The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
The accompanying
notes are an integral part of these unaudited condensed consolidated financial statements.
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(unaudited)
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 cell platform technology engineered
to target patient-specific tumor 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 (the “Institute”) 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. On March 1, 2019, the Company
entered into agreements with Hesperix S.A. (“Hesperix”) and Opko Pharmaceuticals LLC (“OPKO”) to acquire
the XCART technology (the “Transaction”) and closed the Transaction on July 19, 2019 concurrent with the completion
of an approximate $15 million public offering (the “Offering”). For additional information regarding the Transaction,
see Note 4 – “Acquisitions.”
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 (“PSA”) 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.
As used in this Quarterly
Report on Form 10-Q (“Quarterly Report”), unless otherwise indicated, all references herein to “Xenetic,”
the “Company,” “we” or “us” refer to Xenetic Biosciences, Inc. and its wholly owned subsidiaries.
The Company, directly
or indirectly, through its wholly-owned subsidiaries, 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 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 Quarterly 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 March 7, 2019, the Company closed on a $3.1 million registered direct common stock offering
resulting in $2.7 million of net proceeds to the Company. On July 19, 2019, the Company completed the Offering resulting in $13.4
million of net proceeds to the Company. The Company believes that these financings, coupled with the Company’s existing resources,
will be adequate to fund the Company’s operations as a going concern. However, the Company anticipates it may need additional
capital in the long-term to pursue its business initiatives and continue as a going concern. The accompanying condensed consolidated
financial statements have been prepared on a going concern basis and 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.
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 U.S. generally accepted accounting principles 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 Annual Report on Form 10-K for the year ended December 31, 2018 filed with the SEC on March 29, 2019 and
amended on April 30, 2019.
These condensed consolidated
financial statements have been prepared on the assumption that the Company will be able to realize its assets and discharge its
liabilities in the normal course of business. As a result, the financial statements do not include any adjustments relating to
recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary
should the Company be unable to continue as a going concern.
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 for 12 basis; and (iv)
the number of shares of common stock into which each share of preferred stock could be converted 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 Reverse Stock Split.
Certain prior period
amounts have been reclassified to conform to the presentation for the current period.
Principles of
Consolidation
The condensed consolidated
financial statements of the Company include the accounts of Hesperix and Xenetic UK and Xenetic UK’s wholly owned subsidiaries:
Lipoxen, Xenetic Bioscience, Incorporated, and SymbioTec. All intercompany balances and transactions have been eliminated
in consolidation.
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 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 each period, except where such non-participating securities would be anti-dilutive.
For the three and nine
months ended September 30, 2019 and 2018, basic and diluted net loss per share are the same for each respective period 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.
Recently Adopted Accounting
Standards
In June 2018, the Financial
Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2018-07, Compensation
– Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting. ASU 2018-07 expanded the
scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees. An entity should
apply the requirements of Topic 718 to nonemployee awards except for specific guidance on inputs to an option pricing model and
the attribution of cost. ASU 2018-07 specifies that Topic 718 applies to all share-based payment transactions in which a grantor
acquires goods or services to be used or consumed in a grantor’s own operations by issuing share-based payment awards, and
that Topic 718 does not apply to share-based payments used to effectively provide (1) financing to the issuer or (2) awards granted
in conjunction with selling goods or services to customers as part of a contract accounted for under Topic 606 Revenue from
Contracts with Customers. ASU 2018-07 was effective for the Company in the first quarter of fiscal 2019. Adoption of this standard
did not have a material impact on the Company’s condensed consolidated financial statements.
In January 2017, the
FASB issued ASU 2017-04: Intangibles — Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment
that eliminated the requirement to calculate implied fair value of goodwill to measure a goodwill impairment charge. Instead, the
new guidance requires entities to take an impairment charge based on the excess of a reporting unit’s carrying amount over
its fair value. The guidance is effective for the Company no later than 2020. The Company adopted ASU 2017-04 in the first quarter
of fiscal 2019. Adoption of this standard did not have a material impact on the Company’s condensed consolidated financial
statements.
