflicts arise between us and our collaborators or strategic partners, these parties may act in their self-interest, which may limit our ability to implement our strategies.
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If conflicts arise between our corporate or academic collaborators or strategic partners and us, the other party may act in its self-interest, which may limit our ability to
implement our strategies. Some of our academic collaborators and strategic partners are conducting multiple product development efforts within each area that is the subject of
the collaboration with us. Our collaborators or strategic partners, however, may develop, either alone or with others, products in related fields that are competitive with the
products or potential products that are the subject of these collaborations. Competing products, either developed by the collaborators or strategic partners or to which the
collaborators or strategic partners have rights, may result in the withdrawal of partner support for our drug candidates.
Some of our collaborators or strategic partners could also become our competitors in the future. Our collaborators or strategic partners could develop competing products,
preclude us from entering into collaborations with their competitors, fail to obtain timely regulatory approvals, terminate their agreements with us prematurely, or fail to devote
sufficient resources to the development and commercialization of products. Any of these developments could harm our product development efforts, which may adversely
affect our business, results of operations and prospects.
We expect to rely on third-parties to conduct, supervise and monitor our clinical studies, and if these third-parties perform in an unsatisfactory manner, it may harm our
business.
We rely on CROs, clinical investigators and clinical study sites to ensure our clinical studies are conducted properly and on time. We will have limited influence over the
performance by CROs, clinical investigators and clinical study sites and we will control only certain aspects of our CROs’ activities. Nevertheless, we will be responsible for
ensuring that each of our clinical studies is conducted in accordance with the applicable protocol, legal, and regulatory requirements and scientific standards, and our reliance
on the CROs does not relieve us of our regulatory responsibilities.
We, our clinical investigators and our CROs are required to comply with the FDA’s GCPs for conducting, recording and reporting the results of clinical trials to assure that the
data and reported results are credible and accurate and that the rights, integrity and confidentiality of clinical trial participants are protected. The FDA enforces these GCPs
through periodic inspections of study sponsors, principal investigators and clinical trial sites. If we, our CROs or the clinical investigators fail to comply with applicable GCPs,
the clinical data generated in our clinical trials may be deemed unreliable and the FDA may require us to perform additional clinical trials before approving any marketing
applications. Upon inspection, the FDA may determine that our clinical trials did not comply with GCPs. In addition, our future clinical trials will require a sufficient number of
test subjects to evaluate the safety and efficacy of our drug candidates. Accordingly, if our CROs or clinical investigators fail to comply with these regulations or fail to recruit a
sufficient number of patients, we may be required to repeat such clinical trials, which would delay the regulatory approval process.
Our CROs are not our employees, and we are therefore unable to directly monitor whether or not they devote sufficient time and resources to our clinical and nonclinical
programs, which must be conducted in accordance with GCPs and GLPs, respectively. These CROs may also have relationships with other commercial entities, including our
competitors, for whom they may also be conducting clinical studies or other drug development activities that could harm our competitive position. If our CROs do not
successfully carry out their contractual duties or obligations, fail to meet expected deadlines, or if the quality or accuracy of the clinical data they obtain is compromised due to
the failure to adhere to our clinical protocols or regulatory requirements, or for any other reasons, our clinical studies may be extended, delayed or terminated, and we may not
be able to obtain regulatory approval for, or successfully commercialize our pharmaceutical products. As a result, our financial results and the commercial prospects for our
pharmaceutical products would be harmed, our costs could increase, and our ability to generate revenues could be delayed.
We may also rely on other third-parties to store and distribute our products for any clinical studies that we may conduct. Any performance failure on the part of our distributors
could delay clinical development or marketing approval of our pharmaceutical products or commercialization of our products, if approved, producing additional losses and
depriving us of potential product revenue.
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Our collaborators or strategic partners may decide to adopt alternative technologies or may be unable to develop commercially viable products with our technology, which
would negatively impact our revenues and our strategy to develop these products.
Our collaborators or strategic partners may adopt alternative technologies, which could decrease the marketability of our products. Additionally, because our current or future
collaborators or strategic partners are likely to be working on more than one development project, they could choose to shift their resources to projects other than those they are
working on with us. If they do so, this would delay our ability to test our technology and would delay or terminate the development of potential products based on our
platforms. Further, our collaborators and strategic partners may elect not to develop products arising out of our collaborative and strategic partnering arrangements or to devote
sufficient resources to the development, manufacturing, marketing or sale of these products. The failure to develop and commercialize a drug candidate pursuant to our
agreements with our current or future collaborator would prevent us from receiving future milestone and royalty payments which would negatively impact our revenues.
We may seek to establish additional collaborations and, if we are not able to establish them on commercially reasonable terms, we may have to alter our development and
commercialization plans.
Our drug candidate development programs and the potential commercialization of our drug candidates will require substantial additional cash to fund expenses. For some of our
drug candidates, we may decide to collaborate with additional pharmaceutical and biotechnology companies for the development and potential commercialization of those drug
candidates. For our XCART technology, we intend to seek to leverage the manufacturing expertise and capability of an academic or strategic collaborator during early
development.
We face significant competition in seeking appropriate collaborators. Whether we reach a definitive agreement for any additional collaborations will depend, among other
things, upon our assessment of the collaborator’s resources and expertise, the terms and conditions of the proposed collaboration and the proposed collaborator’s evaluation of a
number of factors. Those factors may include the design or results of clinical trials, the likelihood of approval by FDA or similar regulatory authorities outside the United
States, the potential market for the subject drug candidate, the costs and complexities of manufacturing and delivering such drug candidate to patients, the potential of
competing drugs, the existence of uncertainty with respect to our ownership of technology, which can exist if there is a challenge to such ownership without regard to the merits
of the challenge, and industry and market conditions generally. The collaborator may also consider alternative drug candidates or technologies for similar indications that may
be available to collaborate on and whether such a collaboration could be more attractive than the one with us for our drug candidate. The terms of any additional collaborations
or other arrangements that we may establish may not be favorable to us.
We may also be restricted under existing collaboration agreements from entering into future agreements on certain terms with potential collaborators. Collaborations are
complex and time-consuming to negotiate and document. In addition, there have been a significant number of recent business combinations among large pharmaceutical
companies that have resulted in a reduced number of potential future collaborators.
We may not be able to negotiate additional collaborations on a timely basis, including for early XCART development, on acceptable terms, or at all. If we are unable to do so,
we may have to curtail the development of the drug candidate for which we are seeking to collaborate, reduce or delay its development program or one or more of our other
development programs, delay its potential commercialization or reduce the scope of any sales or marketing activities, or increase our expenditures and undertake development
or commercialization activities at our own expense. If we elect to increase our expenditures to fund development or commercialization activities on our own, we may need to
obtain additional capital, which may not be available to us on acceptable terms or at all. If we do not have sufficient funds, we may not be able to further develop our drug
candidates or bring them to market and generate product revenue.
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If we enter into one or more collaborations, we may be required to relinquish important rights to and control over the development of our drug candidates or otherwise be
subject to unfavorable terms.
Any future collaborations we enter into could subject us to a number of risks, including:
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We may not be able to control the amount and timing of resources that our collaborators devote to the development or commercialization of our drug
candidates;
Collaborators may delay clinical trials, provide insufficient funding, terminate a clinical trial or abandon a drug candidate, repeat or conduct new clinical trials
or require a new version of a drug candidate for clinical testing;
Collaborators may not pursue further development and commercialization of products resulting from the strategic partnering arrangement or may elect to
discontinue research and development programs;
Collaborators may not commit adequate resources to the marketing and distribution of our drug candidates, limiting our potential revenues from these
products;
Disputes may arise between us and our collaborators that result in the delay or termination of the research, development or commercialization of our drug
candidates or that result in costly litigation or arbitration that diverts management’s attention and consumes resources;
Collaborators may experience financial difficulties;
Collaborators may not properly maintain or defend our intellectual property rights or may use our proprietary information in a manner that could jeopardize or
invalidate our proprietary information or expose us to potential litigation;
Business combinations or significant changes in a collaborator’s business strategy may also adversely affect a collaborator’s willingness or ability to complete
its obligations under any arrangement;
Collaborators could decide to move forward with a competing drug candidate developed either independently or in collaboration with others, including our
competitors; and
Collaborators could terminate the arrangement or allow it to expire, which would delay the development and may increase the cost of developing our drug
candidates.
Our contract manufacturers are subject to significant regulation with respect to manufacturing our products. The manufacturing facilities on which we rely may not
continue to meet regulatory requirements and have limited capacity.
We currently have relationships with a limited number of suppliers for the manufacturing of our pharmaceutical products. Each supplier may require licenses to manufacture
components if such processes are not owned by the supplier or in the public domain and we may be unable to transfer or sublicense the intellectual property rights we may have
with respect to such activities.
All entities involved in the preparation of pharmaceutical products for clinical studies or commercial sale, including our existing contract manufacturers for our drug
candidates, are subject to extensive regulation. Components of a finished pharmaceutical product approved for commercial sale or used in late-stage clinical studies must be
manufactured in accordance with cGMP. These regulations govern manufacturing processes and procedures (including record keeping) and the implementation and operation of
quality systems to control and assure the quality of investigational products and products approved for sale. Poor control of production processes can lead to the introduction of
adventitious agents or other contaminants, or to inadvertent changes in the properties or stability of our pharmaceutical products that may not be detectable in final product
testing. Our contract manufacturers must supply all necessary documentation in support of an NDA or BLA on a timely basis and must adhere to the FDA’s GLP, and cGMP
regulations enforced by the FDA through its facilities inspection program. The facilities and quality systems of some or all of our third-party contractors must pass a pre-
approval inspection for compliance with the applicable regulations as a condition of regulatory approval of our pharmaceutical products or any of our other potential products.
In addition, the regulatory authorities may, at any time, audit or inspect a manufacturing facility involved with the preparation of our pharmaceutical products or our other
potential products or the associated quality systems for compliance with the regulations applicable to the activities being conducted. If these facilities do not pass a pre-approval
plant inspection, FDA approval of the products will not be granted.
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The regulatory authorities also may, at any time following approval of a product for sale, audit the manufacturing facilities of our third-party contractors. If any such inspection
or audit identifies a failure to comply with applicable regulations or if a violation of our product specifications or applicable regulations occurs independent of such an
inspection or audit, we, or the relevant regulatory authority, may require remedial measures that may be costly and/or time-consuming for us or a third-party to implement and
that may include the temporary or permanent suspension of a clinical study or commercial sales or the temporary or permanent closure of a facility. Any such remedial
measures imposed upon third-parties with whom we contract could materially harm our business.
If our third-party manufacturers fail to maintain regulatory compliance, the FDA can impose regulatory sanctions including, among other things, refusal to approve a pending
application for a drug candidate, or revocation of a pre-existing approval. As a result, our business, financial condition and results of operations may be materially harmed.
Additionally, if supply from one approved manufacturer is interrupted, there could be a significant disruption in commercial supply. The number of manufacturers with the
necessary manufacturing capabilities is limited. In addition, an alternative manufacturer would need to be qualified through an NDA or BLA supplement which could result in
further delay. The regulatory agencies may also require additional studies if a new manufacturer is relied upon for commercial production. Switching manufacturers may
involve substantial costs and is likely to result in a delay in our desired clinical and commercial timelines, which could materially harm our business and results of operations.
These factors could cause the delay of clinical studies, regulatory submissions, required approvals or commercialization of our pharmaceutical products, and/or cause us to
incur higher costs and prevent us from commercializing our products successfully. Furthermore, if our suppliers fail to meet contractual requirements, and we are unable to
secure one or more replacement suppliers capable of production at a substantially equivalent cost, our clinical studies may be delayed or we could lose potential revenue, which
could materially harm our business and results of operations.
We have no manufacturing, sales, marketing or distribution capabilities, and we may have to invest a significant amount of resources to develop these capabilities.
We have no internal manufacturing capabilities. As a result, for manufacturing we depend on third-party manufacturers. Our strategy is based on leveraging the ability of
collaboration partners to develop and manufacture our products for commercialization in the pharmaceutical marketplace and we will be dependent on collaborations with drug
development and manufacturing collaborators. If we are not able to maintain existing collaborative arrangements or establish new arrangements on commercially acceptable
terms, we would be required to undertake product manufacturing and development activities at our own expense. This would increase our capital requirements or require us to
limit the scope of our development activities. Moreover, we have limited or no experience in conducting full scale bioequivalence or other clinical studies, preparing and
submitting regulatory applications, and distributing and marketing pharmaceutical products and as such we are reliant on contract parties for such efforts. We may not be able to
enter into collaborations or hire consultants or external service providers to assist us in sales, marketing and distribution functions on acceptable financial terms or at all.
If any of our developmental collaborators breach or terminate their agreements with us or otherwise fail to conduct their collaborative activities in a timely manner, the
preclinical and/or clinical development and/or commercialization of our pharmaceutical products will be delayed and we would be required to devote additional resources to
product development and commercialization or terminate certain development programs. Also, a license relationship may be terminated at the discretion of our collaborator, or
at the end of contract terms, and in some cases with only limited notice to us. The termination of the collaborative arrangement could have a material adverse effect on our
business, financial condition and results of operations. There also can be no assurance that disputes will not arise with respect to the ownership of rights to any technology
developed with third-parties. These and other possible disagreements with collaborators could lead to delays in the development or commercialization of our pharmaceutical
products or could result in litigation or arbitration, which could be time consuming and expensive and could have a material adverse effect on our business, financial condition
and results of operations. Even if we decide to perform clinical trials, sales, marketing and distribution functions ourselves, we could face a number of additional related risks,
including:
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We may not be able to attract clinical investigators and build effective clinical trials, or a solid marketing department or sales force;
The cost of establishing an internal clinical trials program, marketing department or sales force may exceed our available financial resources and the revenue
generated by any of our current product candidates, if approved, or any other pharmaceutical products that we may develop, in-license or acquire; and
Our direct sales and marketing efforts may not be successful.
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Any failure to perform such activities could have a material adverse effect on our business, financial condition and results of our operations.
Our reliance on third-parties requires us to share our trade secrets, which increases the possibility that a competitor will discover them or that our trade secrets will be
misappropriated or disclosed.
Because we rely on third-parties to manufacture our pharmaceutical products, and because we collaborate with various organizations and academic institutions on the
development of our pharmaceutical products, we must, at times, share trade secrets with them. We seek to protect our proprietary technology in part by entering into
confidentiality agreements and, if applicable, material transfer agreements, collaborative research agreements, consulting agreements or other similar agreements with our
collaborators, advisors, employees and consultants prior to beginning research or disclosing proprietary information. These agreements typically limit the rights of the third-
parties to use or disclose our confidential information, such as trade secrets. The need to share trade secrets and other confidential information when working with third parties
increases the risk that such trade secrets become known by our competitors, are inadvertently incorporated into the technology of others, or are disclosed or used in violation of
these agreements. Given that our proprietary position is based, in part, on our know-how and trade secrets, a competitor’s discovery of our trade secrets or other unauthorized
use or disclosure would impair our competitive position and may have a material adverse effect on our business.
In addition, these agreements typically restrict the ability of our collaborators, advisors, employees and consultants to publish data potentially relating to our trade secrets. Our
academic collaborators typically have rights to publish data, provided that we are notified in advance and may delay publication for a specified time in order to secure our
intellectual property rights arising from the collaboration. In other cases, publication rights are controlled exclusively by us, although in some cases we may share these rights
with other parties. We may also conduct joint research and development programs that may require us to share trade secrets under the terms of our research and development
partnerships or similar agreements. Our competitors may discover our trade secrets, either through breach of these agreements, independent development or publication of
information including our trade secrets in cases where we do not have proprietary or otherwise protected rights at the time of publication. A competitor’s discovery of our trade
secrets would impair our competitive position and have an adverse impact on our business.
Risks Related to Our Intellectual Property
If we fail to adequately protect or enforce our intellectual property rights, we may be unable to operate effectively.
Our success and ability to compete are substantially dependent on our patents, proprietary formulations and trademarks. There can be no assurance that our patents and
associated trademarks and licenses will not be challenged and subsequently invalidated and/or canceled. The invalidation or cancellation of any one or all of the patents or
trademarks would significantly damage our commercial prospects. Further, we may find it necessary to legally challenge parties infringing our patents or trademarks or licensed
trademarks to enforce our rights thereto. There can be no assurance that any of the patents would ultimately be held valid or that efforts to defend any of the patents, trade
secrets, know-how or other IP rights would be successful.
The patent positions of pharmaceutical and biotechnology companies, such as ours, are uncertain and involve complex legal and factual issues. We own numerous U.S. and
foreign patents and a number of pending patent applications that cover various aspects of our drug candidates and technologies. There can be no assurance that patents that have
been issued will be held valid and enforceable in a court of law. Even for patents that are held valid and enforceable, the legal process associated with obtaining such a
judgment is time consuming and costly. Additionally, issued patents can be subject to opposition or other proceedings that can result in the revocation of the patent or
maintenance of the patent in amended form (and potentially in a form that renders the patent without commercially relevant and/or broad coverage). Further, our competitors
may be able to circumvent and otherwise design around our patents. Even if a patent is issued and enforceable, because development and commercialization of pharmaceutical
products can be subject to substantial delays, patents may expire early and provide only a short period of protection, if any, following the commercialization of a product
encompassed by our patents. We may have to participate in interference proceedings declared by the USPTO, which could result in a loss of the patent and/or substantial cost to
us.
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We have filed patent applications and plan to file additional patent applications covering various aspects of our drug candidates and technologies. There can be no assurance
that the patent applications for which we apply would actually be issued as patents, or do so with commercially relevant and/or broad coverage. The coverage claimed in a
patent application can be significantly reduced before the patent is issued. The scope of our claim coverage can be critical to our ability to enter into licensing transactions with
third-parties and our right to receive royalties from our collaboration partnerships. Since publication of discoveries in scientific or patent literature often lags behind the date of
such discoveries, we cannot be certain that we were the first inventor of inventions covered by our patents or patent applications. In addition, there is no guarantee that we will
be the first to file a patent application directed to an invention.
An adverse outcome in any judicial proceeding involving IP, including patents, could subject us to significant liabilities to third-parties, require disputed rights to be licensed
from or to third-parties or require us to cease using the technology in dispute. In those instances where we seek an IP license from another, we may not be able to obtain the
license on a commercially reasonable basis, if at all, thereby raising concerns on our ability to freely commercialize our technologies and/or products. It is also possible that we
or our licensors or licensees will fail to identify patentable aspects of inventions made in the course of development and commercialization activities before it is too late to
obtain patent protection on them. Moreover, in some circumstances, we may not have the right to control the preparation, filing and prosecution of patent applications, or to
maintain the patents, covering technology that we license from or license to third-parties and are reliant on our licensors or licensees. Therefore, these patents and applications
may not be prosecuted and enforced in a manner consistent with the best interests of our business. If our current or future licensors or licensees fail to establish, maintain or
protect such patents and other intellectual property rights, such rights may be reduced or eliminated. If our licensors or licensees are not fully cooperative or disagree with us as
to the prosecution, maintenance or enforcement of any patent rights, such patent rights could be compromised.
Failure to adequately protect or enforce our intellectual property rights could have a material adverse impact on our business, results of operations and prospects.
Issued patents covering our drug candidates could be found invalid or unenforceable if challenged in court.
If we or one of our licensing partners initiated legal proceedings against a third-party to enforce a patent covering one of our drug candidates, the defendant could counterclaim
that the patent covering our drug candidate is invalid and/or unenforceable. In patent litigation in the United States, defendant counterclaims alleging invalidity and/or
unenforceability are commonplace. Grounds for a validity challenge could be an alleged failure to meet any of several statutory requirements, including lack of novelty,
obviousness or non-enablement. Grounds for an unenforceability assertion could be an allegation that someone connected with prosecution of the patent withheld relevant
information from the USPTO, or made a misleading statement, during prosecution. Third-parties may also raise similar claims before administrative bodies in the United States
or abroad, even outside the context of litigation. Such mechanisms include re-examination, post grant review, and equivalent proceedings in foreign jurisdictions (e.g.,
opposition proceedings). Such proceedings could result in revocation or amendment to our patents in such a way that they no longer cover our drug candidates. The outcome
following legal assertions of invalidity and unenforceability is unpredictable. With respect to the validity question, for example, we cannot be certain that there is no
invalidating prior art, of which we and the patent examiner were unaware during prosecution. If a defendant were to prevail on a legal assertion of invalidity and/or
unenforceability, we would lose at least part, and perhaps all, of the patent protection on our drug candidates. Such a loss of patent protection would have a material adverse
impact on our business.
We may not be able to protect our intellectual property rights throughout the world.
Filing, prosecuting and defending patents on drug candidates in all countries throughout the world would be prohibitively expensive, and our intellectual property rights in
some countries outside the United States can be less extensive than those in the United States. In addition, the laws of some foreign countries do not protect intellectual property
rights to the same extent as federal and state laws in the United States. Consequently, we may not be able to prevent third-parties from practicing our inventions in all countries
outside the United States, or from selling or importing products made using our inventions in and into the United States or other jurisdictions. Competitors may use our
inventions in jurisdictions where we have not obtained patent protection to develop their own products and further, may export otherwise infringing products to territories
where we have patent protection, but enforcement is not as strong as that in the United States. These products may compete with our products and our patents or other
intellectual property rights may not be effective or sufficient to prevent them from competing.
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Many companies have encountered significant problems in protecting and defending intellectual property rights in foreign jurisdictions. The legal systems of certain countries,
particularly certain developing countries, do not favor the enforcement of patents, trade secrets and other intellectual property protection, particularly those relating to
biotechnology products, which could make it difficult for us to stop the infringement of our patents or marketing of competing products in violation of our proprietary rights
generally. Proceedings to enforce our patent rights in foreign jurisdictions could result in substantial costs and divert our efforts and attention from other aspects of our business,
could put our patents at risk of being invalidated or interpreted narrowly and our patent applications at risk of not issuing and could provoke third-parties to assert claims
against us. We may not prevail in any lawsuits that we initiate and the damages or other remedies awarded, if any, may not be commercially meaningful. Accordingly, our
efforts to enforce our intellectual property rights around the world may be inadequate to obtain a significant commercial advantage from the intellectual property that we
develop or license.
Failure to adequately protect our intellectual property rights throughout the world could have a material adverse impact on our business, results of operations and prospects.
If we infringe on the intellectual property rights of others, our business and profitability may be adversely affected.
