The accompanying notes are an integral part
of these condensed consolidated financial statements.
The accompanying notes are an integral part
of these condensed consolidated financial statements.
The accompanying notes are an integral part
of these condensed consolidated financial statements.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(Unaudited)
Background
Xenetic Biosciences, Inc.
(the “Company”), incorporated in the state of Nevada and based in Lexington, Massachusetts, is a clinical stage biopharmaceutical
company that is focused on the discovery, development and planned commercialization of a new generation of human drug therapies
for the treatment of a variety of conditions including anemia, endometrial cancer, refractory Acute Myeloid Leukemia, Cystic Fibrosis
and certain other cancers based upon its proprietary and patented drug delivery platform systems and drug development collaborations
with major third party pharmaceutical companies around the world.
We incorporate our patented
and proprietary technologies into a number of drug candidates currently under development either in-house or with biotechnology
and pharmaceutical collaborators in order to create what we believe will be the next-generation biologic drugs and therapeutics.
While we primarily focus on researching and developing orphan oncology drugs, we also have significant interests in drugs being
developed by our collaborators to treat, among others, hemophilia and anemia. Our four core proprietary technologies are:
PolyXen™
|
An enabling biological platform technology designed to extend the circulation in the human body for a variety of existing drug molecules and, thereby, to create potentially superior next generation drug candidates. PolyXen is based on the concept of polysialylation and utilizes polysialic acid, or PSA, which is a biopolymer, comprising a chain of sialic acids molecules. PSA is a natural constituent of the human body, though we obtain our PSA from a bacterial source.
|
Virexxa®
|
A small molecule therapeutic with the potential to confer sensitivity to cancer cells to hormone therapeutics that are otherwise insensitive to such treatments. Virexxa, sodium cridanimod, belongs to a class of low-molecular weight synthetic interferon inducers. In addition to its immunomodulatory properties, Virexxa has been shown to increase levels of progesterone receptor expression in tumor tissue of patients who are progesterone receptor deficient, and thus may restore sensitivity of non-responsive endometrial cancers to hormonal (e.g., progestin) therapy. Based on preclinical observations, Virexxa may also be therapeutically relevant in other hormone-resistant cancers, such as triple-negative breast cancer. Virexxa has been granted an Orphan Drug Designation by the FDA, for treatment of progesterone receptor negative endometrial cancer in conjunction with progesterone therapy.
|
OncoHist™
|
A novel therapeutic platform technology that utilizes the properties of modified human histone H1.3 for targeted cell necrosis or apoptosis programed 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, in the cell nucleus, and is therefore expected to be less toxic and immunogenic than other oncology therapies.
|
ImuXen™
|
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.
|
These proprietary technologies
may address unmet needs, improve the performance of existing drugs, and create new patentable drug candidates. All of our drug
candidates are in the development stage and none has yet received regulatory approval for marketing in the U.S. by the FDA or by
any applicable agencies in other countries.
Going Concern and Management’s
Plan
While these condensed
consolidated financial statements have been prepared on a going concern basis, if the Company does not successfully raise additional
working capital, there can be no assurance that the Company will be able to continue its operations and these conditions raise
substantial doubt about its ability to continue as a going concern. The accompanying condensed consolidated financial statements
do not include any adjustments related to the recoverability or classification of asset-carrying amounts or the amounts and classification
of liabilities that may result should the Company be unable to continue as a going concern.
In March 2016, the Company
engaged an investment banking firm to assist with a proposed sale of the Company’s securities. Though a positive outcome
cannot be assured, as of this filing the Company is in late-stage negotiations to effect a public offering as described herein.
The Company is optimistic that it will be successful in obtaining financing; however there can be no assurance that it will be
able to do so or, if it is able to, that is can do so under commercially reasonable terms. In the event the Company is unsuccessful
in this proposed sale, the Company will plan to rely upon proceeds from the sale of up to an additional $6.0 million in securities
to PJSC Pharmsynthez (“Pharmsynthez”) as provided for in the November 2015 Asset Purchase Agreement with Pharmsynthez
and AS Kevelt (“Kevelt”).
2.
|
Summary of Significant Accounting Policies
|
Preparation of Interim Financial
Statements
The accompanying condensed
consolidated financial statements were prepared by the Company pursuant to the rules and regulations of the Securities and Exchange
Commission (“SEC”) and, in the opinion of management, include all normal and recurring adjustments necessary to present
fairly the results of the interim periods shown. Certain information and footnote disclosures normally included in financial statements
prepared in accordance with US GAAP have been condensed or omitted pursuant to such SEC rules and regulations. Management
believes that the disclosures made are adequate to make the information presented not misleading. The results for the interim periods
are not necessarily indicative of results for the full year. The condensed consolidated financial statements contained herein should
be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s 2015 Annual
Report on Form 10-K.
Certain prior period
amounts have been reclassified to conform to the presentation of the current period.
Principles of Consolidation
The financial statements
of the Company include the accounts of Xenetic Biosciences (UK) Limited (“Xenetic UK”) and its wholly owned subsidiaries:
Lipoxen Technologies Limited, Xenetic Bioscience, Incorporated, and SymbioTec GmbH (“SymbioTec”). All material intercompany
balances and transactions have been eliminated on consolidation.
3.
|
Significant Strategic Drug Development Collaborations – Related Parties
|
The Company has entered
into various research, development, license and supply agreements with Shire plc (“Shire”), formerly Baxalta Incorporated
(a spinoff of the biopharmaceuticals business from Baxter Healthcare SA and Baxter Healthcare Corporation), SynBio LLC (“SynBio”),
Serum Institute of India (“Serum”) and Pharmsynthez. The Company and its collaborative partners continue
to engage in research and development activities with no resultant commercial products through June 30, 2016. No amounts were recognized
as revenue related to these agreements during the six months ended June, 2016 or 2015.
4.
|
Property and Equipment, net
|
Property and equipment,
net consists of the following:
|
|
June 30,
2016
|
|
|
December 31,
2015
|
|
Laboratory equipment
|
|
$
|
264,583
|
|
|
$
|
249,969
|
|
Office and computer equipment
|
|
|
35,190
|
|
|
|
35,190
|
|
Leasehold improvements
|
|
|
26,841
|
|
|
|
26,841
|
|
Furniture and fixtures
|
|
|
20,263
|
|
|
|
20,263
|
|
Property and equipment – at cost
|
|
|
346,877
|
|
|
|
332,263
|
|
Less accumulated depreciation
|
|
|
(288,406
|
)
|
|
|
(270,242
|
)
|
Property and equipment – net
|
|
$
|
58,471
|
|
|
$
|
62,021
|
|
Depreciation expense was
$9,082 and $8,551 for the three months ended June 30, 2016 and 2015, respectively, and $18,164 and $38,828 for the six months ended
June 30, 2016 and 2015, respectively.
5.
|
Hybrid Debt Instrument
|
On July 1, 2015, the
Company entered into a Securities Purchase Agreement (the “SPA”) with Pharmsynthez providing for the issuance of a
minimum of a $3 million 10% Senior Secured Collateralized Convertible Promissory Note (the “SPA Note”). The SPA also
provides for the issuance of certain warrants up to the amount of the SPA Note. The convertible debt and its embedded debt-like
features were recorded on the face of the condensed consolidated balance sheet within current liabilities as an aggregate hybrid
debt instrument.
On November 13, 2015,
the Company entered into an Asset Purchase Agreement (the “APA”) with Pharmsynthez providing for the issuance of a
minimum of a $3.5 million 10% Senior Secured Collateralized Convertible Promissory Note (the “APA Note”) and the transfer
to the Company of certain intellectual property rights with respect to Virexxa in exchange for, among others, 111.5 million shares
of our common stock. The APA also provides for the issuance of certain warrants covering up to half the amount of the APA Note.