In February 2016, FASB
issued 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. This guidance is effective for annual reporting
periods beginning after December 15, 2018, including interim periods within those annual periods. Subsequently, in July 2018, the
FASB issued ASU 2018-11, Lease (Topic 842): Targeted Improvements, which provides a number of practical expedients in transition.
The Company adopted ASU 2016-02 effective January 1, 2019 and elected a package of practical expedients and the new transition
approach permitted by ASU 2018-11. ASU 2018-11 allows the Company not to reassess existing identification of lease, classification
of a lease or any initial direct costs. The Company has also elected to use the hindsight practical expedients. The adoption did
not have a material impact on the Company’s condensed consolidated financial statements, resulted in an approximate $43,000
increase in total assets and total liabilities in our condensed consolidated balance sheet and did not have any effect on accumulated
deficit at the beginning of 2019. See Note 11 for further information.
3.
|
Significant Strategic Collaborations – Related Parties
|
The Company has entered
into various research, development, license and supply agreements with Takeda Pharmaceuticals Co. Ltd. (“Takeda”),
Serum Institute of India (“Serum Institute”), Pharmsynthez and SynBio LLC (“SynBio”), a wholly owned subsidiary
of Pharmsynthez. The Company and its collaborative partners continue to engage in research and development activities with no resultant
commercial products through September 30, 2019. No amounts were recognized as revenue related to these agreements during the three
and nine months ended September 30, 2019 or 2018. The related party ownership interest in the Company materially changed in connection
with the Offering.
On March 1, 2019
(the “Signing Date”) the Company entered into agreements with Hesperix and 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.
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 the Institute and OPKO regarding certain patents
related to “Articles And Methods Directed To Personalized Therapy Of Cancer” and in which the Institute agreed to grant
an exclusive royalty-bearing license, to the patent rights owned by the Institute to OPKO, and OPKO has agreed to pay the Institute
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 the Institute 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 in-process research and development (“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 three and nine months ended September 30, 2019.
5.
|
Property and Equipment, net
|
Property and equipment,
net consists of the following:
|
|
September 30,
2019
|
|
|
December 31,
2018
|
|
Office and computer equipment
|
|
$
|
42,289
|
|
|
$
|
42,289
|
|
Leasehold improvements
|
|
|
–
|
|
|
|
26,841
|
|
Furniture and fixtures
|
|
|
14,738
|
|
|
|
20,263
|
|
Property and equipment – at cost
|
|
|
57,027
|
|
|
|
89,393
|
|
Less accumulated depreciation
|
|
|
(55,437
|
)
|
|
|
(84,437
|
)
|
Property and equipment – net
|
|
$
|
1,590
|
|
|
$
|
4,956
|
|
Depreciation expense
was approximately $1,000 for the three months ended September 30, 2019 and 2018, respectively, and approximately $3,000
and $13,000 for the nine months ended September 30, 2019 and 2018, respectively.
6.
|
Goodwill and Indefinite-Lived Intangible Assets
|
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 assesses goodwill for impairment at least annually, or when events
or changes in the business environment indicate that the carrying value may not be fully recoverable. The Company performs its
annual impairment review during the fourth quarter 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 experienced a significant decline in its stock price during the three months ended September 30, 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 is less than the carrying
amount in excess of Goodwill, therefore fully impairing Goodwill. Goodwill impairment is presented within continuing operations
in the condensed consolidated statements of operations. A reconciliation of the change in the carrying value of Goodwill is as
follows:
Balance as of January 1, 2018
|
|
$
|
3,283,379
|
|
No changes
|
|
|
–
|
|
Balance as of December 31, 2018
|
|
|
3,283,379
|
|
Impairment
|
|
|
(3,283,379
|
)
|
Balance as of September 30, 2019
|
|
$
|
–
|
|
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. The carrying value of the IPR&D was approximately $9.2 million as of September 30,
2019 and December 31, 2018, respectively. IPR&D is required to be tested annually until the project is completed or
abandoned. The IPR&D is not yet commercialized and, therefore, has not yet begun to be amortized as of September 30,
2019. The Company assesses IPR&D for impairment at least annually as of October 1 or when events or changes in
circumstances indicate that the carrying value may be impaired. No impairment was recorded during the nine months ended
September 30, 2019 nor during the year ended December 31, 2018.
