Table of Contents

As filed with the Securities and Exchange Commission on May 13, 2019

Registration No. 333-230637

 

 

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

 

Amendment No. 1 to

FORM S-4

REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933

 

XENETIC BIOSCIENCES, INC.

(Exact name of registrant as specified in its charter)

 

Nevada 2834 45-2952962
(State or other jurisdiction of incorporation (Primary Standard Industrial Classification (I.R.S. Employer
or organization) Code Number) Identification Number)

  

40 Speen Street, Suite 102

Framingham, Massachusetts

(781) 778-7720

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

 

James F. Parslow

Chief Financial Officer
40 Speen Street, Suite 102

Framingham, Massachusetts

(781) 778-7720

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 

With a copy to:

 

Michael Francis, Esq.
Christina C. Russo, Esq.
Akerman LLP
350 East Las Olas Boulevard, Suite 1600
Fort Lauderdale, Florida 33301
(954) 463-2700

 

Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this registration statement and upon completion of the merger described in the accompanying joint proxy statement/prospectus.

 

If the securities being registered on this Form are being offered in connection with the formation of a holding company and there is compliance with General Instruction G, check the following box.

 

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.

 

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

  Large accelerated filer Accelerated filer
  Non-accelerated filer ☐ Smaller reporting company ☒
    Emerging growth company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for comply with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of Securities Act.

 

If applicable, place an X in the box to designate the appropriate rule provision relied upon in conducting this transaction:

Exchange Act Rule 13e-4(i) (Cross-Border Issuer Tender Offer)

Exchange Act Rule 14d-l(d) (Cross-Border Third-Party Tender Offer)

  

The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the registration statement shall become effective on such date as the Commission, acting pursuant to such Section 8(a), may determine.

 

 

   
 

 

Information contained herein is subject to completion or amendment. A registration statement relating to these securities has been filed with the Securities and Exchange Commission. These securities may not be sold nor may offers to buy be accepted prior to the time the registration statement becomes effective. This proxy statement/prospectus shall not constitute an offer to sell or the solicitation of an offer to buy nor shall there be any sale of these securities in any jurisdiction in which such offer, solicitation, or sale would be unlawful.

 

SUBJECT TO COMPLETION— DATED MAY 13, 2019

 

 

XENETIC BIOSCIENCES, INC.

40 Speen Street, Suite 102

Framingham, Massachusetts 01701

NOTICE OF SPECIAL MEETING OF STOCKHOLDERS

To Be Held On June 19, 2019

 

Dear Stockholder:

 

You are cordially invited to attend a Special Meeting of Stockholders (the “Special Meeting”) of XENETIC BIOSCIENCES, INC., a Nevada corporation (the “Company”). The Special Meeting will be held on Wednesday, June 19, 2019 at 10:00 a.m. local time at the offices of Akerman LLP, 350 East Las Olas Boulevard, Suite 1600, Fort Lauderdale, Florida 33301 for the following purposes:

 

1.          To approve the transaction pursuant to which the Company will acquire the XCART platform technology, as described in the proxy statement/prospectus accompanying this Notice (the “Transaction”). In connection with the Transaction, the Company entered into a Share Purchase Agreement, dated as of March 1, 2019 (the “Share Purchase Agreement”), with Hesperix SA, a Swiss corporation (“Hesperix”), the stockholders of Hesperix (each a “Seller” and collectively, the “Sellers”), and Alexey Andreevich Vinogradov, as the representative of each Seller (the “Sellers’ Representative”), providing for the acquisition by the Company of all the outstanding shares of capital stock of Hesperix (the “Hesperix Acquisition”). Upon completion of the Hesperix Acquisition, the Company will assume the rights and obligations under the Assignment Agreement by and among Hesperix, Shemyakin-Ovchinnikov Institute of Bioorganic Chemistry (“IBCH”), PJSC Pharmsynthez (“Pharmsynthez”), and other parties thereto (the “Assignors”), dated March 1, 2019 (the “Hesperix Assignment Agreement”). Completion of the Transaction is conditioned upon the consummation of the Assignment Agreement, dated March 1, 2019, by and between the Company and OPKO Pharmaceuticals, LLC (the “OPKO Assignment Agreement,” and together with the Share Purchase Agreement and the Hesperix Assignment Agreement, the “Transaction Documents”). We refer to this proposal as the “Transaction Proposal.”

 

2.          To approve the issuance of shares of the Company’s common stock, par value $0.001 (the “Common Stock”), to be issued in connection with the Hesperix Acquisition and in accordance with the OPKO Assignment Agreement as required by and in accordance with the applicable rules of The NASDAQ Stock Market LLC (“NASDAQ”). We refer to this proposal as the “Share Issuance Proposal.”

 

3.          To elect Dr. Alexey Vinogradov to the Company’s board of directors. We refer to this proposal as the “Director Proposal.”

 

4.          To approve an amendment to the Company’s Articles of Incorporation to increase the authorized shares of Common Stock. We refer to this proposal as the “Stock Increase Proposal.”

 

5.          To approve a proposal to adjourn the Special Meeting to a later date or dates, if necessary, to permit further solicitation and vote of proxies if, based upon the tabulated vote at the time of the Special Meeting, the Company is not authorized to consummate the transactions contemplated by the aforementioned proposals. We refer to this proposal as the “Adjournment Proposal.”

 

These items of business are more fully described in the proxy statement/prospectus accompanying this Notice.

 

Stockholders of record at the close of business on May 13, 2019 (the “Record Date”) are entitled to notice of, and to attend and to vote at, the Special Meeting and any postponement or adjournment thereof. This Notice of Special Meeting of Stockholders and the attached proxy statement/prospectus are first being mailed to the Company’s stockholders on or about May 17, 2019.

 

All stockholders are cordially invited to attend the Special Meeting in person. Stockholders of record as of the Record Date will be admitted to the Special Meeting and any postponement or adjournment thereof upon presentation of identification. Please note that if your shares are held in the name of a bank, broker, or other nominee, and you wish to vote in person at the Special Meeting, you must bring to the Special Meeting a statement or letter from your bank, broker or other nominee showing your ownership of shares as of the Record Date and a proxy from the record holder of the shares authorizing you to vote at the Special Meeting.

 

Whether or not you plan to attend the Special Meeting in person, you are encouraged to read the proxy statement/prospectus accompanying this Notice and then cast your vote as promptly as possible in accordance with the instructions contained in the proxy statement/prospectus. Even if you have given your proxy, you may still vote in person if you attend the Special Meeting and follow the instructions contained in the attached proxy statement/prospectus.

 

  By Order of the Board of Directors:
   
  James Parslow
  Secretary
  Framingham, Massachusetts
  May 17, 2019
   

  

Your vote is important, whether or not you expect to attend the Special Meeting, we urge you to vote by proxy to ensure your vote is counted. You are urged to vote either via the Internet or telephone, or to mark, sign and date and promptly return the proxy in the stamped return envelope provided with these materials. Voting promptly will help avoid the additional expense of further solicitation to assure a quorum at the meeting.

 

 

 

   
 

 

REFERENCES TO ADDITIONAL INFORMATION

 

This proxy statement/prospectus incorporates important business and financial information about Xenetic that is not included in or delivered with this document. You may obtain this information without charge through the SEC website (www.sec.gov) or upon your written or oral request by contacting the Secretary of Xenetic Biosciences, Inc., 40 Speen Street, Suite 102, Framingham MA 01701 or by calling (781) 778-7720. To ensure timely delivery of these documents, any request should be made no later than June 5, 2019 to receive them before the special meeting.

 

For additional details about where you can find information about Xenetic, please see the section titled “Where You Can Find More Information” in this proxy statement/prospectus.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   
 

 

 

TABLE OF CONTENTS

 

  Page
PROXY STATEMENT/PROSPECTUS SUMMARY 1
QUESTIONS AND ANSWERS ABOUT THE SPECIAL MEETING AND VOTING 3
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING INFORMATION 9
RISK FACTORS 11
PROPOSAL ONE: THE TRANSACTION PROPOSAL 41
PROPOSAL TWO: THE SHARE ISSUANCE PROPOSAL 80
PROPOSAL THREE: THE DIRECTOR PROPOSAL 81
PROPOSAL FOUR: THE STOCK INCREASE PROPOSAL 97
PROPOSAL FIVE: THE ADJOURNMENT PROPOSAL 100
XENETIC’S BUSINESS 101
XENETIC’S MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 121
NO DISSENTER’S RIGHTS 132
NO REGULATORY APPROVALS 132
MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES 132
COMPARISON OF XENETIC STOCKHOLDERS AND HESPERIX SHAREHOLDERS RIGHTS AND CORPORATE GOVERNANCE MATTERS 133
DESCRIPTION OF XENETIC CAPITAL STOCK 145
INTERESTS OF CERTAIN PERSONS IN MATTERS TO BE ACTED UPON 147
SOLICITATION OF PROXIES 147
LEGAL MATTERS 148
EXPERTS 148
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT 148
HOUSEHOLDING OF PROXY MATERIALS 151
WHERE YOU CAN FIND MORE INFORMATION 152
INDEX TO FINANCIAL STATEMENTS F-1
APPENDIX A - Share Purchase Agreement APPENDIX A-1
APPENDIX B - Hesperix Assignment Agreement APPENDIX B-1
APPENDIX C - OPKO Assignment Agreement APPENDIX C-1
APPENDIX D - IP License Agreement APPENDIX D-1
APPENDIX E - Opinion of Maxim Group LLC APPENDIX E-1
APPENDIX F - Common Stock Amendment APPENDIX F-1

 

 

 

   
 

 

XENETIC BIOSCIENCES, INC.

40 Speen Street, Suite 102

Framingham, Massachusetts 01701

 

The following information is furnished to each stockholder in connection with the foregoing Notice of Special Meeting of Stockholders of XENETIC BIOSCIENCES, INC., a Nevada corporation, to be held on Wednesday, June 19, 2019 at 10:00 a.m. local time at the offices of Akerman LLP, 350 East Las Olas Boulevard, Suite 1600, Fort Lauderdale, Florida 33301. The enclosed proxy is for use at the special meeting of stockholders and any postponement or adjournment thereof. This proxy statement/prospectus and form of proxy are being mailed to stockholders on or about May 17, 2019. Unless the content requires otherwise, references in this proxy statement/prospectus to “Xenetic,” the “Company,” “we,” “our,” and “us” refer to Xenetic Biosciences, Inc.

 

In accordance with the Amended and Restated Bylaws of the Company (the “Bylaws”), the Special Meeting has been called for the following purposes:

 

1.          To approve the transaction pursuant to which the Company will acquire the XCART platform technology, as described in this proxy statement/prospectus (the “Transaction”). In connection with the Transaction, the Company entered into a Share Purchase Agreement, dated as of March 1, 2019 (the “Share Purchase Agreement”), with Hesperix SA, a Swiss corporation (“Hesperix”), the stockholders of Hesperix (each a “Seller” and collectively, the “Sellers”), and Alexey Andreevich Vinogradov, as the representative of each Seller (the “Sellers’ Representative”), providing for the acquisition by the Company of all the outstanding shares of capital stock of Hesperix (the “Hesperix Acquisition”). Upon completion of the Hesperix Acquisition, the Company will assume the rights and obligations under the Assignment Agreement by and among Hesperix, Shemyakin-Ovchinnikov Institute of Bioorganic Chemistry (“IBCH”), PJSC Pharmsynthez (“Pharmsynthez”), and other parties thereto (the “Assignors”), dated March 1, 2019 (the “Hesperix Assignment Agreement”). Completion of the Transaction is conditioned upon the consummation of the Assignment Agreement, dated March 1, 2019, by and between the Company and OPKO Pharmaceuticals, LLC (the “OPKO Assignment Agreement,” and together with the Share Purchase Agreement and the Hesperix Assignment Agreement, the “Transaction Documents”). We refer to this proposal as the “Transaction Proposal.”

 

2.          To approve the issuance of shares of the Company’s common stock, par value $0.001 (the “Common Stock”), to be issued in connection with the Hesperix Acquisition and in accordance with the OPKO Assignment Agreement as required by and in accordance with the applicable rules of The NASDAQ Stock Market LLC (“NASDAQ”). We refer to this proposal as the “Share Issuance Proposal.”

 

3.          To elect Dr. Alexey Vinogradov to the Company’s board of directors. We refer to this proposal as the “Director Proposal.”

 

4.          To approve an amendment to the Company’s Articles of Incorporation to increase the authorized shares of Common Stock. We refer to this proposal as the “Stock Increase Proposal.”

 

5.           To approve a proposal to adjourn the Special Meeting to a later date or dates, if necessary, to permit further solicitation and vote of proxies if, based upon the tabulated vote at the time of the Special Meeting, Xenetic is not authorized to consummate the transactions contemplated by the aforementioned proposals. We refer to this proposal as the “Adjournment Proposal.”

 

Pursuant to the Bylaws, no business is proper for consideration, or may be acted upon, at the Special Meeting, except as set forth in the Notice of Special Meeting of Stockholders.

 

Shares represented by duly executed and unrevoked proxies will be voted at the Special Meeting and any postponement or adjournment thereof in accordance with the specifications made therein. If no such specification is made, shares represented by duly executed and unrevoked proxies will be voted “FOR” each of Proposals 1, 2, 3, 4, and 5.

 

 

 

   
 

 

PROXY STATEMENT/PROSPECTUS SUMMARY

 

This summary highlights selected information from this proxy statement/prospectus and may not contain all of the information that is important to you. To better understand the Transaction, the proposals being considered at the Special Meeting, you should read this entire proxy statement/prospectus carefully, including the Transaction Documents and the other documents to which you are referred to herein. For more information, please see the section titled “Where You Can Find More Information.”

 

Overview of the Transaction

 

On March 4, 2019, Xenetic announced its agreement to acquire the novel Chimeric Antigen Receptor T Cell (“CAR T”) platform technology, referred to herein as “XCART,” a proximity-based screening platform capable of identifying CAR constructs that can target patient-specific tumor neoantigens, with a demonstrated proof of mechanism in B-cell non-Hodgkin lymphomas. The XCART technology, developed by The Scripps Research Institute (the “Institute”) in collaboration with 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.

 

The XCART technology platform was designed by its originators to utilize an established screening technique to identify peptide ligands that bind specifically to the unique B-cell receptor (“BCR”) on the surface of an individual patient’s malignant tumor cells. The peptide is then inserted into the antigen-binding domain of a CAR T, and a subsequent transduction/transfection process is used to engineer the patient’s T cells into a CAR T format which redirects the patient’s T cells to attack the tumor. Essentially, the XCART screening platform is the inverse of a typical CAR T screening protocol wherein libraries of highly specific antibody domains are screened against a given target. In the case of XCART screening, the target is itself an antibody domain, and hence highly specific by its nature. The XCART technology creates the possibility of personalized treatment of lymphomas utilizing a CAR with an antigen-binding domain that should only recognize, and only be recognized by, the unique BCR of a particular patient’s B-cell lymphoma. An expected result for XCART is limited off-tumor toxicities, such as B-cell aplasia. Xenetic’s clinical development program will seek to confirm the early preclinical results, and to demonstrate a more attractive safety profile than existing therapies.

 

The Parties

 

Xenetic Biosciences, Inc.

 

Xenetic Biosciences, Inc., a Nevada corporation, is a clinical-stage biopharmaceutical company focused on the discovery, research and development of next -generation biologic drugs and novel orphan oncology therapeutics. Our principal executive offices are located at 40 Speen Street, Suite 102, Framingham MA 01701. Our telephone number is (781) 778-7720.

 

Hesperix SA

 

Hesperix SA, a Swiss corporation, is a biotechnology company created as a holding company with assets recently assigned specifically for the Transaction. Hesperix does not have executive offices but its mailing address is Agus Corporate Services SA, Via Luganetto 4, PO Box 433, CH-6962 Lugano-Viganello.

 

The Transaction Documents

 

A summary description of the Transaction Documents and the transactions contemplated thereby is set forth below. Subject to the satisfaction of the closing conditions, the Transaction is expected to close in the first half of 2019.

 

 

 

 

 1 
 

 

Share Purchase Agreement

 

On March 1, 2019 (the “Signing Date”), the Company entered into the Share Purchase Agreement with Hesperix, the Sellers and the Sellers’ Representative, pursuant to which the Company will purchase from Sellers all of the issued and outstanding shares of capital stock of Hesperix.

 

Under the terms of the Share Purchase Agreement, the Company will issue to Sellers an aggregate of Four Million Eight Hundred Seventy-Five Thousand (4,875,000) shares of Common Stock (the “Hesperix Transaction Shares”), regardless of the trading price per share of the Common Stock at the time of the closing.