Our commercial success will also depend, in part, on us and our collaborative partners not infringing on the patents or proprietary rights of others. There can be no assurance
that the technologies and products used or developed by our collaborative partners and marketed and sold by us will not infringe such rights. If such infringement occurs and
neither we nor our collaborative partner is able to obtain a license from the relevant third-party, we will not be able to continue the development, manufacture, use, or sale of
any such infringing technology or product. There can be no assurance that necessary licenses to third-party technology will be available at all, or on commercially reasonable
terms. In some cases, litigation or other proceedings may be necessary to defend against or assert claims of infringement or to determine the scope and validity of the
proprietary rights of third-parties. Any potential litigation could result in substantial costs to, and diversion of, our resources and could have a material and adverse impact on
us. An adverse outcome in any such litigation or proceeding could subject us to significant liabilities, require us to cease using the subject technology or require us to license
the subject technology from the third-party, all of which could have a material adverse effect on our business.
If we fail to comply with our obligations in the agreements under which we license intellectual property rights from third-parties or otherwise experience disruptions to our
business relationships with our licensors, we could lose license rights that are important to our business.
We are a party to a number of intellectual property license agreements that are important to our business and we expect to enter into additional license agreements in the future.
Our existing license agreements impose, and we expect that future license agreements will impose, various diligence, milestone payment, royalty and other obligations on us. If
we fail to comply with our obligations under these agreements, or we are subject to a bankruptcy, the licensor may have the right to terminate the license, in which event we
would not be able to market products covered by the license.
We may need to obtain licenses from third-parties to advance our research, and we have done so from time to time. We may fail to obtain any of these licenses at a reasonable
cost or on reasonable terms, if at all. In that event, we may be required to expend significant time and resources to develop or license replacement technology. If we are unable
to do so, we may be unable to develop the affected drug candidates, which could harm our business significantly. We cannot provide any assurances that third-party patents do
not exist which might be enforced against our current drug candidates or future products, resulting in either an injunction prohibiting the sales, or, with respect to the sales, an
obligation on our part to pay royalties and/or other forms of compensation to third-parties.
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In many cases, patent prosecution of our licensed technology is controlled solely by the licensor. If our licensors fail to obtain and maintain patent or other protection for the
proprietary intellectual property we license from them, we could lose our rights to the intellectual property or our exclusivity with respect to those rights, and our competitors
could market competing products using the intellectual property. In certain cases, we control the prosecution of patents resulting from licensed technology. In the event we
breach any of our obligations related to such prosecution, we may incur significant liability to our licensing partners. Licensing of intellectual property is of critical importance
to our business and involves complex legal, business and scientific issues and is complicated by the rapid pace of scientific discovery in our industry. Disputes may arise
regarding intellectual property subject to a licensing agreement, including:
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The scope of rights granted under the license agreement and other interpretation-related issues;
The extent to which our technology and processes infringe on intellectual property of the licensor that is not subject to the licensing agreement;
The sublicensing of patent and other rights under our collaborative development relationships;
Our diligence obligations under the license agreement and what activities satisfy those diligence obligations;
The ownership of inventions and know-how resulting from the joint creation or use of intellectual property by our licensors and us and our partners; and
The priority of invention of patented technology.
If disputes over intellectual property that we have licensed prevent or impair our ability to maintain our current licensing arrangements on acceptable terms, we may be unable
to successfully develop and commercialize the affected drug candidates, which could have a material adverse effect on our business.
We may be involved in lawsuits to protect or enforce our patents or the patents of our licensors, which could be expensive, time-consuming and unsuccessful.
Competitors may infringe our patents or the patents of our licensors. To counter infringement or unauthorized use, we may be required to file infringement claims, which can be
expensive and time-consuming. In addition, in an infringement proceeding, a court may decide that a patent of ours or our licensors is not valid, is unenforceable and/or is not
infringed, or may refuse to stop the other party from using the technology at issue on the grounds that our patents do not cover the technology in question. An adverse result in
any litigation or defense proceedings could put one or more of our patents at risk of being invalidated or interpreted narrowly and could put our patent applications at risk of not
issuing.
Interference proceedings provoked by third-parties or brought by us may be necessary to determine the priority of inventions with respect to our patents or patent applications
or those of our licensors. An unfavorable outcome could require us to cease using the related technology or to attempt to license rights to it from the prevailing party. Our
business could be harmed if the prevailing party does not offer us a license on commercially reasonable terms. Our defense of litigation or interference proceedings may fail
and, even if successful, may result in substantial costs and distract our management and other employees. We may not be able to prevent, alone or with our licensors,
misappropriation of our intellectual property rights, particularly in countries where the laws may not protect those rights as fully as in the United States.
Furthermore, because of the substantial amount of discovery required in connection with intellectual property litigation, there is a risk that some of our confidential information
could be compromised by disclosure during this type of litigation. There could also be public announcements of the results of hearings, motions or other interim proceedings or
developments. If securities analysts or investors perceive these results to be negative, it could have a material adverse effect on the price of our Common Stock.
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Changes in U.S. patent law could diminish the value of patents in general, thereby impairing our ability to protect our products.
As is the case with other biopharmaceutical companies, our success is heavily dependent on intellectual property, particularly patents. Obtaining and enforcing patents in the
biotechnology industry involve both technological and legal complexity and is, therefore, costly, time-consuming and inherently uncertain. In addition, the United States has
enacted and is expected to continue to implement wide-ranging patent reform legislation. Further, certain U.S. Supreme Court rulings have narrowed the scope of patent
protection available in certain circumstances and/or weakened the rights of patent owners in certain situations. In addition to increasing uncertainty with regard to our ability to
obtain patents in the future, this combination of events has created uncertainty with respect to the value of patents, once obtained. Depending on decisions by the U.S.
Congress, the federal courts, and the USPTO, the laws and regulations governing patents could change in unpredictable ways that would weaken our ability to obtain new
patents or to enforce our existing patents and patents that we might obtain in the future.
Patent reform legislation could increase the uncertainties and costs surrounding the prosecution of our and our licensors’ patent applications and the enforcement or defense of
our or our licensors’ issued patents. Provisions of the Leahy-Smith America Invents Act (the “Leahy-Smith Act”), adopted in September 2011, made a number of significant
changes to U.S. patent law, the effects of which are still unfolding. The Leahy-Smith Act and its implementation, in addition to any new regulation, could increase the
uncertainties and costs surrounding the prosecution of our patent applications and the enforcement or defense of our issued patents, all of which could have a material adverse
effect on our business and financial condition.
We may be subject to claims that our employees, consultants or independent contractors have wrongfully used or disclosed confidential information of third-parties or that
our employees have wrongfully used or disclosed alleged trade secrets of their former employers.
We employ individuals who were previously employed at universities or other biotechnology or pharmaceutical companies, including our competitors or potential competitors.
We may be subject to claims that we or our employees, consultants or independent contractors have inadvertently or otherwise used or disclosed intellectual property, including
trade secrets or other proprietary information, of any of our employee’s former employers or other third-parties. Litigation may be necessary to defend against these claims. If
we fail in defending any such claims, in addition to paying monetary damages, we may lose valuable intellectual property rights or personnel, which could adversely impact our
business. Even if we are successful in defending against such claims, litigation could result in substantial costs and be a distraction to management and other employees.
We may be subject to claims challenging the inventorship or ownership of our patents and other intellectual property.
We may also be subject to claims that former employees, collaborators or other third-parties have an ownership interest in our patents or other intellectual property. We may
have in the future ownership disputes arising, for example, from conflicting obligations of consultants or others who are involved in developing our drug candidates. Litigation
may be necessary to defend against these and other claims challenging inventorship or ownership. If we fail in defending any such claims, in addition to paying monetary
damages, we may lose valuable intellectual property rights, such as exclusive ownership of, or right to use, valuable intellectual property. Such an outcome could have a
material adverse effect on our business. Even if we are successful in defending against such claims, litigation could result in substantial costs and be a distraction to
management and other employees.
Our inability to protect our confidential information and trade secrets would harm our business and competitive position.
In addition to seeking patents for some of our technology and products, we also rely on trade secrets, including unpatented know-how, technology and other proprietary
information, to maintain our competitive position. We seek to protect these trade secrets, in part, by entering into non-disclosure and confidentiality agreements with parties
who have access to them, such as our employees, corporate collaborators, outside scientific collaborators, contract manufacturers, consultants, advisors and other third-parties.
We also enter into confidentiality and invention or patent assignment agreements with our employees and consultants. Any of these parties may breach the agreements and
disclose our proprietary information, including our trade secrets, and we may not be able to obtain adequate remedies for such breaches. Enforcing a claim that a party illegally
disclosed or misappropriated a trade secret is difficult, expensive and time-consuming, and the outcome is unpredictable. In addition, some courts both within and outside the
United States may be less willing or unwilling to protect trade secrets. If a competitor lawfully obtained or independently developed any of our trade secrets, we would have no
right to prevent such competitor from using that technology or information to compete with us, which could harm our competitive position and our business.
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Obtaining and maintaining our patent protection depends on compliance with various procedural, document submission, fee payment and other requirements imposed by
governmental patent agencies, and our patent protection could be reduced or eliminated for non-compliance with these requirements.
Periodic maintenance fees, renewal fees, annuity fees and various other governmental fees on patents and/or applications will be due to be paid to the USPTO and various
governmental patent agencies outside of the United States in several stages over the lifetime of the patents and/or applications. The USPTO and various non-U.S. governmental
patent agencies require compliance with a number of procedural, documentary, fee payment and other similar provisions during the patent application process. Non-compliance
may result in abandonment or lapse of the patent or patent application, resulting in partial or complete loss of patent rights in the relevant jurisdiction. In such an event, our
competitors might be able to enter the market and this circumstance would have a material adverse effect on our business.
Risks Related to Our Business Operations
We operate in an extremely competitive environment and there can be no assurances that competing technologies would not harm our business development.
We are engaged in a rapidly evolving field. Competition from numerous pharmaceutical companies is intense and expected to increase. The large and rapidly growing market
for oncology treatments is likely to attract new entrants. Numerous biotechnology and pharmaceutical companies are focused on developing cancer treatments and Immuno-
oncology technologies including CAR T. Many, if not all, of these companies have greater financial and other resources and development capabilities than we do. Many of our
competitors also have greater collective experience in undertaking preclinical and clinical testing of products, obtaining regulatory approvals and manufacturing and marketing
prescription pharmaceutical products. There can be no assurance that our under-development drug candidates will be more effective or achieve greater market acceptance than
competitive products, or that our competitors will not succeed in developing products and technologies that are more effective than those being developed by us or that would
render our products and technologies less competitive or obsolete. Additionally, there can be no assurance that the development by others of new or improved drugs will not
make our pharmaceutical products superfluous or obsolete.
Our future success depends on our ability to retain principal members of our executive team, consultants and advisors and to attract, retain and motivate qualified
personnel.
We are highly dependent on principal members of our executive team, the loss of whose services may adversely impact the achievement of our objectives. Recruiting and
retaining other qualified employees, consultants and advisors for our business, including scientific and technical personnel, will also be critical to our success. There is currently
a shortage of skilled executives in our industry, which is likely to continue. As a result, competition for skilled personnel is intense and the turnover rate can be high. We may
not be able to attract and retain personnel on acceptable terms given the competition among numerous pharmaceutical and biotechnology companies for individuals with similar
skill sets. In addition, failure to succeed in preclinical or clinical studies may make it more challenging to recruit and retain qualified personnel. The inability to recruit or loss
of the services of any executive, consultant or advisor may impede the progress of our research and development objectives.
Potential new accounting standards or legislative actions may adversely impact our future financial position or results of operations.
Future changes in financial accounting standards may cause adverse, unexpected fluctuations in the timing of the recognition of revenues or expenses, and may affect our
financial position or results of operations. New standards may occur in the future and may cause us to be required to make changes in our accounting policies. Compliance with
changing regulation of corporate governance and public disclosure may result in additional expenses. Changing laws, regulations and standards relating to corporate
governance and public disclosure, including the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, new SEC regulations, Public Company Accounting Oversight Board,
or PCAOB, standards and NASDAQ rules, are creating uncertainty for companies such as ours and insurance, accounting and auditing costs are high as a result of this
uncertainty and other factors.
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We have limited capital resources and currently have only one full time employee in our finance department. We rely on outside consultants to supplement our internal
expertise and are committed to maintaining high standards of corporate governance and public disclosure. As a result, we intend to invest all reasonably necessary resources to
comply with evolving standards, and this investment may result in increased general and administrative expenses and a diversion of management time and attention from
revenue-generating activities to compliance activities.
We will need to expand our organization and we may experience difficulties in managing this growth, which could disrupt our operations.
As of December 31, 2020, we had four full-time employees. As we mature, we may need to expand our full-time employee base and to hire more consultants and contractors.
Our management may need to divert a disproportionate amount of its attention away from our day-to-day activities and devote a substantial amount of time to managing these
growth activities. We may not be able to effectively manage the expansion of our operations, which may result in weaknesses in our infrastructure, operational mistakes, loss of
business opportunities, loss of employees and reduced productivity among remaining employees, all of which may have a material adverse effect on our business, results of
operations and prospects. Any future growth could require significant capital expenditures and may divert financial resources from other projects, such as the development of
additional drug candidates. If our management is unable to effectively manage our growth, our expenses may increase more than expected, our ability to generate and/or grow
revenues could be reduced, and we may not be able to implement our business strategy. Our future financial performance and our ability to commercialize drug candidates and
compete effectively will depend, in part, on our ability to effectively manage any future growth.
We are a party to collaboration agreements and other significant agreements which contain complex commercial terms that could result in disputes, litigation or
indemnification liability that could adversely affect our business, results of operations and financial condition.
We currently derive, and expect to derive in the foreseeable future, all or much of our revenue from collaboration agreements with biotechnology and pharmaceutical
companies. These collaboration agreements contain complex commercial terms, including:
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Clinical development and commercialization obligations that are based on certain commercial reasonableness performance standards that can often be
difficult to enforce if disputes arise as to adequacy of our partner’s performance;
Research and development performance and reimbursement obligations for our personnel and other resources allocated to partnered drug candidate
development programs;
Clinical and commercial manufacturing agreements, some of which are priced on an actual cost basis for products supplied by us to our partners with
complicated cost allocation formulas and methodologies;
Intellectual property ownership allocation between us and our partners for improvements and new inventions developed during the course of the
collaboration;
Royalties on drug sales based on a number of complex variables, including net sales calculations, geography, scope of patent claim coverage, patent life,
generic competitors, bundled pricing and other factors; and
Indemnity obligations for intellectual property infringement, product liability and certain other claims.
From time to time, we have informal dispute resolution discussions with third-parties regarding the appropriate interpretation of the complex commercial terms contained in our
agreements. One or more disputes may arise or escalate in the future regarding our collaboration agreements, transaction documents, or third-party license agreements that may
ultimately result in costly litigation and unfavorable interpretation of contract terms, which would have a material adverse effect on our business, financial condition and results
of operations.
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Risks Related to Our Common Stock
An active, liquid and orderly market for our Common Stock or Purchase Warrants may not develop.
Our Common Stock and Purchase Warrants trade on NASDAQ. An active trading market for our Common Stock or Purchase Warrants may never develop or be sustained. If an
active market for our Common Stock or Purchase Warrants does not continue to develop or is not sustained, it may be difficult for investors to sell shares or Purchase Warrants
without depressing the market price and investors may not be able to sell the shares or Purchase Warrants at all. An inactive market may also impair our ability to raise capital
by selling Common Stock or Purchase Warrants and may impair our ability to acquire other businesses, applications or technologies using our Common Stock or Purchase
Warrants as consideration, which, in turn, could materially adversely affect our business.
The market price of our securities may be highly volatile, and you may not be able to sell our securities.
Companies trading in the stock market in general have experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating
performance of these companies. Broad market and industry factors may negatively affect the market price of our securities, regardless of our actual operating performance.
The market price of our securities may be volatile. Our securities could be subject to wide fluctuations in price in response to a variety of factors, including the following:
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Adverse results or delays in pre-clinical or clinical studies;
Inability to obtain additional funding;
Any delay in filing an IND or BLA for any of our drug candidates and any adverse development or perceived adverse development with respect to the FDA’s
review of that IND or BLA;
Failure to develop successfully our drug candidates;
Failure to maintain our existing strategic collaborations or enter into new collaborations;
Failure by us or our licensors and strategic collaboration partners to prosecute, maintain or enforce our intellectual property rights;
Changes in laws or regulations applicable to future products;
Inability to obtain adequate product supply for our drug candidates or the inability to do so at acceptable prices;
Adverse regulatory decisions;
Introduction of new products, services or technologies by our competitors;
Failure to meet or exceed financial projections we may provide to the public;
Failure to meet or exceed the financial projections of the investment community;
The perception of the pharmaceutical industry by the public, legislatures, regulators and the investment community;
Announcements of significant acquisitions, strategic partnerships, joint ventures or capital commitments by us, our strategic collaboration partner or our
competitors;
Disputes or other developments relating to proprietary rights, including patents, litigation matters and our ability to obtain patent protection for our technologies;
Additions or departures of key scientific or management personnel;
Significant lawsuits, including patent or stockholder litigation;
Changes in the market valuations of similar companies;
Sales of our securities by us or our stockholders in the future;
Adverse economic conditions, including potential adverse effects of public health issues, such as the coronavirus outbreak on economic activity generally; and
Trading volume of our securities.
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We have entered into several agreements with our stockholders.
We have in the past, and may continue to enter into from time to time, agreements with our stockholders, which may result in conflicts of interest. In addition, these
arrangements may not have been negotiated at arm’s length and may contain terms and conditions that are not in our best interest.
Our preferred stock has rights, preferences and privileges that are not held by, and are preferential to, the rights of our common stockholders, which could result in the
interests of the holders of our preferred stock differing from those of our common stockholders.
The holders of our preferred stock have the right to receive a liquidation preference entitling them to be paid out of our assets available for distribution to stockholders before
any payment may be made to holders of any Common Stock or any series of preferred stock ranked junior to such class of preferred stock. The existence of a liquidation
preference may reduce the value of our Common Stock, make it harder for us to sell shares of Common Stock in offerings in the future, or prevent or delay a change of control.
Additionally, each share of Series A preferred stock and Series B preferred stock are convertible into shares of our Common Stock, subject to an Issuable Maximum and subject
to certain adjustments, which may cause significant dilution to our common stockholders. The preferential rights could result in divergent interests between the holders of
shares of preferred stock and holders of our Common Stock.
The issuance of future shares of Common Stock may result in dilution to our stockholders.
On December 4, 2020, shareholders of the Company voted to approve the Authorized Share Increase and we 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 4, 2020. As of March 11, 2021, we had approximately 8.7
million shares of Common Stock outstanding, excluding 1.7 million of potentially dilutive Common Stock related to outstanding Preferred Stock, warrants, options, restricted
stock and Common Stock awards.
The issuance of these shares of Common Stock and the sale of these shares of Common Stock, or even the potential of such issuance and sale, may have a depressive effect on
the market price of our Common Stock and the issuance of such Common Stock will cause dilution to our stockholders.
We could be subject to securities class action litigation.
In the past, securities class action litigation has often been brought against a company following a decline in the market price of its securities. This risk is especially relevant for
us because pharmaceutical companies have experienced significant stock price volatility in recent years. If we face such litigation, it could result in substantial costs and a
diversion of management’s attention and resources, which could harm our business.
We do not intend to pay dividends on our Common Stock or Preferred Stock so any returns will be limited to the value of our stock.
We have never declared or paid any cash dividends on our Common Stock or Preferred Stock. We currently anticipate that we will retain future earnings for the development,
operation and expansion of our business and do not anticipate declaring or paying any cash dividends for the foreseeable future. Any return to common or preferred
stockholders will therefore be limited to the appreciation of their stock.
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Certain provisions of our Articles of Incorporation, Bylaws, and the Nevada Revised States may be deemed to have an anti-takeover effect, which could cause the market
price of our Common Stock to decline.
Certain provisions of our Articles of Incorporation, Bylaws, and the Nevada Revised States may be deemed to have an anti-takeover effect. Such provisions may delay, deter or
prevent a tender offer or takeover attempt that a stockholder might consider to be in that stockholder’s best interests, including attempts that might result in a premium over the
market price for the shares held by stockholders, which could cause the market price of our Common Stock to decline.
We have, in the past, failed to satisfy certain continued listing requirements on Nasdaq and could fail to satisfy those requirements again in the future which could affect
the market price of our Common Stock and liquidity and reduce our ability to raise capital.
Currently, our Common Stock trades on the Nasdaq Capital Market. During 2020, we received notifications from Nasdaq informing us that the closing bid price for our
common stock had been below $1.00 for 30 consecutive business days and that the Company, therefore, was not in compliance with the bid price requirements for continued
listing on Nasdaq. Although we have since cured these deficiencies, it is possible that we could fall out of compliance again in the future. If we fail to maintain compliance with
any Nasdaq listing requirements, we could be delisted and our stock would be considered a penny stock under regulations of the SEC, and would therefore be subject to rules
that impose additional sales practice requirements on broker-dealers who sell our securities. The additional burdens imposed upon broker-dealers by these requirements could
discourage broker-dealers from effecting transactions in our Common Stock, which could severely limit the market liquidity of our Common Stock and your ability to sell our
securities in the secondary market.
General Risk Factors
Our financial condition, results of operations, business and cash flow may be negatively affected by a public health crisis such as the coronavirus (COVID-19) outbreak.
We may face risks related to health epidemics and pandemics or other outbreaks of communicable diseases. During March 2020, a global pandemic was declared by the World
Health Organization related to the rapidly growing outbreak of a novel strain of coronavirus (COVID-19). The global spread of COVID-19 has created, and continues to create,
significant volatility, uncertainty and economic disruption, including significant volatility in the capital markets. The extent to which the COVID-19 pandemic affects our
business, operations, financial results and the trading price of our Common Stock will depend on numerous evolving factors that we may not be able to accurately predict,
including: the duration and scope of the pandemic or possible resurgence of the pandemic or continued emergence of new strains of COVID-19; the availability of an effective
vaccine and the speed with which it is administered to the public; governmental and business actions that have been and continue to be taken in response to the pandemic
(including mitigation efforts such as stay at home and other social distancing orders) and the impact of the pandemic on economic activity and actions taken in response
(including stimulus efforts such as the Families First Coronavirus Act and the Coronavirus Aid, Relief, and Economic Security Act).