7.
|
Fair Value Measurements
|
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. The carrying amounts of certain of the Company’s financial instruments approximates fair value due to their short maturities.
The Offering
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 of 1,730,000 shares (the “Shares”) of the
Company’s common stock, par value $0.001 (the “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 Pre-funded
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 will 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.
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.
On
the Closing Date, the Company completed the 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 Company intends to use the net proceeds from the Offering of approximately
$13.4 million to fund its research, development and clinical programs, including the development of the XCART technology acquired
in the Transaction, and for other general corporate purposes. Prefunded Warrants to purchase 450,000 shares of Common Stock were
exercised during the three and nine months ended September 30, 2019 resulting in $4,500 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 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 1.9 million shares of Common Stock were exercised on a cashless
one-for-one basis during the three and nine months ended September 30, 2019.
Common Stock
On
July 16, 2019, the Company, in connection with the 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 “Authorized Share Increase”). On June
24, 2019, 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 June 25, 2019. As a result of the Authorized Share Increase and after
giving effect to the Reverse Stock Split, the Company had 12,500,000 authorized shares of Common Stock.
As a result of the
Reverse Stock Split, the number of outstanding shares of our Common Stock held by non-affiliates was approximately 475,000. On
June 28, 2019, the Company received a notice from the Nasdaq Capital Market ("NASDAQ") that it no longer met the minimum
500,000 publicly held shares requirement for continued listing. On July 19, 2019, the Company received a notice from NASDAQ that
the Company had regained compliance with the publicly held shares requirement as a result of the Offering.
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, 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 will 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 this offering were approximately $2.7
million, after deducting expenses related to the 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 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. In June 2019,
the prefunded warrants were exercised in full resulting in $509 of net proceeds to the Company.
Series B Preferred
Stock
As of September 30,
2019 and December 31, 2018 there were approximately 1.8 million shares of Series B Preferred Stock issued and outstanding which
were convertible on a 1.625 preferred shares to one share of common stock basis. The number of shares of Common Stock that, when
aggregated with any shares of Common Stock that may be issued in connection with any conversion of Series B Preferred Stock and
the exercise of warrants issued in connection with the Series B Preferred Stock, is subject to an Issuable Maximum, subject to
adjustment, as set forth in the Second Amended and Restated Certificate of Designation of the Company’s Series B Preferred
Stock. As of September 30, 2019, the Issuable Maximum is 0.6 million shares of Common Stock that can be issued upon the conversion
of the currently outstanding Series B Preferred Stock and the exercise of warrants, issued in connection with the Series B Preferred
Stock, that are currently outstanding.
The March 2019 registered
direct offering 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 $3.9 million increasing the net loss attributable to common shareholders
for the nine months ended September 30, 2019. In addition, the Offering triggered the down-round provision in the Company’s
Series B Preferred Stock, resulting in a further adjustment to the conversion ratio and the recording of a deemed dividend of $1.4
million during the third quarter increasing the net loss attributable to common shareholders for the three and nine months ended
September 30, 2019. There were no Series B Preferred Stock conversions during the nine months ended September 30, 2019. During
the nine months ended September 30, 2018, the holders of Series B Preferred Stock converted approximately 316,000 shares into approximately
26,000 shares of common stock.
Warrants
On July 17, 2019, in
connection with the 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 represents 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. Prefunded Warrants to purchase 450,000 shares were exercised
during the three and nine months ended September 30, 2019 resulting in net proceeds to the Company of $4,500. Also in connection
with the 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 1.9 million shares of common stock were exercised on a cashless one-for-one
basis during the three and nine months ended September 30, 2019. As of September 30, 2019, there were approximately 120,000 Prefunded
Warrants and 0.6 million Purchase Warrants outstanding. Subsequent to quarter end, the remaining outstanding Prefunded Warrants
were exercised resulting in $1,200 of net proceeds to the Company.
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 three and nine months ended September 30, 2019. The
Consent Warrants were subsequently modified to reflect an exercise price of $2.91 price per share in connection with the Offering.
As a result of this modification, the Company recognized a $2,000 expense that was netted against the proceeds of the Offering.
In March 2019, in connection
with its registered direct 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
in June 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 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 September 30, 2019, all of these warrants were outstanding.