During the quarter ended March 31, 2016, the Company issued $3.5 million of convertible debt as well as the associated warrants,
both in connection with the APA Note. The convertible debt and its embedded debt-like features were recorded on the face of the
condensed consolidated balance sheet within current liabilities as an aggregate hybrid debt instrument. See also Note 12.
Subsequent
Events
.
On April 22, 2016, Pharmsynthez
converted all convertible notes (in the principal amount of $6.5 million plus accrued interest of approximately $228,000), issued
by the Company to Pharmsynthez in 2015 and 2016. The conversion rate was $4.95 per share. As such, the Company issued to Pharmsynthez
1,373,036 shares of common stock in connection with conversion of the convertible notes. The related embedded derivatives, which
had been bifurcated from the host debt and accounted for separately, were settled by action of the conversion. The Company recognized
a net loss on conversion, including a final mark-to-market of the compound derivative, of $4.4 million, which is recorded in other
expense in the condensed consolidated statement of comprehensive loss for the three and six months ended June 30, 2016.
Interest expense related
to the SPA Note and the APA Note of approximately $102,000 and $347,000 was recognized in the condensed consolidated statement
of comprehensive loss for the three and six months ended June 30, 2016, respectively.
6.
|
Fair Value Measurements
|
ASC Topic 820,
Fair
Value Measurement,
defines fair value as the price that would be received to sell an asset or be paid to transfer a liability
in an orderly transaction between market participants at the measurement date. The Company applies the following fair value hierarchy,
which prioritizes the inputs used to measure fair value into three levels and bases the categorization within the hierarchy upon
the lowest level of input that is available and significant to the fair value measurement. Level 1 inputs are quoted prices in
active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date.
Level 2 utilizes quoted market prices in markets that are not active, broker or dealer quotations, or alternative pricing sources
with reasonable levels of price transparency. Level 3 inputs are unobservable inputs for the asset or liability in which there
is little, if any, market activity for the asset or liability at the measurement date.
The Company’s cash
and restricted cash are measured at fair value on a recurring basis and are classified as Level 1 in the fair value hierarchy.
The carrying amount of certain of the Company’s financial instruments approximate fair value due to their short maturities.
The Company’s derivative liabilities are measured at fair value on a recurring basis and are classified as Level 3 in the
fair value hierarchy.
The following table provides
a summary of the changes in fair value of the compound derivative measured at fair value on a recurring basis using significant
unobservable inputs during the six months ended June 30, 2016.
Balance as of January 1, 2016
|
|
$
|
3,544,222
|
|
Issuances of compound derivative instrument
|
|
|
3,346,423
|
|
Change in fair value of compound derivative instrument
|
|
|
(1,905,289
|
)
|
Settlement of derivative instrument through conversion of debt host
|
|
|
(4,985,356
|
)
|
Balance as of June 30, 2016
|
|
$
|
–
|
|
There were no financial
instruments classified as Level 3 in the fair value hierarchy during the six months ended June 30, 2015.
Reverse Stock Split
On May 16, 2016, our board
of directors approved a reduction, on a 1 for 33 basis, in our authorized common stock, par value $0.001, along with a corresponding
and proportional decrease in the number of shares issued and outstanding. This reduction was filed with the Nevada Secretary of
State on May 18, 2016, but required a review by FINRA before becoming effective in the market. On May 31, 2016, FINRA announced
that this change took effect in the over-the-counter securities markets on June 1, 2016.
All share information
provided herein reflects the effect of the reverse stock split.
Common Stock
In November 2015, the
Company agreed to issue 3.38 million shares of common stock in connection with the APA. In December 2015, 0.33 million shares of
common stock were issued to Dr. Genkin and Mr. Surkhov pursuant to the APA.
On April 29, 2016, the
Company closed on the APA with an effective date of April 27, 2016, acquiring in-process research and development (“IPR&D”)
related to certain intellectual property rights with respect to the immunomodulator product Virexxa held by Kevelt including the
grant of the worldwide right to develop, market and license Virexxa for certain uses. In connection with the closing of the APA,
the Company issued 3.05 million shares of its common stock to Pharmsynthez and, because there was no alternative use for the IPR&D,
the Company recognized $39.5 million of expense based on the fair value of Virexxa IP received, which was determined to be more
reliably measured than the related equity consideration. Included in the $39.5 million expense was the $3.74 million prepayment
recorded in 2015.
Financing Warrants
In connection with the
Company’s issuance of the APA Note in March 2016, the Company issued a warrant to purchase 0.35 million shares of common
stock in accordance with the terms of the APA (the “Warrant”). The Warrant has a five-year term and is exercisable
commencing March 31, 2016. The exercise price per share under the Warrant is the lessor of $6.60 or 120% of the Public Offering
price, in the event there is a Public Offering, as defined in the APA. If the APA Note is not repaid or converted on or before
six months from the date of issuance, the Holder will be issued an additional warrant to purchase 0.35 million shares of common
stock under the same terms as the Warrant. The Company determined there is a low probability that the Note will not be repaid or
converted within the period six months from the date of issuance and, therefore, did not account for the additional warrant as
issued. The fair value of the warrant was calculated using the Black-Scholes option pricing model. The key valuation assumptions
used consist of the Company’s stock price, a risk free rate of 1.42% and an expected volatility of 135%. Using an allocation
of the APA Note proceeds between the relative fair values of the Warrants and the APA Note, the Company recorded the Warrants at
a value of $1.7 million on the condensed consolidated balance sheet as equity paid-in-capital.
8.
|
Share-Based Compensation
|
Total share-based compensation
related to stock options, common stock awards, and non-financing warrants was $1,731,803 and $89,970 for the three months ended
June 30, 2016 and 2015, respectively, and $2,018,263 and $237,198 for the six months ended June 30, 2016 and 2015, respectively.
Share-based compensation
expense is classified in the condensed consolidated statements of comprehensive loss as follows:
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Research and development expenses
|
|
$
|
1,427,691
|
|
|
$
|
51,736
|
|
|
$
|
1,234,240
|
|
|
$
|
150,881
|
|
Administrative expenses
|
|
|
304,112
|
|
|
|
38,234
|
|
|
|
784,023
|
|
|
|
86,317
|
|
|
|
$
|
1,731,803
|
|
|
$
|
89,970
|
|
|
$
|
2,018,263
|
|
|
$
|
237,198
|
|
Employee Stock Options
During the six months
ended June 30, 2016 and 2015, the Company granted 12,122 employee stock options. The key valuation assumptions used consisted of
the Company’s stock price, a risk free rate of 0.54% and an expected volatility of 123%. There were no employee stock options
granted during the same period in 2015. During the six months ended June 30, 2016, the Company extended the exercise expiration
date of certain former employee stock option awards resulting in a change in incremental value of approximately $24,000 which was
charged to administrative expense. The Company recognized compensation expense related to employee stock options of $310,469 and
$20,668 during the three months ended June 30, 2016 and 2015, respectively, and $765,026 and $84,303 during the six months ended
June 30, 2016 and 2015, respectively.
Non-Employee Stock
Options
No non-employee stock
options were granted during the six months ended June 30, 2016 or 2015 and no non-employee stock options were exercised during
the six months ended June 30, 2016 or 2015. The Company recognized compensation expense related to non-employee stock options of
$3,474 and $4,755 during the three months ended June 30, 2016 and 2015, respectively, and $2,503 and $9,193 during the six months
ended June 30, 2016 and 2015, respectively.
Common stock awards
The Company granted 9,581
and 925 common stock awards during the three months ended June 30, 2016 and 2015, respectively, and 11,939 and 2,043 common stock
awards during the six months ended June 30, 2016 and 2015, respectively, based on the value of the services provided and the average
stock price during each respective period. The Company recognized compensation expense related to common stock awards of $50,000
and $25,500 during the three months ended June 30, 2016 and 2015, respectively, and $107,790 and $51,000 during the six months
ended June 30, 2016 and 2015, respectively.