The ultimate impact of the COVID-19 pandemic on our results of operations and financial condition is dependent on future developments, including the duration of the
pandemic and the related extent of its severity, as well as its impact on macroeconomic conditions, which are uncertain and cannot be predicted at this time. If the global
response to contain the COVID-19 pandemic escalates further or is unsuccessful, or if governmental decisions to ease pandemic related restrictions are ineffective, premature or
counterproductive, we could experience a material adverse effect on our business, financial condition, results of operations and cash flows.
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Our ability to use potential future operating losses and our federal and state NOL carryforwards to offset taxable income from revenue generated from operations or
corporate collaborations could be limited.
The use of our NOL carryforwards may have limitations resulting from certain future ownership changes or other factors under the Code and other taxing authorities. The
TCJA changed both the federal deferred tax value of the NOL carryforwards and the rules of utilization of federal NOL carryforwards. The TCJA lowered the corporate tax rate
from 35% to 21% effective for our 2018 fiscal year. For NOL carryforwards generated in years prior to 2018, there is no annual limitation on the utilization and the
carryforward period remains at 20 years. However, NOL carryforwards generated in years after 2017 will only be available to offset 80% of future taxable income in any single
year but will not expire.
If our NOL carryforwards are limited, and we have taxable income which exceeds the available NOL carryforwards for that period, we would incur an income tax liability even
though NOL carryforwards may be available in future years prior to their expiration. Any such income tax liability may adversely affect our future cash flow, financial position
and financial results.
Tax reform may significantly affect the Company and its stockholders.
Due to the potential for changes to tax laws and regulations or changes to the interpretation thereof, the ambiguity of tax laws and regulations, the subjectivity of factual
interpretations and other factors, our estimates of effective tax rate and income tax assets and liabilities may be incorrect and our financial statements could be adversely
affected. The impact of these factors referenced in the first sentence of this paragraph may be substantially different from period-to-period.
In addition, the amount of income taxes we pay is subject to ongoing audits by U.S. federal, state and local tax authorities and by non-U.S. tax authorities. If audits result in
payments or assessments different from our reserves, our future results may include unfavorable adjustments to our tax liabilities and our financial statements could be
adversely affected. Any further significant changes to the tax system in the United States or in other jurisdictions (including changes in the taxation of international income as
further described below) could adversely affect our financial statements.
Governments may impose price controls, which may adversely affect our future profitability.
We intend to seek approval to market our drug candidates in both the United States and in foreign jurisdictions. In some foreign countries and jurisdictions, particularly in the
European Union, the pricing of prescription pharmaceuticals is subject to governmental control. In these countries, pricing negotiations with governmental authorities can take
considerable time after the receipt of marketing approval for a drug candidate. To obtain reimbursement or pricing approval in some countries, we may be required to conduct
clinical trials to compare the cost effectiveness of our drug candidates to other available therapies, which is time consuming and costly. If reimbursement of our future products
is unavailable or limited in scope or amount, or if pricing is set at unsatisfactory levels, we may be unable to achieve or sustain profitability.
Our employees, principal investigators, consultants and commercial partners may engage in misconduct or other improper activities, including non-compliance with
regulatory standards and requirements and insider trading.
We are exposed to the risk of fraud or other misconduct by our employees, principal investigators, consultants and commercial partners. Misconduct by these parties could
include intentional failures to comply with the regulations of the FDA and non-U.S. regulators, provide accurate information to the FDA and non-U.S. regulators, comply with
healthcare fraud and abuse laws and regulations in the United States and abroad, report financial information or data accurately or disclose unauthorized activities to us. In
particular, sales, marketing and business arrangements in the healthcare industry are subject to extensive laws and regulations intended to prevent fraud, misconduct, kickbacks,
self-dealing and other abusive practices. These laws and regulations may restrict or prohibit a wide range of pricing, discounting, marketing and promotion, sales commission,
customer incentive programs and other business arrangements. Such misconduct could also involve the improper use of information obtained in the course of clinical studies,
which could result in regulatory sanctions and cause serious harm to our reputation or could cause regulatory agencies not to approve our drug candidates. It is not always
possible to identify and deter employee misconduct, and the precautions we take to detect and prevent this activity may not be effective in controlling unknown or unmanaged
risks or losses or in protecting us from governmental investigations or other actions or lawsuits stemming from a failure to comply with these laws or regulations. If any such
actions are instituted against us, and we are not successful in defending ourselves or asserting our rights, those actions could have a significant impact on our business,
including the imposition of significant fines or other sanctions.
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We face potential product liability, and, if successful claims are brought against us, we may incur substantial liability and costs. If the use of our drug candidates harms
patients, or is perceived to harm patients even when such harm is unrelated to our drug candidates, our regulatory approvals could be revoked or otherwise negatively
impacted and we could be subject to costly and damaging product liability claims.
The use of our drug candidates in clinical studies and the sale of any products for which we obtain marketing approval exposes us to the risk of product liability claims. Product
liability claims might be brought against us by consumers, healthcare providers, pharmaceutical companies or others selling or otherwise coming into contact with our products.
There is a risk that our drug candidates may induce adverse events. If we cannot successfully defend against product liability claims, we could incur substantial liability and
costs. In addition, regardless of merit or eventual outcome, product liability claims may result in:
·
·
·
·
·
·
·
Impairment of our business reputation;
Withdrawal of clinical study participants;
Costs due to related litigation;
Distraction of management’s attention from our primary business;
Substantial monetary awards to patients or other claimants;
The inability to commercialize our drug candidates; and
Decreased demand for our drug candidates, if approved for commercial sale,
all of which may have a material adverse effect on our business, results of operations and prospects.
If we fail to comply with environmental, health and safety laws and regulations, we could become subject to fines or penalties or incur costs that could have a material
adverse effect on the success of our business.
We are subject to numerous environmental, health and safety laws and regulations, including those governing laboratory procedures and the handling, use, storage, treatment
and disposal of hazardous materials and wastes. Our operations involve the use of hazardous and flammable materials, including chemicals and biological materials. Our
operations also produce hazardous waste products. We generally contract with third-parties for the disposal of these materials and wastes. We cannot eliminate the risk of
contamination or injury from these materials. In the event of contamination or injury resulting from our use of hazardous materials, we could be held liable for any resulting
damages, and any liability could exceed our resources. We also could incur significant costs associated with civil or criminal fines and penalties.
The workers’ compensation insurance we maintain to cover us for costs and expenses we may incur due to injuries to our employees resulting from the use of hazardous
materials or other work-related injuries may not provide adequate coverage against potential liabilities. In addition, we may incur substantial costs in order to comply with
current or future environmental, health and safety laws and regulations. These current or future laws and regulations may impair our research, development or production
efforts. Failure to comply with these laws and regulations also may result in substantial fines, penalties or other sanctions, which may have a material adverse effect on our
business and results of operations.
Non-cash charges such as share-based payments may adversely impact our results of operations.
We record non-cash charges related to share-based expense, which could fluctuate materially as the Company expects to continue to issue share-based payments awards and
may adversely impact our results of operations.
50
Varying interpretations of existing standards and rules have occurred with frequency and may cause us to have to restate previously reported result of operations.
Varying interpretations of existing standards of accounting policies or accounting treatments of existing transactions may cause us to have to restate previously reported result
of operations.
Our disclosure controls and procedures may not prevent or detect all errors or acts of fraud.
We are subject to the periodic reporting requirements of the Exchange Act. Any disclosure controls and procedures or internal controls and procedures, no matter how well-
conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. These inherent limitations include the realities
that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the
individual acts of some persons, by collusion of two or more people, or by an unauthorized override of the controls. Accordingly, because of the inherent limitations in our
control system, misstatements due to error or fraud may occur and not be detected, which may have a material adverse effect on our business and results of operations.
Failure in our information technology systems, including by cybersecurity attacks or other data security incidents, could significantly disrupt our operations.
Our operations depend, in part, on the continued performance of our information technology systems. Our information technology systems are potentially vulnerable to
physical or electronic break-ins, computer viruses and similar disruptions. Failure of our information technology systems could adversely affect our business, profitability and
financial condition.
A successful cybersecurity attack or other data security incident could result in the misappropriation and/or loss of confidential or personal information, create system
interruptions, or deploy malicious software that attacks our systems. It is possible that a cybersecurity attack might not be noticed for some period of time. The occurrence of a
cybersecurity attack or incident could result in business interruptions from the disruption of our information technology systems, or negative publicity resulting in reputational
damage with our clinical trial participants, customers, stockholders and other stakeholders and/or increased costs to prevent, respond to or mitigate cybersecurity events. In
addition, the unauthorized dissemination of sensitive personal information or proprietary or confidential information could expose us or other third-parties to regulatory fines or
penalties, litigation and potential liability, or otherwise harm our business.
We are a smaller reporting company and the reduced reporting requirements applicable to smaller reporting companies may make our Common Stock less attractive to
investors.
We are a smaller reporting company (“SRC”), which allows us to take advantage of exemptions from various reporting requirements that are applicable to other public
companies that are not SRCs, including not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002, as amended,
reduced disclosure obligations regarding executive compensation in our Annual Report and our periodic reports and proxy statements and providing only two years of audited
financial statements in our Annual Report and our periodic reports. We will remain an SRC until (a) the aggregate market value of our outstanding Common Stock held by non-
affiliates as of the last business day our most recently completed second fiscal quarter exceeds $250 million or (b) (1) we have over $100 million in annual revenues and (2) the
aggregate market value of our outstanding Common Stock held by non-affiliates as of the last business day our most recently completed second fiscal quarter exceeds $700
million. We cannot predict whether investors will find our Common Stock less attractive if we rely on certain or all of these exemptions. If some investors find our Common
Stock less attractive as a result, there may be a less active trading market for our Common Stock and our stock price may be more volatile and may decline.
51
ITEM 1B – UNRESOLVED STAFF COMMENTS
Not Applicable.
ITEM 2 – PROPERTIES
We occupy a facility consisting of approximately 1,700 square feet of office space at 40 Speen Street in Framingham, Massachusetts. The lease is for 24 months through
September 2022. We believe that this space is adequate for our current needs and that if additional space is required, it can be obtained at commercially reasonable terms
nearby.
In addition, we lease 360 sq. ft. of office space in Miami, Florida. The lease provided for an initial term of 12 months, which commenced on December 1, 2016, and has been
extended through November 30, 2021. We believe that this space is adequate for our current needs and that if additional space is required, it can be obtained at commercially
reasonable terms either within its current space or nearby.
ITEM 3 – LEGAL PROCEEDINGS
From time to time, we may be a party to litigation and subject to claims incident to the ordinary course of business. Although the results of litigation and claims cannot be
predicted with certainty, we currently believe that the final outcome of these ordinary course matters will not have a material adverse effect on our business. Regardless of the
outcome, litigation can have an adverse impact on us because of defense and settlement costs, diversion of management resources and other factors.
There are no matters, as of December 31, 2020, that, in the opinion of management, might have a material adverse effect on our financial position, results of operations or cash
flows.
ITEM 4 – MINE SAFETY DISCLOSURES
Not applicable.
52
ITEM 5 – MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY
SECURITIES
PART II
Our Common Stock is listed for trading on The NASDAQ Capital Market under the symbol “XBIO.”
Holders of Record
As of March 11, 2021, there were 425 holders of record of our Common Stock.
Dividends
We have never previously declared or paid any cash dividends on our Common Stock. We currently intend to retain earnings and profits, if any, to support our business strategy
and do not intend to pay any cash dividends within the foreseeable future. Any future determination to pay cash dividends will be at the sole discretion of our Board of
Directors and will depend upon the financial condition of the Company, our operating results, capital requirements, general business conditions and any other factors that the
Board of Directors deems relevant.
Equity Compensation Plan Information
The information required by Item 5 with respect to securities authorized for issuance under equity compensation plans is incorporated herein by reference to Part III, Item 12 of
this Form 10-K.
Recent Sales of Unregistered Securities
None.
Repurchases of Equity Securities of the Issuer
During the quarter ended December 31, 2020, we did not repurchase any of our outstanding securities.
ITEM 6 – SELECTED FINANCIAL DATA
We are not required to provide the information required by this Item because we are a smaller reporting company.
ITEM 7 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
BUSINESS OVERVIEW
We are a biopharmaceutical company focused on progressing XCART™, a personalized Chimeric Antigen Receptor (“CAR”) T platform technology engineered to target
patient- and tumor-specific neoantigens. We are initially advancing cell-based therapeutics targeting the unique B-cell receptor on the surface of an individual patient’s
malignant tumor cells, for the treatment of B-cell lymphomas. XCART has the potential to fuel a robust pipeline of the therapeutic assets targeting high-value oncology
indications. The XCART technology, developed by the Scripps Research Institute (“Scripps Research”) in collaboration with the Shemyakin-Ovchinnikov Institute of
Bioorganic Chemistry, is believed to have the potential to significantly enhance the safety and efficacy of cell therapy for B-cell lymphomas by generating patient- and tumor-
specific CAR T cells. We are currently advancing XCART preclinical efforts through strategic collaborations with Scripps Research and PJSC Pharmsynthez (“Pharmsynthez”).
53
Additionally, we are leveraging our proprietary drug delivery platform, PolyXen®, by partnering with biotechnology and pharmaceutical companies. PolyXen is an enabling
platform technology which can be applied to protein or peptide therapeutics. It employs the natural polymer polysialic acid to prolong a drug's circulating half-life and
potentially improve other pharmacological properties.
We incorporate our patented and proprietary technologies into a number of drug candidates currently under development with biotechnology and pharmaceutical industry
collaborators to create what we believe will be the next-generation biologic drugs with improved pharmacological properties over existing therapeutics. Our drug candidates
have resulted from our research activities or that of our collaborators and are in the development stage. As a result, we continue to commit a significant amount of our resources
to our research and development activities and anticipate continuing to do so for the near future. To date, none of our drug candidates have received regulatory marketing
authorization in the United States (“U.S.”) by the Food and Drug Administration (“FDA”) nor in any other territories by any applicable agencies. We are receiving ongoing
royalties pursuant to a license of our PolyXen technology to an industry partner.
We also have oncology therapeutic investigational drug candidate XBIO-101™ (sodium cridanimod) for the treatment of progestin resistant endometrial cancer. We commenced
a Phase 2 trial under an Investigational New Drug filing in 2017, for the potential treatment of progesterone receptor negative endometrial cancer in conjunction with
progesterone therapy, with the first patient dosed in October 2017. We closed patient enrollment in the trial in March 2019 as a result of slower than expected progress on the
trial resulting from patient enrollment and retention challenges and have suspended further development of XBIO-101. We currently have no plans to continue development of
XBIO-101.
Although we hold a broad patent portfolio, the focus of our internal development efforts during the year ended December 31, 2020 was limited to winding down the XBIO-101
Phase 2 trial and preliminary development efforts associated with our XCART technology.
Critical Accounting Estimates
The preparation of our financial statements in conformity with U.S. generally accepted accounting principles (“U.S. GAAP”) requires us to make estimates, judgments and
assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue, costs and expenses during the
reporting period. On an ongoing basis, we evaluate our estimates that are based on historical experience and on various other assumptions that we believe to be reasonable
under the circumstances. The result of these evaluations forms the basis for making judgments about the carrying values of assets and liabilities and the reported amount of
expenses that are not readily apparent from other sources. Because future events and their effects cannot be determined with certainty, actual results and outcomes could differ
materially from our estimates, judgments and assumptions.
Management believes that the following accounting estimates are the most critical to aid in fully understanding and evaluating our reported financial results, and they require
management’s most difficult subjective or complex judgments, resulting from the need to make estimates about the effect of matters that are inherently uncertain. The following
narrative describes these critical accounting estimates, judgments and assumptions and the effect if actual results differ from these assumptions.
Revenue Recognition
We enter 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.
54
We recognize revenue in accordance with Accounting Standards Codification (“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. We only apply 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, we assess the goods or services promised within each
contract, determine those that are performance obligations, and assess whether each promised good or service is distinct. We then recognize 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, we 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. We use 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 we recognize revenue as or when the
performance obligations under the contract are satisfied. In developing the stand-alone price for a performance obligation, we consider applicable market conditions and
relevant entity-specific factors, including factors that were contemplated in negotiating the agreement with the customer and estimated costs. We validate 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. We recognize a contract asset or liability for the difference between our 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 our license agreements may include delivery of an IP license to a collaboration partner. We 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. We anticipate
recognizing non-refundable upfront license payments and development and regulatory milestone payments received by us in license and collaboration arrangements that
include future obligations, such as supply obligations, ratably over our expected performance period under each respective arrangement. We make our best estimate of the
period over which we expect to fulfill our 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 we enter into an arrangement to sublicense some of our patents, we will consider the performance obligations to determine if there is a single element or multiple
elements to the arrangement as we determine the proper method and timing of revenue recognition. We consider the terms of the license or sublicense for such elements as price
adjustments or refund clauses in addition to any performance obligations for us 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.
55
We expect to recognize royalty revenue in the period of sale, based on the underlying contract terms, provided that the reported sales are reliably measurable, we have no
remaining performance obligations, and all other revenue recognition criteria are met. We anticipate reimbursements for research and development services completed by us
related to the collaboration agreements to be recognized in operations as revenue on a gross basis. Our license and collaboration agreements with certain collaboration partners
could also provide for future milestone receipts to us 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, we expect 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
us are considered inconsequential or perfunctory.
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, clinical trial and related clinical manufacturing expenses, fees paid to contract research organizations (“CROs”) and contract manufacturing organizations
and other outside expenses. We expense research and development costs as incurred. We expense upfront, non-refundable payments made for research and development
services as obligations are incurred. 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.
We are required to estimate accrued research and development expenses at each reporting period. This process involves reviewing open contracts and purchase orders,
communicating with our personnel to identify services that have been performed on our behalf and estimating the level of service performed and the associated cost incurred for
the service when we have not yet been invoiced or otherwise notified of actual costs. The majority of our service providers invoice us in arrears for services performed, on a
pre-determined schedule or when contractual milestones are met. However, some require advanced payments. We make estimates of accrued expenses as of each balance sheet
date in the financial statements based on facts and circumstances known at that time. We periodically confirm the accuracy of the estimates with the service providers and make
adjustments, if necessary. Examples of estimated accrued research and development expenses include fees paid to:
·
·
·
·
Collaborative partners performing research and development and pre-clinical activities;
Program managers in connection with overall program management of clinical trials;
CROs in connection with clinical trials; and
Investigative sites in connection with clinical trials.
We base our expenses related to research and development, pre-clinical activities and clinical trials on our estimates of the services received and efforts expended pursuant to
quotes and contracts with multiple research institutions and CROs that conduct and manage clinical trials on our behalf. The financial terms of these agreements are subject to
negotiation, vary from contract to contract and may result in uneven payment flows. There may be instances in which payments made to vendors will exceed the level of
services provided and result in a prepayment of the expense. In accruing service fees, we estimate the time period over which services will be performed and the level of effort
to be expended in each period. If the actual timing of the performance of services or the level of effort varies from the estimate, we adjust the accrual or prepaid accordingly.
Although we do not expect our estimates to be materially different from amounts actually incurred, our understanding of the status and timing of services performed relative to
the actual status and timing of services performed may vary and may result in reporting amounts that are too high or too low in any particular period. To date, there have not
been any material adjustments to our prior estimates of accrued research and development expenses.
56
Share-based Expense
Share-based expense includes grants of options and restricted stock units (“RSUs”) to employees and non-employees to purchase shares of our common stock, par value $0.001
(the “Common Stock”), Joint Share Ownership Plan awards to employees, as well as 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, we use a weighted average of our historical volatility
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. We account for forfeitures as they occur and not at the time of grant. We have not paid dividends and do not anticipate paying cash dividends in the foreseeable
future and, accordingly, we use 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. We generally determine 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.
We grant common stock awards to non-employees in exchange for services provided. The fair value of common stock awards issued in exchange for services provided by non-
employees is generally determined by using the fair value of the services provided, as this provides the most reliable measure of the fair value of the awards granted. Share-
based expense is recognized as services are rendered on a straight-line basis. The assumptions used in calculating the fair value of the common stock awards represent our best
estimates and involve inherent uncertainties and the application of our judgment. As a result, if factors change and we use different assumptions, share-based expense related to
the Common Stock awards could be materially different in the future.
Warrants
In connection with certain financing, consulting and collaboration arrangements, we issued warrants to purchase shares of our Common Stock. Outstanding warrants are
standalone instruments that are not puttable or mandatorily redeemable by the holder and are classified as equity awards. We measure 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. For warrants that contain vesting triggers based on the achievement of certain objectives, we apply judgment to estimate the probability and
timing of the achievement of those objectives. These estimates involve inherent uncertainties, and as a result, if the probability or timing of the achievement of those objectives
change, expense related warrants could be materially different in the future.
For warrants issued in connection with financing arrangements we allocate the proceeds based on the relative fair value of the award and other instrument(s).
57
Goodwill and 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. Any excess of the purchase price over the estimated fair values of the net assets acquired is recognized as goodwill. At acquisition, we generally determine the fair value
of intangible assets, including in-process research and development (“IPR&D”), using the “income method.” This method starts with a forecast of net cash flows, risk adjusted
for estimated probabilities of technical and regulatory success (for IPR&D) and adjusted to present value using an appropriate discount rate that reflects the risk associated with
the cash flow streams.
Subsequent to acquisition, goodwill and indefinite lived intangibles are not amortized but are tested at least annually as of October 1 for impairment, or when events or changes
in circumstances indicate it is more likely than not that the carrying amount of such assets may not be recoverable. Our annual assessment may consist of a qualitative or
quantitative analysis to determine if it is more likely than not that its fair value exceeds the carrying value. When performing the qualitative method, we determine whether the
existence of events or circumstances leads us to determine that it is more likely than not (that is, a likelihood of more than 50%) that goodwill and indefinite lived intangibles
are impaired. If we choose to first assess qualitative factors and it is determined that it is not more likely than not that goodwill and intangible assets are impaired, then we are
not required to take further action to test for impairment. We also have the option to bypass the qualitative assessment and perform only the quantitative impairment test, which
we may choose to do in some periods but not in others. As the option to perform the qualitative assessment is not a permanent election, we reassess this option during each
annual impairment review.