In addition to the
prefunded and purchase warrants issued in the March 2019 registered direct offering and the Offering, the Company has outstanding
warrants to purchase an aggregate of 262,690 shares of common stock in connection with debt and equity financing arrangements as
of September 30, 2019 at a weighted average exercise price of $51.97 and expiration dates ranging from July 2020 through November
2021. There were no debt and equity financing warrants granted or exercised during the nine months ended September 30, 2019. During
the nine months ended September 30, 2018, debt and equity financing warrants to purchase approximately 31,000 shares of common
stock were exercised resulting in approximately $1.5 million of net proceeds to the Company.
Total share-based expense
related to stock options, restricted stock units (“RSUs”), common stock awards, and non-financing warrants were approximately
$0.2 million and $0.3 million during the three months ended September 30, 2019 and 2018, respectively, and approximately $0.7 million
and $1.2 million for the nine months ended September 30, 2019 and 2018, respectively.
Share-based compensation
expense is classified in the condensed consolidated statements of operations as follows:
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
Research and development expenses
|
|
$
|
38,843
|
|
|
$
|
9,155
|
|
|
$
|
81,921
|
|
|
$
|
178,926
|
|
General and administrative expenses
|
|
|
208,594
|
|
|
|
314,323
|
|
|
|
648,610
|
|
|
|
996,355
|
|
|
|
$
|
247,437
|
|
|
$
|
323,478
|
|
|
$
|
730,531
|
|
|
$
|
1,175,281
|
|
Employee Stock Options
During the nine months
ended September 30, 2019, the Company granted 50,000 stock option awards. The weighted average grant date fair value per option
share was $1.18. Key assumptions used in the Black-Scholes option pricing model for options granted during the nine months ending
September 30, 2019 were the Company’s stock price, a risk free rate of 1.60%, an expected
life of 5.5 years and an expected volatility of 119.11%. There were no employee stock options exercised during the nine
months ended September 30, 2019. No employee stock options or RSUs were granted nor exercised during the nine months ended September
30, 2018. The Company recognized a total of $0.2 million and $0.3 million of compensation expense related to employee stock options
during the three months ended September 30, 2019 and 2018, respectively, and $0.7 million and $1.1 million during the nine months
ended September 30, 2019 and 2018, respectively.
Non-Employee Stock Options
The Company did not
grant any non-employee stock options during the nine months ended September 30, 2019. During the nine months ended September 30,
2018, the Company granted 834 non-employee stock options. There were no non-employee stock options exercised during the nine months
ended September 30, 2019 and 2018, respectively. The Company did not recognize any expense related to non-employee stock options
during the three and nine months ended September 30, 2019, respectively, as all options were fully vested in 2018. The Company
recognized approximately $1,000 and $36,000 of expense during the three and nine months ended September 30, 2018, respectively.
Common Stock Awards
During the three months
ended September 30, 2019 and 2018, the Company granted 7,153 and 375 common stock awards, respectively, and 9,026 and 1,627 common
stock awards during the nine months ended September 30, 2019 and 2018, respectively, based on the value of the professional services
provided and the average stock price during each respective quarter. As all services were rendered in each respective quarter,
approximately $15,000 and $17,000 of expense related to common stock awards was recognized during the three month periods ended
September 30, 2019 and 2018, respectively, and approximately $47,000 and $52,000 of expense during the nine months ended September
30, 2019 and 2018, respectively. Other than 7,836 shares of Common Stock issued in June 2019, which represented common stock awards
authorized but not issued as of March 31, 2019, all common stock awards were authorized but not issued as of September 30, 2019.
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 as payment for services. As of September 30, 2019 and December 31, 2018, collaboration
warrants to purchase 44,944 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 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. These warrants have an average weighted exercise
price of $124.90 and expiration dates ranging from December 2019 through May 2021. No collaboration warrants were granted or
exercised in connection with collaboration or consulting services during the three and nine months ended September 30, 2019
and 2018, respectively.
During the nine months
ended September 30, 2019 and 2018, 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 $26.2 million and $23.5 million as of September 30, 2019
and December 31, 2018, respectively.
As of September 30,
2019, and December 31, 2018, the net deferred tax liability of $2.9 million 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 Company’s 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 September 30,
2019 and December 31, 2018, the Company did not record any unrecognized tax positions.