Warrants
In connection with certain
of the Company’s collaboration agreements and consulting arrangements, the Company has issued warrants to purchase shares
of common stock. On May 16, 2016, the Company modified the exercise price of 150,307 performance-based warrants held by Serum and individuals related to Serum from $25.41 to $7.92 and resulted in an incremental value expense
of $204,000. Additionally, the Company issued 212,122 warrants to purchase shares of common stock to Serum with an exercise price
of $7.92. The new warrants were fully vested and the Company recognized $1.37 million of expense related to the grant.
As of June 30, 2016,
and December 31, 2015, warrants to purchase 758,347 shares of common stock were outstanding. These warrants were fair valued at
each issuance date using the Black-Scholes option pricing model. Warrants for which a measurement has not been reached are subject
to re-measurement at each reporting period until the measurement date is reached. Expense is recognized on a straight-line basis
over the expected service period or at the date of issuance, if there is not a service period. Expense for the six months ended
June 30, 2016, was $1.1 million including the incremental value recognized for the warrant modification. The Company issued no
warrants in connection with collaboration agreements and consulting services during the three and six months ended June 30, 2015.
During the six months
ended June 30, 2016 and 2015, there was no provision for income taxes as the Company incurred losses during both periods. 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. The Company records a valuation allowance against
its deferred tax assets as the Company believes it is more likely than not the deferred tax assets will not be realized. The valuation
allowance against deferred tax assets was approximately $16.5 million and $15.3 million as of June 30, 2016 and December 31,
2015, respectively.
As of June 30, 2016, and
December 31, 2015, the net deferred tax liability of $2,918,518 on the condensed consolidated balance sheets is related to book
and tax basis differences for intangible assets with indefinite lives that were acquired in the January 2012 acquisition of SymbioTec.
In accordance with ASC 740-10-30-18, the deferred tax liability related to the intangible assets cannot be used to offset deferred
tax assets when determining the amount of the valuation allowance for deferred tax assets which are not more-likely-than-not to
be realized. This results in a net deferred tax liability, even though the Company has a full valuation allowance on its other
net deferred tax assets. This net deferred tax liability will continue to be reflected on the balance sheet until the related intangible
assets are no longer held by the Company.
As of June 30, 2016 and
December 31, 2015, the Company did not record any unrecognized tax positions.
In August 2013, the Company
entered into an agreement to lease office and laboratory space in Lexington, Massachusetts under an operating lease with a commencement
date of January 1, 2014 and a termination date of January 31, 2019. With the execution of this lease, the Company is
required to maintain a $66,000 letter of credit as a security deposit. In connection with the Lexington lease, the Company recorded
$76,107 as prepaid rent as of June 30, 2016, with $46,646 recorded as a non-current asset. The Company also incurred a liability
of $89,074 with respect to the Company’s contribution to the landlord’s leasehold improvements, of which $47,743 is
outstanding as of June 30, 2016, with $29,446 recorded as a non-current liability, respectively. This liability is repayable as
additional rent expense over the term of the lease and bears interest at 6%. The Company also leased office space in London, UK
during 2014, however the lease was terminated in March 2015 in accordance with the terms of the lease.
11.
|
Related Party Transactions
|
In May 2011, the Company
received a short term unsecured loan facility of up to $1.7 million from SynBio, an affiliate of the Company, of which $152,529
and $395,000 was outstanding as of June 30, 2016 and December 31, 2015, respectively. In connection with the APA, the Company
made a series of payments during the first two quarters of 2016 totaling $242,471 to creditors of Kevelt. Pursuant to the APA such
payments are considered direct offsets to the loan with SynBio. No payments were made during the six months ended June 30, 2015.
The loan had an interest rate of 8.04% per annum as of the date of grant, with interest payable upon repayment of the loan, which
was to be seven months after the closing date of the loan. During 2012, the loan matured and it was agreed by both parties that
the loan can be called due with full repayment of the outstanding principal including accrued interest upon future agreement by
both parties. It was also agreed as of July 1, 2012 that no further interest on the outstanding loan balance would be accrued.
The loan is recorded in “Loans due to related parties” within current liabilities.
The Company has
entered into various research, development, license and supply agreements with Shire, SynBio, Serum and Pharmsynthez, each a
related party whose relationship and ownership has not materially changed from that disclosed in our 10-K/A filed April
29, 2016.
On July 1, 2016, the Company
received total proceeds of $0.5 million in connection with the APA financing arrangement. The APA provided for the issuance of
certain warrants to purchase a number of share of the Company’s common stock equal to 50% of the number of shares issuable
under the APA Notes. The Warrant has a five-year term and is exercisable upon grant. The exercise price per share under the Warrant
is the lessor of $6.60 or 120% of the Capital Raise price, in the event there is a Capital Raise. If the APA Note is not repaid
or converted on or before six months from the date of issuance, the Holder will be issued an additional warrant under the same
terms as the Warrant.
Mr. M. Scott Maguire is
our Chief Executive Officer. Mr. Maguire current annual salary is $505,735 pursuant to his written employment agreement
with the Company. Of Mr. Maguire’s 2015 salary amount and 2016 salary amount through today, fifty percent (50%) has been
paid in cash and fifty percent (50%) has been deferred and accrued pursuant to an unwritten arrangement between us and Mr. Maguire.
On July 1, 2016, we issued a convertible promissory note in the amount of $369,957.51 and warrants to purchase 37,369 shares of
our common stock at the Exercise Price to Mr. Maguire for the deferred salary. We also entered into a Deferred Salary Security
Agreement with Mr. Maguire, pursuant to which Mr. Maguire agreed to continue to defer fifty percent (50%) of his salary until the
earlier to occur of: (i) the closing of a public offering of our securities concurrent to a NASDAQ listing, or (ii) September 30,
2016 (the “Deferral End Date”). All deferred salary shall become due and payable on the Deferral End Date. As
security for the payment of the deferred salary, we granted Mr. Maguire a continuing subordinated security interest in our assets,
including all inventory, accounts, accounts receivable, equipment, trademarks, contracts, copyrights and general intangibles.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING
STATEMENTS
This report contains both
historical and forward-looking statements. The forward-looking statements in this quarterly report are not based on historical
facts, but rather reflect the current expectations of our management concerning future results and events. These forward-looking
statements include, but are not limited to, statements concerning our plans to continue the development of our proposed drug candidates;
our expectations regarding the nature, timing and extent of clinical trials and proposed clinical trials; our expectations regarding
the timing for proposed submissions of regulatory filings, including but not limited to any Investigational New Drug (“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.
In some cases, these statements
may be identified by terminology such as “may”, “will”, “should”, “expect”, “plan”,
“anticipate”, “believe”, “estimate”, “predict”, “potential”, or “continue”,
or the negative of such terms and other comparable terminology. Although we believe that the expectations reflected in the forward-looking
statements contained herein are reasonable, we cannot guarantee future results, the levels of activity, performance or achievements.
These statements involve known and unknown risks and uncertainties that may cause our or our industry’s results, levels of
activity, performance or achievements to be materially different from those expressed or implied by forward-looking statements.
The Management’s
Discussion and Analysis of Financial Condition and Results of Operations (the “MD&A”) should be read together with
our financial statements and related notes included elsewhere in this quarterly report. This quarterly report, including the MD&A,
contains trend analysis and other forward-looking statements. Any statements in this quarterly report that are not statements of
historical facts are forward-looking statements. These forward-looking statements made herein are based on our current expectations,
involve a number of risks and uncertainties and should not be considered as guarantees of future performance.
The single most pressing
factor that could cause actual results to differ materially and adversely is our need to raise additional working capital for the
purpose of further developing our various drug candidates.