 

The closing of the Hesperix Acquisition is subject to customary closing conditions as well as conditions regarding (i) the Company having adequate financing to fund future working capital obligations of the Company following the closing and, (ii) the Company obtaining necessary and appropriate stockholder approvals, evidencing among other matters, approval of the Transaction and the issuance of the Transaction Shares (as defined below). Subject to the satisfaction of the closing conditions, the Transaction is expected to close in the first half of 2019.

 

Hesperix Assignment Agreement

 

On the Signing Date and in connection with the Transaction, Hesperix entered into the Hesperix Assignment Agreement with 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 absence of the Hesperix Assignment Agreement, the manufacture, use, offer for sale, sale, or importation of such product would infringe a valid claim of an issued patent or a valid claim of a pending application, if such were issued. Upon completion of the Hesperix Acquisition, the Company will assume the rights and obligations under the Hesperix Assignment Agreement.

 

OPKO Assignment Agreement and License Agreement

 

On the Signing Date, the Company entered into the OPKO Assignment Agreement with OPKO, 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 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 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 will issue to OPKO One Million Nine Hundred Sixty-Eight Thousand Seven Hundred Fifty (1,968,750) shares of Common Stock (the “OPKO Transaction Shares”) and to the Institute Six Hundred Fifty-Six Thousand Two Hundred Fifty (656,250) shares of Common Stock (the “Institute Transaction Shares,” and along with the Hesperix Transaction Shares and the OPKO Transaction Shares, the “Transaction Shares”) regardless of the trading price per share of the Company’s Common Stock at the time of the closing.

 

Considerations with Respect to U.S. Federal Income Tax Consequences

 

Tax matters are very complicated, and the tax consequences of the Transaction to a particular stockholder will depend on such stockholder’s circumstances. Accordingly, you should consult your tax advisor for a full understanding of the tax consequences of the Transaction to you, including the applicability and effect of federal, state, local and foreign income and other tax laws. For more information, please see the section titled “Material U.S. Federal Income Tax Consequences.”

 

Regulatory Approvals

 

In the United States, Xenetic must comply with applicable federal and state securities laws and the rules and regulations of NASDAQ in connection with the issuance of shares of Xenetic Common Stock pursuant to the Share Purchase Agreement and the filing of this proxy statement/prospectus with the SEC.

 

 

 

 

 2 
 

 

Dissenters’ Rights

 

Holders of shares of Xenetic Common Stock are not entitled to dissenter’s rights in connection with the Transaction.

 

Anticipated Accounting Treatment

 

The Transaction is expected to be treated as an asset acquisition by the Company. To determine the accounting for this transaction under United States (U.S.) generally accepted accounting principles (GAAP), a company must assess whether an integrated set of assets and activities should be accounted for as an acquisition of a business or an asset acquisition. Substantially all of the fair value is included in in-process research and development and no substantive processes are being acquired. As such, the Transaction is expected to be treated as an asset acquisition. Asset acquisitions are to be accounted for by allocating costs, including transaction costs, of the acquisition to the acquired assets based on their relative fair value basis.

 

Comparison of Stockholder Rights

 

The rights of holders of shares in Hesperix are governed by Hesperix’s articles of incorporation and Swiss corporate law. The rights of Xenetic stockholders are governed by Xenetic’s articles of incorporation, Xenetic’s amended and restated bylaws and Nevada law. Accordingly, the rights associated with shares in Hesperix are different from the rights associated with Xenetic Common Stock. After the Hesperix Acquisition, Hesperix shareholders who have tendered their shares in Hesperix will become Xenetic stockholders and will have rights different from those they have now as Hesperix shareholders. See the section titled “Comparison of Xenetic Biosciences Stockholders and Hesperix Shareholders Rights and Corporate Governance Matters” for a discussion of certain aspects of Nevada corporate law and Swiss law, and the different rights associated with Xenetic Common Stock and shares in Hesperix.

 

Interests of Certain Persons in Matters to be Acted Upon

 

In considering whether to approve the proposals at the Special Meeting, the Company’s stockholders should recognize that certain of the Company’s directors and stockholders have interests in the Transaction that may differ from, or that are in addition to, their interests as stockholders generally (the “Interested Parties”). These interests may cause some of the Interested Parties to view the Transaction differently than you may view them as a disinterested stockholder of the Company, and may influence or may have influenced the Interested Parties in determining to support or approve the Transaction. See the section titled “Interests of Certain Persons in Matters to be Acted Upon.”

 

As of the Record Date, approximately [●] of our issued and outstanding shares of our Common Stock representing [●]% of the total voting power of stockholders entitled to vote on the Transaction, were held by certain of the Interested Parties. Each of these Interested Parties entered into individual Voting Agreements with the Company pursuant to which each such Interested Party has agreed to vote all of its shares of Common Stock “FOR” the Transaction Proposal, the Share Issuance Proposal, and the Director Proposal. Accordingly, approval of the Transaction Proposal, the Share Issuance Proposal, and the Director Proposal is expected, regardless of whether or not disinterested stockholders vote in favor of such proposals.

 

QUESTIONS AND ANSWERS ABOUT THE SPECIAL MEETING AND VOTING

 

Why am I receiving these materials?

 

The Company sent you this proxy statement/prospectus and enclosed proxy card because the Board of Directors is soliciting your proxy to vote at the Special Meeting. The Company intends to mail this proxy statement/prospectus and accompanying proxy card on or about May 17, 2019 to all stockholders of record entitled to vote at the Special Meeting. This document serves as:

 

● a proxy statement of the Company used to solicit proxies for the Special Meeting; and

 

● a prospectus of the Company used to offer the Hesperix Transaction Shares to Sellers.

 

 

 

 

 3 
 

 

What is the purpose of the Special Meeting?

 

At the Special Meeting, the stockholders of the Company will act upon the matters outlined in the Notice of Special Meeting of Stockholders and discussed in this proxy statement/prospectus.

 

Where is the Special Meeting being held?

 

We will hold the Special Meeting at the offices of Akerman LLP, 350 East Las Olas Boulevard, Suite 1600, Fort Lauderdale, Florida 33301 at 10:00 a.m. local time, unless postponed or adjourned to a later date in accordance with the Adjournment Proposal or otherwise.

 

Who may vote at the Special Meeting?

 

Only stockholders of record at the close of business on May 13, 2019, which is the Record Date for the Special Meeting, may vote on the proposals. Each stockholder is entitled to cast one vote on each proposal presented at the Special Meeting for each share of Common Stock such holder owned as of the Record Date.

 

Stockholder of Record: Shares Registered in Your Name

 

If on the Record Date your shares were registered directly in your name with the Company’s transfer agent, Empire Stock Transfer, then you are a stockholder of record. As a stockholder of record, you may vote in person at the meeting or vote by proxy. Whether or not you plan to attend the meeting, we urge you to fill out and return the enclosed proxy card or vote by proxy over the telephone or on the internet as instructed below to ensure your vote is counted.

 

Beneficial Owner: Shares Registered in the Name of a Broker or Bank

 

If on the Record Date your shares were held not in your name but in an account at a brokerage firm, bank, dealer, or other similar organization, then you are the beneficial owner of shares held in “street name” and these proxy materials are being forwarded to you by that organization. The organization holding your account is considered to be the stockholder of record for purposes of voting at the Special Meeting. As a beneficial owner, you have the right to direct your broker or other agent regarding how to vote the shares in your account. You are also invited to attend the Special Meeting. However, since you are not the stockholder of record, you may not vote your shares in person at the meeting, unless you request and obtain a valid proxy from your broker or other agent.

 

What are my voting rights?

 

Holders of Common Stock are entitled to one vote per share on each proposal presented at the Special Meeting. As of May 13, 2019, a total of [●] shares of Common Stock were issued and outstanding. There is no cumulative voting.

 

How do I vote?

 

The procedures for voting are simple:

 

Stockholder of Record: Shares Registered in Your Name

 

If you are a stockholder of record, you may vote in person at the Special Meeting, vote by proxy using the enclosed proxy card, vote by proxy over the telephone, or vote by proxy through the internet. Whether or not you plan to attend the meeting, we urge you to vote by proxy to ensure your vote is counted. You may still attend the meeting and vote in person even if you have already voted by proxy.

 

·To vote in person, come to the Special Meeting and we will give you a ballot when you arrive.

 

·To vote using the proxy card, simply complete, sign and date the enclosed proxy card and return it promptly in the envelope provided. If you return your signed proxy card to us before the Special Meeting, we will vote your shares as you direct.

 

 

 

 

 4 
 

 

·To vote over the telephone, dial [●] using a touch-tone phone and follow the recorded instructions. You will be asked to provide the company number and control number from the enclosed proxy card. Your telephone vote must be received by 11:59 p.m. Eastern Time on June 18, 2019 to be counted.

 

·To vote through the internet, go to https://stocktrack.simplyvoting.com to complete an electronic proxy card. You will be asked to provide the company number and control number from the enclosed proxy card. Your internet vote must be received by 11:59 p.m. Eastern Time on June 18, 2019 to be counted.

 

Beneficial Owner: Shares Registered in the Name of Broker or Bank

 

If you are a beneficial owner of shares registered in the name of your broker, bank, or other agent, you should have received a voting instruction form with these proxy materials from that organization rather than from us. Simply complete and mail the voting instruction form to ensure that your vote is counted. Alternatively, you may vote by telephone or over the internet as instructed by your broker or bank. To vote in person at the Special Meeting, you must obtain a valid proxy from your broker, bank or other agent. Follow the instructions from your broker or bank included with these proxy materials, or contact your broker or bank to request a proxy form.

 

What happens if I do not vote?

 

Stockholder of Record: Shares Registered in Your Name

 

If you are a stockholder of record and do not vote by completing your proxy card, by telephone, through the internet, or in person at the Special Meeting, your shares will not be voted.

 

Beneficial Owner: Shares Registered in the Name of Broker or Bank

 

If you are a beneficial owner and do not instruct your broker, bank, or other agent how to vote your shares, the question of whether your broker or nominee will still be able to vote your shares depends on whether the particular proposal is deemed by applicable laws to be a “routine” matter. Brokers and nominees can use their discretion to vote “uninstructed” shares with respect to matters that are considered to be “routine,” but not with respect to “non-routine” matters. Under applicable rules, “non-routine” matters are matters that may substantially affect the rights or privileges of stockholders, such as mergers, stockholder proposals, elections of directors (even if not contested), executive compensation (including any advisory stockholder votes on executive compensation and on the frequency of stockholder votes on executive compensation), and certain corporate governance proposals, even if management-supported. All of the Proposals described in this proxy statement/prospectus are considered non-routine, except the Stock Increase Proposal. Accordingly, your broker or nominee may vote your shares only on the Stock Increase Proposal without your instructions.

 

Can I change my vote after submitting my proxy?

 

Stockholder of Record: Shares Registered in Your Name

 

Yes.

 

·You may submit another properly completed proxy card with a later date.

 

·You may grant a subsequent proxy by telephone or through the internet.

 

·You may send a timely written notice that you are revoking your proxy to our Corporate Secretary at 40 Speen Street, Suite 102, Framingham, Massachusetts 01701.

 

·You can revoke your proxy by attending the Special Meeting and voting in person. Simply attending the meeting will not, by itself, revoke your proxy.

 

 

 

 

 5 
 

 

Your most current proxy card or telephone or internet proxy received by the time of the Special Meeting is the one that is counted.

 

Beneficial Owner: Shares Registered in the Name of Broker or Bank

 

If your shares are held by your broker or bank as a nominee or agent, you should follow the instructions provided by your broker or bank.

 

How are votes counted?

 

Votes will be counted by the inspector of election appointed for the meeting who will separately count (1) with respect to the Director Proposal, votes “FOR,” “WITHHOLD,” and broker non-votes and, (2) with respect to the other proposals, votes “FOR,” “AGAINST,” abstentions, and broker non-votes.

 

What is the vote required to approve each proposal?

 

The vote required and method of calculation for the proposals to be considered at the Special Meeting are as follows:

 

Proposal One - The Transaction Proposal. Approval of this proposal requires the affirmative vote of a majority of the votes cast affirmatively or negatively at the Special Meeting. For purposes of determining whether this proposal has passed, abstentions and broker non-votes will have no effect on the proposal.

 

Proposal Two - The Share Issuance Proposal. Approval of this proposal requires the affirmative vote of a majority of the votes cast affirmatively or negatively at the Special Meeting. For purposes of determining whether this proposal has passed, abstentions and broker non-votes will have no effect on the proposal.

 

Proposal Three - The Director Proposal. Approval of this proposal requires a plurality of votes cast at the Special Meeting. For purposes of determining whether this proposal has passed, broker non-votes will have no effect on the proposal.

 

Proposal Four - The Stock Increase Proposal. Approval of this proposal requires the affirmative vote of stockholders that represent a majority of the voting power entitled to vote on the Common Stock Amendment. For purposes of determining whether this proposal has passed, broker non-votes and abstentions will have the effect of a vote “AGAINST” on the proposal.

 

Proposal Five - The Adjournment Proposal. Approval of this proposal requires the affirmative vote of a majority of the votes cast affirmatively or negatively at the Special Meeting. For purposes of determining whether this proposal has passed, abstentions and broker non-votes will have no effect on the proposal.

 

How does the Xenetic board of directors recommend that Xenetic stockholders vote?

 

After careful consideration, the Board of Directors unanimously recommends that Xenetic stockholders vote:

 

·“FOR” Proposal One - the Transaction Proposal;
·“FOR” Proposal Two – the Share Issuance Proposal;
·“FOR” Proposal Three – the Director Proposal;
· “FOR” Proposal Four – the Stock Increase Proposal; and
 · “FOR” Proposal Five – the Adjournment Proposal.

 

What is the quorum requirement?

 

A quorum of stockholders is necessary to hold a valid meeting. A quorum will be present if stockholders holding at least fifty percent (50%) of the outstanding shares entitled to vote are present at the Special Meeting in person or represented by proxy. On the Record Date, there were [●] shares outstanding and entitled to vote. Thus, the holders of [●] shares must be present in person or represented by proxy at the meeting to have a quorum.

 

 

 

 

 6 
 

 

Your shares will be counted towards the quorum if you submit a valid proxy (or one is submitted on your behalf by your broker, bank, or other nominee) or if you vote in person at the meeting. Abstentions and broker non-votes will be counted towards the quorum requirement. If there is no quorum, the chairman of the meeting may adjourn the meeting to another date.

 

Are there any federal or state regulatory requirements that must be complied with or federal or state regulatory approvals or clearances that must be obtained in connection with the Transaction?

 

We must comply with applicable federal and state securities laws and NASDAQ rules and regulations in connection with the issuance of the Transaction Shares, including the filing with the SEC of this proxy statement/prospectus and the required stockholder approvals under NASDAQ rules.

 

How can I find out the results of the voting at the Special Meeting?

 

Preliminary voting results will be announced at the Special Meeting. In addition, final voting results will be published in a Current Report on Form 8-K that we expect to file within three business days after the Special Meeting.

 

What are the material U.S. federal income tax consequences of the Transaction to U.S. Sellers?

 

We have not obtained a tax opinion from legal counsel or tax experts on the Transaction. The Transaction for federal income tax purposes is not intended to qualify as a reorganization within the meaning of Section 368(a) of the Internal Revenue Code of 1986, as amended, and the regulations promulgated thereunder. Based on the provisions of the Internal Revenue Code of 1986, as amended, existing United States Treasury regulations promulgated thereunder and administrative and judicial interpretations thereof, all as in effect as of the date hereof and all of which are subject to change (possibly with retroactive effect), the Transaction will not give rise to the recognition of gain or losses to us or our stockholders for U.S. federal income tax purposes. The foregoing summary is for general information only and does not discuss any state, local, foreign or other tax consequences.

 

The U.S. federal income tax consequences described above may not apply to all Sellers. Your tax consequences will depend on your individual situation. Accordingly, we strongly urge you to consult your tax advisor for a full understanding of the particular tax consequences of the Transaction to you.

 

Who is paying for this proxy solicitation?

 

The Company will bear the cost of soliciting proxies, including the printing, mailing and filing of this proxy statement/prospectus, the proxy card and any additional information furnished to our stockholders. You will need to obtain your own internet access if you choose to access the proxy materials and/or vote over the internet. We may use the services of our directors, officers and other employees to solicit proxies from our stockholders without additional compensation. Arrangements will also be made with banks, brokers, nominees, custodians and fiduciaries who are record holders of the Common Stock for the forwarding of solicitation materials to the beneficial owners of our Common Stock. We will reimburse these banks, brokers, nominees, custodians and fiduciaries for the reasonable out-of-pocket expenses they incur in connection with the forwarding of solicitation materials. The Company has retained Okapi Partners, LLC (“Okapi”), an independent proxy solicitation firm, to assist in soliciting proxies on its behalf. The Company has agreed to pay Okapi Partners a fee of $6,500, plus costs and expenses, for these services. If stockholders need assistance with casting or changing their vote, they should contact our proxy solicitor, Okapi, toll free at (877) 259-6290.