Leases
The Company determines
whether an arrangement is a lease at inception. In January 2019, the Company entered into a sublease and relocated its corporate
headquarters from Lexington, Massachusetts to Framingham, Massachusetts. This sublease calls for total future minimum rent payments
of approximately $52,000 and has a termination date of September 30, 2020, which corresponds to the underlying base lease. 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 condensed consolidated balance sheet. The Company recognized
a ROU asset and a lease liability of approximately $43,000 during the nine months ended September 30, 2019. 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:
|
|
Nine Months
Ended
September 30,
|
|
|
|
2019
|
|
Operating cash flow information:
|
|
|
|
|
Cash paid for amounts included in the measurement of lease liabilities
|
|
$
|
16,629
|
|
Non-cash activity:
|
|
|
|
|
Right-of-use assets obtained in exchange for lease obligations
|
|
$
|
43,330
|
|
Supplemental balance
sheet information related to our operating leases is as follows:
|
|
Balance Sheet Classification
|
|
September 30, 2019
|
|
Right-of-use assets
|
|
Prepaid expenses and other
|
|
$
|
26,701
|
|
Current lease liabilities
|
|
Accrued expenses and other current liabilities
|
|
$
|
26,701
|
|
Non-current lease liabilities
|
|
Other liabilities
|
|
$
|
–
|
|
The Company did not
apply the provisions of ASU 2016-02 to the lease of its former headquarters in Lexington, Massachusetts or its office space lease
in Miami, Florida as they did not have a material impact on our condensed consolidated financial statements. The leases would have
resulted in a combined increase in total assets of approximately $3,000 and a combined increase in total liabilities of approximately
$3,000 in our September 30, 2019 condensed consolidated balance sheet, respectively, and would not have a material impact on our
accumulated deficit as of the beginning of 2019. The lease of the Company’s former headquarters expired on January 31, 2019
and the Miami office space lease expires in November 2019. As of September 30, 2019, total minimum lease payments on these leases
were approximately $3,000.
12.
|
Related Party Transactions
|
The Company has entered
into various research, development, license and supply agreements with Serum Institute and Pharmsynthez (as well as SynBio, a wholly
owned subsidiary of Pharmsynthez), each a related party whose relationship has not materially changed from that disclosed in the
Company’s Annual Report on Form 10-K for the years ended December 31, 2018 filed with the SEC on March 29, 2019 as amended
on April 30, 2019. In connection with the Offering, Serum Institute’s and Pharmsynthez’ ownership significantly changed.
As of September 30, 2019, Serum Institute owned less than 1% and Pharmsynthez owned approximately 7.9% of the total outstanding
common stock of the Company.
During the third quarter,
the Company entered into a sponsored research agreement with Pharmsynthez related to experiments identified by the Company to support
its efforts as it prepares 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. The Company expensed approximately
$40,000 related to this agreement during the three months ended September 30, 2019. As of September 30, 2019, approximately $310,000
was recorded as an advanced payment and included in Prepaid expenses and other on the September 30, 2019 condensed consolidated
balance sheet.
On July 19, 2019, the
Company acquired the XCART technology platform from Hesperix and OPKO. Dr. Genkin is a director and significant shareholder of
Hesperix. In addition, the Company agreed to repay 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.
Subsequent to quarter
end, the Company entered into a loan agreement with Pharmsynthez (the “Pharmsynthez Loan”), pursuant to which the Company
shall advance Pharmsynthez an aggregate principal amount of up to $500,000 to be used for the development of a specific product
under the August 2011 Stock Subscription and Collaborative Development of Pharmaceutical Products Agreement between the Company
and SynBio. The Pharmsynthez Loan has a term of 15-months and shall accrue interest at a rate of 10% per annum. The Pharmsynthez
Loan is guaranteed by SynBio and AS Kevelt, which are the operating entities of Pharmsynthez, and is secured by all of the equity
interests of the Company owned by Pharmsynthez and SynBio.
The Company performed
a review of events subsequent to the balance sheet date through the date the financial statements were issued and determined that
there were no such events requiring recognition or disclosure in the financial statements other than as discussed above.