Other factors that could
cause actual results to differ materially include without limitation:
|
·
|
our ability to finance our business;
|
|
·
|
our ability to achieve milestone and other
payments associated with our co-development collaborations and strategic arrangements;
|
|
·
|
the impact of new technologies on our
drug candidates and our competition;
|
|
·
|
changes in laws or regulations of governmental
agencies;
|
|
·
|
interruptions or cancellation of existing
contracts;
|
|
·
|
impact of competitive products and pricing;
|
|
·
|
product demand and market acceptance and
risks;
|
|
·
|
the presence of competitors with greater
financial resources;
|
|
·
|
product development and commercialization
risks;
|
|
·
|
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;
|
|
·
|
adverse publicity related to our products
or the Company itself;
|
|
·
|
adverse claims relating to our Intellectual
Property (“IP”);
|
|
·
|
the adoption of new, or changes in, accounting
principles;
|
|
·
|
the costs inherent with complying with
current and new statutes and regulations applicable to public reporting companies, such as the Sarbanes-Oxley Act of 2002; and
|
|
·
|
other new lines of business that the Company
may enter in the future.
|
These factors are not necessarily all of the important factors that
could cause actual results to differ materially from those expressed in the forward-looking statements in this quarterly report.
Other unknown or unpredictable factors also could have material adverse effects on our future results. The forward-looking statements
in this quarterly report are made only as of the date of this quarterly report, and we do not have any obligation to publicly update
any forward-looking statements to reflect subsequent events or circumstances. Please also refer to risk factors described on SEC
Form S-1 filed on May 9, 2016.
ITEM 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
BUSINESS OVERVIEW
Management’s discussion
and analysis of our financial condition and results of operations (“MD&A”) should be read in conjunction with the
condensed consolidated financial statements and related footnotes.
The
Company, carrying on business in a single operating segment, is a clinical-stage biopharmaceutical company focused on discovery,
research and development of next-generation biologic drugs and novel orphan oncology therapeutics that may contribute to improvements
in global human health. Our 200+ patent portfolio covers next generation biologic drugs and novel oncology therapeutics and provides
protection for our current drug candidates and positions as well as strategic partnership and commercialization opportunities.
Our
objective is to leverage our portfolio to maximize out-license opportunities that generate working capital to both build incremental
shareholder value and provide funding necessary to clinically develop our orphan oncology drug candidate pipeline through to market
launch.
Our
lead product candidates include ErepoXen, a polysialylated form of erythropoietin (EPO) for the treatment of anemia in pre-dialysis
patients with chronic kidney disease, and FDA orphan designated oncology therapeutics Virexxa and OncoHist for the treatment of
progesterone receptor negative endometrial cancer and refractory Acute Myeloid Leukemia, respectively.
Significant Transactions and Recent Developments
Asset
Acquisition and Financing Arrangement
On
November 13, 2015, the Company entered into an Asset Purchase Agreement (the “APA”) with Pharmsynthez providing for
the issuance of a minimum of a $3.5 million 10% Senior Secured Collateralized Convertible Promissory Note (the “APA Note”)
and the transfer to the Company of certain intellectual property rights with respect to Virexxa in exchange for, among others,
111.5 million shares of our common stock.. The APA also provides for the issuance of certain warrants covering up to half the amount
of the APA Note. During the six months ended June 30, 2016, the Company issued $3.5 million of convertible debt as well as the
associated warrants, both in connection with the APA Note. The convertible debt and its embedded debt-like features were recorded
on the face of the consolidated balance sheet within current liabilities as an aggregate hybrid debt instrument.
On
April 29, 2016, the Company closed on the APA with an effective date of April 27, 2016, acquiring certain intellectual property
rights with respect to the immunomodulator product Virexxa held by Kevelt and grant of the worldwide right to develop, market and
license Virexxa for certain uses.
In
connection with the closing of the APA, the Company issued 3,045,455 shares of its common stock to Pharmsynthez. In addition, Pharmsynthez
converted all convertible notes (in the principal amount of $6.5 million plus accrued interest of approximately $300,000), issued
by the Company to Pharmsynthez in 2015 and 2016. The conversion rate as set forth in the notes was $4.95 per share. As such, the
Company issued to Pharmsynthez 1,373,036 shares of its common stock in connection with conversion of the convertible notes, which
amount, together with the 3,045,455 shares of common stock in connection with the closing of the Asset Purchase Agreement, resulted
in an aggregate of 4,418,491 new shares of common stock being issued to Pharmsynthez.
Technology Overview
We incorporate our patented
and proprietary technologies into a number of drug candidates currently under development either in-house or with biotechnology
and pharmaceutical collaborators in order to create what we believe will be the next-generation biologic drugs and therapeutics.
While we primarily focus on researching and developing orphan oncology drugs, we also have significant interests in drugs being
developed by our collaborators to treat, among others, hemophilia and anemia. Our four core proprietary technologies are:
|
|
PolyXen
™
|
An enabling biological platform technology designed to extend the circulation in the human body for a variety of existing drug molecules and, thereby, to create potentially superior next generation drug candidates. PolyXen is based on the concept of polysialylation and utilizes polysialic acid, or PSA, which is a biopolymer, comprising a chain of sialic acids molecules. PSA is a natural constituent of the human body, though we obtain our PSA from a bacterial source.
|
Virexxa®
|
A small molecule therapeutic with the potential to confer sensitivity to cancer cells to hormone therapeutics that are otherwise insensitive to such treatments. Virexxa, sodium cridanimod, belongs to a class of low-molecular weight synthetic interferon inducers. In addition to its immunomodulatory properties, Virexxa has been shown to increase levels of progesterone receptor expression in tumor tissue of patients who are progesterone receptor deficient, and thus may restore sensitivity of non-responsive endometrial cancers to hormonal (e.g., progestin) therapy. Based on preclinical observations, Virexxa may also be therapeutically relevant in other hormone-resistant cancers, such as triple-negative breast cancer. Virexxa has been granted an Orphan Drug Designation by the FDA, for treatment of progesterone receptor negative endometrial cancer in conjunction with progesterone therapy.
|
OncoHist™
|
A novel therapeutic platform technology that utilizes the properties of modified human histone H1.3 for targeted cell necrosis or apoptosis programed 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, in the cell nucleus, and is therefore expected to be less toxic and immunogenic than other oncology therapies.
|
ImuXen™
|
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.
|
These proprietary technologies
may address unmet needs, improve the performance of existing drugs, and create new patentable drug candidates. All of our drug
candidates are in the development stage and none has yet received regulatory approval for marketing in the U.S. by the FDA or by
any applicable agencies in other countries..
Our Business Strategy
Our goal is to become
a leader in the development of novel orphan oncology drugs while leveraging our proprietary delivery technology as a vehicle for
creating next generation bio-therapeutics.
Our strategy is to pursue
a continuous and ongoing effort of out-licensing our PolyXen platform technology to drive short-term, incremental shareholder value
and generate working capital to assist in providing the funding required to support our long-term development of orphan oncology
drug candidates through regulatory approval and commercialization.
We advance our PolyXen
platform technology through collaborative out-license arrangements with global pharmaceutical companies that can apply the resources
necessary to bring the drug candidate to worldwide commercialization and with other partners that in-license our technology on
a restrictive-market basis. The latter provides access to clinical data which can assist us in making decisions about potential
monetization in larger markets.
We believe our orphan
oncology drug candidates may meet an established and unmet therapeutic need for a relatively limited population of patients, and
products with very high sales potential – benefiting from more favorable price and reimbursement policies.
We advance our drug candidates
through a combination of conducting our own in-house research and through the use of contract manufacturing and contract research
organizations in order to efficiently manage the Company’s overheads. Continuous pipeline growth and advancement of out-licensed
drug candidates is dependent, in part, on several important co-development collaborations and strategic arrangements. Together
with our collaborative partners, we are focused on developing our pipeline of next generation bio-therapeutics and novel orphan
drugs in oncology based primarily on our PolyXen, OncoHist and Virexxa proprietary technologies.