 

 

 

 

 7 
 

 

Voting by Proxy Over the Internet or by Telephone

 

Stockholders whose shares are registered in their own names may vote by proxy by mail, over the Internet or by telephone. Instructions for voting by proxy over the Internet or by telephone are set forth on the notice of proxy materials. The Internet and telephone voting facilities will close at 11:59 p.m. Eastern Time on June 18, 2019. The notice will also provide instructions on how you can elect to receive future proxy materials electronically or in printed form by mail. If you choose to receive future proxy materials electronically, you will receive an email with instructions containing a link to future proxy materials and a link to the proxy voting site. Your election to receive proxy materials electronically or in printed form by mail will remain in effect until you terminate such election.

 

If your shares are held in street name, the voting instruction form sent to you by your broker, bank or other nominee should indicate whether the institution has a process for beneficial holders to provide voting instructions over the Internet or by telephone. A number of banks and brokerage firms participate in a program that also permits stockholders whose shares are held in street name to direct their vote over the Internet or by telephone. If your bank or brokerage firm gives you this opportunity, the voting instructions from the bank or brokerage firm that accompany this proxy statement/prospectus will tell you how to use the Internet or telephone to direct the vote of shares held in your account. If your voting instruction form does not include Internet or telephone information, please complete and return the voting instruction form in the self-addressed, postage-paid envelope provided by your broker. Stockholders who vote by proxy over the Internet or by telephone need not return a proxy card or voting instruction form by mail, but may incur costs, such as usage charges, from telephone companies or Internet service providers.

 

 

 

 

 

 

 

 

 

 

 8 
 

 

CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING INFORMATION

 

This proxy statement/prospectus contains various “forward-looking statements.” Forward-looking statements relate to expectations, beliefs, projections, future plans and strategies, anticipated events or trends and similar expressions concerning matters that are not historical facts. 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. All forward-looking statements may be impacted by a number of risks and uncertainties. These forward-looking statements include, but are not limited to, statements concerning our plans to develop our proposed drug candidate; our expectations regarding the nature, timing and extent of clinical trials and proposed clinical trials including the timing of generating clinical data from these trials; our expectations regarding the timing for proposed submissions of regulatory filings, including but not limited to any Investigational New Drug (“IND”) filing or any New Drug Application (“NDA”); the nature, timing and extent of collaboration arrangements; the expected results pursuant to collaboration arrangements including the receipts of future payments that may arise pursuant to collaboration arrangements; the outcome of our plans to obtain regulatory approval of our drug candidates; the outcome of our plans for the commercialization of our drug candidates; our plans to address certain markets, engage third party manufacturers and evaluate additional drug candidates for subsequent commercial development and the likelihood and extent of competition to our drug candidates; the development of the CAR T technology; and the risk that the Transaction may not be completed on the terms or in the timeframe expected by the Company or at all.

 

The forward-looking statements in this proxy statement/prospectus are based on our beliefs, assumptions and expectations of our future performance, taking into account all information currently available to us. These beliefs, assumptions and expectations are subject to risks and uncertainties and can change as a result of many possible events or factors, not all of which are known to us. If a change occurs, our business, financial condition, liquidity and results of operations may vary materially from those expressed in our forward-looking statements. You should carefully consider these risks before you make an investment decision with respect to our securities, along with the following factors that could cause actual results to vary from our forward-looking statements:

 

·our need to raise additional working capital in the very near term for the purpose of developing products and technologies and to continue as a going concern;
·our ability to finance our business;
·our ability to successfully execute, manage and integrate key acquisitions and mergers, including the acquisition of the CAR T technology;
·product development and commercialization risks, including our ability to successfully develop the CAR T technology;
·our ability to successfully commercialize our current and future drug candidates;
·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;
·continued availability of supplies or materials used in manufacturing at the current prices;
·the ability of management to execute plans and motivate personnel in the execution of those plans;
·our ability to attract and retain key personnel;
·adverse publicity related to our products or the Company itself;

 

 

 

 

 

 

 

 9 
 

 

·adverse claims relating to our intellectual property;
·the adoption of new, or changes in, accounting principles;
·the costs inherent with complying with statutes and regulations applicable to public reporting companies, such as the Sarbanes-Oxley Act of 2002;
·other new lines of business that the Company may enter in the future; and
·other factors set forth in the Risk Factors section of this proxy statement/prospectus and in subsequent filings we make with the Securities and Exchange Commission.

 

We cannot guarantee future results, levels of activity, performance or achievements. You should not place undue reliance on forward-looking statements, which apply only as of the date of this proxy statement/prospectus. We do not intend and disclaim any duty or obligation to update or revise any industry information or forward-looking statements set forth in this proxy statement/prospectus to reflect new information, future events or otherwise, except as required under the United States federal securities laws.

 

 

 

 

 

 

 

 

 

 

 

 

 

 10 
 

 

RISK FACTORS

 

An investment in our Common Stock involves a high degree of risk. Before deciding whether to invest in our Common Stock, you should consider carefully the risks described below. If any of these risks actually occur, our business, financial condition, results of operations or cash flows could be seriously harmed. This could cause the trading price of our Common Stock to decline, resulting in a loss of all or part of your investment.

 

Risks Related to the Transaction

 

We cannot assure you that the proposed Transaction will be completed on a timely basis or at all or that the Company will recognize the anticipated benefits of the Transaction.

 

On March 1, 2019, we entered into an agreement to acquire the novel CAR T platform technology, referred to herein as “XCART,” a proximity-based screening platform capable of identifying CAR constructs that can target patient-specific tumor neoantigens, with a demonstrated proof of mechanism in B-cell Non-Hodgkin lymphomas. The XCART technology, developed by the Institute in collaboration with the 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.

 

There are a number of risks and uncertainties relating to the Transaction. For example, the Transaction may not be completed, or may not be completed in the time frame, on the terms or in the manner currently anticipated and the Company may not recognize the anticipated benefits of the Transaction, as a result of a number of factors, including the following:

 

·that one or more closing conditions to the Transaction, including certain regulatory approvals, may not be satisfied or waived, on a timely basis or otherwise, that the required approval by the stockholders of the Company may not be obtained, and the Company may not have adequate financing to fund its future working capital obligations following the closing;
·unexpected costs, charges or expenses resulting from the Transaction;
·uncertainty of the expected financial performance of the Company following completion of the Transaction;
·the ability of the Company to implement its business strategy; and
·the occurrence of any event that could give rise to termination of the Transaction.

 

Our business will substantially depend on the success of XCART.

 

Our business will substantially depend on the successful consummation of the acquisition of the XCART platform technology and its clinical development, regulatory approval and commercialization. It will require substantial clinical development and regulatory approval efforts before we are permitted to commence its commercialization, if ever. The clinical trials and manufacturing and marketing of XCART and any other product candidates will be subject to extensive and rigorous review and regulation by numerous government authorities in the United States, the European Union and other jurisdictions where we intend to test and, if approved, market our product candidates. Before obtaining regulatory approvals for the commercial sale of any product candidate, we must demonstrate through preclinical testing and clinical trials that the product candidate is safe and effective for use in each target indication, and potentially in specific patient populations. This process can take many years and may include post-marketing studies and surveillance, which would require the expenditure of substantial resources beyond the proceeds we have currently raised. Of the large number of drugs in development for approval in the United States and the European Union, only a small percentage successfully complete the FDA or European Medicines Agency, or EMA, regulatory approval processes, as applicable, and are commercialized. Accordingly, even if we are able to obtain the requisite financing to continue to fund our research, development and clinical programs, we cannot assure you that XCART or any of our other product candidates will be successfully developed or commercialized.

 

 

 

 

 11 
 

 

Some of the Company’s directors and principal stockholders have interests in the Transaction that may differ from, or are in addition to, those of the Company’s other stockholders.

 

In considering whether to approve the proposals at the Special Meeting, the Company’s stockholders should recognize that certain of the Company’s directors and stockholders have interests in the Transaction that may differ from, or that are in addition to, their interests as stockholders generally. These interests include, among others, (i) Dr. Genkin, a director of the Company, serves as the Executive Chairman of Pharmsynthez, the Company’s largest and controlling stockholder with ownership of approximately [●]% of the Company’s issued and outstanding Common Stock as of the Record Date, (ii) Mr. Knyazev, a director of the Company, is also a director of Pharmsynthez, (iii) Dr. Curtis Lockshin, an executive officer of the Company, is an officer of a wholly-owned subsidiary of Pharmsynthez, and (iv) Adam Logal, a director of the Company, is the Senior Vice President and Chief Financial Officer of OPKO Health, which owns approximately [●]% of the Company’s issued and outstanding Common Stock and approximately [●]% of the issued and outstanding stock of Pharmsynthez. These interests may cause some of the Interested Parties to view the Transaction differently than you may view them as a disinterested stockholder of the Company, and may influence or may have influenced the Interested Parties in determining to support or approve the Transaction.

 

The market price of the Company’s Common Stock may decline as a result of the Transaction.

 

The market price of the Company’s Common Stock may decline as a result of the Transaction for a number of reasons including:

 

·the Company may not achieve the perceived benefits of the Transaction as rapidly or to the extent anticipated;
·the effect of the Transaction on the Company’s business and prospects is not consistent with the expectations of financial or industry analysts; or
·investors react negatively to the effect Company’s business and prospects resulting from the Transaction.

 

The number of shares of Common Stock that the Sellers, OPKO, and the Institute will receive in the Transaction will not change based on the market price of our Common Stock so the consideration that the Sellers, OPKO, and the Institute will receive at the closing of the Transaction may have a greater or lesser value than the value at the time the Transaction Documents were entered into.

 

The Transaction Documents set the number of Transaction Shares of our Common Stock to be issued in the Transaction. Any changes in the market price of our Common Stock before the completion of the Transaction will not affect the number of Transaction Shares issuable pursuant to the Transaction. Therefore, if before the completion of the Transaction the market price of our Common Stock declines from the market price on the date of the Transaction Documents, then paid by the Company in the Transaction may have a consideration with substantially lower value at closing. Conversely, if before the completion of the Transaction the market price of our Common Stock increases from the market price on the date of the Transaction Documents, then paid by the Company in the Transaction may have a consideration with substantially greater value at closing.

 

Risks Related to Our Common Stock

 

An active, liquid and orderly market for our Common Stock may not develop.

 

Our Common Stock trades on NASDAQ Capital Markets. An active trading market for our Common Stock may never develop or be sustained. If an active market for our Common Stock does not continue to develop or is not sustained, it may be difficult for investors in our Common Stock to sell shares without depressing the market price for the shares or to sell the shares at all. An inactive market may also impair our ability to raise capital by selling Common Stock and may impair our ability to acquire other businesses, applications or technologies using our Common Stock as consideration, which, in turn, could materially adversely affect our business. 

 

 

 

 

 12 
 

 

The market price of our stock may be highly volatile, and you may not be able to sell shares of our stock.

 

Companies trading in the stock market in general have experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of these companies. Broad market and industry factors may negatively affect the market price of our stock, regardless of our actual operating performance.

 

The market price of our stock may be volatile. Our stock price could be subject to wide fluctuations in response to a variety of factors, including the following:

 

·adverse results or delays in pre-clinical or clinical studies;
·inability to obtain additional funding;
·any delay in filing an IND or BLA for any of our drug candidates and any adverse development or perceived adverse development with respect to the FDA’s review of that IND or BLA;
·failure to develop successfully our drug candidates;
·failure to maintain our existing strategic collaborations or enter into new collaborations;
·failure by us or our licensors and strategic collaboration partners to prosecute, maintain or enforce our intellectual property rights;
·changes in laws or regulations applicable to future products;
·inability to obtain adequate product supply for our drug candidates or the inability to do so at acceptable prices;
·adverse regulatory decisions;
·introduction of new products, services or technologies by our competitors;
·failure to meet or exceed financial projections we may provide to the public;
·failure to meet or exceed the financial projections of the investment community;
·the perception of the pharmaceutical industry by the public, legislatures, regulators and the investment community;
·announcements of significant acquisitions, strategic partnerships, joint ventures or capital commitments by us, our strategic collaboration partner or our competitors;
·disputes or other developments relating to proprietary rights, including patents, litigation matters and our ability to obtain patent protection for our technologies;
·additions or departures of key scientific or management personnel;
·significant lawsuits, including patent or stockholder litigation;
·changes in the market valuations of similar companies;
·sales of our Common Stock by us or our stockholders in the future; and
·trading volume of our Common Stock.

 

 

Our executive officers, directors and affiliates own a significant percentage of our stock and will be able to exert significant control over matters subject to stockholder approval.

 

As of the Record Date, our executive officers, directors and affiliates beneficially own approximately [·]% of our outstanding Common Stock. Therefore, these stockholders will have the ability to influence us through their ownership positions. Further, our majority stockholder, Pharmsynthez, has beneficial ownership of approximately [●] million shares of Common Stock. These shares represent ownership of approximately [·]% of our Common Stock as of the Record Date. These stockholders may be able to determine all matters requiring stockholder approval. For example, these stockholders, acting together, may be able to control elections of directors, amendments of our organizational documents, or approval of any merger, sale of assets, or other major corporate transaction. This may prevent or discourage unsolicited transaction proposals or offers for our Common Stock that you may believe are in your best interest as one of our stockholders.

 

We have entered into several agreements with our major stockholders.

 

We have entered into several agreements with our major stockholders. Some of the agreement parties may be considered affiliates of ours, which may result in conflicts of interest. In addition, these arrangements may not have been negotiated at arm’s length and may contain terms and conditions that are not in our best interest and would not otherwise be applicable if we entered into arrangements with a third-party not affiliated with us.

 

 

 

 

 13 
 

 

Our preferred stock has rights, preferences and privileges that are not held by, and are preferential to, the rights of our common stockholders, which could result in the interests of the holders of our preferred stock differing from those of our common stockholders.

 

The holders of our preferred stock have the right to receive a liquidation preference entitling them to be paid out of our assets available for distribution to stockholders before any payment may be made to holders of any Common Stock or any series of preferred stock ranked junior to such class of preferred stock. The existence of a liquidation preference may reduce the value of our Common Stock, make it harder for us to sell shares of Common Stock in offerings in the future, or prevent or delay a change of control. Additionally, each share of Series A preferred stock is convertible into one share of Common Stock and each share of Series B preferred stock is convertible into two shares of Common Stock, subject to certain adjustments, which may cause substantial dilution to our common stockholders. The preferential rights could result in divergent interests between the holders of shares of preferred stock and holders of our Common Stock. In addition, our majority shareholder, Pharmsynthez holds shares consisting of the majority of our Series B Preferred Stock and all of our Series A Preferred Stock. The interests of these preferred holders may differ from the interests of our security holders as a whole.

 

The issuance of future shares of Common Stock may result in dilution to our stockholders.

 

As of the Record Date, we had [] shares of Common Stock excluding:

 

·[970,000] shares of Common Stock underlying outstanding Series A Preferred Stock, which are convertible into Common Stock on a one-for-one basis;
 ·[1,804,394] shares of Common Stock underlying outstanding Series B Preferred Stock, which are convertible into Common Stock on a two-for-one basis;
 ·[509,000] shares of Common Stock issuable upon the exercise of outstanding pre-funded warrants;
 ·[5,240,427] shares of Common Stock issuable upon the exercise of outstanding warrants;
 ·[1,833,011] shares of Common Stock issuable upon the exercise of outstanding options;
 ·[50,000] shares of Common Stock underlying outstanding restricted stock units;
 · [97,036] shares of Common Stock issuable in connection with the Common Stock awards; and
 ·7,500,000 shares of Common Stock to be issued in connection with the Transaction, including 4,875,000 shares of Common Stock to be issued to the Hesperix Sellers and 2,625,000 shares of Common Stock to be issued in connection with the OPKO Assignment Agreement.

 

The issuance of these shares of Common Stock and the sale of these shares of Common Stock, or even the potential of such issuance and sale, may have a depressive effect on the market price of our Common Stock and the issuance of such Common Stock will cause dilution to our stockholders.

 

We could be subject to securities class action litigation.

 

In the past, securities class action litigation has often been brought against a company following a decline in the market price of its securities. This risk is especially relevant for us because pharmaceutical companies have experienced significant stock price volatility in recent years. If we face such litigation, it could result in substantial costs and a diversion of management’s attention and resources, which could harm our business

 

We do not intend to pay dividends on our Common Stock or preferred stock so any returns will be limited to the value of our stock.