When performing quantitative analysis, we use the income and market valuation methods and may weight outcomes of valuation approaches when estimating fair value. Inputs
and assumptions used to determine fair value are determined from a market participant view, which might be different than our specific views. The valuation process is
complex and requires significant input and judgment using internal and external sources. Market approaches depend on the availability of guideline companies and
representative transactions. When using the income approach, complex and judgmental matters applicable to the valuation process may include estimated useful life,
projections, tax rates and discount rates.
Goodwill
We compare the fair value of our reporting unit to its carrying value. An impairment loss, if any, is measured as the excess of the carrying value of goodwill over the fair value
of goodwill. We determine our reporting unit by identifying the components of our operating segment with similar economic characteristics based on quantitative and
qualitative factors that have discrete financial information available. We determined that we have one reporting unit. We experienced a significant decline in the market price of
our stock during 2019 resulting in a drop in our market capitalization indicating potential impairment. The Company determined the fair value of the reporting unit using its
market capitalization and concluded that the fair value of the reporting unit was less than the carrying amount in excess of Goodwill. As result, we recorded an asset impairment
charge of $3.3 million during the year ended December 31, 2019 and, therefore, no Goodwill was recorded as of December 31, 2020 and 2019, respectively.
Indefinite-lived Intangible Assets
IPR&D intangible assets are considered indefinite-lived intangible assets until completion or abandonment of the associated research and development efforts. We compare the
fair value of the intangible asset to its carrying value. An impairment loss, if any, is measured as the excess of the carrying value of the intangible asset over its fair value.
During 2019, we used the quantitative method and determined the fair value of the indefinite-lived intangible asset exceeded its carrying value as of October 1, 2019. During
2020, we completed an impairment analysis of the IPR&D and concluded that the following factors indicate that the IPR&D was impaired: a decision by management to delay
indefinitely any further development of the IPR&D and to not support the underlying intellectual property; the failure to sell or license the IPR&D to a third party; and the
reduction in market capitalization. As a result, we recorded an asset impairment charge of $9.2 million during the year ended December 31, 2020 representing the excess of the
IPR&D asset’s carrying value over its estimated fair value. Indefinite-lived intangible assets were approximately $0 and $9.2 million at December 31, 2020 and 2019,
respectively.
58
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 in assumptions could potentially lead to impairment.
We believe our estimates and assumptions are reasonable and otherwise consistent with assumptions that marketplace participants would use in their estimates of fair value.
However, if future results are not consistent with our estimates and assumptions, then we may be exposed to an impairment charge, which could be material. Use of different
estimates and judgments could yield materially different results in our analysis and could result in materially different asset values or expense.
Effects of the COVID-19 Pandemic
During March 2020, a global pandemic was declared by the World Health Organization related to the rapidly growing outbreak of a novel strain of coronavirus, or COVID-19.
The pandemic has significantly affected economic conditions in the U.S., accelerating during the first half of March 2020 and continuing into 2021, as federal, state and local
governments react to the public health crisis with mitigation measures, creating significant uncertainties in the U.S. economy. We continue to evaluate the effects of the
COVID-19 pandemic on our business, and while our operations were not materially affected during the year ended December 31, 2020 despite social distancing and other
measures taken in response to the pandemic, the ultimate impact of the COVID-19 pandemic on our results of operations and financial condition is dependent on future
developments, including the duration of the pandemic and the related extent of its severity, as well as its impact on macroeconomic conditions, which are uncertain and cannot
be predicted at this time. If the global response to contain the COVID-19 pandemic escalates further or is unsuccessful, or if governmental decisions to ease pandemic related
restrictions are ineffective, premature or counterproductive, we could experience a material adverse effect on our business, financial condition, results of operations and cash
flows.
Results of Operations
The table below sets forth the comparison of our historical results of operations for the year ended December 31, 2020 to the year ended December 31, 2019.
Description
Revenue:
Royalty revenue
Operating costs and expenses:
Research and development
General and administrative
Asset impairment charges
Total operating costs and expenses
Loss from operations
Other income (expense):
Other income (expense)
Interest income, net
Loss before income taxes
Income tax benefit
Net loss
2020
2019
Increase (Decrease) Percentage Change
$
436,942
$
17,066
$
419,876
2,460.3%
(4,889,340)
(4,731,176)
(3,283,379)
(12,903,895)
(12,886,829)
3,315
108,489
(12,775,025)
–
$
(12,775,025)
$
(3,157,934)
(1,331,105)
5,959,749
1,470,710
1,050,834
(3,807)
17,682
1,036,959
2,918,518
(1,881,559)
(64.6)%
(28.1)%
181.5%
11.4%
8.2%
(114.8)%
16.3%
8.1%
100.0%
(14.7)%
(1,731,406)
(3,400,071)
(9,243,128)
(14,374,605)
(13,937,663)
(492)
126,171
(13,811,984)
2,918,518
(10,893,466)
59
$
Revenue
Revenue for the year ended December 31, 2020 increased by $0.4 million, or 2,460.3%, to $0.4 million from approximately $17,000 for the year ended December 31, 2019.
The increase in revenue represents a full year of royalty revenue related to our sublicense agreement with Takeda Pharmaceuticals Co. Ltd. (“Takeda”) compared to only three
months of royalties in 2019 as sales by the sublicensee of the product generating the royalty commenced during the third quarter of 2019.
Research and Development Expense
Overall, R&D expenses for the year ended December 31, 2020 decreased by $3.2 million, or 64.6% to $1.7 million from $4.9 million for the year ended December 31, 2019
primarily due to IPR&D expense of $3.0 million in the prior year. During the year ended December 31, 2019, we expensed $3.0 million of IPR&D associated with our
acquisition of the XCART technology. There was no similar expense in 2020. Excluding the $3.0 million of IPR&D expense for the year ended December 31, 2019 from total
R&D expense of $4.9 million, R&D expense for the year ended December 31, 2019 was $1.9 million compared to $1.7 million for the year ended December 31, 2020, a
decrease of approximately $127,000, or 6.8%.
The table below sets forth the research and development expenses incurred by category of expense for the year ended December 31, 2020 and 2019.
Category of Expense
IPR&D expense
Outside services and Contract Research Organizations
Share-based expense
Personnel costs
Other
Total research and development expense
Year ended December 31,
2020
2019
–
1,203,582
49,191
342,883
135,750
1,731,406
$
$
3,031,226
1,357,820
156,964
297,651
45,679
4,889,340
$
$
The decrease in outside services and contract research organizations expense was primarily due to decreased spending on our XBIO-101 phase 2 clinical trial during the year
ended December 31, 2020 as compared to the prior year. Costs related to the phase 2 clinical trial were significantly lower as we closed patient enrollment during the first
quarter of 2019 and suspended further development of XBIO-101. The decrease in XBIO-101 costs were substantially offset by increased costs related to our XCART pre-
clinical development efforts in 2020. Salaries and wages increased during the year ended December 31, 2020 due to slightly higher employee related costs, which was partially
offset by lower share-based expense.
General and Administrative Expense
General and administrative expenses decreased by approximately $1.3 million, or 28.1% for the year ended December 31, 2020, to $3.4 million from $4.7 million in 2019,
primarily due to approximately $1.1 million of transaction costs associated with the XCART acquisition incurred during the year ended December 31, 2019. There was no
similar expense for the comparable period in 2020. Excluding the $1.1 million of transaction costs associated with the XCART acquisition for the year ended December 31,
2019 from total G&A expenses of $4.7 million, G&A expenses for the year ended December 31, 2019 were $3.6 million, compared to $3.4 million for the year ended
December 31, 2020, a decrease of approximately $228,000, or 6.3%. This decrease was primarily due to lower share-based expense and a gain on settlement of certain vendor
amounts related to the close-out of our XBIO-101 trial. These decreases were partially offset by increased employee costs during the year ended December 31, 2020 compared
to the same period in the prior year.
60
Asset Impairment Charges
Asset impairment charges were $9.2 million for the year ended December 31, 2020 compared to $3.3 million for the year ended December 31, 2019. During the year ended
December 31, 2020, we recorded an asset impairment charge of $9.2 million related to our IPR&D. During the year ended December 31, 2019, we recorded an asset
impairment charge of $3.3 million related to our Goodwill.
Other Income (Expense)
Other expense was approximately $500 for the year ended December 31, 2020 compared to approximately $3,300 of other income for the same period in 2019. This decrease in
other income was primarily related to changes in foreign currency exchange rates during the year ended December 31, 2020 as compared to the same period in 2019.
Interest Income, net
Interest income, net increased to approximately $126,000 during the year ended December 31, 2020 as compared to approximately $108,000 for the same period in the prior
year. This increase is primarily due to interest earned on our loan receivable with Pharmsynthez partially offset by a decrease in interest income on invested funds.
Income Tax Benefit
Income tax benefit of $2.9 million for the year ended December 31, 2020 was due to the impairment of IPR&D in 2020. There was no similar benefit during the same period in
the prior year.
Non-GAAP Measures
In the Company’s narrative discussion of operations above, we exclude the impact of non-cash expenses and the impact of the Company’s acquisition of the XCART
technology from certain operating measures, which narrative discussion includes reconciliation of such adjusted financial measures to the directly comparable GAAP financial
measure. We believe these adjusted operating measures may provide investors with useful information regarding our underlying performance from period to period and allow
investors to better understand our results of operations. Management uses these adjusted measures when assessing the performance of the business.
Liquidity and Capital Resources
We incurred a net loss of approximately $10.9 million for the year ended December 31, 2020. We had an accumulated deficit of approximately $176.9 million at December 31,
2020 as compared to an accumulated deficit of approximately $166.0 million at December 31, 2019. Working capital was approximately $11.4 million at December 31, 2020
and $9.7 million at December 31, 2019, respectively. During the year ended December 31, 2020, our working capital increased by $1.8 million due to our December 2020
registered direct Common Stock offering resulting in $5.4 million in net proceeds to us. This increase in working capital was substantially offset by our net loss for the year
ended December 31, 2020. We expect to continue incurring losses for the foreseeable future and may need to raise additional capital or pursue other strategic alternatives in the
long-term in order to continue the pursuit of our business plan.
61
Our principal source of liquidity consists of cash. At December 31, 2020, we had approximately $11.5 million in cash and $0.9 million in current liabilities. At December 31,
2019, we had approximately $10.4 million in cash and $1.4 million in current liabilities. We have historically relied upon sales of our equity securities to fund our operations.
We expect the majority of our funding through equity or equity-linked instruments, debt financings, corporate collaborations, related party funding and/or licensing agreements
to continue as a trend for the foreseeable future.
Management evaluates whether there are conditions or events, considered in the aggregate, that raise substantial doubt about our ability to continue as a going concern within
one year after the date that the financial statements are issued. We have incurred substantial losses since our inception, and we expect to continue to incur operating losses in the
near-term. These factors raise substantial doubt about our ability to continue as a going concern. We believe that we have access to capital resources through possible public or
private equity offerings, debt financings, corporate collaborations, related party funding, or other means to continue as a going concern. On December 4, 2020, we closed on a
$6.0 million registered direct Common Stock offering resulting in $5.4 million of net proceeds to us. We believe that this financing, coupled with our existing resources, will be
adequate to fund our operations through the first quarter of 2022. However, we anticipate we may need additional capital in the long-term to pursue our business initiatives. The
terms, timing and extent of any future financing will depend upon several factors, including the achievement of progress in our clinical development programs, our ability to
identify and enter into licensing or other strategic arrangements, and factors related to financial, economic and market conditions, many of which are beyond our control.
Cash Flows from Operating Activities
Cash flows used in operating activities for the year ended December 31, 2020 of approximately $4.3 million was primarily due to our net loss for the period, offset by non-cash
charges associated with asset impairment charges, deferred income taxes, share-based expense, and settlement of certain amounts payable to a vendor related to the close-out of
our XBIO-101 trial. Cash flows used in operating activities for the year ended December 31, 2019 totaled approximately $6.4 million, which was primarily due to our net loss
for the period, offset by non-cash charges associated with asset impairment charges, acquired IPR&D and share-based expense.
Cash Flows from Investing Activities
There were no cash flows from investing activities for the year ended December 31, 2020. Cash flows provided by investing activities for the year ended December 31, 2019
totaled $2,000, which represented proceeds from the sale of property and equipment. As of December 31, 2020, there were no material commitments for capital expenditures.
Cash Flow from Financing Activities
Cash flows from financing activities for the year ended December 31, 2020 totaled approximately $5.4 million representing net proceeds from our registered direct Common
Stock offering in December 2020. Cash flows from financing activities for the year ended December 31, 2019 totaled approximately $16.1 million representing net proceeds
from our registered direct stock offering in March 2019 and our underwritten stock offering in July 2019.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future material effect on our financial condition, changes in financial
condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.
62
Contractual Obligations
Contractual obligations represent future cash commitments and liabilities under agreements with third-parties and exclude contingent liabilities for which we cannot reasonably
predict future payment. Our contractual obligations result from property leases for office space. Although we do have obligations for CRO services, the table below excludes
potential payments we may be required to make under our agreements with CROs because timing of payments and actual amounts paid under those agreements may be
different depending on the timing of receipt of goods or services or changes to agreed-upon terms or amounts for some obligations, and those agreements are cancelable upon
written notice by the Company and therefore, not long-term liabilities. The contracts also contain variable costs that are hard to predict as they are based on such things as
patients enrolled and clinical trial sites, which can vary and, therefore, are also not included in the table below. Additionally, the expected timing of payment of the obligations
presented below is estimated based on current information.
The following tables represent our contractual obligations as of December 31, 2020, aggregated by type:
Payments Due by Period
As of December 31, 2020
Total
Less
than
1 year
1-3
years
3-5
years
More
than
5 years
Lease obligations
Total
$
$
83,649
83,649
$
$
54,532
54,532
$
$
29,117
29,117
$
$
–
–
$
$
–
–
Recent Accounting Standards
Refer to Note 3, Summary of Significant Accounting Policies, of the accompanying financial statements set forth in Item 8.
ITEM 7A – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are not required to provide the information required by this Item because we are a smaller reporting company.
63
ITEM 8 – FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2020 and 2019
Consolidated Statements of Comprehensive Loss for the years ended December 31, 2020 and 2019
Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2020 and 2019
Consolidated Statements of Cash Flows for the years ended December 31, 2020 and 2019
Notes to Consolidated Financial Statements
F-1
F-3
F-4
F-5
F-6
F-7
64
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, 2020 and 2019, the related consolidated
statements of comprehensive loss, stockholders’ equity and cash flows for each of the two years in the period ended December 31, 2020, 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, 2020 and 2019, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2020, 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
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 recent registered direct common stock offering that resulted in approximately $5.4 million of net proceeds, coupled with the
Company’s existing resources.
F-1
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 XCART
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.
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 16, 2021
F-2
XENETIC BIOSCIENCES, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
Current assets:
Cash
Prepaid expenses and other
Total current assets
Property and equipment, net
Goodwill and indefinite-lived intangible assets
Other assets
Total assets
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable
Accrued expenses and other current liabilities
Total current liabilities
Deferred tax liability and other long-term liabilities
Total liabilities
Commitments and contingent liabilities (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, 2020 and December 31, 2019
Series A, $0.001 par value: 970,000 shares issued and outstanding as of December 31, 2020 and December 31, 2019
Common stock, $0.001 par value; 50,000,000 and 12,500,000 shares authorized as of December 31, 2020 and December
31, 2019; 8,772,198 and 6,092,432 shares issued as of December 31, 2020 and December 31, 2019, respectively;
8,745,207 and 6,065,441 shares outstanding as of December 31, 2020 and December 31, 2019, respectively
Additional paid in capital
Accumulated deficit
Accumulated other comprehensive income
Treasury stock
Total stockholders' equity
Total liabilities and stockholders' equity
December 31, 2020
December 31, 2019
$
$
$
$
11,527,552
841,958
12,369,510
–
–
809,985
13,179,495
327,396
609,532
936,928
27,043
963,971
1,804
970
8,771
194,133,511
(176,902,086)
253,734
(5,281,180)
12,215,524
13,179,495
$
$
$
$
10,367,920
722,079
11,089,999
757
9,243,128
1,213,042
21,546,926
931,128
484,029
1,415,157
2,918,518
4,333,675
1,804
970
6,092
188,240,451
(166,008,620)
253,734
(5,281,180)
17,213,251
21,546,926
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,
2020
2019
$
436,942
436,942
$
17,066
17,066
(1,731,406)
(3,400,071)
(9,243,128)
(14,374,605)
(13,937,663)
(492)
126,171
125,679
(4,889,340)
(4,731,176)
(3,283,379)
(12,903,895)
(12,886,829)
3,315
108,489
111,804
(13,811,984)
(12,775,025)
2,918,518
–
(10,893,466)
(12,775,025)
–
(5,284,379)
$
$
(10,893,466)
(1.70)
$
$
(18,059,404)
(6.33)
Revenue
Royalty revenue
Total revenue
Operating costs and expenses:
Research and development
General and administrative
Asset impairment charges (Note 7)
Total operating costs and expenses
Loss from operations
Other income (expense):
Other income (expense)
Interest income, net
Total other income
Loss before income taxes
Income tax benefit
Net loss
Deemed dividend
Net loss applicable to common stockholders
Basic and diluted loss per share
Weighted-average shares of common stock outstanding, basic and diluted
6,392,381
2,852,464
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
Number
of
Shares
2,774,394
Par
Value ($0.001)
2,774
$
Number
of
Shares
810,856
Par
Value ($0.001)
811
$
Additional
Paid in
Capital
$ 168,170,244
Accumulated
Other
Comprehensive
Income
(Loss)
Accumulated
Deficit
$ (153,233,595) $
253,734
$
Treasury
Stock
(5,281,180) $
Total
Stockholders'
Equity
9,912,788
–
–
–
–
–
–
–
–
–
–
–
–
–
2,774,394
–
–
–
–
–
2,774,394
$
$
–
–
–
–
–
–
–
–
–
–
–
–
–
2,774
–
–
–
–
–
2,774
86,667
87
2,698,963
1,746,666
1,747
13,420,203
624,995
612,417
2,201,553
7,836
–
1,442
–
–
–
–
–
6,092,432
$
2,448,980
229,598
–
1,188
–
8,772,198
$
625
612
2,202
7
–
1
–
–
–
–
–
6,092
2,449
229
–
1
–
8,771
3,030,601
5,597
(2,202)
(7)
63,536
(1)
5,284,379
(5,284,379)
806,090
47,427
–
$ 188,240,451
5,424,376
(229)
468,914
–
–
–
–
–
–
–
–
–
–
–
–
(12,775,025)
–
–
–
–
(1)
–
$ 194,133,511
(10,893,466)
$ (176,902,086) $
$ (166,008,620) $
–
–
–
–
–
–
–
–
–
–
–
–
–
253,734
–
–
–
–
–
253,734
–
–
–
–
–
–
–
–
–
–
–
–
–
$
(5,281,180) $
–
–
–
–
–
$
(5,281,180) $
2,699,050
13,421,950
3,031,226
6,209
–
–
63,536
–
5,284,379
(5,284,379)
806,090
47,427
(12,775,025)
17,213,251
5,426,825
–
468,914
–
(10,893,466)
12,215,524
Balance as of January 1, 2019
Issuance of common stock and warrants
in March 2019 registered direct
offering, net of issuance costs
Issuance of common stock and warrants
in July 2019 public offering, net of
issuance costs
Issuance of common stock in connection
with purchase of in-process research and
development
Exercise of pre-funded warrants
Exercise of purchase warrants
Issuance of common stock to vendor
Issuance of warrants in connection with
reverse stock split
Issuance of common stock to adjust for
reverse split rounding
Deemed dividend related to Series B
Preferred Stock down round provision
Accretion of deemed dividend related to
Series B Preferred Stock down round
provision
Share-based expense
Common stock awards to vendors
Net loss
Balance as of December 31, 2019
Issuance of common stock in December
2020 registered direct offering, net of
issuance costs
Exercise of purchase warrants
Share-based expense
Issuance of common stock to vendor
Net loss
Balance as of December 31, 2020
The accompanying notes are an integral part of these consolidated financial statements.
F-5
XENETIC BIOSCIENCES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss
Adjustments to reconcile net loss to net cash used in operating activities:
Acquired in-process research and development
Asset impairment charges
Deferred income taxes
Depreciation
Amortization of right of use asset
Gain on sale of property and equipment
Gain on settlement with vendor
Share-based expense
Issuance of warrants in connection with reverse stock split
Vendor share-based expense
Changes in operating assets and liabilities:
Prepaid expenses and other assets
Accounts payable, accrued expenses and other liabilities
Net cash used in operating activities
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of property and equipment
Net cash provided by investing activities
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of common stock in December 2020 registered direct offering
Net proceeds from issuance of common stock and warrants in July 2019 public offering
Net proceeds from issuance of common stock and warrants in March 2019 registered direct offering
Proceeds from exercise of warrants
Net cash provided by financing activities
Net change in cash
Cash at beginning of period
Cash at end of period
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Right of use asset obtained in exchange for lease liability
Issuance of common stock to vendor
Issuance of common stock to acquire in-process research and development
Issuance of common stock to adjust for Reverse Stock Split
Issuance of common stock from cashless exercise of purchase warrants
FOR THE YEARS ENDED
DECEMBER 31,
2020
2019
$
(10,893,466)
$
(12,775,025)
–
9,243,128
(2,918,518)
757
28,080
–
(143,639)
468,914
–
–
325,662
(378,111)
(4,267,193)
–
–
5,426,825
–
–
–
5,426,825
1,159,632
10,367,920
11,527,552
–
70,564
1
–
–
229
$
$
$
$
$
$
$
3,031,226
3,283,379
–
4,199
23,288
(2,000)
–
806,090
63,536
47,427
(653,563)
(227,961)
(6,399,404)
2,000
2,000
–
13,421,950
2,699,050
6,209
16,127,209
9,729,805
638,115
10,367,920
8
43,330
7
3,031,226
1
2,202
$
$
$
$
$
$
$
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 progressing XCART™, a personalized Chimeric Antigen Receptor (“CAR”) T platform technology engineered to target patient- and tumor-specific neoantigens.
The Company is initially advancing cell-based therapeutics targeting the unique B-cell receptor on the surface of an individual patient’s malignant tumor cells, for the treatment
of B-cell lymphomas. The XCART technology, developed by the Scripps Research Institute (“Scripps Research”) in collaboration with the Shemyakin-Ovchinnikov Institute of
Bioorganic Chemistry (“IBCH”), is believed to have the potential to significantly enhance the safety and efficacy of cell therapy for B-cell lymphomas by generating patient-
and tumor-specific CAR T cells.