Our Technologies
PolyXen
™
PolyXen is a drug delivery
technology designed to extend the circulation in the human body for a variety of existing drug molecules and, thereby, to create
potentially superior next generation drug candidates. It is based on the concept of polysialylation and utilizes polysialic acid
(PSA), which is a biopolymer, comprising a chain of sialic acids molecules. PSA is a natural constituent of the human body, though
Xenetic obtains its PSA from a bacterial source.
Sialic acid is found on
the external membrane of a number of cell types in the body. In addition, it is a natural component expressed on the external membrane
on a number of bacterial types. The chain of sialic acid molecules can be anywhere from 4 to over 200 individual sialic acid molecules
in length. We use the linear form of PSA called colominic acid. It is a natural, hydrophilic polymer isolated from a bacterial
strain of E. coli K1. This natural glycan is negatively charged, non-toxic and is biodegradable. The PSA chain is extensively purified
from large-scale bacterial cultures under current Good Manufacturing Practices (cGMP), modified to specified sizes and then attached
to defined sites on the therapeutic in order to enhance the properties of the therapeutic. The major effect of PSA addition to
a therapeutic is to change the apparent hydrodynamic radius of the molecule. This physical alteration then changes a number of
the biological characteristics of the therapeutic.
Both the length and the
site of attachment of the PSA chain can enhance the properties of the therapeutic. The most noticeable, and perhaps the most relevant
enhancement, is an extension of the lifetime of the therapeutic in blood circulation. This is due to the increase in the size of
the drug which results in a decrease in the clearance rate of the molecule in the kidney by glomerular filtration. In addition,
studies have shown that using PolyXen changes in other biological characteristics of the therapeutic such as protease sensitivity
and temperature sensitivity. The linked PSA molecules may be less viscous in solution compared to other technologies, potentially
providing for easier injections and fewer adverse injection site reactions.
The current standard for
certain biologic delivery agents is methyl polyethylene glycol (or PEG) which is attached similarly to therapeutics. The mode of
action between PSA and PEG is similar, increasing the apparent size of the molecule and thereby increasing the circulating time
of the drug in the blood. PEGylation is a proven technology that can offer advantages in terms of pharmacokinetics and pharmacodynamics
for therapeutics over non-modified, first generation molecules. There are a number of PEG modified molecules on the market, in
clinical trials and under development. However, PEGylation is deemed to have limitations. It is not biodegradable and may therefore
at high doses result in intra-cellular accumulation, potentially leading to vacuole formation in the cells. In comparison, PSA
is a chain of sialic acids which is a natural constituent of the human body. PSA is biodegradable into individual sialic acid units.
PEG has also been shown to be immunogenic when coupled to proteins and can activate the complement system showing limitations on
particular molecules. PSA has to date been shown to be non-immunogenic as well as demonstrating greater versatility and fewer limitations
on early-stage development relative to PEG. We believe PSA may provide the advantages of PEG, which represents a multi-billion
dollar market, without its disadvantages, offering a potential advance over PEG molecules.
We plan to develop drug
candidates, such as ErepoXen that uses the PolyXen platform delivery technology, to a stage that will enable us to seek profitable
out-licensing arrangements with major pharmaceutical companies for further development and eventual commercialization, in exchange
for milestone payments and royalties from product sales. We are also pursuing outlicensing PolyXen for use with a partner’s
proprietary molecule in exchange for upfront payments, clinical milestones and royalties linked to sales. In general, our collaborative
out-licensing agreements relating to the platforms are an integral part of our early-stage monetization strategy.
In addition to potentially
enhancing therapeutics, we believe that adding PSA to an existing marketed biological drug may allow for patent extension, thereby
potentially creating a patent-protected next generation candidate. We are exploring such opportunities.
Virexxa®
On November 13, 2015,
we entered into an Asset Purchase Agreement, or the Kevelt APA, with AS Kevelt, an Estonian biotech company, or Kevelt, and Pharmsynthez.
Pursuant to the Kevelt APA, Kevelt and Pharmsynthez, transferred to us certain intellectual property rights with respect to Virexxa,
and the worldwide rights to develop, market and license Virexxa for certain uses, except for excluded uses within the Commonwealth
of Independent States (CIS) in exchange for, among others, 3.38 million shares of our common stock. Virexxa is a Phase II oncology
drug candidate which is under investigation for the treatment of certain endometrial cancers. As part of this total consideration,
we also acquired Kevelt's U.S. Orphan Drug designation for the use of Virexxa in the treatment of progesterone receptor negative
endometrial cancer in conjunction with progesterone therapy. The Company closed on the Asset Purchase Agreement effective April
27, 2016.
Virexxa is our most advanced
candidate with an orphan designation for a subset of endometrial cancers and an Investigational New Drug, or IND, in effect for
Phase II clinical trials in the U.S. and certain territories in Eastern Europe. While Virexxa (a sodium cridanimod), belongs to
a class of low-molecular weight synthetic interferon, or IFN, inducers and is primarily used in a wide range of therapeutic areas
such as antiviral, antibacterial, antitumor, and inflammatory indications due to its ability to modify or regulate one or more
immune system functions, Virexxa may prove to be therapeutically relevant in hormone-resistant cancers by increasing the levels
of progesterone receptor, or PR, expression in tumor tissue of patients who are PR deficient. As such, it may restore the sensitivity
of non-responsive endometrial cancers to hormonal (e.g., progestin) therapy. Accordingly, we are pursuing the use of Virexxa for
endometrial cancer.
OncoHist™
OncoHist is a therapeutic
platform technology that utilizes the recombinant, modified, properties of the human histone H1.3 (H1.3) for targeted cell killing
by cell necrosis or apoptosis-programmed cell death.
OncoHist may be a drug
candidate to treat a broad range of cancer indications. It, unlike many competing oncology therapies, is based on a molecule occurring
naturally in the human body, in the cell nucleus, and is therefore expected to be less toxic and immunogenic than other oncology
therapies. We developed a novel form of the H1 histone molecule and were granted patent protection of the new chemical entity,
N-bis-met-histone 1.3, or OncoHist, in use against cancer through at least 2027.
OncoHist is based on research
covered under our patent portfolio related to novel functions of histones. Histone H1 has strong anti-proliferative properties
against cancer cells of different histological origin. This has been demonstrated extensively for hematologic malignancies, such
as leukemias, lymphomas, and myelomas, and also for tumors from other tissues. Susceptibility of cells to the cytotoxic effect
of histones is determined by the ability of histone H1 to selectively destabilize the tumor cell membrane, which results in cell
death. OncoHist was tested on 58 tumor cell lines derived from various tissues. Hematopoietic cancer cell lines were found to be
among the cell lines the most sensitive to OncoHist. OncoHist binds to the cell membrane and the binding mechanism appears to be
completely different from that of other therapeutic agents on the market for hematopoietic cancers. The Dana-Faber Cancer Institute
is currently conducting additional studies of the OncoHist binding mechanism. Hematopoietic cancer lines resistant to current chemotherapeutic
agents have still been sensitive to OncoHist.
We plan to develop drug
candidates such as OncoHist for AML, which uses the OncoHist platform technology, to a stage that will enable us to seek profitable
outlicensing arrangements or commercialization. A Phase I/II trial to evaluate the safety and tolerability of OncoHist alone for
AML was conducted in 2004-2007 at Saarland University, in Germany with 22 AML patients. Formal criteria of response were not met
in any of the patients; however, according to the overall assessment of the investigator three patients achieved a partial remission
although the strict criteria for partial remission according to protocol were only partly fulfilled. Six patients had a temporary
increase of their platelet count while on therapy during the follow-up period. Most notably, two patients who had received two
treatment cycles each experienced stabilization of their disease for six and one-half and 16 months, respectively.