 

We have never declared or paid any cash dividends on our Common Stock or preferred stock. We currently anticipate that we will retain future earnings for the development, operation and expansion of our business and do not anticipate declaring or paying any cash dividends for the foreseeable future. Any return to common or preferred stockholders will therefore be limited to the appreciation of their stock.

 

 

 

 14 
 

 

Risks Related to Our Financial Condition and Capital Requirements

 

We have never been profitable and may never achieve or sustain profitability.

 

We are a clinical stage biopharmaceutical company with a limited operating history. Pharmaceutical product and technology development is a highly speculative undertaking and involves a substantial degree of risk. To date, we have focused primarily on developing our drug candidates, XBIO-101 and PolyXen, our biological platform technology, and researching additional drug candidates. We have no products approved for commercial sale and have generated only limited revenue to date. Due to capital constraints in 2018 we focused solely on the development of XBIO-101. We continue to incur significant research and development and other expenses related to our ongoing operations. As a result, we have never been profitable and we may not achieve profitability in the foreseeable future, if at all. Our ability to generate profits in the future will depend on a number of factors, including: 

 

  · Funding the costs relating to the research and development, regulatory approval, commercialization and sale and marketing of our drug candidates and technologies;
  · Market acceptance of our drug candidates and technologies;
  · Costs of acquiring and developing new drug candidates and technologies;
  · Ability to bring our drug candidates to market;
  · General and administrative costs relating to our operations;
  · Increases in our research and development costs;
  · Charges related to purchases of technology or other assets;
  · Establishing, maintaining and protecting our intellectual property rights;
  · Attracting, hiring and retaining qualified personnel; and
  · Our ability to raise additional capital.

 

As of March 31, 2019, we had an accumulated deficit of approximately $154.6 million. Substantial doubt exists about our ability to continue as a going concern as a result of anticipated capital needs. We expect to incur additional significant operating losses as we expand our research and development activities and our commercialization, marketing and sales efforts. We may also encounter unforeseen expenses, difficulties, complications, delays and other unknown factors that may adversely affect our business. In addition, because of the numerous risks and uncertainties associated with pharmaceutical product development, including that our current drug candidates may not achieve the clinical endpoints of applicable trials, we are unable to predict the timing or amount of increased expenses, and if or when we will achieve or maintain profitability. If we are unable to generate sufficient revenue from our operations to pay expenses or we are unable to obtain additional financing on commercially reasonable terms, our business, financial condition and results of operations may be materially and adversely affected.

 

Our independent registered public accounting firm and the Company have expressed substantial doubt about our ability to continue as a going concern.

 

We have concluded there is substantial doubt about our ability to continue as a going concern. As described in their audit report, our auditors have included an explanatory paragraph that states that we have incurred recurring losses and negative cash flows from operations since inception and have an accumulated deficit at March 31, 2019 of $154.6 million. These matters raise substantial doubt about our ability to continue as a going concern. Our consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. If we cannot continue as a viable entity, our stockholders may lose some or all of their investment in us.

 

We will require substantial additional funding to achieve our goals. Failure to obtain this necessary capital when needed on acceptable terms, or at all, may force us to delay, limit or terminate our product development efforts, other operations or commercialization efforts.

 

Developing drug candidates is an expensive, risky and lengthy process, and we expect our expenses to increase in connection with our ongoing activities, particularly as we continue the research and development of, continue and initiate clinical trials of, and seek marketing approval for, our drug candidates.

 

 

 

 15 
 

 

As of March 31, 2019, we had cash and restricted cash of $2.1 million. We expect that we will require additional capital to complete clinical trials, obtain regulatory approval for, and to commercialize, our drug candidates, including our other preclinical drug candidates and our future drug candidates. However, our operating plan may change as a result of many factors currently unknown to us, and we may need to seek additional funds sooner than planned, through public or private equity or debt financings, third-party funding, marketing and distribution arrangements, as well as other collaborations, strategic alliances and licensing arrangements, or a combination of these approaches. In any event, we will require additional capital to pursue preclinical and clinical activities, pursue regulatory approval for, and to commercialize, our longer term pipeline drug candidates. Even if we believe we have sufficient funds for our current or future operating plans, we may seek additional capital if market conditions are favorable or if we have specific strategic considerations.

 

Any additional fundraising efforts may divert our management from their day-to-day activities, which may adversely affect our ability to develop and commercialize our drug candidates. In addition, we cannot guarantee that future financing will be available in sufficient amounts or on terms acceptable to us, if at all. Moreover, the terms of any financing may negatively impact the holdings or the rights of our stockholders, and the issuance of additional securities, whether equity or debt, by us or the possibility of such issuance may cause the market price of our shares to decline. The incurrence of indebtedness could result in increased fixed payment obligations and we may be required to agree to certain restrictive covenants, such as limitations on our ability to incur additional debt, limitations on our ability to acquire, sell or license intellectual property rights and other operating restrictions that could adversely impact our ability to conduct our business.

 

If we are unable to obtain funding on a timely basis, we may be required to significantly curtail, delay or discontinue our clinical development program or the commercialization of any drug candidates. We may also be unable to expand our operations or otherwise capitalize on our business opportunities, as desired, which could harm our business, financial condition and results of operations.

 

Raising additional capital may cause dilution to our stockholders, restrict our operations or require us to relinquish rights to our technologies or drug candidates.

 

Until such time, if ever, as we can generate substantial product revenues, we expect to finance our cash needs through a combination of equity and debt financings, as well as selectively continuing to enter into collaborations, strategic alliances and licensing arrangements. We do not currently have any committed external source of funds. To the extent that we raise additional capital through the sale of equity or convertible debt securities, equity interests will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect the rights of our stockholders. Debt financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends, and may be secured by all or a portion of our assets.

 

If we raise funds by selectively continuing to enter into collaborations, strategic alliances or licensing arrangements with third-parties, we may have to relinquish additional valuable rights to our technologies, future revenue streams, research programs or drug candidates or grant licenses on terms that may not be favorable to us. If we are unable to raise additional funds through equity or debt financings when needed, we may be required to delay, limit, reduce or terminate our product development or future commercialization efforts or grant rights to develop and market drug candidates that we would otherwise prefer to develop and market ourselves. If we are unable to raise additional funds through collaborations, strategic alliances or licensing arrangements, we may be required to terminate product development or future commercialization efforts or to cease operations altogether.

 

Risks Related to the Discovery and Development of our Pharmaceutical Products

 

We are an early stage company in the business of developing pharmaceutical products including drug candidates and technologies. Given the uncertainty of such development, our business operations may never fully materialize and create value for investors.

 

 

 

 

 16 
 

 

We currently do not have any products that have gained marketing approval. We have invested substantially all of our efforts and financial resources developing ErepoXen, OncoHist and, most recently, XBIO-101. Our revenues to date consist primarily of collaboration revenue from a single partner and not from product sales or royalties. Our ability to generate product revenues, which may not occur for several years, if ever, will depend on the successful development and eventual commercialization of our drug candidates. We currently generate no revenues from sales of any drugs, and we may never be able to develop or commercialize a marketable drug. Each of our drug candidates will require development, management of development and manufacturing activities, marketing approval in multiple jurisdictions, obtaining manufacturing supply, building of a commercial organization, substantial investment and significant marketing efforts before we generate any revenues from drug sales. We have not yet demonstrated an ability to successfully overcome many of the risks and uncertainties frequently encountered by companies in new and rapidly evolving fields, particularly in the pharmaceutical area. For example, to execute our business plan, we will need to successfully:

 

  · Execute development activities for our drug candidates, including successful enrollment in and completion of clinical trials;
  · Obtain required marketing approvals for the development and commercialization of our drug candidates;
  · Obtain and maintain patent and trade secret protection or regulatory exclusivity for our drug candidates;
  · Protect, leverage and expand our intellectual property portfolio;
  · Establish and maintain clinical and commercial manufacturing capabilities or make arrangements with third-party manufacturers for clinical and commercial manufacturing;
  · Build and maintain robust sales, distribution and marketing capabilities, either on our own or in collaboration with strategic partners, if our drug candidates are approved;
  · Gain acceptance for our drug candidates, if approved, by patients, the medical community and third party payors;
  · Effectively compete with other therapies;
  · Obtain and maintain healthcare coverages and adequate reimbursement;
  · Maintain a continued acceptable safety profile for our drug candidates following approval;
  · Develop and maintain any strategic relationships we elect to enter into, if any;
  · Enforce and defend intellectual property rights and claims; and
  · Manage our spending as costs and expenses increase due to preclinical development, clinical trials, marketing approvals and commercialization.

 

We may find it difficult to enroll patients in our clinical studies, which could delay or prevent clinical studies of our pharmaceutical products.

 

Identifying and qualifying patients to participate in clinical studies of our pharmaceutical products is critical to our success. The timing of our clinical studies depends on the speed at which we can recruit patients to participate in testing our pharmaceutical products. We may experience delays. If patients are unwilling to participate in our clinical studies because of negative publicity from adverse events in the biopharmaceutical industries or for other reasons, including competitive clinical studies for similar patient populations, the timeline for recruiting patients, conducting studies and obtaining regulatory approval of potential products may be delayed. These delays could result in increased costs, delays in advancing our product development, delays in testing the effectiveness of our technology or termination of the clinical studies altogether.

 

We may not be able to identify, recruit and enroll a sufficient number of patients, or those with required or desired characteristics to achieve diversity in a study, to complete our clinical studies in a timely manner. Patient enrollment is affected by factors including:

 

  · Severity of the disease under investigation;
  · Real or perceived availability of alternative treatments;
  · Size and nature of the patient population;
  · Eligibility criteria for and design of the trial in question;
  · Perceived risks and benefits of the drug candidate under study;
  · Proximity and availability of clinical sites for prospective patients;
  · Ongoing clinical trials of potentially competitive agents;
  · Physicians’ and patients’ perceptions as to the potential advantages of our drug candidates being studied in relation to available therapies or other products under development;
  · Our CRO’s and our trial sites’ efforts to facilitate timely enrollment in clinical trials;
  · Patient referral practices of physicians; and
  · The need to monitor patients and collect patient data adequately during and after treatment.

 

 

 

 

 17 
 

 

We may not be able to initiate or continue clinical studies if we cannot enroll a sufficient number of eligible patients to participate in the clinical studies required by the FDA or other regulatory agencies. Our ability to successfully initiate, enroll and complete a clinical study in any foreign country is subject to numerous risks unique to conducting business in foreign countries, including:

 

  · Difficulty in establishing or managing relationships with CROs and physicians;
  · Different standards for the conduct of clinical studies;
  · Our inability to locate qualified local consultants, physicians and partners; and
  · The potential burden of complying with a variety of foreign laws, medical standards and regulatory requirements, including the regulation of pharmaceutical and biotechnology products and treatment.

 

If we have difficulty enrolling a sufficient number of patients to conduct our clinical studies as planned, we may need to delay, limit or terminate ongoing or planned clinical studies, any of which would have an adverse effect on our business.

 

We may encounter substantial delays in commencement, enrollment or completion of our clinical trials or we may fail to demonstrate safety and efficacy to the satisfaction of applicable regulatory authorities, which could prevent us from commercializing our current and future drug candidates on a timely basis, if at all.

 

Before obtaining marketing approval from regulatory authorities for the sale of our current and future drug candidates, we must conduct extensive clinical trials to demonstrate the safety and efficacy of the drug candidates. We cannot guarantee that any clinical studies will be conducted as planned or completed on schedule, if at all. A failure of one or more clinical studies can occur at any stage of testing. Events that may prevent successful or timely completion of clinical development include:

 

  · Delays in reaching a consensus with regulatory agencies on study design;
  · Delays in reaching agreement on acceptable terms with prospective CROs and clinical study sites;
  · Delays in obtaining required Institutional Review Board, or Independent Ethics Committee approval at each clinical study site;
  · Delays in recruiting suitable patients to participate in our clinical studies;
  · Imposition of a clinical hold by regulatory agencies, including after an inspection of our clinical study operations or study sites;
  · Failure by our CROs, other third-parties or us to adhere to clinical study requirements;
  · Failure to perform in accordance with the FDA’s GCP, or applicable regulatory requirements in other countries;
  · Delays in the testing, validation, manufacturing and delivery of our drug candidates to the clinical sites;
  · Delays in having patients complete participation in a study or return for post-treatment follow-up;
  · Clinical study sites or patients dropping out of a study;
  · Occurrence of serious adverse events associated with the drug candidate that are viewed to outweigh its potential benefits; or
  · Changes in regulatory requirements and guidance that require amending or submitting new clinical protocols.

 

 

 

 

 18 
 

 

Any inability to successfully complete preclinical studies and clinical trials could result in additional costs to us or impair our ability to generate revenues from product sales, regulatory and commercialization milestones and royalties. In addition, if we make manufacturing or formulation changes to our drug candidates, we may need to conduct additional studies to bridge our modified drug candidates to earlier versions. Clinical trial delays also could shorten any periods during which we may have the exclusive right to commercialize our drug candidates or allow our competitors to bring products to market before we do, which could impair our ability to successfully commercialize our drug candidates and may harm our business, financial condition, results of operations and prospects.

 

If the results of our clinical studies are inconclusive or if there are safety concerns or adverse events associated with our pharmaceutical products, we may:

 

  · Be delayed in obtaining marketing approval or licenses for our drug candidates, if at all;
  · Obtain approval for indications or patient populations that are not as broad as intended or desired;
  · Obtain approval with labeling that includes significant use or distribution restrictions or safety warnings;
  · Be subject to changes with the way the product is administered;
  · Be required to perform additional clinical studies to support approval or be subject to additional post-marketing testing requirements;
  · Have regulatory authorities withdraw their approval of the product or impose restrictions on its distribution in the form of a modified risk evaluation and mitigation strategy;
  · Be subject to the addition of labeling statements, such as warnings or contraindications;
  · Be sued; or
  · Experience damage to our reputation.

 

As described above, any of these events could prevent us from achieving or maintaining market acceptance of our pharmaceutical products and impair our ability to generate revenues.

 

Clinical trials may fail to demonstrate the safety and efficacy of our pharmaceutical drug candidates and could prevent or significantly delay regulatory approval.

 

Before receiving NDA or BLA approval to commercialize a drug candidate, we must demonstrate to the FDA, with substantial evidence from well-controlled clinical trials, that the drug candidate is both safe and effective or the biologic is safe, pure and potent. If these trials or future clinical trials are unsuccessful, our business and reputation could be harmed and our stock price could be adversely affected.

 

Clinical failure can occur at any stage of clinical development. Clinical trials may produce negative or inconclusive results, and we or any of our current and future collaborators may decide, or regulators may require us, to conduct additional clinical or preclinical testing. We will be required to demonstrate with substantial evidence through well-controlled clinical trials that our drug candidates are as safe and effective for use in a specific patient population as the respective reference products before we can seek regulatory approvals for their commercial sale. Success in early clinical trials does not mean that future larger registration clinical trials will be successful because drug candidates in later-stage clinical trials may fail to demonstrate equivalent safety and efficacy to the satisfaction of the FDA and foreign regulatory agencies despite having progressed through initial clinical trials. Drug candidates that have shown promising results in early clinical trials may still fail in subsequent confirmatory clinical trials. Similarly, the outcome of preclinical testing and early clinical trials may not be predictive of the success of later clinical trials, and interim results of a clinical trial do not necessarily predict final results. A number of companies in the pharmaceutical industry, including those with greater resources and experience than us, have suffered significant setbacks in advanced clinical trials, even after obtaining promising results in earlier clinical trials.

 

In addition, the design of a clinical trial can determine whether its results will support approval of a product and flaws in the design of a clinical trial may not become apparent until the clinical trial is well advanced. We may be unable to design and execute a clinical trial to support regulatory approval. In some instances, there can be significant variability in safety or efficacy results between different trials of the same drug candidate due to numerous factors, including but not limited to changes in trial protocols, differences in size and type of the patient populations, adherence to the dosing regimen and the rate of dropout among clinical trial participants.

 

 

 

 

 19 
 

 

Because of these risks, our research and development efforts, and those of our collaborative partners, may not result in any commercially viable products. If a significant portion of these development efforts is not successfully completed, or if required regulatory approvals are not obtained by us or our partners, or any approved products are not commercially successful, we may not generate significant revenues or become profitable.

 

Even if we complete the necessary preclinical and clinical studies, we cannot predict when or if we will obtain regulatory approval to commercialize a drug candidate or the approval may be for a more narrow indication than we expect.