Additionally, Xenetic is leveraging its proprietary drug delivery platform, PolyXen®, by partnering with biotechnology and pharmaceutical companies. PolyXen is an enabling
platform technology which can be applied to protein or peptide therapeutics. It employs the natural polymer polysialic acid to prolong a drug's circulating half-life and
potentially improve other pharmacological properties. Xenetic incorporates its patented and proprietary technologies into a number of drug candidates currently under
development with biotechnology and pharmaceutical industry collaborators to create what the Company believes will be the next-generation biologic drugs with improved
pharmacological properties over existing therapeutics.
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, and 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. On
December 4, 2020, the Company closed on a $6.0 million registered direct offering of the Company’s common stock, par value $0.001 (the “Common Stock”) resulting in $5.4
million of net proceeds to the Company. The Company believes that this financing, coupled with the Company’s existing resources, will be adequate to fund the Company’s
operations through the first quarter of 2022. 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 clinical development programs, its ability to identify
and enter into licensing or other strategic arrangements, and factors related to financial, economic and market conditions, many of which are beyond its control.
F-7
2.
Impact of COVID-19
During March 2020, a global pandemic was declared by the World Health Organization related to the rapidly growing outbreak of a novel strain of coronavirus, or COVID-19.
The pandemic has significantly affected economic conditions in the U.S., accelerating during the first half of March 2020 and continuing into 2021, as federal, state and local
governments react 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 is 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.
3.
Summary of Significant Accounting Policies
Preparation of Financial Statements
On June 25, 2019, the Company effected a reduction, on a 1 for 12 basis, in its authorized Common Stock, par value $0.001, along with a corresponding and proportional
decrease in the number of shares issued and outstanding (the “Reverse Stock Split”). On the effective date of the Reverse Stock Split, (i) every 12 shares of Common Stock
were reduced to one share of Common Stock, with any fractional amounts rounded up to one share; (ii) the number of shares of Common Stock into which each outstanding
warrant, restricted stock unit, or option to purchase Common Stock were proportionately reduced on the same basis as the Common Stock; (iii) the exercise price of each
outstanding warrant or option to purchase Common Stock were proportionately increased on a 1 to 12 basis; and (iv) the number of shares of Common Stock into which each
share of Preferred Stock were proportionately reduced on the same basis as the Common Stock. Unless otherwise indicated, all of the share numbers, share prices, and exercise
prices have been adjusted, on a retroactive basis, to reflect this 1 for 12 Reverse Stock Split.
Certain prior period amounts have been reclassified to conform to the presentation for the current period.
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.
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, 2020
and 2019, 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
The Company considers all highly liquid investments with maturities 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 Company maintains cash primarily with one major financial
institution that management believes is of high credit quality. The carrying amount of cash equivalents approximate their fair value due to the short-term nature of these
instruments
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:
Asset Classification
Laboratory equipment
Office and computer equipment
Leasehold improvements
Furniture and fixtures
Estimated Useful Life
3 years
3 years
5 years or the remaining term of the lease, if shorter
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
Acquired indefinite-lived intangible assets consist of in-process research and development (“IPR&D”) related to the Company’s business combination with SymbioTec, which
was recorded at fair value on the acquisition date. At acquisition, we generally determine the fair value of intangible assets, including IPR&D, using the “income method.”
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 as of October 1, 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. The Company historically had performed its annual
impairment review as of October 1. The Company determined that IPR&D was impaired during the year ended December 31, 2020. See Note 7 Goodwill, Indefinite-Lived
Intangible Assets and Other Long-Term Assets.
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.
Goodwill
Goodwill is comprised of the purchase price of business combinations in excess of the fair value assigned at acquisition to the net tangible and identifiable intangible assets
acquired and is not amortized. The Company assessed goodwill for impairment at least annually, or when events or changes in the business environment indicated that the
carrying value may not be fully recoverable. 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 goodwill is impaired. If the Company chooses to first assess
qualitative factors and it is determined that it is not more likely than not goodwill 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 do in some periods but
not in others. The Company historically had performed its annual impairment review as of October 1 at the reporting unit level. Goodwill may be considered impaired if the
carrying value of the reporting unit, including goodwill, exceeds the reporting unit’s fair value. The Company is comprised of one reporting unit. The Company determined that
Goodwill was impaired during the year ended December 31, 2019. See Note 7 Goodwill, Indefinite-Lived Intangible Assets and Other Long-term Assets.
F-10
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. No such impairments were recorded during the years ended December 31, 2020 and 2019.
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.
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,
determine those that are performance obligations, and assess 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).
F-11
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.
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 costs, clinical trial and related clinical manufacturing expenses, fees paid to contract research organizations (“CROs”) and contract
manufacturing organizations 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.
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;
CROs in connection with clinical trials; and
Investigative sites in connection with clinical trials.
F-12
The Company bases its expenses related to research and development, pre-clinical activities and clinical trials on its estimates of the services received and efforts expended
pursuant to quotes and contracts with multiple research institutions 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, 2020 and 2019, the Company has recorded accrued program expense of approximately $0.1 million as a component of accrued expenses. In addition, the
Company has recorded approximately $0.2 million and $0.7 million of prepayments as a component of prepaid expenses and other current assets as of December 31, 2020 and
2019, respectively.
Share-based Expense
Stock options and restricted stock units
The Company grants share-based payments in the form of options and restricted stock units (“RSUs”) to employees and non-employees, Joint Share Ownership Plan (“JSOP”)
awards to employees, as well as 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 terms represent 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.
Common stock awards
The Company grants 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, as this provides the most reliable measure of the fair value of the awards granted. 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 on a straight-line basis as services are rendered. The share-based payments related to
Common Stock awards for the settlement of services provided by non-employees is recorded on the consolidated statement of comprehensive loss in the same manner and
charged to the same account as if such settlements had been made in cash.
F-13
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.
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, 2020 and 2019, there were approximately 27,000 JSOP awards
issued.
For the years ended December 31, 2020 and 2019, 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, 2020 and
2019, approximately 391,000 and 516,000 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 Contingent Liabilities for further information.
F-14
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
and, in some cases, whether it meets the definition of a reverse merger. 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.
Recent Accounting Standards
In November 2018, the Financial Accounting Standards Board (“FASB”) issued ASU 2018-18, Clarifying the Interaction between Topic 808 and Topic 606. The guidance
clarifies that certain transactions between collaborative arrangement participants should be accounted for as revenue under ASC 606 when the collaborative arrangement
participant is a customer for a promised good or service that is distinct within the collaborative arrangement. The guidance also precludes entities from presenting amounts
related to transactions with a collaborative arrangement participant that is not a customer as revenue, unless those transactions are directly related to third-party sales. ASU
2018-18 is effective in the first quarter of 2020 and should be applied retrospectively to January 1, 2018, when the Company adopted ASC 606. Early adoption is permitted.
The new guidance was adopted on January 1, 2020 and it did not have a material effect on the Company’s consolidated financial statements.
In August 2018, the FASB issued ASU 2018-13, Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement. The guidance eliminates, adds
and modifies certain disclosure requirements for fair value measurements as part of its disclosure framework project. ASU 2018-13 is effective for annual reporting periods
beginning after December 15, 2019 and interim periods within those annual periods and early adoption is permitted. The new guidance was adopted on January 1, 2020 and it
did not have a material effect on the Company’s consolidated financial statements.
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. We are currently evaluating the impact of adoption, but we do not anticipate that it will have a material effect on our consolidated financial statements.
F-15
4.
Significant Strategic Collaborations
Takeda Pharmaceutical Co. Ltd. (together with its wholly owned subsidiaries, “Takeda”)
The Company is party to an exclusive research, development and license agreement with Takeda related to the development of a novel series of polysialylated blood
coagulation factors. This collaboration with Takeda relies on the Company’s PolyXen technology to conjugate polysialic acid (“PSA”) with therapeutic blood-clotting factors,
with the goal of improving the pharmacokinetic profile and extending the active half-life of these biologic molecules. The agreement grants Takeda a worldwide, exclusive,
royalty-bearing license to the Company’s PSA patented and proprietary technology in combination with Takeda’s proprietary molecules designed for the treatment of blood and
bleeding disorders.
On October 27, 2017, the Company entered into a Right of Sublicense Agreement (the “Sublicense Agreement”) with Takeda that granted to Takeda the right to grant a
nonexclusive 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 (“Covered Products.”) Pursuant to the Sublicense Agreement, Takeda (i) paid the Company a one-time payment of
seven million five hundred thousand dollars ($7,500,000) in November 2017 and (ii) agreed to pay to the Company single digit royalty payments based upon net sales of the
Covered Products throughout the term. Royalty payments commenced in 2019 and approximately $437,000 and $17,000 were recorded as revenue by the Company during the
years ended December 31, 2020 and 2019, respectively. 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. There were no remaining performance obligations
and all other revenue recognition criteria were met.
Scripps Research
On May 15, 2020, the Company and Scripps Research entered into a Research Funding and Option Agreement (the “Scripps Agreement”), pursuant to which the Company has
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 is
payable by the Company to Scripps Research on a quarterly basis in accordance with a negotiated budget, which provides 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 has
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 has 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. The Company has paid $0.9 million to Scripps Research under this agreement through
December 31, 2020.
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 SynBio, LLC (“SynBio”), had a share ownership in the Company of approximately 5.1% and 7.4% of the total outstanding
Common Stock as of December 31, 2020 and 2019, respectively. In addition to its Common Stock ownership, Pharmsynthez holds outstanding warrants to purchase our
Common Stock, 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.
F-16
During the third quarter of 2019, the Company entered into a Sponsored Research Agreement with Pharmsynthez (the “SRA”) related to experiments identified by the
Company to support its efforts for initial tech transfer of the XCART methods to a future academic collaborator. Under the agreement, the Company made a $350,000 payment
to Pharmsynthez during the third quarter of 2019, which is refundable on pro rata basis if the project is terminated prematurely as a result of Pharmsynthez failing to perform
the work. On June 12, 2020, the Company and Pharmsynthez entered into a Master Services Agreement (“MSA”) to advance the development of the Company’s XCART
technology for B-cell malignancies. The MSA terminated and superseded the SRA. The Company expensed approximately $0.2 million related to work performed under these
agreements during the year ended December 31, 2020. As of December 31, 2020 and December 31, 2019, approximately $25,000 and $0.1 million, respectively, was recorded
as an advanced payment and included in Prepaid expenses and other on the consolidated balance sheets.
Under the 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 is
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 provides for milestone payments, the Company is 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.
The Company and Pharmsynthez executed a work order on June 12, 2020 (the “Work Order”) under the 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 are expected to
take approximately 20 months unless earlier terminated in accordance with the MSA. Under the terms of the Work Order, the Company paid Pharmsynthez $51,000 as an initial
payment for trial startup costs, which amount was credited against the amounts paid under the SRA. The Work Order provides for additional pass-through costs to be invoiced
by Pharmsynthez upon execution of contracts with third party sites, which will be further credited against the SRA. The total cost under the Work Order is currently estimated
to be approximately $1.8 million. Through December 31, 2020, all costs incurred under the MSA were credited against the amounts paid under the SRA. Additionally, the
Work Order provides 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. For the year ended December 31, 2020, the Company expensed approximately $50,000 under the Work Order related to the milestone
payments.
SynBio LLC
In August 2011, SynBio, a wholly-owned subsidiary of Pharmsynthez, 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 engage in the
development of commercial candidates in any territory outside of the SynBio Market.
SynBio and the Company are each 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. Serum Institute of India Limited
(“Serum Institute”) has agreed to directly provide the research supplies to SynBio, where the Company is not liable for any failure to supply the research supplies as a result of
any act or fault of Serum Institute. Upon successful commercialization of any resultant products, the Company is entitled to receive low double digit royalties 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.
F-17
Through December 31, 2020, SynBio continued to engage in research and development activities with no resultant commercial products. In December 2020, Pharmsynthez
reported positive data from SynBio’s 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 reported in its press release that it expects that the Russian stage of registration activities will be completed in 2021 and that it will be able to start
production of the product as early as the first quarter of 2022. The Company did not recognize revenue in connection with the Co-Development Agreement during the years
ended December 31, 2020 and 2019.
Serum Institute of India Limited
In August 2011, the Company entered into a collaborative research and development agreement with 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 (“PSA-EPO”). 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. Royalty payments are payable by the Company
to Serum Institute for net sales received by the Company over the term of the license. There are no milestone or other research-related payments due under the collaborative
arrangement.
Through December 31, 2020, Serum Institute continued to engage in research and development activities with no resultant commercial products. No royalty revenue or expense
was recognized by the Company related to the Serum Institute arrangement during the years ended December 31, 2020 and 2019. Serum Institute had a share ownership of less
than 1% of the total outstanding Common Stock of the Company as of December 31, 2020 and 2019, respectively. In addition to its Common Stock ownership, Serum Institute
holds outstanding warrants to purchase the Company’s Common Stock. See Note 11, Stockholders’ Equity.
5.
Acquisitions
On March 1, 2019 (the “Signing Date”) the Company entered into agreements with Hesperix and Opko Pharmaceuticals LLC (“OPKO”) to acquire the XCART technology.
The Company entered into a Share Purchase Agreement, as amended (the “Share Purchase Agreement”), with Hesperix, the owners of Hesperix (each, a “Seller” and
collectively, the “Sellers”), and Alexey Andreevich Vinogradov, as the representative of each Seller, pursuant to which the Company purchased from Sellers all of the issued
and outstanding shares of capital stock of Hesperix.
Under the terms of the Share Purchase Agreement, the Company issued to Sellers an aggregate of Four Hundred Six Thousand Two Hundred Forty-Six (406,246) shares of the
Company’s Common Stock (the “Transaction Shares”) at the time of the closing. In addition, the Share Purchase Agreement contains customary representations and warranties
relating to each Seller and about the condition of the Company and Hesperix. The Company issued the Transaction Shares pursuant to a registration statement on Form S-4.
On the Signing Date and in connection with the Transaction, Hesperix entered into an assignment agreement (the “Hesperix Assignment Agreement”) with IBCH,
Pharmsynthez, and certain other parties thereto (collectively, the “Assignors”), pursuant to which, the Assignors have agreed, among other things, to sell, assign, transfer, and
convey unto Hesperix all of their individual right, title, and interest throughout the world in and to patents related to “Articles And Methods Directed To Personalized Therapy
Of Cancer,” and the related know-how. Hesperix has agreed to pay each of IBCH and Pharmsynthez a royalty rate in the low single digit range based on the net sales of
products in each country in which, in the absence of the Hesperix Assignment Agreement, the manufacture, use, offer for sale, sale, or importation of such product would
infringe a valid claim of a patent.
F-18
Also on the Signing Date, the Company entered into an assignment agreement with OPKO (the “OPKO Assignment Agreement”), pursuant to which the Company will acquire
and accept, all of OPKO’s right, title and interest in and to that certain Intellectual Property License Agreement (the “IP License Agreement”), entered into between Scripps
Research and OPKO regarding certain patents related to “Articles And Methods Directed To Personalized Therapy Of Cancer” and in which Scripps Research agreed to grant
an exclusive royalty-bearing license, to the patent rights owned by Scripps Research to OPKO, and OPKO has agreed to pay Scripps Research a royalty rate in the low single
digit range based on the net sales of products in each country in which, in the absence of the IP License Agreement, the manufacture, use, offer for sale, sale, or importation of
such product would infringe a valid claim of a patent or pending application.
Under the terms of the OPKO Assignment Agreement and the IP License Agreement, the Company issued One Hundred Sixty Four Thousand Sixty Two (164,062) shares of
the Company’s Common Stock to OPKO and Fifty-Four Thousand Six Hundred Eighty Seven (54,687) shares of the Company’s Common Stock to Scripps Research at the
time of the closing. In addition, the OPKO Assignment Agreement contains customary representations and warranties relating to OPKO and the IP License Agreement.
On July 19, 2019, the Company closed the Transaction (the “Closing Date”), acquiring IPR&D related to certain intellectual property rights with respect to the XCART
technology. The acquisition did not meet the business combination requirements and, as a result, was accounted for as an asset acquisition. The total consideration for the
IPR&D was approximately $4.1 million, which represented the value of the common shares issued of $3.0 million utilizing the market price of the Company’s stock price at the
Closing Date and approximately $1.1 million of transaction costs. As there was no future alternative use for the IPR&D, the Company recorded expense of $3.0 million to
research and development expense and $1.1 million to general and administrative expense for the transaction costs in the year ended December 31, 2019.
6.
Property and Equipment, net
Property and equipment, net consists of the following:
Office and computer equipment
Furniture and fixtures
Property and equipment – at cost
Less accumulated depreciation
Property and equipment, net
December 31,
2020
December 31,
2019
$
$
42,289
14,738
57,027
(57,027)
–
$
$
42,289
14,738
57,027
(56,270)
757
Depreciation expense was approximately $1,000 and $4,000 for the years ended December 31, 2020 and 2019, respectively. During the year ended December 31, 2019, the
Company sold certain furniture and fixtures for $2,000 resulting in an approximate $2,000 gain.
7.
Goodwill, Indefinite-Lived Intangible Assets and Other Long-Term Assets
Goodwill
The Company experienced a significant decline in the market price of its stock during 2019 resulting in a drop in its market capitalization indicating potential impairment. The
Company determined the fair value of the reporting unit using its market capitalization, concluding that the fair value of the reporting unit was less than the carrying amount in
excess of Goodwill. As a result, the Company recorded a $3.3 million asset impairment charge during the year ended December 31, 2019, which is presented within operating
costs and expenses in the consolidated statements of comprehensive loss. A reconciliation of the change in the carrying value of Goodwill during the year ended December 31,
2019 is as follows:
Balance as of January 1, 2019
Impairment
Balance as of December 31, 2019
$
$
3,283,379
(3,283,379)
–
F-19
Indefinite-Lived Intangible Assets
The Company’s indefinite-lived intangible asset, OncoHist, is IPR&D relating to the Company’s business combination with SymbioTec in 2012. IPR&D is tested for
impairment whenever events or changes in circumstances indicate that the carrying value may not be recoverable, although it is to be tested at least annually until the project is
completed or abandoned. The Company completed an impairment analysis of the IPR&D during 2020 and concluded that the following factors indicated that the IPR&D was
impaired: a decision by management to delay indefinitely any further development of the IPR&D and to not support the underlying intellectual property; the failure to sell or
license the IPR&D to a third party; and the reduction in market capitalization. For the year ended December 31, 2020, the Company recorded an asset impairment charge of
$9.2 million, which is presented within operating costs and expenses in the consolidated statements of comprehensive loss, representing the excess of the IPR&D asset’s
carrying value over its estimated fair value. No indefinite-lived intangible asset impairment was recorded during the year ended December 31, 2019. A reconciliation of the
change in the carrying value of Indefinite-Lived Intangible Assets is as follows:
Balance as of January 1, 2019
No changes
Balance as of December 31, 2019
Impairment
Balance as of December 31, 2020
$
$
9,243,128
–
9,243,128
(9,243,128)
–
Other Long-Term 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, 2020 and 2019, 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, 2020 and 2019.
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 Co-Development Agreement. 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, and is secured by all of the equity interests of the Company owned by Pharmsynthez and SynBio. The Company recognized approximately
$51,000 and $9,000 of interest income related to this loan during the twelve-months ended December 31, 2020 and 2019, respectively.
Effective January 23, 2021 (the “Effective Date”), 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 call 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 installments from January 31, 2021 through June 30, 2021. In addition, the Pharmsynthez Loan Extension requires monthly interest payments and the
repayment of the remaining principal amount in six (6) equal monthly installments from July 2021 through January 2022. All other terms of the Pharmsynthez Loan remain in
effect. As a result, approximately $0.1 million was classified as long-term within Other Assets on the consolidated balance sheet with the remaining $0.5 million classified as
short term within Prepaid expenses and other. Subsequent to the Effective Date, payments of principal and interest of approximately $0.1 million were received in accordance
with the Pharmsynthez Loan Extension.
F-20
8.
Accrued Expenses
Accrued expenses consist of the following:
Accrued payroll and benefits
Accrued professional fees
Accrued research costs
Other
9.
Fair Value Measurements
December 31,
2020
December 31,
2019
$
$
126,615
375,694
62,607
9,134
574,050
$
$
68,016
306,413
80,519
9,039
463,987
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. The carrying amount of certain of the Company’s financial instruments
approximate fair value due to their short maturities. As of December 31, 2020 and 2019, the carrying amounts of the Company’s financial instruments approximates 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, 2020 and 2019.
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. During the year ended December 31, 2020, the Company recognized a deferred tax benefit
representing the reversal of its deferred tax liability related to the impairment of its IPR&D. There was no income tax provision (benefit) for the year ended December 31, 2019
as the Company has incurred losses to date.
The components of loss before income taxes are as follows:
Domestic (U.S.)
Foreign (U.K.)
Foreign (Germany)
Foreign (Switzerland)
Loss before income taxes
Year ended December 31,
2020
(4,368,330)
(61,867)
(9,357,256)
(24,531)
(13,811,984)
$
$
2019
(4,317,585)
(2,302,131)
(3,389,473)
(2,765,836)
(12,775,025)
$
$
F-21
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:
Federal
State
Change in valuation allowance
Permanent differences, net
Goodwill impairment
Foreign rate differential
Share-based payments, net
Enhanced research and development tax credits
Rate change
Other items
Net benefit for income taxes
Year ended December 31,
2020
2019
$
$
(2,900,517)
(230,238)
3,089,617
1,399
–
(985,231)
22,267
(56,564)
(2,015,683)
156,432
(2,918,518)
$
$
(2,682,755)
(284,724)
1,878,033
1,323
689,510
381,190
11,084
(54,148)
–
60,487
–
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:
Deferred tax assets:
U.K. net operating loss carryforwards
U.K. capital loss carryforwards
U.S. federal net operating loss carryforwards
Switzerland net operating loss carryforwards
IPR&D
Share-based payments
Enhanced research and development tax credits
Germany net operating loss carryforwards
U.S. state net operating loss carryforwards
Transaction costs
Accrued expenses
Depreciation
Lease liability
Total deferred tax assets before valuation allowance
Valuation allowance for deferred tax assets
Net deferred tax assets
Deferred tax liabilities:
Indefinite-lived intangible asset
Right of use asset – leases
Total deferred tax liabilities
Net deferred liability
F-22
Year ended December 31,
2020
2019
$
$
$
10,733,568
1,550,659
4,671,789
72,614
7,020,109
1,961,112
1,375,136
636,378
1,408,866
122,892
91,118
–
17,082
29,661,323
(29,644,241)
17,082
–
(17,082)
(17,082)
–
$
8,984,851
1,340,302
3,857,973
23,510
6,454,240
2,065,735
1,219,815
545,852
1,160,983
142,013
72,503
5,070
5,475
25,878,322
(25,872,847)
5,475
(2,918,518)
(5,475)
(2,923,993)
(2,918,518)
For the years ended December 31, 2020 and 2019, the Company had U.K. net operating loss carryforwards of approximately $56.5 million and $52.9 million, respectively, U.S.
federal net operating loss carryforwards of approximately $22.2 million and $18.4 million, respectively, U.S. state net operating loss carryforwards of approximately $22.3
million and $18.4 million, respectively, Germany net operating loss carryforwards of approximately $2.0 million and $1.7 million, respectively, and Switzerland net operating
loss carryforwards of approximately $0.9 million and $0.3 million, respectively. The U.K. and Germany net operating loss carryforwards can be carried forward indefinitely.