ImuXen
™
ImuXen is a patented platform
technology based on the concept of simultaneous delivery of multiple active pharmaceutical ingredients (APIs), as antigens with
the same liposome. The liposomes are composed of lipids that encapsulate an aqueous core. The APIs can be trapped in the core,
be associated with the lipids, or both. Proteins, peptides, nucleic acids, polysaccharides and live or inactivated infectious agents
can all be used as an API with the same liposome. Both the size and the lipid composition can be controlled which affects the biological
properties of the liposome. Manufacturing involves the passive entrapment of the vaccine APIs by freeze drying commercially available
liposomes with the antigens of interest. When the material is rehydrated it yields liposomes with the entrapped APIs.
Having multiple APIs formulated
with the same liposome allows simultaneous delivery of the antigens to the same antigen presenting cell. This may allow a more
efficient immune response to all the agents presented. In addition, it is possible that multiple vaccines can be delivered with
a single injection. Relevant pre-clinical studies have shown a reduction in the number of doses and dosage required, and a faster
immune response time. This efficient immune response also may allow for use of antigens that traditionally give a poor antibody
response.
This technology is not
currently the focus of clinical development for the Company. However, through a license agreement with Pharmsynthez, there is a
novel multiple sclerosis vaccine that is in clinical development in Russia. SynBio completed a Phase I/II clinical trial to treat
relapsing remitting multiple sclerosis (RRMS), and secondary progressive multiple sclerosis (SPMS) in the CIS. Peptides corresponding
to antigenic sections of basic myelin protein were encapsulated within liposomes to be used as the therapeutic agent in our drug
candidate, Xemys, which uses the ImuXen platform technology. As an integral part of our strategy, we await later stage clinical
data on Xemys to determine whether to progress this candidate into U.S. clinical trials for potential out-licensing.
Critical Accounting Estimates
The preparation of our
financial statements in conformity with US GAAP requires management 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 amount of expenses during
the reporting period. On an ongoing basis, we evaluate management’s 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
could differ from our assumptions and estimates, and such differences could be material.
There has been no material
change to our critical accounting estimates since those critical accounting estimates described in our Annual Report on Form 10-K
filed on March 30, 2016.
RESULTS OF OPERATIONS
Comparison of Quarter Ended June 30,
2016 and 2015
The comparison of our historical results of
operations for the fiscal quarter ended June 30, 2016 to the fiscal quarter ended June 30, 2015 is set forth below:
Description
|
|
Quarter Ended
June 30, 2016
|
|
|
Quarter Ended
June 30, 2015
|
|
|
Increase
(Decrease)
|
|
|
Percentage
Change
|
|
Research and development (“R&D”)
|
|
$
|
(2,205,213
|
)
|
|
$
|
(555,740
|
)
|
|
$
|
(1,649,473
|
)
|
|
|
(297
|
)
|
IPR&D expense
|
|
|
(39,500,000
|
)
|
|
|
–
|
|
|
|
(39,500,000
|
)
|
|
|
–
|
|
General and administrative
|
|
|
(1,557,677
|
)
|
|
|
(803,399
|
)
|
|
|
(754,278
|
)
|
|
|
(94
|
)
|
Loss from operations
|
|
|
(43,262,890
|
)
|
|
|
(1,359,139
|
)
|
|
|
(41,854,687
|
)
|
|
|
(3,083
|
)
|
Other income (expense)
|
|
|
12,863
|
|
|
|
234,453
|
|
|
|
(221,590
|
)
|
|
|
(95
|
)
|
Change in fair value of derivative liability
|
|
|
1,769,275
|
|
|
|
–
|
|
|
|
1,769,275
|
|
|
|
–
|
|
Loss on conversion of debt
|
|
|
(6,187,337
|
)
|
|
|
–
|
|
|
|
(6,187,337
|
)
|
|
|
–
|
|
Interest income
|
|
|
13
|
|
|
|
914
|
|
|
|
(901
|
)
|
|
|
(99
|
)
|
Interest expense
|
|
|
(103,086
|
)
|
|
|
(1,386
|
)
|
|
|
(101,700
|
)
|
|
|
(7,338
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(47,771,162
|
)
|
|
$
|
(1,125,158
|
)
|
|
$
|
(46,646,004
|
)
|
|
|
(4,146
|
)
|
Research and Development
Overall, corporate R&D
expenses for the quarter ended June 30, 2016 increased by $41.1 million, or 7,404% to $41,705,213 from $555,740 in the comparable
quarter in 2015. The table below sets forth the R&D costs incurred by the Company, by category of expense, for the quarters
ended June 30, 2016 and 2015:
|
|
Quarter ended,
|
|
Category of Expense
|
|
June 30, 2016
|
|
|
June 30, 2015
|
|
IPR&D expense
|
|
$
|
39,500,000
|
|
|
$
|
–
|
|
Outside services and Contract Research Organizations
|
|
|
563,233
|
|
|
|
315,408
|
|
Salaries and wages
|
|
|
120,233
|
|
|
|
125,941
|
|
Share-based compensation expense
|
|
|
1,427,691
|
|
|
|
51,736
|
|
Rent
|
|
|
22,362
|
|
|
|
21,796
|
|
Other
|
|
|
71,695
|
|
|
|
40,859
|
|
Total research and development expense
|
|
$
|
41,705,213
|
|
|
$
|
555,740
|
|
The
increase in R&D expenses during the three months ended June 30, 2016, compared to the same period in 2015 was primarily due
to the Company’s acquisition and immediate expensing of the Virexxa asset ($39.5 million) coupled with $1.36 million recognized
in connection with warrants issued to Serum. Separate from these, the primary increase in R&D costs of approximately $200,000
relates to the addition and incorporation of Virexxa programs into the Company’s operating activity.
General and Administrative
General and administrative
expenses increased by $754,278 or 94% for the quarter ended June 30, 2016 to $1,557,677 from $803,399 in the same quarter in 2015.
The most significant drivers of the change were related to an increase of approximately $612,000 in legal and consulting services
related to efforts to effect our planned capital stock offering and uplist to a national securities exchange as well as related
accounting and regulatory costs. The increase is also driven by approximately $155,000 increase in share-based compensation. These
increases were partially offset by decreases in personnel and other administrative costs.
Hybrid Debt Instrument
On July 1, 2015, the Company
entered into a Securities Purchase Agreement (the “SPA”) with Pharmsynthez providing for the issuance of a minimum
of a $3 million 10% Senior Secured Collateralized Convertible Promissory Note (the “SPA Note”). The SPA also provides
for the issuance of certain warrants up to the amount of the SPA Note. The convertible debt and its embedded debt-like features
were recorded on the face of the condensed consolidated balance sheet within current liabilities as an aggregate hybrid debt instrument.
On April 22, 2016, Pharmsynthez
converted all convertible notes (in the principal amount of $6.5 million plus accrued interest of approximately $228,000), issued
by the Company to Pharmsynthez in 2015 and 2016. The conversion rate was $4.95 per share. As such, the Company issued to Pharmsynthez
1,373,036 shares of common stock in connection with conversion of the convertible notes. The related embedded derivatives, which
had been bifurcated from the host debt and accounted for separately, were settled by action of the conversion. The Company recognized
a net loss on conversion, including a final mark-to-market of the compound derivative, of $4.4 million.
Other Income (Expense)
Other income decreased
$221,590, or 95% for the three months ended June 30, 2016 to 30,517 to $12,863 from $234,453 in the comparable period in 2015.
The current period gain of primarily relates to gains on payables held in foreign currency compared to the same period in 2015
which included adjustments to foreign currency translation for prior period corrections.