 

A drug candidate cannot be commercialized until the appropriate regulatory authorities have reviewed and approved the drug candidate. Even if our drug candidates demonstrate safety and efficacy in clinical studies, the regulatory agencies may not complete their review processes in a timely manner, or we may not be able to obtain regulatory approval. Additional delays may result if an FDA Advisory Committee or other regulatory advisory group or authority recommends non-approval or restrictions on approval. In addition, we may experience delays or rejections based upon additional government regulation from future legislation or administrative action, or changes in regulatory agency policy during the period of product development, clinical studies and the review process. Regulatory agencies also may approve a drug candidate for fewer or more limited indications than requested or may grant approval subject to the performance of post-marketing studies. In addition, regulatory agencies may not approve the labeling claims that are necessary or desirable for the successful commercialization of our drug candidates. Failure to obtain, or a delay in obtaining, regulatory approval to commercialize a drug candidate will impair our ability to generate revenues and harm our business prospects.

 

Even if we obtain regulatory approval for a drug candidate, our drug candidate will remain subject to regulatory scrutiny.

 

If our drug candidates are approved, they will be subject to ongoing regulatory requirements for manufacturing, labeling, packaging, storage, advertising, promotion, sampling, record-keeping, conduct of post-marketing studies and submission of safety, efficacy and other post-market information, including both federal and state requirements in the United States and requirements of comparable foreign regulatory authorities.

 

Manufacturers and manufacturing facilities are required to comply with extensive FDA, and comparable foreign regulatory authority, requirements, including ensuring that quality control and manufacturing procedures conform to cGMP regulations. As such, we will be subject to continual review and inspections to assess compliance with cGMP and adherence to commitments made in any, BLA or marketing authorization application, or MAA. Accordingly, we and our collaborators and suppliers must continue to expend time, money and effort in all areas of regulatory compliance, including manufacturing, production and quality control.

 

Any regulatory approvals that we or our collaboration partners receive for our drug candidates may be subject to limitations on the approved indicated uses for which the product may be marketed or to the conditions of approval or may contain requirements for potentially costly additional clinical trials and surveillance to monitor the safety and efficacy of the drug candidate. We will be required to report certain adverse reactions and production problems, if any, to the FDA and comparable foreign regulatory authorities. Any new legislation addressing drug safety issues could result in delays in product development or commercialization or increased costs to assure compliance. We will have to comply with requirements concerning advertising and promotion for our products. Promotional communications with respect to prescription drugs are subject to a variety of legal and regulatory restrictions and must be consistent with the information in the product’s approved label. As such, we are not allowed to promote our products for indications or uses for which they do not have approval. If our drug candidates are approved, we must submit new or supplemental applications and obtain approval for certain changes to the approved products, product labeling or manufacturing process. We could also be asked to conduct post-marketing clinical trials to verify the safety and efficacy of our products in general or in specific patient subsets. An unsuccessful post-marketing study or failure to complete such a study could result in the withdrawal of marketing approval.

 

 

 

 

 20 
 

 

If a regulatory agency discovers previously unknown problems with an approved product, such as adverse events of unanticipated severity or frequency or problems with our manufacturing facilities or disagrees with the promotion, marketing or labeling of a product, such regulatory agency may impose restrictions on that product or us, including requiring withdrawal of the product from the market. If we fail to comply with applicable regulatory requirements, a regulatory agency or enforcement authority may, among other things:

 

  · Issue untitled and warning letters;
  · Impose civil or criminal penalties;
  · Suspend or withdraw regulatory approval or revoke a license;
  · Suspend any of our ongoing clinical trials;
  · Refuse to approve pending applications or supplements to approved applications submitted by us;
  · Impose restrictions on our operations, including closing our manufacturing facilities; or
  · Seize or detain products or require a product recall.

 

Any government investigation of alleged violations of law could require us to expend significant time and resources in response and could generate negative publicity. Any failure to comply with ongoing regulatory requirements may significantly and adversely affect our ability to commercialize and generate revenue from our products. If regulatory sanctions are applied or if regulatory approval is withdrawn, the value of our company and our operating results will be negatively impacted.

 

The commercial success of any current or future pharmaceutical products will depend upon the degree of market acceptance by physicians, patients, third-party payors and others in the medical community.

 

Even with the requisite approvals, the commercial success of our pharmaceutical products will depend in part on the medical community, patients, and third-party payors accepting our pharmaceutical products as medically useful, cost-effective, and safe. Any pharmaceutical product that we or our partners bring to the market may not gain market acceptance by physicians, patients, third-party payors and others in the medical community. The degree of market acceptance of these pharmaceutical products, if approved for commercial sale, will depend on a number of factors, including:

 

  · The effectiveness of our approved drug candidates as compared to currently available products;
  · Patient willingness to adopt our approved drug candidates in place of current therapies;
  · Our ability to provide acceptable evidence of safety and efficacy;
  · Relative convenience and ease of administration;
  · The prevalence and severity of any adverse side effects;
  · Restrictions on use in combination with other products;
  · Availability of alternative treatments;
  · Pricing and cost-effectiveness assuming either competitive or potential premium pricing requirements, based on the profile of our drug candidates and target markets;
  · Effectiveness of our or our partners’ sales and marketing strategy;
  · Our ability to obtain sufficient third-party coverage or reimbursement; and
  · Potential product liability claims.

 

Even if a potential product displays a favorable efficacy and safety profile in preclinical and clinical studies, market acceptance of the product will not be known until after it is launched. Our efforts to educate the medical community and third-party payors on the benefits of the pharmaceutical products may require a significant amount of resources and may never be successful. If these products do not achieve an adequate level of acceptance, we may not generate significant product revenue and may not become profitable.

 

 

 

 

 21 
 

 

The commercial potential of a pharmaceutical candidate in development is difficult to predict. If the market size for a new drug candidate or technology is significantly smaller than we anticipate, it could significantly and negatively impact our revenue, results of operations and financial condition.

 

It is very difficult to estimate the commercial potential of pharmaceutical products due to important factors such as safety and efficacy compared to other available technologies or treatments, including changing standards of care, third-party payor reimbursement standards, patient and physician preferences, the availability of competitive alternatives that may emerge either during the long drug development process or after commercial introduction, and the availability of generic versions of our successful drug candidates following approval by government health authorities based on the expiration of regulatory exclusivity or our inability to prevent generic versions from coming to market by asserting our patents. If due to these factors, or others, the market potential for a pharmaceutical product is lower than we anticipated, it could significantly and negatively impact the commercial terms of any collaboration partnership potential for such pharmaceutical product or, if we have already entered into a collaboration for such pharmaceutical product, the revenue potential from royalty and milestone payments could be significantly diminished which would negatively impact our business, financial condition and results of operations.

 

Failure to obtain or maintain adequate coverage and reimbursement for our drug candidates, if approved, could limit our ability to market those products and decrease our ability to generate revenue.

 

The success of our drug candidates, if approved, depends on the availability of adequate coverage and reimbursement from third-party payors. In addition, because our drug candidates represent new approaches to the treatment of certain diseases, we cannot be sure that coverage and reimbursement will be available for, or accurately estimate the potential revenue from, our drug candidates or assure that coverage and reimbursement will be available for any product that we may develop.

 

Patients who are provided medical treatment for their conditions generally rely on third-party payors to reimburse all or part of the costs associated with their treatment. Adequate coverage and reimbursement from governmental healthcare programs, such as Medicare and Medicaid, and commercial payors are critical to new product acceptance.

 

Government authorities and third-party payors, such as private health insurers and health maintenance organizations, decide which drugs and treatments they will cover and the amount of reimbursement. Coverage and reimbursement by a third-party payor may depend upon a number of factors, including the third-party payor’s determination that use of a product is:

 

  · A covered benefit under its health plan;
  · Safe, effective and medically necessary;
  · Appropriate for the specific patient;
  · Cost-effective; and
  · Neither experimental nor investigational.

 

In the United States, no uniform policy of coverage and reimbursement for products exists among third-party payors. As a result, obtaining coverage and reimbursement approval of a product from a government or other third-party payor is a time-consuming and costly process that could require us to provide to each payor supporting scientific, clinical and cost-effectiveness data for the use of our products on a payor-by-payor basis, with no assurance that coverage and adequate reimbursement will be obtained. Even if we obtain coverage for a given product, the resulting reimbursement payment rates might not be adequate for us to achieve or sustain profitability or may require co-payments that patients find unacceptably high. Additionally, third-party payors may not cover, or provide adequate reimbursement for, long-term follow-up evaluations required following the use of our gene-modifying products. Patients are unlikely to use our drug candidates unless coverage is provided and reimbursement is adequate to cover a significant portion of the cost of our drug candidates. There is significant uncertainty related to insurance coverage and reimbursement of newly approved products. It is difficult to predict at this time what third-party payors will decide with respect to the coverage and reimbursement for our drug candidates.

 

Moreover, increasing efforts by governmental and third-party payors in the United States and abroad to cap or reduce healthcare costs may cause such organizations to limit both coverage and the level of reimbursement for newly approved products and, as a result, they may not cover or provide adequate payment for our drug candidates. We expect to experience pricing pressures in connection with the sale of any of our drug candidates due to the trend toward managed healthcare, the increasing influence of health maintenance organizations, cost containment initiatives and additional legislative changes.

 

 

 

 

 22 
 

 

We intend to seek approval to market our drug candidates in both the United States and in select foreign jurisdictions. If we obtain approval in one or more foreign jurisdictions for our drug candidates, we will be subject to rules and regulations in those jurisdictions. In some foreign countries, the pricing of pharmaceutical products is subject to governmental control and other market regulations which could put pressure on the pricing and usage of our drug candidates. In these countries, pricing negotiations with governmental authorities can take considerable time after obtaining marketing approval of a drug candidate. In addition, market acceptance and sales of our drug candidates will depend significantly on the availability of adequate coverage and reimbursement from third-party payors for our drug candidates and may be affected by existing and future health care reform measures. Failure to obtain or maintain adequate coverage and reimbursement for our drug candidates, if approved, could limit our ability to market those products and decrease our ability to generate revenue.

 

We may use our financial and human resources to pursue a particular research program or drug candidate and fail to capitalize on programs or drug candidates that may be more profitable or for which there is a greater likelihood of success.

 

Because we have limited resources, we may forego or delay pursuit of opportunities with certain programs or drug candidates or for indications that later prove to have greater commercial potential. Our resource allocation decisions may cause us to fail to capitalize on viable commercial products or profitable market opportunities. Our spending on current and future research and development programs for drug candidates may not yield any commercially viable products. If we do not accurately evaluate the commercial potential or target market for a particular drug candidate, we may relinquish valuable rights to that drug candidate through strategic collaboration, licensing or other royalty arrangements in cases in which it would have been more advantageous for us to retain sole development and commercialization rights to such drug candidate, or we may allocate internal resources to a drug candidate in a therapeutic area in which it would have been more advantageous to enter into a partnering arrangement. Failure to pursue opportunities with greater commercial potential or relinquishing valuable rights to drug candidates may adversely impact our business, results of operations and prospects.

 

We may not be successful in our efforts to identify or discover additional pharmaceutical products.

 

The success of our business depends primarily upon our ability to identify and develop pharmaceutical products. Our research programs may fail to identify potential pharmaceutical products for clinical development for a number of reasons. Our research methodology may be unsuccessful in identifying potential pharmaceutical products or our potential pharmaceutical products may be shown to have harmful side effects or may have other characteristics that may make the products unmarketable or unlikely to receive marketing approval.

 

If any of these events occur, we may be forced to abandon our development efforts for a program or programs, which would have a material adverse effect on our business and could potentially cause us to cease operations. Research programs to identify new pharmaceutical products require substantial technical, financial and human resources. We may focus our efforts and resources on potential programs or pharmaceutical products that ultimately prove to be unsuccessful. If we are not successful in our efforts to identify or discover additional pharmaceutical products, it could adversely affect our business, results of operations and prospects.

 

We may fail to obtain orphan drug designations from the FDA for our drug candidates, and even if we obtain such designations, we may be unable to maintain the benefits associated with orphan drug designation, including the potential for market exclusivity.

 

Under the Orphan Drug Act, the FDA may grant orphan drug designation to a drug or biologic intended to treat a rare disease or condition, which is defined as one occurring in a patient population of fewer than 200,000 in the United States, or a patient population greater than 200,000 in the United States where there is no reasonable expectation that the cost of developing the drug or biologic will be recovered from sales in the United States. In the United States, orphan drug designation entitles a party to financial incentives such as opportunities for grant funding towards clinical trial costs, tax advantages and user-fee waivers. In addition, if a product that has orphan drug designation subsequently receives the first FDA approval for the disease for which it has such designation, the product is entitled to orphan drug exclusivity, which means that the FDA may not approve any other applications, including a full NDA or BLA, to market the same drug or biologic for the same indication for seven years, except in limited circumstances, such as a showing of clinical superiority to the product with orphan drug exclusivity or where the manufacturer is unable to assure sufficient product quantity.

 

 

 

 

 23 
 

 

OncoHist for AML and XBIO-101 for endometrial cancer have orphan designation in the U.S. While we have not obtained nor have we sought to obtain additional orphan designations for any drug candidate, we believe our products and drug candidates could qualify for additional orphan drug designations for additional indications. We may seek to obtain orphan drug designation for our drug candidates for any qualifying indications they may be approved for in the future. Even if we obtain such designations, we may not be the first to obtain marketing approval of our drug candidate for the orphan-designated indication due to the uncertainties associated with developing pharmaceutical products. In addition, exclusive marketing rights in the United States may be limited if we seek approval for an indication broader than the orphan-designated indication or may be lost if the FDA later determines that the request for designation was materially defective or if the manufacturer is unable to assure sufficient quantities of the product to meet the needs of patients with the rare disease or condition. Further, even if we obtain orphan drug exclusivity for a product, that exclusivity may not effectively protect the product from competition because different drugs with different active moieties can be approved for the same condition. Even after an orphan product is approved, the FDA can subsequently approve the same drug with the same active moiety for the same condition if the FDA concludes that the later drug is safer, more effective or makes a major contribution to patient care. Orphan drug designation neither shortens the development time or regulatory review time of a drug, nor gives the drug any advantage in the regulatory review or approval process. In addition, while we may seek orphan drug designation for our drug candidates, we may never receive such designations.

 

The market opportunities for our drug candidates may be limited to those patients who are ineligible for or have failed prior treatments and may be small.

 

Cancer therapies are sometimes characterized as first line, second line or third line, and the FDA often approves new therapies initially only for third line use. When cancer is detected early enough, first line therapy is sometimes adequate to cure the cancer or prolong life without a cure. Whenever first line therapy, usually chemotherapy, hormone therapy, surgery or a combination of these, proves unsuccessful, second line therapy may be administered. Second line therapies often consist of more chemotherapy, radiation, antibody drugs, tumor targeted small molecules or a combination of these. Third line therapies can include bone marrow transplantation, antibody and small molecule targeted therapies, more invasive forms of surgery and new technologies. In markets with approved therapies, we expect to initially seek approval of our drug candidates as a later stage therapy for patients who have failed other approved treatments. Subsequently, for those drugs that prove to be sufficiently beneficial, if any, we would expect to seek approval as a second line therapy and potentially as a first line therapy, but there is no guarantee that our drug candidates, even if approved, would be approved for second line or first line therapy. In addition, we may have to conduct additional clinical trials prior to gaining approval for second line or first line therapy.

 

Our projections of both the number of people who have the cancers we are targeting, as well as the subset of people with these cancers in a position to receive later stage therapy and who have the potential to benefit from treatment with our drug candidates, are based on our beliefs and estimates. These estimates have been derived from a variety of sources, including scientific literature, surveys of clinics, patient foundations or market research and may prove to be incorrect. Further, new studies may change the estimated incidence or prevalence of these cancers. The number of patients may turn out to be lower than expected. In addition, the potentially addressable patient population for our drug candidates may be limited or may not be amenable to treatment with our drug candidates. Even if we obtain significant market share for our drug candidates, we may never achieve profitability without obtaining regulatory approval for additional indications, including use as a first or second line therapy, which may adversely affect our business and results of operations.

 

 

 

 

 24 
 

 

Healthcare legislative reform measures may have a material adverse effect on our business and results of operations.

 

In both the United States and certain foreign jurisdictions, there have been a number of legislative and regulatory enactments in recent years that change the healthcare system in ways that could impact our future ability to sell our drug candidates profitably.