$9.0 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 2032. 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.
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 if there is a change in ownership and a change in the nature or conduct of the business carried on by the Company, and 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, 2020 and 2019, the Company did not record any uncertain tax positions.
The Company files income tax returns in the U.S. federal tax jurisdiction and 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 2020 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, 2020. The Company has not 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.
F-23
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, 2020, 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.
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.
On December 10, 2020, the Company entered into a Securities Purchase Agreement with certain institutional and accredited investors named therein, pursuant to which the
Company agreed to issue and sell, in a registered direct offering (the “2020 Offering”), 2,448,980 shares of the Company’s Common Stock, par value $0.001 per share, at an
offering price of $2.45 per share. The net proceeds to the Company from the 2020 Offering were approximately $5.4 million, after deducting expenses of $0.6 million related to
the 2020 Offering, including the placement agent’s fees and related offering expenses. The shares were offered by the Company pursuant to a prospectus supplement to the
Company’s effective shelf registration statement on Form S-3 (Registration No. 333-227572), which was initially filed with the SEC on September 27, 2018, and was declared
effective on October 12, 2018. The 2020 Offering closed on December 14, 2020.
On December 4, 2020, 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 50,000,000 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 4, 2020.
On July 17, 2019, the Company entered into an underwriting agreement (the "Underwriting Agreement") with Maxim Group LLC (the “Underwriter”), relating to the
Company’s offering (the “July 2019 Offering”) of 1,730,000 shares (the “Shares”) of the Company’s Common Stock, Prefunded Warrants to purchase 570,000 shares of
Common Stock (the “Prefunded Warrants”), and warrants to purchase 2,300,000 shares of the Common Stock (the “Purchase Warrants,” and together with the Shares and the
Prefunded Warrants, the "Firm Securities"). Each Share was sold together with one Purchase Warrant at a combined public offering price of $6.50 per Share and Purchase
Warrant. Each Prefunded Warrant purchased was sold together with one Purchase Warrant at a combined public offering price of $6.49 per Prefunded Warrant and Purchase
Warrant. The Prefunded Warrants were exercisable beginning on July 17, 2019 at an exercise price of $0.01 per share. The holders of the Prefunded Warrants did not have the
right to exercise any portion of the Prefunded Warrant if the holder (together with its affiliates) would beneficially own in excess of 4.99% of the number of shares of Common
Stock outstanding immediately after giving effect to the exercise, as such percentage ownership is determined in accordance with the terms of the Prefunded Warrants. The
Prefunded Warrants had an intrinsic value of approximately $3.1 million. Pursuant to the Underwriting Agreement, the Company also granted the Underwriter a 45-day option
to purchase up to an additional 345,000 shares of Common Stock and/or Purchase Warrants to purchase up to 345,000 shares of Common Stock (the "Additional Securities,"
and together with the Firm Securities, the "Securities"), at the public offering price less discounts and commissions. The Securities were offered, issued, and sold pursuant to an
effective Registration Statement on Form S-1 (Reg. No. 333-231508) and accompanying prospectus filed with the SEC under the Securities Act of 1933, as amended.
F-24
On the Closing Date, the Company completed the July 2019 Offering resulting in gross proceeds to the Company of approximately $15.0 million before deducting the
underwriting discount and offering fees and expenses payable by the Company. In addition, on the Closing Date, the Underwriter exercised its overallotment option with
respect to 160,000 Purchase Warrants, resulting in additional gross proceeds of $1,600. The net proceeds from the July 2019 Offering of approximately $13.4 million is funding
the Company’s research, development and clinical programs, including the development of the XCART technology acquired in the Transaction, and for other general corporate
purposes. All of the Prefunded Warrants were exercised during the year ended December 31, 2019 resulting in $5,700 of net proceeds to the Company.
The Purchase Warrants are immediately exercisable at a price of $13.00 per share of Common Stock and expire five years from the date of issuance. The Purchase Warrants
began trading on NASDAQ on July 23, 2019 under the symbol “XBIOW.” The Purchase 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 Purchase Warrant may be exercised, at the option of the holder, on
a cashless basis for one share of Common Stock. 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 $4.61 per share, for a total of approximately $11.3 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 1.83%, an expected life of 5 years and an expected
volatility of 141.89%. Purchase Warrants to purchase approximately 0.2 million and 2.2 million shares of Common Stock were exercised on a cashless one-for-one basis during
the years ended December 31, 2020 and 2019.
On July 16, 2019, the Company, in connection with the July 2019 Offering, entered into a consent agreement with certain holders of warrants to purchase shares of the
Company’s Common Stock whose consent was sought in connection with the offering. In consideration of the holders’ consent, the Company agreed to (i) issue such holders an
aggregate of 16,666 shares of the Company’s Common Stock (“Consent Shares”) and (ii) adjust the exercise price of those certain warrants issued to each holder in connection
with the Company’s Reverse Stock Split on June 25, 2019. The Consent Shares and incremental cost associated with the warrant modification were determined to be direct
costs of the offering and, as a result, have been included within net proceeds from the offering.
On June 21, 2019, the Company filed a Certificate of Change to the Company’s Articles of Incorporation with the Secretary of State of Nevada to effect the Reverse Stock
Split. The Reverse Stock Split was effective at 12:01 a.m., eastern Time, on June 25, 2019. No fractional shares were issued as a result of the Reverse Stock Split and any
remaining share fractions were rounded up to the nearest whole share, resulting in 1,442 new shares of Common Stock being issued to existing holders of the Company’s
Common Stock.
On June 19, 2019, 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 150,000,000 shares on a pre-Reverse Stock Split basis. The Company filed a Certificate of Amendment to the Company’s Articles of Incorporation with the Secretary
of the State of Nevada to effect this increase as of June 25, 2019. As a result of this increase and after giving effect to the Reverse Stock Split, the Company had 12,500,000
authorized shares of Common Stock.
On March 5, 2019, the Company entered into a Securities Purchase Agreement with certain purchasers pursuant to which the Company offered to the purchasers, in a registered
direct offering (the “March 2019 Offering”), an aggregate of (i) 86,667 shares of Common Stock, par value $0.001 per share and (ii) prefunded warrants to purchase 42,417
shares of Common Stock. The prefunded warrants were exercisable beginning on March 7, 2019 at an exercise price of $0.012 per share. The shares were sold at a price of
$24.00 per share and the prefunded warrants were sold at a price of $23.988 per prefunded warrant, which represents the per share purchase price for the shares less the $0.012
per share exercise price for each such prefunded warrant. The holders of the prefunded warrants did not have the right to exercise any portion of the prefunded warrant if the
holder (together with its affiliates) would beneficially own in excess of 9.99% 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 prefunded warrants. The net proceeds to the Company from the March 2019 Offering
were approximately $2.7 million, after deducting expenses related to the March 2019 Offering, including dealer-manager fees and expenses. In a concurrent private placement,
the Company issued to the purchasers a warrant to purchase one share of the Company’s Common Stock for each share and prefunded warrant purchased in the March 2019
Offering. These warrants have an exercise price of $27.00 per share, were exercisable beginning on September 8, 2019 and expire seven years from such date. 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
$22.74 per share, for a total of approximately $2.9 million. The fair value of the warrants was estimated using a Black-Scholes model utilizing the following key valuation
assumptions: the Company’s stock price, a risk free rate of 2.56%, an expected life of 7.5 years and an expected volatility of 111.3%. The prefunded warrants had an intrinsic
value of approximately $1.1 million. During the year ended December 31, 2019, all of the prefunded warrants were exercised resulting in $509 of net proceeds to the Company.
F-25
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.
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 on a twelve preferred shares for 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.
The Series A Preferred Stock has additional terms covering stock dividends and splits, voting rights, fractional shares and fundamental transactions. As of December 31, 2020
and 2019, there were approximately 1.0 million shares of Series A Preferred Stock issued and outstanding which are convertible into 80,834 shares of Common Stock. There
were no Series A Preferred Stock conversions during the years ended December 31, 2020 and 2019.
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.
F-26
Conversion. Series B Preferred Stock is convertible, at any time and from time to time at the option of the holder thereof on a one preferred share to 1.63 common shares
basis, subject to an issuable maximum and the adjustments described below.
Subsequent Equity Sales. The Series B Preferred Stock has full 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, 2020
and 2019, 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
and the exercise of outstanding warrants that were issued in connection with the Series B Preferred Stock.
The stock offerings in 2019 triggered the down-round provision in the Company’s Series B Preferred Stock resulting in an adjustment to the conversion ratio and the recording
of a deemed dividend of $5.3 million increasing the net loss attributable to common shareholders for the year ended December 31, 2019. There were no Series B Preferred
Stock conversions during the years ended December 31, 2020 and 2019.
Warrants Related to Collaboration and Consulting Agreements
In connection with certain of the Company’s collaboration agreements and consulting arrangements, the Company has issued warrants to purchase shares of Common Stock as
payment for services. As of December 31, 2020 and 2019, warrants to purchase 30,307 and 32,412 shares of Common Stock were outstanding, respectively. The fair value of
these warrants was determined at each issuance date using the Black-Scholes option pricing model. The warrants were subject to re-measurement at each reporting period until
the measurement date was reached. Expense was recognized on a straight-line basis over the expected service period or at the date of issuance if there is not a service period.
On December 31, 2014, SynBio was granted a warrant to purchase 17,033 new shares of Common Stock at an exercise price of $304.92 per share (“SynBio 2014 Warrant”).
The SynBio 2014 Warrant was exercisable in four equal tranches, each with separate non-market, performance-based vesting criteria. The Company used its judgment to assess
the probability and timing of SynBio achieving these vesting criteria and estimated that it was not probable that the vesting criteria for any tranche would be achieved. None of
the vesting criteria were met and, therefore, these warrants were forfeited. These warrants expired as of December 31, 2019.
In connection with the SynBio 2014 Warrant grant, warrants to purchase 809 aggregate new shares of Common Stock were issued to SynBio and Pharmsynthez non-director
designees (“SynBio Partner Warrants”) on December 31, 2014 under the same terms and conditions of the SynBio 2014 Warrant. The vesting criteria for any tranche were not
met and, therefore, these warrants were forfeited. These warrants expired as of December 31, 2019.
On December 31, 2014, the Company granted Serum Institute a warrant to purchase 8,081 new shares of Common Stock at an exercise price of $95.04 per share, as adjusted
(“Serum Institute 2014 Warrant”). The Serum Institute 2014 Warrant was exercisable in two equal tranches, each with separate non-market, performance-based vesting criteria.
The Company used its judgment to assess the probability and timing of Serum Institute achieving these vesting criteria. These judgments were reassessed at each reporting
period until the measurement date was reached. These warrants expired as of December 31, 2019.
In connection with the Serum Institute 2014 Warrant grant, warrants to purchase 410 aggregate new shares of Common Stock were issued to Serum Institute non-director
designees (“Serum Institute Partner Warrants”) on December 31, 2014 under the same terms and conditions of the Serum Institute 2014 Warrant. These warrants expired as of
December 31, 2019.
F-27
As of December 31, 2020, there were 17,677 Serum Institute warrants outstanding to purchase shares of Common Stock with an exercise price of $95.04. These warrants were
fully vested and expensed at the time of grant.
The Company did not recognize warrant expense related to collaboration agreements during the years ended December 31, 2020 and 2019. During the years ended December
31, 2020 and 2019, collaboration warrants to purchase 2,105 shares and 12,532 shares expired, respectively. No collaboration or consulting service warrants were granted or
exercised during the years ended December 31, 2020 and 2019. As of December 31, 2020, outstanding collaboration warrants have an average weighted exercise price of
$124.74 and expiration dates ranging from April 2021 through May 2021.
Warrants Related to Financing Arrangements
In connection with the July 2019 Offering, the Company offered to the purchasers Prefunded Warrants to purchase 570,000 shares of Common Stock. The Prefunded Warrants
were exercisable beginning on July 17, 2019 at an exercise price of $0.01 per share. The Prefunded Warrants were sold at a price of $6.49 per Prefunded Warrant, which
represented the per share purchase price for the shares less the $0.01 per share exercise price for each such Prefunded Warrant. The holders of the Prefunded Warrants did not
have the right to exercise any portion of the Prefunded Warrant 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 Prefunded
Warrants. All of the Prefunded Warrants to purchase 570,000 shares were exercised during the year ended December 31, 2019 resulting in net proceeds to the Company of
$5,700. Also in connection with the July 2019 Offering, the Company issued to the purchasers the Purchase Warrants. These Purchase Warrants have an exercise price of
$13.00 per share, were exercisable beginning on July 17, 2019 and expire five years from such date. The warrants began trading on NASDAQ on July 23, 2019 under the
symbol “XBIOW.” The Purchase 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 Purchase Warrant may be exercised, at the option of the holder, on a cashless basis for one share of Common Stock. Purchase
Warrants to purchase approximately 0.2 million shares and 2.2 million shares of Common Stock were exercised on a cashless, one-for-one basis during the years ended
December 31, 2020 and 2019, respectively. As of December 31, 2020 there were approximately 29,000 Purchase Warrants outstanding.
On June 24, 2019, the Company entered into a consent agreement with certain holders of warrants to purchase shares of the Company’s Common Stock whose consent was
required to effect the Reverse Stock Split. In consideration of the holders’ consent, the Company agreed to issue the holders warrants (the “Consent Warrants”) to purchase
8,335 shares of the Company’s Common Stock, at an exercise price per share based on a volume weighted average price for the five trading days following the effectiveness of
the Reverse Stock Split. The Consent Warrants were issued on July 3, 2019 at an exercise price of $10.63. The Company evaluated the terms of the Consent Warrants and
determined that they should be classified as equity instruments. The grant date fair value of these warrants was estimated to be $7.62 per share, for a total of approximately
$64,000. The fair value of the Consent Warrants was estimated using a Black-Scholes model utilizing the following key valuation assumptions: the Company’s stock price, a
risk free rate of 1.83%, an expected life of 7 years and an expected volatility of 114.53%. The Company recorded approximately $64,000 as general and administrative expense
during the year ended December 31, 2019. The Consent Warrants were subsequently modified to reflect an exercise price of $2.91 price per share in connection with the July
2019 Offering. As a result of this modification, the Company recognized a $2,000 expense that was netted against the proceeds of the July 2019 Offering.
In March 2019, in connection with the March 2019 Offering, the Company offered to the purchasers prefunded warrants to purchase 42,417 shares of Common Stock. The
prefunded warrants were exercisable beginning on March 7, 2019 at an exercise price of $0.012 per share. The prefunded warrants were sold at a price of $23.988 per
prefunded warrant, which represents the per share purchase price for the shares less the $0.012 per share exercise price for each such prefunded warrant. The holders of the
prefunded warrants did not have the right to exercise any portion of the prefunded warrant if the holder (together with its affiliates) would beneficially own in excess of 9.99%
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 prefunded warrants. All of these prefunded warrants were exercised during the year ended December 31, 2019 resulting in net proceeds to the Company of $509. In
a concurrent private placement, the Company issued to the purchasers a warrant to purchase one share of the Company’s Common Stock for each share and prefunded warrant
(129,084 shares) purchased in the March 2019 Offering. These warrants have an exercise price of $27.00 per share, are exercisable beginning on September 8, 2019 and expire
seven years from such date. As of December 31, 2020, all of these warrants were outstanding.
F-28
In addition to the prefunded and purchase warrants issued in the March 2019 Offering and the July 2019 Offering, the Company has outstanding debt and equity financing
warrants to purchase an aggregate of 212,185 and 262,690 shares of Common Stock in connection with debt and equity financing arrangements as of December 31, 2020 and
2019 at a weighted average exercise price of $50.20 and $51.97, respectively, and expiration dates ranging from March 2021 through November 2021. There were no debt and
equity financing warrants granted or exercised during the year ended December 31, 2020. Except as described above for the March 2019 Offering and the July 2019 Offering,
there were no debt and equity financing warrants granted or exercised during the years ended December 31, 2020 and 2019.
12.
Share-Based Expense
Total share-based expense related to stock options, RSUs and Common Stock awards was approximately $0.5 million and $0.9 million for the years ended December 31, 2020
and 2019, respectively. Share-based expense is classified in the consolidated statements of comprehensive loss as follows:
Research and development expenses
General and administrative expenses
Stock Options
Year Ended December 31,
2020
2019
$
$
49,190
419,724
468,914
$
$
126,933
726,584
853,517
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 2020 and 2019 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, 2020 and 2019, 125,000 and 525,000 total stock options to purchase shares of Common Stock were granted by the Company,
respectively. The weighted average grant date fair value per option share was $0.95 and $1.24, respectively. No stock options were exercised during the years ended December
31, 2020 and 2019.
During the years ended December 31, 2020 and 2019, 271,515 and 27,831 total stock options vested, respectively, with total fair values of approximately $0.8 million and $1.0
million, respectively. As of December 31, 2020, there was approximately $0.5 million of unrecognized share-based payments related to employee stock options that are
expected to vest. The Company expects to recognize this expense over a weighted-average period of approximately 1.6 years.
F-29
Key assumptions used in the Black-Scholes option pricing model for options granted to employees during the years ending December 31, 2020 and 2019 are as follows:
Weighted-average expected dividend yield (%)
Weighted-average expected volatility (%)
Weighted-average risk-free interest rate (%)
Weighted-average expected life of option (years)
Weighted-average exercise price ($)
Year Ended December 31,
2020
2019
–
127.87
0.49
5.50
1.10
–
156.78
1.71
5.88
1.31
The following is a summary of employee stock option activity for the years ended December 31, 2020 and 2019:
Outstanding as of January 1, 2019
Granted
Expired
Outstanding as of December 31, 2019
Granted
Expired
Outstanding as of December 31, 2020
Vested or expected to vest as of December 31, 2020
Exercisable as of December 31, 2019
Exercisable as of December 31, 2020
Number of
shares
Weighted-
average
exercise
price
Weighted-
average
remaining
life
(years)
147,472
525,000
(10,413)
662,059
125,000
(23,337)
763,722
763,722
123,864
372,042
$
$
$
$
$
45.95
1.31
25.32
10.88
1.10
52.55
8.01
8.01
47.69
15.12
Aggregate
intrinsic
value
8.17
$
–
9.34
$
66,125
8.68
8.68
7.10
8.09
$
$
$
$
498,625
498,625
–
186,449
A summary of the status of the Company’s non-vested employee stock option shares as of December 31, 2020, and the changes during the year ended December 31, 2020, is as
follows:
Balance as of January 1, 2020
Granted
Forfeited
Vested
Balance as of December 31, 2020
F-30
Number of
shares
538,195
125,000
–
(271,515)
391,680
$
$
$
$
$
Weighted-
average
grant date
fair value
2.05
0.95
–
2.83
1.15
Restricted Stock Units
There are 4,167 RSUs outstanding as of December 31, 2020 and 2019, respectively. There were no RSU grants for the years ended December 31, 2020 and 2019. The RSUs
vest annually over a 3-year period and had a grant date fair value of $25.37. During the years ended December 31, 2020 and 2019, 1,389 RSUs were vested in each year and
none expired.
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 year ended December 31, 2020. During the year ended December 31, 2019, 15,500 total stock options to purchase shares of Common
Stock were granted by the Company to non-employees. No non-employee stock options were exercised during the years ended December 31, 2020 and 2019, respectively.
During the year ended December 31, 2020, 15,500 total stock options vested, with total fair values of approximately $15,000. No non-employee stock options vested during the
year ended December 31, 2019. For the years ended December 31, 2020 and 2019, the Company recognized approximately $400 and $3,000, respectively, of compensation
expense related to non-employee options.
The following is a summary of non-employee stock option activity for the years ended December 31, 2020 and 2019:
Outstanding as of January 1, 2019
Granted
Expired
Outstanding as of December 31, 2019
Granted
Expired
Outstanding as of December 31, 2020
Vested or expected to vest as of December 31, 2020
Exercisable as of December 31, 2019
Exercisable as of December 31, 2020
Number of
shares
Weighted-
average
exercise
price
Weighted-
average
remaining
life
(years)
Aggregate
intrinsic
value
73.52
1.08
225.72
17.09
–
225.72
14.61
14.61
66.15
14.61
5.40
$
4.74
$
3.79
3.79
4.63
3.79
$
$
$
$
–
–
14,880
14,880
–
14,880
5,302
15,500
(242)
20,560
–
(242)
20,318
20,318
5,060
20,318
$
$
$
$
$
F-31
A summary of the status of the Company’s non-vested non-employee stock option shares as of December 31, 2020, and the changes during the year ended December 31, 2020
is as follows:
Balance as of January 1, 2020
Granted
Vested
Balance as of December 31, 2020
Common Stock Awards
Number of
shares
15,500
–
(15,500)
–
$
$
$
$
Weighted-
average
grant date
fair value
0.94
–
(0.94)
–
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, 2020 and 2019 are as follows:
Balance as of January 1, 2019
Granted
Issued
Balance as of December 31, 2019
Granted
Issued
Balance as of December 31, 2020
Number of shares
7,404
9,026
(7,836)
8,594
–
(1,188)
7,406
No Common Stock awards were granted during the year ended December 31, 2020. The Company granted 9,026 shares of Common Stock during the year ended December 31,
2019 in exchange for professional services. As all services were rendered, expense related to Common Stock awards of approximately $47,000 was recognized during the year
ended December 31, 2019. The balance of the Common Stock awards has not been issued as of December 31, 2020.