Interest Expense
Interest expense increased
from $1,386 to approximately $103,000 for the quarter ended June 30, 2016 compared to the same period in 2015. The increase in
interest expense is primarily due to interest charges associated with the SPA Note and APA Note. There was not a similar promissory
note in the comparable period in 2015. The interest expense for the three months ended June 30, 2015, is primarily related to a
financing arrangement with the landlord of the Company’s office and lab lease in the US, which commenced in January 2014.
Comparison of Six Months Ended June 30,
2016 and 2015
The comparison of our
historical results of operations for the six months ended June 30, 2016 to the six months ended June 30, 2015 is set forth below:
Description
|
|
Six Months Ended
June 30, 2016
|
|
|
Six Months Ended
June 30, 2015
|
|
|
Increase
(Decrease)
|
|
|
Percentage
Change
|
|
Research and development
|
|
$
|
(2,634,494
|
)
|
|
$
|
(1,590,823
|
)
|
|
$
|
(1,043,671
|
)
|
|
|
(66
|
)
|
IPR&D expense
|
|
|
(39,500,000
|
)
|
|
|
–
|
|
|
|
(39,500,000
|
)
|
|
|
–
|
|
General and administrative
|
|
|
(2,980,043
|
)
|
|
|
(1,738,625
|
)
|
|
|
(1,241,418
|
)
|
|
|
(71
|
)
|
Loss from operations
|
|
|
(45,114,537
|
)
|
|
|
(3,329,448
|
)
|
|
|
(41,785,089
|
)
|
|
|
(1,255
|
)
|
Other income (expense)
|
|
|
(13,551
|
)
|
|
|
(225,515
|
)
|
|
|
211,964
|
|
|
|
94
|
|
Change in fair value of derivative liability
|
|
|
1,905,289
|
|
|
|
–
|
|
|
|
1,905,289
|
|
|
|
–
|
|
Loss on issuance of hybrid debt instrument
|
|
|
(1,584,218
|
)
|
|
|
–
|
|
|
|
(1,584,218
|
)
|
|
|
–
|
|
Loss on conversion of debt
|
|
|
(6,187,337
|
)
|
|
|
–
|
|
|
|
(6,187,337
|
)
|
|
|
–
|
|
Interest income
|
|
|
27
|
|
|
|
1,088
|
|
|
|
(1,061
|
)
|
|
|
(98
|
)
|
Interest expense
|
|
|
(348,470
|
)
|
|
|
(2,512
|
)
|
|
|
(345,958
|
)
|
|
|
(13,772
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(51,342,797
|
)
|
|
$
|
(3,556,387
|
)
|
|
$
|
(47,786,410
|
)
|
|
|
(1,344
|
)
|
Research and Development
Overall, corporate R&D
expenses for the six months ended June 30, 2016 increased by $40.5 million, or 2,549% to $42,134,494 from $1,590,823 in the comparable
period in 2015. The table below sets forth the R&D costs incurred by the Company, by category of expense, for the quarters
ended June 30, 2016 and 2015:
|
|
Six Months Ended,
|
|
Category of Expense
|
|
June 30, 2016
|
|
|
June 30, 2015
|
|
IPR&D expense
|
|
$
|
39,500,000
|
|
|
$
|
–
|
|
Outside services and Contract Research Organizations
|
|
|
986,750
|
|
|
|
1,029,537
|
|
Salaries and wages
|
|
|
248,792
|
|
|
|
267,481
|
|
Share-based compensation expense
|
|
|
1,234,240
|
|
|
|
150,881
|
|
Rent
|
|
|
44,441
|
|
|
|
44,913
|
|
Other
|
|
|
120,271
|
|
|
|
98,011
|
|
Total research and development expense
|
|
$
|
42,124,494
|
|
|
$
|
1,590,823
|
|
The
increase in R&D expenses during the six months ended June 30, 2016, compared to the same period in 2015 was primarily due to
the Company’s acquisition and immediate expensing of the Virexxa asset ($39.5 million) coupled with $1.36 million recognized
in connection with warrants issued to Serum. Separate from these, R&D costs were relative flat period over period.
General and Administrative
General and administrative
expenses increased by $1,241,418 or 71% for the six months ended June 30, 2016 to $2,980,043 from $1,738,625 in the comparable
period of 2015. The most significant drivers of the change were related to an increase of approximately $909,000 in legal and consulting
services in connection with our efforts to effect our planned capital stock offering and uplist to a national exchange as well
as related accounting and regulatory costs. The increase is also driven by approximately $436,000 increase in share-based compensation.
These increases were partially offset by decreases in personnel and other administrative costs.
Hybrid Debt Instrument
On July 1, 2015, the Company
entered into a Securities Purchase Agreement (the “SPA”) with Pharmsynthez providing for the issuance of a minimum
of a $3 million 10% Senior Secured Collateralized Convertible Promissory Note (the “SPA Note”). The SPA also provides
for the issuance of certain warrants up to the amount of the SPA Note. The convertible debt and its embedded debt-like features
were recorded on the face of the condensed consolidated balance sheet within current liabilities as an aggregate hybrid debt instrument.
On April 22, 2016, Pharmsynthez
converted all convertible notes (in the principal amount of $6.5 million plus accrued interest of approximately $228,000), issued
by the Company to Pharmsynthez in 2015 and 2016. The conversion rate was $4.95 per share. As such, the Company issued to Pharmsynthez
1,373,036 shares of common stock in connection with conversion of the convertible notes. The related embedded derivatives, which
had been bifurcated from the host debt and accounted for separately, were settled by action of the conversion. The Company recognized
a net loss on conversion, including a final mark-to-market of the compound derivative, of $4.4 million.
Other Expense
Other expense decreased
approximately $211,964, or 94% to $13,551 for the six months ended June 30, 2016 from $225,515 in the comparable period in 2015.
This decrease is primarily related to effects on payables held in foreign currency compared to the same period in 2015 which also
included adjustments to foreign currency translation for prior period corrections.
Interest Expense
Interest expense increased
from $2,512 to approximately $348,000 for the six months ended June 30, 2016 compared to the same period in 2015. The increase
in interest expense is primarily due to interest charges associated with the SPA Note and APA Note. There was not a similar promissory
note in the comparable period in 2015. The interest expense for the six months ended June 30, 2015, is primarily related to a
financing arrangement with the landlord of the Company’s office and lab lease in the US, which commenced in January 2014.
Liquidity and Capital Resources
At
June 30, 2016 and December 31, 2015, we had working capital deficits of approximately $3.3 million and $3.2 million, respectively.
At June 30, 2016 we had approximately $0.2 million in cash and $3.6 million in accounts payable and accrued expenses. At December
31, 2015, we had approximately $0.13 million in cash and $3.3 million in accounts payable and accrued expenses. Our working capital
has increased in 2016 due primarily to $3.5 million of debt proceeds offset by $3.4 million net cash used during the six months
end June 30, 2016, which consisted of meeting creditor obligations, furthering our clinical development, and other general operating
needs.
As of August 15, 2016,
the Company will be required to raise additional working capital in order to meet its financial obligations for the next 12 months.
We have historically relied
upon equity financing to fund our operations. Since 2005, we have raised approximately $53.5 million in equity financing, including
$6.5 million from the April 2016 conversion of the SPA Note and APA Note to equity, $10 million from the sale of shares to Baxter
in January 2014, as well as received $10 million from revenue producing activities in the years prior to 2014. Approximately 90%
of that revenue was from a single customer, Baxter, in connection with milestone receipts and fees for services. We expect the
majority of our funding through equity or equity linked instruments to continue as a trend for the foreseeable future.
On July 1, 2015, the Company
entered into the SPA with Pharmsynthez for the issuance of the SPA Note, which provided net proceeds of approximately $3 million
in July 2015 for the general working capital needs of the Company.