 

Furthermore, there have been and continue to be a number of initiatives at the federal and state level that seek to reduce healthcare costs. Most significantly, in March 2010, the Patient Protection and Affordable Health Care Act, as amended by the Health Care and Education Reconciliation Act, or collectively the ACA, was signed into law, which includes measures that significantly change the way healthcare is financed by both governmental and private insurers. In January 2017, Congress voted to adopt a budget resolution for fiscal year 2017, or the Budget Resolution, that authorizes the implementation of legislation that would repeal portions of the ACA. In addition, on January 20, 2017, President Trump signed an Executive Order directing federal agencies with authorities and responsibilities under the ACA to waive, defer, grant exemptions from, or delay the implementation of any provision of the ACA that would impose a fiscal or regulatory burden on states, individuals, healthcare providers, health insurers, or manufacturers of pharmaceuticals or medical devices. Further, on October 12, 2017, President Trump issued another executive order requiring the Secretaries of the Departments of Health and Human Services (“HHS”), Labor, and the Treasury to consider proposing regulations or revising existing guidance to allow more employers to form association health plans that would be allowed to provide coverage across state lines, increase the availability of short-term, limited duration health insurance plans, which are generally not subject to the requirements of the ACA, and increase the availability and permitted use of health reimbursement arrangements. On October 13, 2017, the Department of Justice announced that HHS was immediately stopping its cost sharing reduction payments to insurance companies based on the determination that those payments had not been appropriated by Congress. Furthermore, on December 22, 2017, President Trump signed the Tax Cuts and Jobs Act (the “TCJA”) into law that, in addition to overhauling the federal tax system, also, effective as of January 1, 2019, repeals the penalties associated with the individual mandate. Congress or the President of the United States also could consider subsequent legislation or executive action to replace or eliminate elements of the ACA. We will continue to evaluate the effect that the ACA and any future measures to modify, repeal or replace the ACA have on our business. We are not able to provide any assurance that the continued healthcare reform debate will not result in legislation, regulation, or executive action by the President of the United States that is adverse to our business.

 

Laws and other reform and cost containment measures that may be proposed and adopted in the future remain uncertain, but may result in additional reductions in Medicare and other healthcare funding, which could have a material adverse effect on our future customers and accordingly, our ability to generate revenue, attain profitability, or commercialize our products.

 

Risks Related to Our Reliance on Third-Parties

 

If conflicts arise between us and our collaborators or strategic partners, these parties may act in their self-interest, which may limit our ability to implement our strategies.

 

If conflicts arise between our corporate or academic collaborators or strategic partners and us, the other party may act in its self-interest, which may limit our ability to implement our strategies. Some of our academic collaborators and strategic partners are conducting multiple product development efforts within each area that is the subject of the collaboration with us. Our collaborators or strategic partners, however, may develop, either alone or with others, products in related fields that are competitive with the products or potential products that are the subject of these collaborations. Competing products, either developed by the collaborators or strategic partners or to which the collaborators or strategic partners have rights, may result in the withdrawal of partner support for our drug candidates.

 

Some of our collaborators or strategic partners could also become our competitors in the future. Our collaborators or strategic partners could develop competing products, preclude us from entering into collaborations with their competitors, fail to obtain timely regulatory approvals, terminate their agreements with us prematurely, or fail to devote sufficient resources to the development and commercialization of products. Any of these developments could harm our product development efforts, which may adversely affect our business, results of operations and prospects.

 

 

 

 

 25 
 

 

We expect to rely on third-parties to conduct, supervise and monitor our clinical studies, and if these third-parties perform in an unsatisfactory manner, it may harm our business.

 

We expect to rely on CROs, clinical investigators and clinical study sites to ensure our clinical studies are conducted properly and on time. We will have limited influence over the performance by CROs, clinical investigators and clinical study sites and we will control only certain aspects of our CROs’ activities. Nevertheless, we will be responsible for ensuring that each of our clinical studies is conducted in accordance with the applicable protocol, legal, and regulatory requirements and scientific standards, and our reliance on the CROs does not relieve us of our regulatory responsibilities.

 

We, our clinical investigators and our CROs are required to comply with the FDA’s GCPs for conducting, recording and reporting the results of clinical trials to assure that the data and reported results are credible and accurate and that the rights, integrity and confidentiality of clinical trial participants are protected. The FDA enforces these GCPs through periodic inspections of study sponsors, principal investigators and clinical trial sites. If we or our CROs or the clinical investigators fail to comply with applicable GCPs, the clinical data generated in our clinical trials may be deemed unreliable and the FDA may require us to perform additional clinical trials before approving any marketing applications. Upon inspection, the FDA may determine that our clinical trials did not comply with GCPs. In addition, our future clinical trials will require a sufficient number of test subjects to evaluate the safety and efficacy of our drug candidates. Accordingly, if our CROs or clinical investigators fail to comply with these regulations or fail to recruit a sufficient number of patients, we may be required to repeat such clinical trials, which would delay the regulatory approval process.

 

Our CROs are not our employees, and we are therefore unable to directly monitor whether or not they devote sufficient time and resources to our clinical and nonclinical programs, which must be conducted in accordance with GCPs and GLPs, respectively. These CROs may also have relationships with other commercial entities, including our competitors, for whom they may also be conducting clinical studies or other drug development activities that could harm our competitive position. If our CROs do not successfully carry out their contractual duties or obligations, fail to meet expected deadlines, or if the quality or accuracy of the clinical data they obtain is compromised due to the failure to adhere to our clinical protocols or regulatory requirements, or for any other reasons, our clinical studies may be extended, delayed or terminated, and we may not be able to obtain regulatory approval for, or successfully commercialize our pharmaceutical products. As a result, our financial results and the commercial prospects for our pharmaceutical products would be harmed, our costs could increase, and our ability to generate revenues could be delayed.

 

We may also rely on other third-parties to store and distribute our products for any clinical studies that we may conduct. Any performance failure on the part of our distributors could delay clinical development or marketing approval of our pharmaceutical products or commercialization of our products, if approved, producing additional losses and depriving us of potential product revenue.

 

Our collaborators or strategic partners may decide to adopt alternative technologies or may be unable to develop commercially viable products with our technology, which would negatively impact our revenues and our strategy to develop these products.

 

Our collaborators or strategic partners may adopt alternative technologies, which could decrease the marketability of our products. Additionally, because our current or future collaborators or strategic partners are likely to be working on more than one development project, they could choose to shift their resources to projects other than those they are working on with us. If they do so, this would delay our ability to test our technology and would delay or terminate the development of potential products based on our platforms. Further, our collaborators and strategic partners may elect not to develop products arising out of our collaborative and strategic partnering arrangements or to devote sufficient resources to the development, manufacturing, marketing or sale of these products. The failure to develop and commercialize a drug candidate pursuant to our agreements with our current or future collaborator would prevent us from receiving future milestone and royalty payments which would negatively impact our revenues.

 

 

 

 

 26 
 

 

We may seek to establish additional collaborations and, if we are not able to establish them on commercially reasonable terms, we may have to alter our development and commercialization plans.

 

Our drug candidate development programs and the potential commercialization of our drug candidates will require substantial additional cash to fund expenses. For some of our drug candidates, we may decide to collaborate with additional pharmaceutical and biotechnology companies for the development and potential commercialization of those drug candidates.

 

We face significant competition in seeking appropriate collaborators. Whether we reach a definitive agreement for any additional collaborations will depend, among other things, upon our assessment of the collaborator’s resources and expertise, the terms and conditions of the proposed collaboration and the proposed collaborator’s evaluation of a number of factors. Those factors may include the design or results of clinical trials, the likelihood of approval by FDA or similar regulatory authorities outside the United States, the potential market for the subject drug candidate, the costs and complexities of manufacturing and delivering such drug candidate to patients, the potential of competing drugs, the existence of uncertainty with respect to our ownership of technology, which can exist if there is a challenge to such ownership without regard to the merits of the challenge, and industry and market conditions generally. The collaborator may also consider alternative drug candidates or technologies for similar indications that may be available to collaborate on and whether such a collaboration could be more attractive than the one with us for our drug candidate. The terms of any additional collaborations or other arrangements that we may establish may not be favorable to us.

 

We may also be restricted under existing collaboration agreements from entering into future agreements on certain terms with potential collaborators. Collaborations are complex and time-consuming to negotiate and document. In addition, there have been a significant number of recent business combinations among large pharmaceutical companies that have resulted in a reduced number of potential future collaborators.

 

We may not be able to negotiate additional collaborations on a timely basis, on acceptable terms, or at all. If we are unable to do so, we may have to curtail the development of the drug candidate for which we are seeking to collaborate, reduce or delay its development program or one or more of our other development programs, delay its potential commercialization or reduce the scope of any sales or marketing activities, or increase our expenditures and undertake development or commercialization activities at our own expense. If we elect to increase our expenditures to fund development or commercialization activities on our own, we may need to obtain additional capital, which may not be available to us on acceptable terms or at all. If we do not have sufficient funds, we may not be able to further develop our drug candidates or bring them to market and generate product revenue.

 

If we enter into one or more collaborations, we may be required to relinquish important rights to and control over the development of our drug candidates or otherwise be subject to unfavorable terms.

 

Any future collaborations we enter into could subject us to a number of risks, including:

 

  · We may not be able to control the amount and timing of resources that our collaborators devote to the development or commercialization of our drug candidates;
  · Collaborators may delay clinical trials, provide insufficient funding, terminate a clinical trial or abandon a drug candidate, repeat or conduct new clinical trials or require a new version of a drug candidate for clinical testing;
  · Collaborators may not pursue further development and commercialization of products resulting from the strategic partnering arrangement or may elect to discontinue research and development programs;
  · Collaborators may not commit adequate resources to the marketing and distribution of our drug candidates, limiting our potential revenues from these products;
  · Disputes may arise between us and our collaborators that result in the delay or termination of the research, development or commercialization of our drug candidates or that result in costly litigation or arbitration that diverts management’s attention and consumes resources;
  · Collaborators may experience financial difficulties;

 

 

 

 

 27 
 

 

 

 

· Collaborators may not properly maintain or defend our intellectual property rights or may use our proprietary information in a manner that could jeopardize or invalidate our proprietary information or expose us to potential litigation;
  · Business combinations or significant changes in a collaborator’s business strategy may also adversely affect a collaborator’s willingness or ability to complete its obligations under any arrangement;
  · Collaborators could decide to move forward with a competing drug candidate developed either independently or in collaboration with others, including our competitors; and
  · Collaborators could terminate the arrangement or allow it to expire, which would delay the development and may increase the cost of developing our drug candidates.

 

Our contract manufacturers are subject to significant regulation with respect to manufacturing our products. The manufacturing facilities on which we rely may not continue to meet regulatory requirements and have limited capacity.

 

We currently have relationships with a limited number of suppliers for the manufacturing of our pharmaceutical products. Each supplier may require licenses to manufacture components if such processes are not owned by the supplier or in the public domain and we may be unable to transfer or sublicense the intellectual property rights we may have with respect to such activities. 

 

All entities involved in the preparation of pharmaceutical products for clinical studies or commercial sale, including our existing contract manufacturers for our drug candidates, are subject to extensive regulation. Components of a finished pharmaceutical product approved for commercial sale or used in late-stage clinical studies must be manufactured in accordance with cGMP. These regulations govern manufacturing processes and procedures (including record keeping) and the implementation and operation of quality systems to control and assure the quality of investigational products and products approved for sale. Poor control of production processes can lead to the introduction of adventitious agents or other contaminants, or to inadvertent changes in the properties or stability of our pharmaceutical products that may not be detectable in final product testing. Our contract manufacturers must supply all necessary documentation in support of an NDA or BLA on a timely basis and must adhere to the FDA’s GLP, and cGMP regulations enforced by the FDA through its facilities inspection program. The facilities and quality systems of some or all of our third-party contractors must pass a pre-approval inspection for compliance with the applicable regulations as a condition of regulatory approval of our pharmaceutical products or any of our other potential products. In addition, the regulatory authorities may, at any time, audit or inspect a manufacturing facility involved with the preparation of our pharmaceutical products or our other potential products or the associated quality systems for compliance with the regulations applicable to the activities being conducted. If these facilities do not pass a pre-approval plant inspection, FDA approval of the products will not be granted.

 

The regulatory authorities also may, at any time following approval of a product for sale, audit the manufacturing facilities of our third-party contractors. If any such inspection or audit identifies a failure to comply with applicable regulations or if a violation of our product specifications or applicable regulations occurs independent of such an inspection or audit, we or the relevant regulatory authority may require remedial measures that may be costly and/or time-consuming for us or a third-party to implement and that may include the temporary or permanent suspension of a clinical study or commercial sales or the temporary or permanent closure of a facility. Any such remedial measures imposed upon third-parties with whom we contract could materially harm our business.

 

If our third-party manufacturers fail to maintain regulatory compliance, the FDA can impose regulatory sanctions including, among other things, refusal to approve a pending application for a drug candidate, or revocation of a pre-existing approval. As a result, our business, financial condition and results of operations may be materially harmed.

 

Additionally, if supply from one approved manufacturer is interrupted, there could be a significant disruption in commercial supply. The number of manufacturers with the necessary manufacturing capabilities is limited. In addition, an alternative manufacturer would need to be qualified through an NDA or BLA supplement which could result in further delay. The regulatory agencies may also require additional studies if a new manufacturer is relied upon for commercial production. Switching manufacturers may involve substantial costs and is likely to result in a delay in our desired clinical and commercial timelines, which could materially harm our business and results of operations.

 

 

 

 

 

 28 
 

 

These factors could cause the delay of clinical studies, regulatory submissions, required approvals or commercialization of our pharmaceutical products, cause us to incur higher costs and prevent us from commercializing our products successfully. Furthermore, if our suppliers fail to meet contractual requirements, and we are unable to secure one or more replacement suppliers capable of production at a substantially equivalent cost, our clinical studies may be delayed or we could lose potential revenue, which could materially harm our business and results of operations.

 

We have no manufacturing, sales, marketing or distribution capabilities, and we may have to invest a significant amount of resources to develop these capabilities.

 

We have no internal manufacturing capabilities. As a result, for manufacturing we depend on third-party manufacturers, including Kevelt, Pharmsynthez and the Serum Institute, which in turn may rely upon third-parties to manufacture our products. Although our strategy is based on leveraging the ability of collaboration partners to develop and manufacture our products for commercialization in the pharmaceutical marketplace, we will be dependent on collaborations with drug development and manufacturing collaborators. If we are not able to maintain existing collaborative arrangements or establish new arrangements on commercially acceptable terms, we would be required to undertake product manufacturing and development activities at our own expense. This would increase our capital requirements or require us to limit the scope of our development activities. Moreover, we have limited or no experience in conducting full scale bioequivalence or other clinical studies, preparing and submitting regulatory applications, and distributing and marketing pharmaceutical products and as such we are reliant on contract parties for such efforts. We may not be able to enter into collaborations or hire consultants or external service providers to assist us in sales, marketing and distribution functions on acceptable financial terms or at all.

 

If any of our developmental collaborators breach or terminate their agreements with us or otherwise fail to conduct their collaborative activities in a timely manner, the preclinical and/or clinical development and/or commercialization of our pharmaceutical products will be delayed and we would be required to devote additional resources to product development and commercialization or terminate certain development programs. Also, a license relationship may be terminated at the discretion of our collaborator, or at the end of contract terms, and in some cases with only limited notice to us. The termination of the collaborative arrangement could have a material adverse effect on our business, financial condition and results of operations. There also can be no assurance that disputes will not arise with respect to the ownership of rights to any technology developed with third-parties. These and other possible disagreements with collaborators could lead to delays in the development or commercialization of our pharmaceutical products or could result in litigation or arbitration, which could be time consuming and expensive and could have a material adverse effect on our business, financial condition and results of operations. Even if we decide to perform clinical trials, sales, marketing and distribution functions ourselves, we could face a number of additional related risks, including:

 

  · we may not be able to attract clinical investigators and build effective clinical trials, or a solid marketing department or sales force;
  · the cost of establishing an internal clinical trials program, marketing department or sales force may exceed our available financial resources and the revenue generated by any of our current product candidates, if approved, or any other pharmaceutical products that we may develop, in-license or acquire; and
  · our direct sales and marketing efforts may not be successful.

 

Any failure to perform such activities could have a material adverse effect on our business, financial condition and results of our operations.

 

 

 

 

 29 
 

 

Our reliance on third-parties requires us to share our trade secrets, which increases the possibility that a competitor will discover them or that our trade secrets will be misappropriated or disclosed.

 

Because we rely on third-parties to manufacture our pharmaceutical products, and because we collaborate with various organizations and academic institutions on the development of our pharmaceutical products, we must, at times, share trade secrets with them. We seek to protect our proprietary technology in part by entering into confidentiality agreements and, if applicable, material transfer agreements, collaborative research agreements, consulting agreements or other similar agreements with our collaborators, advisors, employees and consultants prior to beginning research or disclosing proprietary information. These agreements typically limit the rights of the third-parties to use or disclose our confidential information, such as trade secrets. Despite the contractual provisions employed when working with third-parties, the need to share trade secrets and other confidential information increases the risk that such trade secrets become known by our competitors, are inadvertently incorporated into the technology of others, or are disclosed or used in violation of these agreements. Given that our proprietary position is based, in part, on our know-how and trade secrets, a competitor’s discovery of our trade secrets or other unauthorized use or disclosure would impair our competitive position and may have a material adverse effect on our business.