Joint Share Ownership Plan
As of December 31, 2020 and 2019, 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, 2020 and 2019.
F-32
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 year ended December 31, 2020, the Company made contributions of approximately $27,000 to the 401(k) Plan. There were no company contributions to
the 401(k) Plan during the year ended December 31, 2019.
14.
Commitments and Contingent Liabilities
Leases
The Company determines whether an arrangement is a lease at inception. On October 1, 2020, the Company entered into a 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 has a termination date of September 30, 2022.
The Company does not have options to extend, termination options or material residual value guarantees. The Company recorded a right-of-use (“ROU”) asset and
corresponding lease liability on the consolidated balance sheet. The Company recognized a ROU asset and a lease liability of approximately $71,000 during the year ended
December 31, 2020. As the sublease does not provide an implicit rate, we used our incremental borrowing rate (10.2%) based on the information available at the lease’s
commencement date in determining the present value of lease payments.
Supplemental cash flow information and non-cash activity related to our operating leases are as follows:
Operating cash flow information:
Cash paid for amounts included in the measurement of lease liabilities
Non-cash activity:
Right-of-use assets obtained in exchange for lease liability
Supplemental balance sheet information related to our operating leases is as follows:
Year Ended
December 31,
2020
$
$
28,080
70,564
Right-of-use assets - ST
Right-of-use assets - LT
Current lease liabilities
Non-current lease liabilities
Balance Sheet Classification
Prepaid expenses and other
Other assets
Accrued expenses and other current liabilities
Other liabilities
December 31, 2020
35,482
27,043
35,482
27,043
$
$
$
$
The Company did not apply the provisions of ASU 2016-02 to the lease of its office space lease in Miami, Florida. During the fourth quarter of 2020, the Company renewed its
Miami office lease for twelve-months to November 2021. 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, 2020, total minimum lease payments on this lease was approximately $22,000.
F-33
15.
Related Party Transactions
The Company has entered into various research, development, license and supply agreements with Serum Institute and Pharmsynthez (including SynBio), 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, Goodwill, Indefinite-Lived Intangible Assets and Other Long-Term Assets, for details on arrangements with collaboration partners that are also related parties.
On July 19, 2019, the Company acquired the XCART technology platform from Hesperix and OPKO. Dr. Genkin is a director of the Company and was a significant
shareholder of Hesperix. In addition, the Company repaid an approximate $225,000 loan that Dr. Genkin entered into with Hesperix. Mr. Adam Logal, one of our directors, is
Senior Vice President, Chief Financial Officer, Chief Accounting Officer and Treasurer of OPKO Health, Inc., the parent company of OPKO.
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, other than the
Pharmsynthez Loan Extension discussed in Note 7, Goodwill, Indefinite-Lived Intangible Assets and Other Long-Term Assets, there were no such events requiring recognition
or disclosure in the financial statements.
F-34
ITEM 9 – CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
ITEM 9A – CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as
defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of the end of the period covered by this Annual
Report on Form 10-K.
Based on this evaluation our management, including our Chief Executive Officer and Chief Financial Officer, concluded that, as of December 31, 2020, our disclosure controls
and procedures are designed at a reasonable assurance level and are effective to provide reasonable assurance that information we are required to disclose in reports that we file
or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and that such information is
accumulated and communicated to our management, including our principal executive and principal financial officers, or persons performing similar functions, as appropriate,
to allow timely decisions regarding required disclosure.
Management’s Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule 13a-15(f) of the Exchange
Act. Management, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, conducted an assessment of the design and
effectiveness of our internal control over financial reporting as of the end of the period covered by this Annual Report on Form 10-K. In making its assessment of internal
control over financial reporting, management used the criteria set forth by the Committee of Sponsoring Organizations (“COSO”) of the Treadway Commission in Internal
Control — Integrated Framework (2013 Framework). Based on this assessment, our management concluded that, as of the end of the period covered by this Annual Report on
Form 10-K, our internal control over financial reporting was effective based on the criteria set forth by COSO of the Treadway Commission in Internal Control — Integrated
Framework.
This annual report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. Management’s report was
not subject to attestation by our registered public accounting firm pursuant to an exemption for non-accelerated filers set forth in Section 989G of the Dodd-Frank Wall Street
Reform and Consumer Protection Act.
Changes in Internal Control Over Financial Reporting
There have been no changes in our internal control over financial reporting that occurred during the quarterly period covered by this Annual Report on Form 10-K that have
materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
65
Limitations on Effectiveness of Controls and Procedures
In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can
provide only reasonable assurance of achieving the desired control objectives. The Company’s internal control over financial reporting includes those policies and procedures
that:
(1)
(2)
(3)
Pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the Company’s assets;
Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted
accounting principles, and that the Company’s receipts and expenditures are being made only in accordance with authorizations of the Company’s management and
directors; and
Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a
material effect on the financial statements.
Management, including the Company’s principal executive and principal financial officers, or persons performing similar functions, does not expect that the Company’s
internal controls will prevent or detect all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute,
assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of
controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of internal controls can provide absolute assurance
that all control issues and instances of fraud, if any, have been detected. Also, any evaluation of the effectiveness of controls in future periods are subject to the risk that those
internal controls may become inadequate because of changes in business conditions, or that the degree of compliance with the policies or procedures may deteriorate.
ITEM 9B – OTHER INFORMATION
None.
66
ITEM 10 – DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
PART III
The information required by this Item will be set forth in the Company’s definitive proxy statement or information statement to be filed with the SEC in connection with the
Company’s 2021 Annual Meeting of Stockholders within 120 days of the end of the Company’s fiscal year ended December 31, 2020 and is incorporated herein by reference,
or will be included in an amendment to this Annual Report on Form 10-K.
ITEM 11 – EXECUTIVE COMPENSATION
The information required by this Item will be set forth in the Company’s definitive proxy statement or information statement to be filed with the SEC in connection with the
Company’s 2021 Annual Meeting of Stockholders within 120 days of the end of the Company’s fiscal year ended December 31, 2020 and is incorporated herein by reference,
or will be included in an amendment to this Annual Report on Form 10-K.
ITEM 12 – SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The information required by this Item will be set forth in the Company’s definitive proxy statement or information statement to be filed with the SEC in connection with the
Company’s 2021 Annual Meeting of Stockholders within 120 days of the end of the Company’s fiscal year ended December 31, 2020 and is incorporated herein by reference,
or will be included in an amendment to this Annual Report on Form 10-K.
ITEM 13 – CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required by this Item will be set forth in the Company’s definitive proxy statement or information statement to be filed with the SEC in connection with the
Company’s 2021 Annual Meeting of Stockholders within 120 days of the end of the Company’s fiscal year ended December 31, 2020 and is incorporated herein by reference,
or will be included in an amendment to this Annual Report on Form 10-K.
ITEM 14 – PRINCIPAL ACCOUNTING FEES AND SERVICES
The information required by this Item will be set forth in the Company’s definitive proxy statement or information statement to be filed with the SEC in connection with the
Company’s 2021 Annual Meeting of Stockholders within 120 days of the end of the Company’s fiscal year ended December 31, 2020 and is incorporated herein by reference,
or will be included in an amendment to this Annual Report on Form 10-K.
67
ITEM 15 – EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a)
The following is filed as part of this Annual Report on Form 10-K:
PART IV
·
·
Consolidated Financial Statements: The consolidated financial statements and report of independent registered public accounting firm required by this item are
included in Part II, Item 8;
Financial Statement Schedules: All schedules are omitted because they are not applicable or not required, or because the required information is shown either in
the consolidated financial statements or in the notes thereto.
(b)
Exhibits: The exhibits which are filed or furnished with this Annual Report on Form 10-K or which are incorporated herein by reference are set forth in the Exhibit
Index beginning on page 69 which is incorporated herein by reference.
ITEM 16 – FORM 10-K SUMMARY
Not applicable.
68
Exhibit
No.
Exhibit Index
Form
Filing Date
Exhibit
Number
Filed
Herewith
EXHIBIT INDEX
2.1
2.2
2.3
2.4
2.5
3.1
3.2
3.3
3.4
3.5
3.6
3.7
3.8
3.9
3.10
3.11
3.12
3.13
4.1
4.2
4.3
4.4
4.5
4.6
4.7
4.8
4.9
Order of the High Court of Justice, Chancery Division, entered January 23, 2014
Share Purchase Agreement between Xenetic Biosciences, Inc., Hesperix SA, certain Sellers
8-K
8-K/A
and Alexey Andreevich Vinogradov, dated March 1, 2019
First Amendment to Share Purchase Agreement dated June 7, 2019
Second Amendment to Share Purchase Agreement dated June 24, 2019
Third Amendment to Share Purchase Agreement dated July 15, 2019
Articles of Incorporation
Certificate of Amendment to Articles of Incorporation
Certificate of Amendment to Articles of Incorporation
Certificate of Amendment to Articles of Incorporation
Certificate of Change Pursuant to NRS 78.209
Certificate of Amendment to Articles of Incorporation
Amended and Restated Bylaws
Form of Amended and Restated Certificate of Designation of Preferences, Rights and
Limitations of Series A Preferred Stock
Second Amended and Restated Certificate of Designation of Preferences, Rights and
Limitations of Series B Preferred Stock
Certificate of Change Pursuant to NRS 78.209
Certificate of Amendment to Articles of Incorporation
Certificate of Amendment to Articles of Incorporation
Certificate of Amendment to Articles of Incorporation
Description of Registrant’s Securities Registered Pursuant to Section 12 of the Securities
Exchange Act of 1934
Form of Common Stock Certificate of the Registrant
Xenetic Biosciences, Inc. Shareholder Voting Agreement dated October 26, 2016 between
Xenetic Biosciences Inc. and SynBio, LLC
Serum Institute of India Limited Warrant to Purchase Common Stock of Xenetic
Bioscience, Inc.
Form of Common Stock Purchase Warrant
Form of Management Common Stock Purchase Warrant
Form of Amended and Restated Common Stock Purchase Warrant
Form of Common Stock Purchase Warrant
Form of Common Stock Purchase Warrant
8-K
8-K
8-K
S-1
8-K
8-K
10-Q
10-Q
8-K
8-K
S-1/A
S-1/A
8-K
8-K
S-1/A
S-1/A
10-K
8-K
8-K
8-K
8-K
S-1/A
01/29/2014
05/13/2019
06/13/2019
06/24/2019
07/16/2019
11/21/2011
02/12/2013
02/27/2013
01/10/2014
01/10/2014
09/30/2015
02/27/2017
10/27/2016
10/31/2016
06/24/2019
06/24/2019
07/14/2016
10/27/2016
04/15/2015
11/16/2015
11/16/2015
11/16/2015
07/08/2016
10/31/2016
2.1
2.1
2.1
2.1
2.1
3.1
3.1
3.1
3.1
3.2
3.1
3.1
3.8
3.9
3.1
3.2
4.1
4.2
10.03
10.3
10.4
10.6
10.3
10.53
X
X
X
69
Exhibit
Number
10.3
Filed
Herewith
10.8
4.2
4.1
4.2
9.1
9.1
9.2
9.3
Exhibit
No.
4.10
Registration Rights Agreement, dated July 1, 2015, between Xenetic Bioscience, Inc. and
OJSC Pharmsynthez
Exhibit Index
4.11
4.12
4.13
4.14
10.1
Form of First Amendment to Registration Rights Agreement
Form of Common Stock Purchase Warrant
Form of Common Stock Purchase Warrant
Form of Common Stock Purchase Warrant
Possible Offer for Xenetic Biosciences plc by General Sales & Leasing, Inc., dated October
21, 2013
Form
8-K
8-K
8-K
8-K
8-K
8-K
Filing Date
07/08/2015
11/16/2015
03/07/2019
06/25/2019
07/22/2019
10/21/2013
10.2
Recommended Acquisition of Xenetic Biosciences plc by General Sales & Leasing, Inc.
8-K/A
11/25/2013
including Scheme of Arrangement
10.3
Announcement of Recommended Offer by General Sales and Leasing, Inc. for shares of
Xenetic Biosciences plc, dated November 12, 2013
10.4
Agreement of Conveyance, Transfer and Assignment of Subsidiaries and Assumption of
10.5†
10.6†
Obligations dated November 12, 2013 between General Sales Inc., Leasing, Inc., Oxbridge
Technology Partners, SA, Shift It Media Company and General Aircraft, Inc.
Form of Rules of the Lipoxen plc Unapproved Share Option Plan dated July 18, 2000 (as
amended by a resolution of the board of directors of Lipoxen plc passed on March 14,
2006)
Form of Xenetic Biosciences plc 2007 Share Option Scheme and US Addendum (as
established in 2007 and by resolution of shareholders in 2010 and awarded by board
resolution in 2012)
8-K
10-K
11/25/2013
11/27/2013
10-K
04/15/2014
10.5
10-K
04/15/2014
10.6
10.7†
Form of Amended and Restated Xenetic Biosciences, Inc. Equity Incentive Plan, effective
DEF14A
11/08/2019
Appendix A
as of December 4, 2019
10.8
Stock Purchase Agreement, dated January 29, 2014, between Xenetic Biosciences, Inc. and
10-K/A
02/18/2015
Baxter Healthcare SA
10.9
Stock Purchase Agreement Amendment No. 1, dated February 14, 2014, between Xenetic
10-K/A
02/18/2015
Biosciences, Inc. and Baxter Healthcare SA
10.10#
Exclusive Research, Development and License Agreement, dated August 15, 2005,
10-K/A
02/18/2015
between Lipoxen Technologies Limited, Baxter Healthcare SA and Baxter Healthcare
Corporation
10.11#
Letter Agreement, dated December 11, 2006, between Lipoxen Technologies Limited,
10-K/A
02/18/2015
Baxter Healthcare SA, Baxter Healthcare Corporation and Serum Institute of India Limited
10.12#
Amendment to the Exclusive Research, Development and License Agreement, dated
10-K/A
02/18/2015
December 13, 2006, between Lipoxen Technologies Limited, Baxter Healthcare SA and
Baxter Healthcare Corporation
10.08
10.09
10.10
10.11
10.12
70
Exhibit
No.
10.13#
Second Amendment to the Exclusive Research, Development and License Agreement,
dated May 28, 2009, between Lipoxen Technologies Limited, Baxter Healthcare SA and
Baxter Healthcare Corporation
Exhibit Index
Form
10-K/A
Filing Date
02/18/2015
Exhibit
Number
10.13
Filed
Herewith
10.14#
Amendment Number Four to the Exclusive Research, Development and License
10-K/A
02/18/2015
10.14
Agreement, dated August 10, 2010, between Lipoxen Technologies Ltd., Baxter Healthcare
SA and Baxter Healthcare Corporation
10.15#
Amendment Number Five to the Exclusive Research, Development and License
10-K/A
02/18/2015
10.15
Agreement, dated September 15, 2010, between Lipoxen Technologies Ltd., Baxter
Healthcare SA and Baxter Healthcare Corporation
10.16#
Form of Sixth Amendment to the Exclusive Research, Development and License
10-K/A
02/18/2015
10.16
Agreement, dated January 29, 2014, between Lipoxen Technologies Limited, Baxter
Healthcare SA and Baxter Healthcare Corporation
10.17#
Agreement on Co-Development and the Terms of Exclusive License dated August 4, 2011
10-K/A
02/18/2015
between Lipoxen plc, Lipoxen Technologies LTD and SynBio LLC
10.18#
Subscription Agreement in respect of ordinary shares in the capital of Lipoxen plc dated
10-K/A
02/18/2015
August 4, 2011 between SynBio LLC and Lipoxen plc
10.19#
Collaboration, License and Development Agreement, dated November 11, 2009, between
10-K/A
02/18/2015
Pharmsynthez ZAO and Lipoxen Technologies Ltd.
10.20#
Exclusive Patent and Know How License and Manufacturing Agreement, dated August 4,
10-K/A
02/18/2015
2011, between Lipoxen plc, Lipoxen Technologies Ltd and Serum Institute of India
Limited
10.21
Intellectual Property Assignment between Dmitry Genkin, FDS Pharma, Lipoxen
10-K
04/15/2015
Technologies Limited and Xenetic Biosciences Inc.
10.22
Securities Purchase Agreement, dated May 2015, between Xenetic Bioscience, Inc. and
OJSC Pharmsynthez
10.23
Form of Asset Purchase Agreement, dated as of November 13, 2015, by and among
Xenetic Biosciences, Inc., Lipoxen Technologies, LTD, a U.K. corporation, AS Kevelt, an
Estonian company and OJSC Pharmsynthez
10.24
10.25
Form of First Amendment to Securities Purchase Agreement
Form of Transition, Services and Resupply Agreement by and among Xenetic Bioscience,
Inc., AS Kevelt and OJSC Pharmsynthez
8-K
8-K
8-K
8-K
07/08/2015
11/16/2015
11/16/2015
11/16/2015
10.18
10.19
10.20
10.21
10.1
10.1
10.1
10.7
10.11
71
Exhibit
No.
10.26†
Employment Agreement, dated December 1, 2016, between Xenetic Biosciences, Inc. and
Jeffrey Eisenberg
Exhibit Index
10.27†
Employment Agreement, dated January 1, 2017 between Xenetic Biosciences, Inc. and
Curtis Lockshin
10.28†
Employment Agreement, dated March 23, 2017 between Xenetic Biosciences, Inc. and
James F. Parslow
Form
8-K
8-K
8-K
Filing Date
12/6/2016
01/04/2017
04/04/2017
10.29†
Form of Indemnity Agreement by and between Xenetic Biosciences, Inc. and each of its
10-Q
08/14/2017
directors and executive officers
10.30†
Amended and Restated Employment Agreement, dated October 26, 2017, between Xenetic
10-K
03/30/2018
Biosciences, Inc. and Jeffrey Eisenberg
10.31#
Right to Sublicense Agreement, dated October 27, 2017, by and among Xenetic
Biosciences, Inc., Baxalta Incorporated, Baxalta US Inc., and Baxalta GmbH
10-K
03/30/2018
10.32†
Settlement Agreement, dated November 3, 2017, by and among M. Scott Maguire, Xenetic
10-K
03/30/2018
Biosciences (UK) Limited and Lipoxen Technologies, Limited
10.33
Assignment Agreement between Xenetic Biosciences, Inc. and OPKO Pharmaceuticals,
8-K/A
05/20/2019
LLC, dated March 1, 2019
10.34
10.35
10.36
10.37
First Amendment to Assignment Agreement dated June 7, 2019
Second Amendment to Assignment Agreement dated June 24, 2019
Third Amendment to Assignment Agreement dated July 15, 2019
Voting Agreement between Xenetic Biosciences, Inc. and PJSC Pharmsynthez, dated
March 1, 2019
10.38
Voting Agreement between Xenetic Biosciences, Inc. and OPKO Pharmaceuticals, LLC,
dated March 1, 2019
10.39
Voting Agreement between Xenetic Biosciences, Inc. and Dr. Dmitry Dmitrievich Genkin,
dated March 1, 2019
10.40
Form of Securities Purchase Agreement entered into as of March 5, 2019, by and among
Xenetic Biosciences, Inc. and those purchase parties thereto.
10.41
Form of Consent Agreement by and among Xenetic Biosciences, Inc. and certain
purchasers dated June 24, 2019
10.42
Warrant Agency Agreement, between Xenetic Biosciences, Inc. and Empire Stock Transfer,
Inc. dated July 19, 2019
10.43
Consent Agreement by and among Xenetic Biosciences, Inc. and certain purchasers dated
July 16, 2019
10.44†
Letter Agreement re. Appointment of Non – Employee, Independent Director of Xenetic
Biosciences, Inc. for Grigory G. Borisenko, effective as of September 26, 2019
10.45†
Form of Letter Agreement re. Appointment of Non – Employee, Independent Director of
Xenetic Biosciences, Inc.
8-K
8-K
8-K
8-K
8-K
8-K
8-K
8-K
8-K
8-K
10-K
10-K
06/13/2019
06/24/2019
07/16/2019
03/04/2019
03/04/2019
03/04/2019
03/07/2019
06/25/2019
07/22/2019
07/16/2019
03/26/2020
03/26/2020
Exhibit
Number
10.1
Filed
Herewith
10.1
10.1
10.1
10.45
10.46
10.47
10.1
10.1
10.1
10.1
10.1
10.2
10.3
10.1
10.1
10.1
10.1
10.50
10.51
72
Exhibit No.
10.46†
10.47†
Form of Xenetic Biosciences, Inc. Stock Option Grant Notice
Xenetic Biosciences, Inc. Stock Option Grant Notice, dated December 4, 2019, between
Jeffrey Eisenberg and Xenetic Biosciences, Inc.
Exhibit Index
10.48
Form of Securities Purchase Agreement between Xenetic Biosciences, Inc. and the
purchasers named therein, dated as of December 10, 2020
10.49
Engagement Letter between Xenetic Biosciences, Inc. and H.C. Wainwright & Co., LLC,
dated as of December 9, 2020
10.50##
Research Funding and Option Agreement, dated May 15, 2020, between the Company and
the Scripps Research Institute
10.51##
Master Service Agreement, dated June 12, 2020, between the Company and PJSC
Pharmsynthez
10.52##
Work Order to Master Service Agreement, dated June 12, 2020, between the Company and
Form
10-K
10-K
8-K
8-K
10-Q
10-Q
10-Q
Filing Date
03/26/2020
03/26/2020
12/14/2020
12/14/2020
08/12/2020
08/12/2020
08/12/2020
Filed
Herewith
Exhibit
Number
10.52
10.53
10.1
10.2
10.1
10.2
10.3
21.1
23.1
24.1
31.1
31.2
32.1*
PJSC Pharmsynthez.
List of Subsidiaries
Consent of Marcum LLP
Power of Attorney (included on signature page)
Certification of Principal Executive Officer, as required by Rule 13a-14(a) or Rule 15d-
14(a)
Certification of Principal Financial Officer, as required by Rule 13a-14(a) or Rule 15d-
14(a)
Certification of Principal Executive Officer and Principal Financial Officer, as required by
Rule 13a-14(b) or Rule 15d-14(b) and Section 1350 of Chapter 36 of Title 18 of the United
States Code (18 U.S.C. §1350)
XBRL Instance Document.