In November 2015 we entered
into the APA which included the 1
st
amendment to the SPA (the “Amended SPA”) wherein Pharmsynthez agreed
to purchase from the Company up to $3.5 million of additional 10% Convertible Promissory Notes (the “APA Notes”). The
APA contains a total financing commitment from Pharmsynthez in the amount of $10 million. The APA Notes represent bridge financing
to be drawn down from this $10 million. As of August 15, 2016, the Company had received net proceeds of $4.0 million from the APA
Notes, leaving a balance of $6.0 million in funding commitment from Pharmsynthez.
In connection with the
closing of the APA in April 2016, the Company issued 3,045,455 shares of its common stock to Pharmsynthez. In addition, Pharmsynthez
converted all convertible notes (in the principal amount of $6.5 million plus accrued interest of approximately $300,000), issued
by the Company to Pharmsynthez in 2015 and 2016. The conversion rate as set forth in the notes was $4.95 per share. As such, the
Company issued to Pharmsynthez 1,373,036 shares of its common stock in connection with conversion of the convertible notes, which
amount, together with the 3,045,455 shares of common stock in connection with the closing of the Asset Purchase Agreement, resulted
in an aggregate of 4,418,491 new shares of common stock being issued to Pharmsynthez.
Pharmsynthez, as part
of the APA, has agreed to invest $6.0 million (the “Additional Investment”) as part of our planned total capital raise
and planned up-list to a national securities exchange (the “Capital Raise”). The $6.0 million represents the remaining
available draw down from Pharmsynthez’s $10 million total financing commitment. The total amount of financing contemplated
in the APA is $18.5 million consisting of $4.0 million in the APA Notes (which has been drawn down as of March 30, 2016), $6.0
million in the Additional Investment and an anticipated minimum of $8.5 million in proceeds resulting from the general public offering.
The Company believes this total financing will be sufficient for the Company to meet its financial obligations and to continue
its planned operations for the next 12 months.
In the event that the
Company is unable to cause a listing of its securities on a national securities exchange and pursuant to the APA, Pharmsynthez
shall loan to the Company up to the Additional Investment of $6.0 million on essentially similar terms as the APA Notes. This outcome
would require the Company to seek additional financing and/or defer certain research and development activities in order to meet
its financial obligations over the next 12 months.
The Company is optimistic
that it will be successful in obtaining the financing contemplated in the APA. However, there can be no assurance that it will
be able to do so or, if it is able to, that it can do so under commercially reasonable terms. Further, Pharmsynthez’s $6.0
million commitment is an important factor in the Capital Raise. If Pharmsynthez becomes unable or unwilling to fulfill its $6.0
million commitment, the completion of the Capital Raise will be adversely affected. These financial statements have been prepared
on a going concern basis. If we are unable to complete the Capital Raise for any reason, there will be substantial doubt about
our ability to continue as a going concern.
Until we reach commercialization
of our technology or receive significant and regular cash flows from our current collaborations or from planned out-licensing of
our technology, we expect the trend of accessing capital markets to finance our working capital needs to continue.
The only significant cash
receipts that we could expect from our current collaborations would be from Shire. Due to the uncertainties and risks inherent
in the clinical development process, we are unable to predict precisely when those receipts may occur, if ever. We do not expect
any significant receipts to become due within the next six months. However, there can be no assurance that future receipts will
ever become due because they are contingent on positive outcomes from Shire’s clinical development efforts in connection
with the Factor VIII drug candidate.
We have commenced the
process of seeking out-license arrangements for our ErepoXen™ technology but are currently unable to reliably predict when
that process may result in an agreement. Due to the uncertainties inherent in the clinical research process and unknown future
market conditions, there can be no assurance our ErepoXen™ technology will lead to any future income.
Cash Flows Used in Operating Activities
Cash flows used in operating
activities for the six months ended June 30, 2016 totaled approximately $3.1 million, which includes a net loss of approximately
$51.3 million offset by approximately $48.2 million in non-cash charges related to the Virexxa asset acquisition, which was immediately
expensed ($39.5 million), as well as the hybrid debt instrument ($6.2 million including issuance loss, interest, amortization,
change in fair value, and loss on extinguishment upon conversion of the debt host). In addition, as the Company recognized a net
non-cash charge of approximately $2.0 million for share-based compensation and warrants.
Cash flows used in operating
activities for the six months ended June 30, 2015 totaled approximately $2.2 million, which includes a net loss of approximately
$3.6 million, partially offset by approximately $0.7 million in net decreases in account receivable and increase in accounts payable
and accrued expenses, approximately $0.3 million in foreign exchange translation charges and approximately $0.2 million in non-cash
charges for share-based compensation. The $2.2 million includes cash expenses of approximately $0.6 million in salaries, wages,
employee fringe benefits and related taxes, including scientific staff, approximately $0.8 million in program-specific clinical
development costs, $0.4 million in legal fees and $0.1 million in accounting and tax consultants.
Cash Flows from Investing Activities
For the six months ended
June 30, 2016 and 2015, respectively, there were no significant cash sources or uses from investing activities.
Cash Flow from Financing Activities
The Company received $3.5
million in proceeds from issuance of $3.5 million 10% convertible secured promissory notes in connection with the APA. For the
quarter ended June 30, 2015, there were no significant cash sources or uses from financing activities.
Off Balance Sheet Arrangements
The Company has no off
balance sheet financing arrangements. The Company has one facility lease obligation and written employment agreements with three
key employees as of June 30, 2016.
Recent Accounting Pronouncements
There has been no material
change to the recent accounting pronouncements under consideration since those described in our Annual Report on Form 10-K filed
on March 30, 2016.
Available Information
Our website address is
www.xeneticbio.com.
The information in, or that can be accessed through, our website is not part of this Quarterly Report
on Form 10-Q. 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 U.S. Securities and Exchange Commission (the “SEC”). The public may read and copy any
materials we file with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, D.C. 20549. Information
on the operations of the Public Reference Room can be obtained by calling 1-800-SEC-0330. The SEC maintains an internet site that
contains reports, proxy and information statements and other information regarding our filings at
www.sec.gov.
ITEM 3 – QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
We are not required to
provide the information required by this Item because we are a smaller reporting company.
ITEM 4 – 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) or 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 Quarterly Report on Form 10-Q.
Based on this evaluation
our management, including our Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered
by this Quarterly Report on Form 10-Q, our disclosure controls and procedures are designed at a reasonable assurance level and
are effective to provide reasonable assurance that information we are required to disclose in reports that we file or submit under
the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and
forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief
Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
Changes in Internal Control over Financial
Reporting
There have been no changes
in our internal control over financial reporting that occurred during the period covered by this Quarterly Report on Form 10-Q
that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II – OTHER INFORMATION
ITEM 1 – LEGAL PROCEEDINGS
We are not currently subject
to any material legal proceedings, nor, to our knowledge, is any material legal proceeding threatened against us. From time to
time, we may be a party to certain legal proceedings, incidental to the normal course of our business. While the outcome of these
legal proceedings cannot be predicted with certainty, we do not expect that these proceedings will have a material effect upon
our financial condition or results of operations.
ITEM 1A – RISK FACTORS
There were no material
changes to the risk factors described on SEC Form S-1 filed on May 9, 2016 (except to the extent additional factual information
disclosed elsewhere in this Quarterly Report on Form 10-Q relates to such risk factors (including, without limitation, the matters
discussed in Part 1, Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations)).
ITEM 2 – UNREGISTERED SALES OF
EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM 3 – DEFAULTS UPON SENIOR
SECURITIES
None.
ITEM 4 – MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5 – OTHER INFORMATION
None.
ITEM 6 – EXHIBITS
The attached list of exhibits
in the “Exhibit Index” immediately preceding the exhibits to this Quarterly Report on Form 10-Q is incorporated herein
by reference to this item.
SIGNATURES
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.
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XENETIC BIOSCIENCES, INC.
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August 15, 2016
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By:
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/S/ MICHAEL SCOTT MAGUIRE
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Michael Scott Maguire
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Chief Executive Officer and President
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