 

In addition, these agreements typically restrict the ability of our collaborators, advisors, employees and consultants to publish data potentially relating to our trade secrets. Our academic collaborators typically have rights to publish data, provided that we are notified in advance and may delay publication for a specified time in order to secure our intellectual property rights arising from the collaboration. In other cases, publication rights are controlled exclusively by us, although in some cases we may share these rights with other parties. We may also conduct joint research and development programs that may require us to share trade secrets under the terms of our research and development partnerships or similar agreements. Despite our efforts to protect our trade secrets, our competitors may discover our trade secrets, either through breach of these agreements, independent development or publication of information including our trade secrets in cases where we do not have proprietary or otherwise protected rights at the time of publication. A competitor’s discovery of our trade secrets would impair our competitive position and have an adverse impact on our business.

 

Risks Related to Our Intellectual Property

 

If we fail to adequately protect or enforce our intellectual property rights, we may be unable to operate effectively.

 

Our success and ability to compete are substantially dependent on our patents, proprietary formulations and trademarks. Although we believe that the patents and associated trademarks and licenses are valid, there can be no assurance that they will not be challenged and subsequently invalidated and/or canceled. The invalidation or cancellation of any one or all of the patents or trademarks would significantly damage our commercial prospects. Further, we may find it necessary to legally challenge parties infringing our patents or trademarks or licensed trademarks to enforce our rights thereto. There can be no assurance that any of the patents would ultimately be held valid or that efforts to defend any of the patents, trade secrets, know-how or other IP rights would be successful.

 

The patent positions of pharmaceutical and biotechnology companies, such as ours, are uncertain and involve complex legal and factual issues. We own numerous U.S. and foreign patents and a number of pending patent applications that cover various aspects of our drug candidates and technologies. There can be no assurance that patents that have been issued will be held valid and enforceable in a court of law. Even for patents that are held valid and enforceable, the legal process associated with obtaining such a judgment is time consuming and costly. Additionally, issued patents can be subject to opposition or other proceedings that can result in the revocation of the patent or maintenance of the patent in amended form (and potentially in a form that renders the patent without commercially relevant and/or broad coverage). Further, our competitors may be able to circumvent and otherwise design around our patents. Even if a patent is issued and enforceable, because development and commercialization of pharmaceutical products can be subject to substantial delays, patents may expire early and provide only a short period of protection, if any, following the commercialization of a product encompassed by our patents. We may have to participate in interference proceedings declared by the USPTO, which could result in a loss of the patent and/or substantial cost to us.

 

 

 

 

 30 
 

 

We have filed patent applications and plan to file additional patent applications, covering various aspects of our drug candidates and technologies. There can be no assurance that the patent applications for which we apply would actually be issued as patents, or do so with commercially relevant and/or broad coverage. The coverage claimed in a patent application can be significantly reduced before the patent is issued. The scope of our claim coverage can be critical to our ability to enter into licensing transactions with third-parties and our right to receive royalties from our collaboration partnerships. Since publication of discoveries in scientific or patent literature often lags behind the date of such discoveries, we cannot be certain that we were the first inventor of inventions covered by our patents or patent applications. In addition, there is no guarantee that we will be the first to file a patent application directed to an invention.

 

An adverse outcome in any judicial proceeding involving IP, including patents, could subject us to significant liabilities to third-parties, require disputed rights to be licensed from or to third-parties or require us to cease using the technology in dispute. In those instances where we seek an IP license from another, we may not be able to obtain the license on a commercially reasonable basis, if at all, thereby raising concerns on our ability to freely commercialize our technologies and/or products. It is also possible that we or our licensors or licensees will fail to identify patentable aspects of inventions made in the course of development and commercialization activities before it is too late to obtain patent protection on them. Moreover, in some circumstances, we may not have the right to control the preparation, filing and prosecution of patent applications, or to maintain the patents, covering technology that we license from or license to third-parties and are reliant on our licensors or licensees. Therefore, these patents and applications may not be prosecuted and enforced in a manner consistent with the best interests of our business. If our current or future licensors or licensees fail to establish, maintain or protect such patents and other intellectual property rights, such rights may be reduced or eliminated. If our licensors or licensees are not fully cooperative or disagree with us as to the prosecution, maintenance or enforcement of any patent rights, such patent rights could be compromised.

 

Failure to adequately protect or enforce our intellectual property rights could have a material adverse impact on our business, results of operations and prospects.

 

Issued patents covering our drug candidates could be found invalid or unenforceable if challenged in court.

 

If we or one of our licensing partners initiated legal proceedings against a third-party to enforce a patent covering one of our drug candidates, the defendant could counterclaim that the patent covering our drug candidate is invalid and/or unenforceable. In patent litigation in the United States, defendant counterclaims alleging invalidity and/or unenforceability are commonplace. Grounds for a validity challenge could be an alleged failure to meet any of several statutory requirements, including lack of novelty, obviousness or non-enablement. Grounds for an unenforceability assertion could be an allegation that someone connected with prosecution of the patent withheld relevant information from the USPTO, or made a misleading statement, during prosecution. Third-parties may also raise similar claims before administrative bodies in the United States or abroad, even outside the context of litigation. Such mechanisms include re-examination, post grant review, and equivalent proceedings in foreign jurisdictions (e.g., opposition proceedings). Such proceedings could result in revocation or amendment to our patents in such a way that they no longer cover our drug candidates. The outcome following legal assertions of invalidity and unenforceability is unpredictable. With respect to the validity question, for example, we cannot be certain that there is no invalidating prior art, of which we and the patent examiner were unaware during prosecution. If a defendant were to prevail on a legal assertion of invalidity and/or unenforceability, we would lose at least part, and perhaps all, of the patent protection on our drug candidates. Such a loss of patent protection would have a material adverse impact on our business.

 

We may not be able to protect our intellectual property rights throughout the world.

 

Filing, prosecuting and defending patents on drug candidates in all countries throughout the world would be prohibitively expensive, and our intellectual property rights in some countries outside the United States can be less extensive than those in the United States. In addition, the laws of some foreign countries do not protect intellectual property rights to the same extent as federal and state laws in the United States. Consequently, we may not be able to prevent third-parties from practicing our inventions in all countries outside the United States, or from selling or importing products made using our inventions in and into the United States or other jurisdictions. Competitors may use our inventions in jurisdictions where we have not obtained patent protection to develop their own products and further, may export otherwise infringing products to territories where we have patent protection, but enforcement is not as strong as that in the United States. These products may compete with our products and our patents or other intellectual property rights may not be effective or sufficient to prevent them from competing.

 

 

 

 

 

 31 
 

 

Many companies have encountered significant problems in protecting and defending intellectual property rights in foreign jurisdictions. The legal systems of certain countries, particularly certain developing countries, do not favor the enforcement of patents, trade secrets and other intellectual property protection, particularly those relating to biotechnology products, which could make it difficult for us to stop the infringement of our patents or marketing of competing products in violation of our proprietary rights generally. Proceedings to enforce our patent rights in foreign jurisdictions could result in substantial costs and divert our efforts and attention from other aspects of our business, could put our patents at risk of being invalidated or interpreted narrowly and our patent applications at risk of not issuing and could provoke third-parties to assert claims against us. We may not prevail in any lawsuits that we initiate and the damages or other remedies awarded, if any, may not be commercially meaningful. Accordingly, our efforts to enforce our intellectual property rights around the world may be inadequate to obtain a significant commercial advantage from the intellectual property that we develop or license.

 

Failure to adequately protect our intellectual property rights throughout the world could have a material adverse impact on our business, results of operations and prospects.

 

If we infringe on the intellectual property rights of others, our business and profitability may be adversely affected.

 

Our commercial success will also depend, in part, on us and our collaborative partners not infringing on the patents or proprietary rights of others. There can be no assurance that the technologies and products used or developed by our collaborative partners and marketed and sold by us will not infringe such rights. If such infringement occurs and neither we nor our collaborative partner is able to obtain a license from the relevant third-party, we will not be able to continue the development, manufacture, use, or sale of any such infringing technology or product. There can be no assurance that necessary licenses to third-party technology will be available at all, or on commercially reasonable terms. In some cases, litigation or other proceedings may be necessary to defend against or assert claims of infringement or to determine the scope and validity of the proprietary rights of third-parties. Any potential litigation could result in substantial costs to, and diversion of, our resources and could have a material and adverse impact on us. An adverse outcome in any such litigation or proceeding could subject us to significant liabilities, require us to cease using the subject technology or require us to license the subject technology from the third-party, all of which could have a material adverse effect on our business.

 

If we fail to comply with our obligations in the agreements under which we license intellectual property rights from third-parties or otherwise experience disruptions to our business relationships with our licensors, we could lose license rights that are important to our business.

 

We are a party to a number of intellectual property license agreements that are important to our business and we expect to enter into additional license agreements in the future. Our existing license agreements impose, and we expect that future license agreements will impose, various diligence, milestone payment, royalty and other obligations on us. If we fail to comply with our obligations under these agreements, or we are subject to a bankruptcy, the licensor may have the right to terminate the license, in which event we would not be able to market products covered by the license.

 

We may need to obtain licenses from third-parties to advance our research, and we have done so from time to time. We may fail to obtain any of these licenses at a reasonable cost or on reasonable terms, if at all. In that event, we may be required to expend significant time and resources to develop or license replacement technology. If we are unable to do so, we may be unable to develop the affected drug candidates, which could harm our business significantly. We cannot provide any assurances that third-party patents do not exist which might be enforced against our current drug candidates or future products, resulting in either an injunction prohibiting the sales, or, with respect to the sales, an obligation on our part to pay royalties and/or other forms of compensation to third-parties.

 

 

 

 

 32 
 

 

In many cases, patent prosecution of our licensed technology is controlled solely by the licensor. If our licensors fail to obtain and maintain patent or other protection for the proprietary intellectual property we license from them, we could lose our rights to the intellectual property or our exclusivity with respect to those rights, and our competitors could market competing products using the intellectual property. In certain cases, we control the prosecution of patents resulting from licensed technology. In the event we breach any of our obligations related to such prosecution, we may incur significant liability to our licensing partners. Licensing of intellectual property is of critical importance to our business and involves complex legal, business and scientific issues and is complicated by the rapid pace of scientific discovery in our industry. Disputes may arise regarding intellectual property subject to a licensing agreement, including:

 

  · The scope of rights granted under the license agreement and other interpretation-related issues;
  · The extent to which our technology and processes infringe on intellectual property of the licensor that is not subject to the licensing agreement;
  · The sublicensing of patent and other rights under our collaborative development relationships;
  · Our diligence obligations under the license agreement and what activities satisfy those diligence obligations;
  · The ownership of inventions and know-how resulting from the joint creation or use of intellectual property by our licensors and us and our partners; and
  · The priority of invention of patented technology.

 

If disputes over intellectual property that we have licensed prevent or impair our ability to maintain our current licensing arrangements on acceptable terms, we may be unable to successfully develop and commercialize the affected drug candidates, which could have a material adverse effect on our business.

 

We may be involved in lawsuits to protect or enforce our patents or the patents of our licensors, which could be expensive, time-consuming and unsuccessful.

 

Competitors may infringe our patents or the patents of our licensors. To counter infringement or unauthorized use, we may be required to file infringement claims, which can be expensive and time-consuming. In addition, in an infringement proceeding, a court may decide that a patent of ours or our licensors is not valid, is unenforceable and/or is not infringed, or may refuse to stop the other party from using the technology at issue on the grounds that our patents do not cover the technology in question. An adverse result in any litigation or defense proceedings could put one or more of our patents at risk of being invalidated or interpreted narrowly and could put our patent applications at risk of not issuing.

 

Interference proceedings provoked by third-parties or brought by us may be necessary to determine the priority of inventions with respect to our patents or patent applications or those of our licensors. An unfavorable outcome could require us to cease using the related technology or to attempt to license rights to it from the prevailing party. Our business could be harmed if the prevailing party does not offer us a license on commercially reasonable terms. Our defense of litigation or interference proceedings may fail and, even if successful, may result in substantial costs and distract our management and other employees. We may not be able to prevent, alone or with our licensors, misappropriation of our intellectual property rights, particularly in countries where the laws may not protect those rights as fully as in the United States.

 

Furthermore, because of the substantial amount of discovery required in connection with intellectual property litigation, there is a risk that some of our confidential information could be compromised by disclosure during this type of litigation. There could also be public announcements of the results of hearings, motions or other interim proceedings or developments. If securities analysts or investors perceive these results to be negative, it could have a material adverse effect on the price of our Common Stock underlying the units.

 

 

 

 

 

 33 
 

 

Changes in U.S. patent law could diminish the value of patents in general, thereby impairing our ability to protect our products.

 

As is the case with other biopharmaceutical companies, our success is heavily dependent on intellectual property, particularly patents. Obtaining and enforcing patents in the biotechnology industry involve both technological and legal complexity and is, therefore, costly, time-consuming and inherently uncertain. In addition, the United States has recently enacted and is currently implementing wide-ranging patent reform legislation. Recent U.S. Supreme Court rulings have narrowed the scope of patent protection available in certain circumstances and weakened the rights of patent owners in certain situations. In addition to increasing uncertainty with regard to our ability to obtain patents in the future, this combination of events has created uncertainty with respect to the value of patents, once obtained. Depending on decisions by the U.S. Congress, the federal courts, and the USPTO, the laws and regulations governing patents could change in unpredictable ways that would weaken our ability to obtain new patents or to enforce our existing patents and patents that we might obtain in the future.

 

Patent reform legislation could increase the uncertainties and costs surrounding the prosecution of our and our licensors’ patent applications and the enforcement or defense of our or our licensors’ issued patents. Provisions of the Leahy-Smith America Invents Act, or the Leahy-Smith Act, adopted in September 2011, which includes a number of significant changes to U.S. patent law, are still being implemented through the adoption of new regulations. The Leahy-Smith Act and its implementation, in addition to any new regulation, could increase the uncertainties and costs surrounding the prosecution of our patent applications and the enforcement or defense of our issued patents, all of which could have a material adverse effect on our business and financial condition.

 

We may be subject to claims that our employees, consultants or independent contractors have wrongfully used or disclosed confidential information of third-parties or that our employees have wrongfully used or disclosed alleged trade secrets of their former employers.

 

We employ individuals who were previously employed at universities or other biotechnology or pharmaceutical companies, including our competitors or potential competitors. We may be subject to claims that we or our employees, consultants or independent contractors have inadvertently or otherwise used or disclosed intellectual property, including trade secrets or other proprietary information, of any of our employee’s former employers or other third-parties. Litigation may be necessary to defend against these claims. If we fail in defending any such claims, in addition to paying monetary damages, we may lose valuable intellectual property rights or personnel, which could adversely impact our business. Even if we are successful in defending against such claims, litigation could result in substantial costs and be a distraction to management and other employees.

 

We may be subject to claims challenging the inventorship or ownership of our patents and other intellectual property.

 

We may also be subject to claims that former employees, collaborators or other third-parties have an ownership interest in our patents or other intellectual property. We may have in the future ownership disputes arising, for example, from conflicting obligations of consultants or others who are involved in developing our drug candidates. Litigation may be necessary to defend against these and other claims challenging inventorship or ownership. If we fail in defending any such claims, in addition to paying monetary damages, we may lose valuable intellectual property rights, such as exclusive ownership of, or right to use, valuable intellectual property. Such an outcome could have a material adverse effect on our business. Even if we are successful in defending against such claims, litigation could result in substantial costs and be a distraction to management and other employees.

 

 Our inability to protect our confidential information and trade secrets would harm our business and competitive position.

 

In addition to seeking patents for some of our technology and products, we also rely on trade secrets, including unpatented know-how, technology and other proprietary information, to maintain our competitive position. We seek to protect these trade secrets, in part, by entering into non-disclosure and confidentiality agreements with parties who have access to them, such as our employees, corporate collaborators, outside scientific collaborators, contract manufacturers, consultants, advisors and other third-parties. We also enter into confidentiality and invention or patent assignment agreements with our employees and consultants. Any of these parties may breach the agreements and disclose our proprietary information, including our trade secrets, and we may not be able to obtain adequate remedies for such breaches. Enforcing a claim that a party illegally disclosed or misappropriated a trade secret is difficult, expensive and time-consuming, and the outcome is unpredictable. In addition, some courts both within and outside the United States may be less willing or unwilling to protect trade secrets. If a competitor lawfully obtained or independently developed any of our trade secrets, we would have no right to prevent such competitor from using that technology or information to compete with us, which could harm our competitive position and our business.