101.INS
101.SCH XBRL Taxonomy Extension Schema Document.
101.CAL XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB XBRL Taxonomy Extension Label Linkbase Document.
101.PRE XRBL Taxonomy Extension Presentation Linkbase Document.
X
X
X
X
X
X
X
X
X
X
X
X
†
#
##
Indicates a management contract or any compensatory plan, contract or arrangement.
Application has been made with the Securities and Exchange Commission to seek confidential treatment of certain confidential material contained in this document.
Omitted material for which confidential treatment has been requested has been filed separately with the Securities and Exchange Commission.
Portions of this exhibit, marked by brackets and asterisks, have been omitted pursuant to Item 601(b)(10) of Regulation S-K under the Securities Act of 1933, as
amended, because they are both (i) not material and (ii) would likely cause competitive harm to the registrant if publicly disclosed. The registrant undertakes to promptly
provide an unredacted copy of the exhibit on a supplemental basis, if requested by the Commission or its staff.
* This certification is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liability of that section,
nor shall it be deemed incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended.
73
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
SIGNATURES
Date: March 16, 2021
By:
XENETIC BIOSCIENCES, INC.
/s/ JEFFREY F. EISENBERG
Jeffrey F. Eisenberg
Chief Executive Officer
POWER OF ATTORNEY AND SIGNATURES
We, the undersigned officers and directors of Xenetic Biosciences, Inc., hereby severally constitute and appoint Jeffrey F. Eisenberg, our true and lawful attorney, with
full power to him, to sign for us in our names in the capacities indicated below, all amendments to this report, and generally to do all things in our names and on our behalf in
such capacities to enable Xenetic Biosciences, Inc. to comply with the provisions of the Securities Exchange Act of 1934, as amended, and all requirements of the Securities
and Exchange Commission.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the
capacities indicated below on the 16th day of March, 2021.
Signature
Title(s)
/s/ JEFFREY F. EISENBERG
Jeffrey F. Eisenberg
Date: March 16, 2021
/s/ JAMES PARSLOW
James Parslow
Date: March 16, 2021
/s/ GRIGORY BORISENKO
Grigory Borisenko
Date: March 16, 2021
/s/ JAMES CALLAWAY
James Callaway
Date: March 16, 2021
/s/ FIRDAUS JAL DASTOOR
Firdaus Jal Dastoor
Date: March 16, 2021
/s/ DMITRY GENKIN
Dmitry Genkin
Date: March 16, 2021
/s/ ROGER KORNBERG
Roger Kornberg
Date: March 16, 2021
/s/ ADAM LOGAL
Adam Logal
Date: March 16, 2021
/s/ ALEXEY VINOGRADOV
Alexey Vinogradov
Date: March 16, 2021
Chief Executive Officer and Director
(Principal Executive Officer)
Chief Financial Officer
(Principal Financial Officer and Principal Accounting Officer)
Director
Director
Director
Director
Director
Director
Director
74
Exhibit 3.12
1
2
EXHIBIT A
Certificate of Amendment
(PURSUANT TO NRS 78.385 and 78.390)
Certificate of Amendment to Articles of Incorporation
For Nevada Profit Corporations
(Pursuant to NRS 78.385 and 78,390 - After Issuance of Stock)
BARBARA K. CEGAVSKE
Secretary of State
202 North Carson Street
Carson City, Nevada 89701-4201
(775) 684-5708
Website: www.nvsos.gov.
1. Name of Corporation:
XENETIC BIOSCIENCES, INC.
2. Section 1 of Article III of the articles have been amended as follows:
1. Article III, Section I
Section 1. Authorized Shares. The aggregate number of shares which the Corporation shall have authority to issue is seventy two million five hundred thousand (72,500,000)
shares, consisting of two classes to be designated, sixty two million five hundred thousand (62,500,000) shares shall be designated as "Common Stock" and ten million
(10,000,000) shares shall be designated as undifferentiated blank check "Preferred Stock," with all of such shares having a par value of $.001 per share.
See Attached.
3. The vote by which the stockholders holding shares in the corporation entitling them to exercise at least a majority of the voting power, or such greater proportion
of the voting power as may be required in the case of a vote by classes or series, or as may be required by the provisions of the articles of incorporation* have voted in
favor of the amendment is: 55.77%
4. Effective date and time of filing: Date: 12/4/20 Time: 12:02 A.M. ET
5. Signature:
/s/ James Parslow
*If any proposed amendment would alter or change any preference or any relative or other right given to any class or series of outstanding shares, then the amendment must be
approved by the vote, in addition to the affirmative vote otherwise required, of the holders of shares representing a majority of the voting power of each class or series affected
by the amendment regardless to limitations or restrictions on the voting power thereof.
3
Xenetic Biosciences, Inc.
Certificate of Amendment
Item 2
Article III, Section 1
Section 1, Authorized Shares. The aggregate number of shares which the Corporation shall have authority to issue is seventy two million five hundred thousand (72,500,000)
shares, consisting of two classes to be designated, sixty two million five hundred thousand (62,500,000) shares shall be designated as "Common Stock" and ten million
(10,000,000) shares shall be designated as 'undifferentiated blank check "Preferred Stock," with all of such shares having a par value of $.001 per share.
The Preferred Stock may be issued in one or more series, each series to be appropriately designated by a distinguishing letter or title, prior to the issuance of any shares thereof.
The voting powers, designations, preferences, limitations, restrictions, and relative, participating, optional and other rights, and the qualifications, limitations, or restrictions
thereof, of the Preferred Stock shall hereinafter be prescribed by resolution of the board of directors pursuant to Section 3 of this Article.
4
BARBARA K. CEGAVSKE
Secretary of State
206 North Carson Street
Carson City, Nevada 89701-4299
(775) 684-5708
Website: www.nvsos.gov
1. Name of corporation:
Xenetic Biosciences, Inc.
Certificate of Change filed Pursuant to NRS 78.209
For Nevada Profit Corporations
Entity or Nevada Business Identification Number (NVID): NV20111523936
2. The current number of authorized shares and the par value, if any, of each class or series, if any, of shares before the change:
12,500,000 common shares, par value $0.001
10,000,000 preferred shares, par value $0.001
3. The number of authorized shares and the par value, if any, of each class or series, if any, of shares after the change:
62,500,000 common shares, par value $0.001
10,000,000 preferred shares, par value $0.001
4. The number of shares of each affected class or series, if any, to be issued after the change in exchange for each issue share of the same class or series:
5. The provisions, if any, for the issuance of fractional shares, or for the payment of money or the issuance of scrip to stockholders otherwise entitled to a
fraction of a share and the percentage of outstanding shares affected thereby:
6. The required approval of the stockholders has been obtained.
7. Effective date and time of filing (optional):
Date: 12/04/2020
Time: 12:02 A.M. E.T.
(must not be later than 90 days after the certificate is filed)
8. Signature: (required): X
X /s/ James Parslow
Signature of Officer
CFO
Title
Exhibit 3.13
1
2
ATTACHMENT
BARBARA K. CEGAVSKE
Secretary of State
202 North Carson Street
Carson City, Nevada 89701-4201
(775) 684-5708
Website: www.nvsos.gov.
Certificate of Amendment
(PURSUANT TO NRS 78.385 and 78.390)
Certificate of Amendment to Articles of Incorporation
For Nevada Profit Corporations
(Pursuant to NRS 78.385 and 78,390 - After Issuance of Stock)
1. Name of Corporation:
XENETIC BIOSCIENCES, INC.
2. Section 1 of Article III of the articles have been amended as follows:
1. Article III, Section I
Section 1. Authorized Shares. The aggregate number of shares which the Corporation shall have authority to issue is sixty million (60,000,000) shares, consisting of two classes
to be designated, fifty million (50,000,000) shall be designated as "Common Stock" and ten million (10,000,000) shares shall be designated as undifferentiated blank check
"Preferred Stock," with all of such shares have a par value of $.001 per share.
See Attached.
3. The vote by which the stockholders holding shares in the corporation entitling them to exercise at least a majority of the voting power, or such greater proportion
of the voting power as may be required in the case of a vote by classes or series, or as may be required by the provisions of the articles of incorporation* have voted in
favor of the amendment is: 55.77%
4. Effective date and time of filing: Date: 12/4/20 Time: 12:02 A.M. ET
5. Signature:
/s/ James Parslow
*If any proposed amendment would alter or change any preference or any relative or other right given to any class or series of outstanding shares, then the amendment must be
approved by the vote, in addition to the affirmative vote otherwise required, of the holders of shares representing a majority of the voting power of each class or series affected
by the amendment regardless to limitations or restrictions on the voting power thereof.
3
Xenetic Biosciences, Inc.
Certificate of Amendment
Item 2
Article III, Section 1
Section 1. Authorized Shares. The aggregate number of shares which the Corporation shall have authority to issue is sixty million (60,000,000) shares, consisting of two classes
to be designated, fifty million (50,000,000) shall be designated as "Common Stock" and ten million (10,000,000) shares shall be designated as undifferentiated blank check
"Preferred Stock," with all of such shares have a par value of $.001 per share.
The Preferred Stock may be issued in one or more series, each series to be appropriately designated by a distinguishing letter or title, prior to the issuance of any shares thereof.
The voting powers, designations, preferences, limitations, restrictions, and relative, participating, optional and other rights, and the qualifications, limitations, or restrictions
thereof, of the Preferred Stock shall hereinafter be prescribed by resolution of the board of directors pursuant to Section 3 of this Article III
4
BARBARA K. CEGAVSKE
Secretary of State
206 North Carson Street
Carson City, Nevada 89701-4299
(775) 684-5708
Website: www.nvsos.gov
1. Name of corporation:
Xenetic Biosciences, Inc.
Certificate of Change filed Pursuant to NRS 78.209
For Nevada Profit Corporations
Entity or Nevada Business Identification Number (NVID): NV20111523936
2. The current number of authorized shares and the par value, if any, of each class or series, if any, of shares before the change:
62,500,000 common shares, par value $0.001
10,000,000 preferred shares, par value $0.001
3. The number of authorized shares and the par value, if any, of each class or series, if any, of shares after the change:
50,000,000 common shares, par value $0.001
10,000,000 preferred shares, par value $0.001
4. The number of shares of each affected class or series, if any, to be issued after the change in exchange for each issue share of the same class or series:
5. The provisions, if any, for the issuance of fractional shares, or for the payment of money or the issuance of scrip to stockholders otherwise entitled to a
fraction of a share and the percentage of outstanding shares affected thereby:
6. The required approval of the stockholders has been obtained.
7. Effective date and time of filing (optional):
Date: 12/04/2020
Time: 12:02 A.M. E.T.
(must not be later than 90 days after the certificate is filed)
8. Signature: (required): X
X /s/ James Parslow
Signature of Officer
Chief Financial Officer
Title
Exhibit 4.1
DESCRIPTION OF THE REGISTRANT’S SECURITIES
REGISTERED PURSUANT TO SECTION 12 OF THE
SECURITIES EXCHANGE ACT OF 1934
When used herein, the terms the “Company”, “we,” “our,” and “us” refer to Xenetic Biosciences, Inc.
The following summary describes our capital stock and the material provisions of our articles of incorporation, as amended, and our amended and restated bylaws. Because the
following is only a summary, it does not contain all of the information that may be important to you. For a complete description, you should refer to our articles of
incorporation, as amended, and our amended and restated bylaws, copies of which are incorporated by reference as exhibits to our Annual Report on Form 10-K.
Our charter provides that we may issue up to 50,000,000 shares of Common Stock, $0.001 par value per share (the “Common Stock”), and 10,000,000 shares of preferred
stock, $0.001 par value per share, 1,000,000 of which are designated as Series A Preferred Stock, 2,500,000 of which are designated as Series B Preferred Stock, and 6,500,000
of which shares of preferred stock are undesignated. Under Nevada law, stockholders are not generally liable for our debts or obligations.
DESCRIPTION OF CAPITAL STOCK
Voting Rights
DESCRIPTION OF COMMON STOCK
Common Stock is entitled to one vote per share on all matters submitted to a vote of the stockholders, including the election of directors. Except as otherwise required by law or
provided in any resolution adopted by our board of directors with respect to any series of preferred stock, the holders of our Common Stock will possess all voting power.
Generally, all matters to be voted on by stockholders must be approved by a majority (or, in the case of election of directors, by a plurality) of the votes entitled to be cast by all
shares of our Common Stock that are present in person or represented by proxy, subject to any voting rights granted to holders of any preferred stock. Our stockholders do not
have cumulative voting rights in the election of directors. Holders of our Common Stock representing 50% of our capital stock issued, outstanding and entitled to vote,
represented in person or by proxy, are necessary to constitute a quorum at any meeting of our stockholders. A vote by the holders of a majority of our outstanding shares is
required to effectuate certain fundamental corporate changes such as liquidation, merger or an amendment to our charter.
Dividends
Subject to the preferential rights of any other class or series of shares of stock created from time to time by our board of directors from time to time, the holders of shares of our
Common Stock will be entitled to such cash dividends, non-cumulative, as may be declared from time to time by our board of directors from funds available therefore. We will
not pay any dividends on shares of Common Stock (other than dividends in the form of Common Stock) unless and until such time as we pay dividends on our preferred stock
on an as-converted basis.
1
Liquidation
Subject to the preferential rights of any other class or series of shares of stock created from time to time by our board of directors, upon liquidation, dissolution or winding up,
the holders of shares of our Common Stock will be entitled to share ratably in the assets of the Company available for distribution to such holders.
Rights and Preferences
In the event of any merger or consolidation with or into another company in connection with which shares of our Common Stock are converted into or exchangeable for shares
of stock, other securities or property (including cash), all holders of our Common Stock will be entitled to receive the same kind and amount of shares of stock and other
securities and property (including cash). Holders of our Common Stock have no pre-emptive, conversion, subscription or other rights and there are no redemption or sinking
fund provisions applicable to our Common Stock. The rights, preferences and privileges of the holders of our Common Stock are subject to and may be adversely affected by
the rights of the holders of shares of any series of our preferred stock that we may designate in the future.
Fully Paid and Nonassessable
All of our outstanding shares of Common Stock are duly authorized, validly issued, fully paid and nonassessable.
Exchange Listing
Our Common Stock is traded on the NASDAQ Capital Market under the trading symbol “XBIO.”
DESCRIPTION OF PURCHASE WARRANTS
The following summary of certain terms and provisions of warrants to purchase 2,300,000 shares of the Common Stock (the “Purchase Warrants”) is not complete and is
subject to, and qualified in its entirety by the provisions of, the Purchase Warrants. For a complete description, you should refer to the form of Purchase Warrant, a copy of
which is incorporated by reference as an exhibit to our Annual Report on Form 10-K.
Exercisability
The Purchase Warrants are exercisable beginning on the date of original issuance and at any time up to the date that is five years after their original issuance. The Purchase
Warrants will be exercisable, at the option of each holder, in whole or in part by delivering to us a duly executed exercise notice and, at any time a registration statement
registering the issuance of the shares of Common Stock underlying the Purchase Warrants under the Securities Act of 1933, as amended (the “Securities Act”) is effective and
available for the issuance of such shares, or an exemption from registration under the Securities Act is available for the issuance of such shares, by payment in full in
immediately available funds for the number of shares of Common Stock purchased upon such exercise. If a registration statement registering the issuance of the shares of
Common Stock underlying the Purchase Warrants under the Securities Act is not effective or available and an exemption from registration under the Securities Act is not
available for the issuance of such shares, the holder may, in its sole discretion, elect to exercise the Purchase Warrant through a cashless exercise, in which case the holder
would receive upon such exercise the net number of shares of Common Stock determined according to the formula set forth in the Purchase Warrant. In addition, the Purchase
Warrant may be exercised on a cashless basis beginning 30 days from the pricing of the Purchase Warrant (“Cashless Date”) if the VWAP (as defined in the Purchase Warrant)
of the Common Stock on any Trading Day (as defined in the Purchase Warrant) on or after the Cashless Date fails to exceed the exercise price in effect on such date (as may be
subject to adjustment). The number of shares of Common Stock issuable in such cashless exercise shall equal the number of shares of Common Stock that would be issuable
upon exercise of the Purchase Warrant in accordance with it terms if such exercise were by means of a cash exercise. No fractional shares of Common Stock will be issued in
connection with the exercise of a Purchase Warrant. In lieu of fractional shares, we will pay the holder an amount in cash equal to the fractional amount multiplied by the
exercise price.
2
Exercise Limitation
A holder will not have the right to exercise any portion of the Purchase Warrant if the holder (together with its affiliates) would beneficially own in excess of 4.99% (or, upon
election of the holder, 9.99%) 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 Purchase Warrants. However, any holder may increase or decrease such percentage, provided that any increase will not be
effective until the 61st day after such election.
Exercise Price
The Purchase Warrants will have an exercise price of $13.00 per share. The exercise price is subject to appropriate adjustment in the event of certain stock dividends and
distributions, stock splits, stock combinations, reclassifications or similar events affecting our Common Stock and also upon any distributions of assets, including cash, stock or
other property to our stockholders.
Transferability
Subject to applicable laws, the Purchase Warrants may be offered for sale, sold, transferred or assigned without our consent.
Exchange Listing
The Purchase Warrants are traded on the NASDAQ Capital Market under the symbol “XBIOW.”
Fundamental Transactions
If a fundamental transaction occurs, then the successor entity will succeed to, and be substituted for us, and may exercise every right and power that we may exercise and will
assume all of our obligations under the Purchase Warrants with the same effect as if such successor entity had been named in the Purchase Warrant itself. If holders of our
Common Stock are given a choice as to the securities, cash or property to be received in a fundamental transaction, then the holder shall be given the same choice as to the
consideration it receives upon any exercise of the Purchase Warrant following such fundamental transaction.
Rights as a Stockholder
Except as otherwise provided in the Purchase Warrants or by virtue of such holder’s ownership of shares of our Common Stock, the holder of a Purchase Warrant does not have
the rights or privileges of a holder of our Common Stock, including any voting rights, until the holder exercises the Purchase Warrant.
3
ANTI-TAKEOVER EFFECTS
Certain provisions of the Company’s articles of incorporation, as amended, the Company’s amended and restated bylaws, and the Nevada Revised Statutes (the “NRS”) may be
deemed to have an anti-takeover effect. Such provisions may delay, deter or prevent a tender offer or takeover attempt that a stockholder might consider to be in that
stockholder’s best interests, including attempts that might result in a premium over the market price for the shares held by stockholders.
The NRS permits, if authorized by the Company’s articles of incorporation, as amended, the issuance of blank check preferred stock with preferences, limitations and relative
rights determined by a corporation’s board of directors without stockholder approval.
The Company’s articles of incorporation, as amended, currently authorizes the issuance of blank check preferred stock, of which 6,500,000 preferred shares are available for
future issuance in one or more series to be issued from time to time.
The Company has opted out of NRS 78.411 to 78.444, which prohibits Nevada corporations from engaging in any “combination” with an “interested stockholder” for a period
of two years following the date that the stockholder became an “interested stockholder” unless prior to that time the Board of Directors of the corporation approved either the
“combination” or the transaction which resulted in the stockholder becoming an “interested stockholder.”
Each of the foregoing may have the effect of preventing or rendering more difficult or costly, the completion of a takeover transaction that stockholders might view as being in
their best interests.
4
Exhibit 21.1
SUBSIDIARIES OF REGISTRANT
Subsidiary
Country / State of Incorporation
Xenetic Biosciences (UK), Ltd.
United Kingdom registered company
Lipoxen Technologies, Ltd.
United Kingdom registered company
Xenetic Bioscience, Inc.
Delaware
SymbioTec, GmbH
Hesperix S.A.
German registered company
Swiss registered company
Exhibit 23.1
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM’S CONSENT
We consent to the incorporation by reference in the Registration Statement of Xenetic Biosciences, Inc. on Form S-8 (File Nos. 333-237529, 333-222272 and 333-218024) and
on Form S-3 (File Nos. 333-227572 and 333-233769) of our report dated March 16, 2021, with respect to our audits of the consolidated financial statements of Xenetic
Biosciences, Inc. as of December 31, 2020 and 2019 and for each of the two years in the period ended December 31, 2020, which report is included in this Annual Report on
Form 10-K of Xenetic Biosciences, Inc. for the year ended December 31, 2020.
/s/ Marcum LLP
Marcum LLP
Boston, Massachusetts
March 16, 2021
Exhibit 31.1
I, Jeffrey F Eisenberg, certify that:
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
PURSUANT TO EXCHANGE ACT RULES 13a-14(a) AND 15d-14(a),
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
1.
2.
3.
4.
I have reviewed this annual report on Form 10-K of Xenetic Biosciences, Inc.;
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in
light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition,
results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules
13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a)
(b)
(c)
(d)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that
material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the
period in which this report is being prepared;
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with
generally accepted accounting principles;
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the
disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the
registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal
control over financial reporting; and
5.
The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s
auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a)
(b)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to
adversely affect the registrant’s ability to record, process, summarize and report financial information; and
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial
reporting.
Dated: March 16, 2021
By: /s/ Jeffrey F Eisenberg
Jeffrey F. Eisenberg
Principal Executive Officer
Exhibit 31.2
I, James Parslow, certify that:
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER
PURSUANT TO EXCHANGE ACT RULES 13a-14(a) AND 15d-14(a),
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
1.
2.
3.
4.
I have reviewed this annual report on Form 10-K of Xenetic Biosciences, Inc.;
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in
light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition,
results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules
13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a)
(b)
(c)
(d)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that
material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the
period in which this report is being prepared;
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with
generally accepted accounting principles;
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the
disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the
registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal
control over financial reporting; and
5.
The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s
auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a)
(b)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to
adversely affect the registrant’s ability to record, process, summarize and report financial information; and
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial
reporting.
Dated: March 16, 2021
By: /s/ James Parslow
James Parslow
Principal Financial Officer
Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report on Form 10-K of Xenetic Biosciences, Inc. (the “Company”) for the fiscal year ended December 31, 2020, as filed with the
Securities and Exchange Commission on the date hereof (the “Report”), we, the undersigned officers of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge:
1.
2.
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Dated: March 16, 2021
/s/ Jeffrey F. Eisenberg
Jeffrey F. Eisenberg
Chief Executive Officer
(Principal Executive Officer)
/s/James Parslow
James Parslow
Chief Financial Officer
(Principal Financial Officer)