 

 

 

 

 34 
 

 

Obtaining and maintaining our patent protection depends on compliance with various procedural, document submission, fee payment and other requirements imposed by governmental patent agencies, and our patent protection could be reduced or eliminated for non-compliance with these requirements.

 

Periodic maintenance fees, renewal fees, annuity fees and various other governmental fees on patents and/or applications will be due to be paid to the USPTO and various governmental patent agencies outside of the United States in several stages over the lifetime of the patents and/or applications. The USPTO and various non-U.S. governmental patent agencies require compliance with a number of procedural, documentary, fee payment and other similar provisions during the patent application process. Non-compliance may result in abandonment or lapse of the patent or patent application, resulting in partial or complete loss of patent rights in the relevant jurisdiction. In such an event, our competitors might be able to enter the market and this circumstance would have a material adverse effect on our business.

 

Risks Related to Our Business Operations

 

We operate in an extremely competitive environment and there can be no assurances that competing technologies would not harm our business development.

 

We are engaged in a rapidly evolving field. Competition from numerous pharmaceutical companies is intense and expected to increase. The large and rapidly growing market for oncology treatments is likely to attract new entrants. Numerous biotechnology and pharmaceutical companies are focused on developing cancer treatments and I-O technologies including CAR T. Many, if not all, of these companies have greater financial and other resources and development capabilities than we do. Many of our competitors also have greater collective experience in undertaking preclinical and clinical testing of products, obtaining regulatory approvals and manufacturing and marketing prescription pharmaceutical products. There can be no assurance that our under-development drug candidates will be more effective or achieve greater market acceptance than competitive products, or that our competitors will not succeed in developing products and technologies that are more effective than those being developed by us or that would render our products and technologies less competitive or obsolete. Additionally, there can be no assurance that the development by others of new or improved drugs will not make our pharmaceutical products superfluous or obsolete.

 

We are a party to collaboration agreements and other significant agreements which contain complex commercial terms that could result in disputes, litigation or indemnification liability that could adversely affect our business, results of operations and financial condition.

 

We currently derive, and expect to derive in the foreseeable future, all or much of our revenue from collaboration agreements with biotechnology and pharmaceutical companies. These collaboration agreements contain complex commercial terms, including:

 

  ·  Clinical development and commercialization obligations that are based on certain commercial reasonableness performance standards that can often be difficult to enforce if disputes arise as to adequacy of our partner’s performance;
  · Research and development performance and reimbursement obligations for our personnel and other resources allocated to partnered drug candidate development programs;
  · Clinical and commercial manufacturing agreements, some of which are priced on an actual cost basis for products supplied by us to our partners with complicated cost allocation formulas and methodologies;
  · Intellectual property ownership allocation between us and our partners for improvements and new inventions developed during the course of the collaboration;
  · Royalties on drug sales based on a number of complex variables, including net sales calculations, geography, scope of patent claim coverage, patent life, generic competitors, bundled pricing and other factors; and
  · Indemnity obligations for intellectual property infringement, product liability and certain other claims.

 

 

 

 

 35 
 

 

From time to time, we have informal dispute resolution discussions with third-parties regarding the appropriate interpretation of the complex commercial terms contained in our agreements. One or more disputes may arise or escalate in the future regarding our collaboration agreements, transaction documents, or third-party license agreements that may ultimately result in costly litigation and unfavorable interpretation of contract terms, which would have a material adverse effect on our business, financial condition and results of operations.

 

Governments may impose price controls, which may adversely affect our future profitability.

 

We intend to seek approval to market our drug candidates in both the United States and in foreign jurisdictions. In some foreign countries and jurisdictions, particularly in the European Union, the pricing of prescription pharmaceuticals is subject to governmental control. In these countries, pricing negotiations with governmental authorities can take considerable time after the receipt of marketing approval for a drug candidate. To obtain reimbursement or pricing approval in some countries, we may be required to conduct clinical trials to compare the cost effectiveness of our drug candidates to other available therapies, which is time consuming and costly. If reimbursement of our future products is unavailable or limited in scope or amount, or if pricing is set at unsatisfactory levels, we may be unable to achieve or sustain profitability.

 

Write-offs related to the impairments of our long-lived assets, including goodwill and indefinite-lived intangible assets, and other non-cash charges such as share-based payments may adversely impact our results of operations.

 

We may incur significant non-cash charges related to impairments of our long-lived assets, including goodwill and indefinite-lived intangible assets. Although we did not record any such charges during 2018, we are required to perform periodic impairment reviews of those assets at least annually. The carrying value of goodwill on our balance sheet that is subject to impairment reviews was approximately $3.3 million at December 31, 2018 and December 31, 2017 and the carrying value of our indefinite-lived assets was $9.2 million at December 31, 2018 and December 31, 2017. To the extent future reviews conclude that the expected future cash flows generated from our business activities are not sufficient to recover the carrying value of these assets, we will be required to measure and record an impairment charge to write-down these assets to their realizable values and those impairment charges could be equal to the entire carrying value.

 

We completed our last review during the fourth quarter of 2018 and determined that goodwill and indefinite-lived intangible assets were not impaired as of December 31, 2018. However, there can be no assurance that upon completion of subsequent reviews a material impairment charge will not be recorded. If future periodic reviews determine that our assets are impaired and a write-down is required, it will adversely impact our operating results.

 

In addition, we recorded non-cash charges of approximately $1.4 million and $1.8 million for share-based expense during the years ended December 31, 2018 and 2017, respectively. In the future, this amount could fluctuate materially as the Company expects to continue to issue share-based payments awards.

 

Potential new accounting standards or legislative actions may adversely impact our future financial position or results of operations.

 

Future changes in financial accounting standards may cause adverse, unexpected fluctuations in the timing of the recognition of revenues or expenses, and may affect our financial position or results of operations. New standards may occur in the future and may cause us to be required to make changes in our accounting policies. Compliance with changing regulation of corporate governance and public disclosure may result in additional expenses. Changing laws, regulations and standards relating to corporate governance and public disclosure, including the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, new SEC regulations, Public Company Accounting Oversight Board, or PCAOB, standards and NASDAQ rules, are creating uncertainty for companies such as ours and insurance, accounting and auditing costs are high as a result of this uncertainty and other factors.

 

 

 

 

 36 
 

 

We have limited capital resources and currently have only one full time employee in our finance department. We rely on outside consultants to supplement our internal expertise and are committed to maintaining high standards of corporate governance and public disclosure. As a result, we intend to invest all reasonably necessary resources to comply with evolving standards, and this investment may result in increased general and administrative expenses and a diversion of management time and attention from revenue-generating activities to compliance activities.

 

Varying interpretations of existing standards and rules have occurred with frequency and may cause us to have to restate previously reported result of operations.

 

Varying interpretations of existing standards of accounting policies or accounting treatments of existing transactions may cause us to have to restate previously reported result of operations.

 

For example, in January 2014 we completed a transaction that we determined to be a reverse merger business combination. We allocated the purchase price consideration to the assets acquired and liabilities assumed at their estimated fair values as of the date of acquisition. Our determination that the transaction met the criteria for a business combination was based on our best knowledge of the facts and circumstances surrounding the transaction, and required the application of our judgment. Changes to this determination would result in the transaction to be accounted for as a recapitalization, with no goodwill recorded, which could cause a material change in our reported results of operations and could cause the Company to have to amend prior periodic or other filings with the SEC, at further expense to the Company. We may be subject to similar varying interpretations of existing standards of accounting policies or accounting treatments in the future.

 

In addition, we do not consider the Company to be a development stage entity for financial reporting presentation purposes. A determination that the Company is a development stage entity could cause a material change in our reported results of operations and could cause the Company to have to amend prior periodic or other filings with the SEC, at further expense to the Company.

 

Tax reform may significantly affect the Company and its stockholders.

 

On December 22, 2017, the TCJA, which significantly reforms the Internal Revenue Code of 1986, as amended (the “Code”), was signed into law. The TCJA, among other things, includes changes to U.S. federal tax rates, including reduction of the corporate tax rate from a top marginal rate of 35% to a flat rate of 21%, limitations of the tax deduction for interest expense to 30% of adjusted earnings (except for certain small businesses), limitations of the deduction for net operating losses (“NOLs”) to 80% of current year taxable income and elimination of NOL carrybacks, one time taxation of offshore earnings at reduced rates regardless of whether they are repatriated, elimination of U.S. tax on foreign earnings (subject to certain important exceptions), immediate deductions for certain new investments instead of deductions for depreciation expense over time, modifying or repealing many business deductions and credits and putting into effect the migration from a “worldwide” system of taxation to a territorial system. Notwithstanding the reduction in the corporate income tax rate, the overall impact of the new federal tax law is uncertain and our business and financial condition could be adversely affected. In addition, it is uncertain if and to what extent various states will adjust their policies in response to the newly enacted federal tax law. The impact of this tax reform on holders of our Common Stock is uncertain and could be adverse.

 

Due to the potential for changes to tax laws and regulations or changes to the interpretation thereof (including regulations and interpretations pertaining to the TCJA), the ambiguity of tax laws and regulations, the subjectivity of factual interpretations and other factors, our estimates of effective tax rate and income tax assets and liabilities may be incorrect and our financial statements could be adversely affected. The impact of these factors referenced in the first sentence of this paragraph may be substantially different from period-to-period.

 

 

 

 

 37 
 

 

In addition, the amount of income taxes we pay is subject to ongoing audits by U.S. federal, state and local tax authorities and by non-U.S. tax authorities. If audits result in payments or assessments different from our reserves, our future results may include unfavorable adjustments to our tax liabilities and our financial statements could be adversely affected. Any further significant changes to the tax system in the United States or in other jurisdictions (including changes in the taxation of international income as further described below) could adversely affect our financial statements.

 

Our ability to use potential future operating losses and our federal and state NOL carryforwards to offset taxable income from revenue generated from operations or corporate collaborations could be limited.

 

The use of our NOL carryforwards may have limitations resulting from certain future ownership changes or other factors under the Code and other taxing authorities. The TCJA changed both the federal deferred tax value of the NOL carryforwards and the rules of utilization of federal NOL carryforwards. The TCJA lowered the corporate tax rate from 35% to 21% effective for our 2018 fiscal year. For NOL carryforwards generated in years prior to 2018, there is no annual limitation on the utilization and the carryforward period remains at 20 years. However, NOL carryforwards generated in years after 2017 will only be available to offset 80% of future taxable income in any single year but will not expire.

 

If our NOL carryforwards are limited, and we have taxable income which exceeds the available NOL carryforwards for that period, we would incur an income tax liability even though NOL carryforwards may be available in future years prior to their expiration. Any such income tax liability may adversely affect our future cash flow, financial position and financial results.

 

Our future success depends on our ability to retain key employees, consultants and advisors and to attract, retain and motivate qualified personnel.

 

We are highly dependent on principal members of our executive team and key employees, the loss of whose services may adversely impact the achievement of our objectives. Recruiting and retaining other qualified employees, consultants and advisors for our business, including scientific and technical personnel, will also be critical to our success. There is currently a shortage of skilled executives in our industry, which is likely to continue. As a result, competition for skilled personnel is intense and the turnover rate can be high. We may not be able to attract and retain personnel on acceptable terms given the competition among numerous pharmaceutical and biotechnology companies for individuals with similar skill sets. In addition, failure to succeed in preclinical or clinical studies may make it more challenging to recruit and retain qualified personnel. The inability to recruit or loss of the services of any executive, key employee, consultant or advisor may impede the progress of our research and development objectives.

 

We will need to expand our organization and we may experience difficulties in managing this growth, which could disrupt our operations.

 

As of March 31, 2019, we had four full-time employees. As we mature, we may need to expand our full-time employee base and to hire more consultants and contractors. Our management may need to divert a disproportionate amount of its attention away from our day-to-day activities and devote a substantial amount of time to managing these growth activities. We may not be able to effectively manage the expansion of our operations, which may result in weaknesses in our infrastructure, operational mistakes, loss of business opportunities, loss of employees and reduced productivity among remaining employees, all of which may have a material adverse effect on our business, results of operations and prospects. Any future growth could require significant capital expenditures and may divert financial resources from other projects, such as the development of additional drug candidates. If our management is unable to effectively manage our growth, our expenses may increase more than expected, our ability to generate and/or grow revenues could be reduced, and we may not be able to implement our business strategy. Our future financial performance and our ability to commercialize drug candidates and compete effectively will depend, in part, on our ability to effectively manage any future growth.

 

 

 

 

 38 
 

 

Our employees, principal investigators, consultants and commercial partners may engage in misconduct or other improper activities, including non-compliance with regulatory standards and requirements and insider trading.

 

We are exposed to the risk of fraud or other misconduct by our employees, principal investigators, consultants and commercial partners. Misconduct by these parties could include intentional failures to comply with the regulations of the FDA and non-U.S. regulators, provide accurate information to the FDA and non-U.S. regulators, comply with healthcare fraud and abuse laws and regulations in the United States and abroad, report financial information or data accurately or disclose unauthorized activities to us. In particular, sales, marketing and business arrangements in the healthcare industry are subject to extensive laws and regulations intended to prevent fraud, misconduct, kickbacks, self-dealing and other abusive practices. These laws and regulations may restrict or prohibit a wide range of pricing, discounting, marketing and promotion, sales commission, customer incentive programs and other business arrangements. Such misconduct could also involve the improper use of information obtained in the course of clinical studies, which could result in regulatory sanctions and cause serious harm to our reputation or could cause regulatory agencies not to approve our drug candidates. It is not always possible to identify and deter employee misconduct, and the precautions we take to detect and prevent this activity may not be effective in controlling unknown or unmanaged risks or losses or in protecting us from governmental investigations or other actions or lawsuits stemming from a failure to comply with these laws or regulations. If any such actions are instituted against us, and we are not successful in defending ourselves or asserting our rights, those actions could have a significant impact on our business, including the imposition of significant fines or other sanctions.

 

We face potential product liability, and, if successful claims are brought against us, we may incur substantial liability and costs. If the use of our drug candidates harms patients, or is perceived to harm patients even when such harm is unrelated to our drug candidates, our regulatory approvals could be revoked or otherwise negatively impacted and we could be subject to costly and damaging product liability claims.

 

The use of our drug candidates in clinical studies and the sale of any products for which we obtain marketing approval exposes us to the risk of product liability claims. Product liability claims might be brought against us by consumers, healthcare providers, pharmaceutical companies or others selling or otherwise coming into contact with our products. There is a risk that our drug candidates may induce adverse events. If we cannot successfully defend against product liability claims, we could incur substantial liability and costs. In addition, regardless of merit or eventual outcome, product liability claims may result in:

 

  ·  Impairment of our business reputation;
  · Withdrawal of clinical study participants;
  · Costs due to related litigation;
  · Distraction of management’s attention from our primary business;
  · Substantial monetary awards to patients or other claimants;
  · The inability to commercialize our drug candidates; and
  · Decreased demand for our drug candidates, if approved for commercial sale,

 

all of which may have a material adverse effect on our business, results of operations and prospects.

 

If we fail to comply with environmental, health and safety laws and regulations, we could become subject to fines or penalties or incur costs that could have a material adverse effect on the success of our business.

 

We are subject to numerous environmental, health and safety laws and regulations, including those governing laboratory procedures and the handling, use, storage, treatment and disposal of hazardous materials and wastes. Our operations involve the use of hazardous and flammable materials, including chemicals and biological materials. Our operations also produce hazardous waste products. We generally contract with third-parties for the disposal of these materials and wastes. We cannot eliminate the risk of contamination or injury from these materials. In the event of contamination or injury resulting from our use of hazardous materials, we could be held liable for any resulting damages, and any liability could exceed our resources. We also could incur significant costs associated with civil or criminal fines and penalties.

 

 

 

 

 39 
 

 

The workers’ compensation insurance we maintain to cover us for costs and expenses we may incur due to injuries to our employees resulting from the use of hazardous materials or other work-related injuries may not provide adequate coverage against potential liabilities. In addition, we may incur substantial costs in order to comply with current or future environmental, health and safety laws and regulations. These current or future laws and regulations may impair our research, development or production efforts. Failure to comply with these laws and regulations also may result in substantial fines, penalties or other sanctions, which may have a material adverse effect on our business and results of operations.

 

Our disclosure controls and procedures may not prevent or detect all errors or acts of fraud.

 

We are subject to the periodic reporting requirements of the Exchange Act. Any disclosure controls and procedures or internal controls and procedures, no matter how well-conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people or by an unauthorized override of the controls. Accordingly, because of the inherent limitations in our control system, misstatements due to error or fraud may occur and not be detected, which may have material adverse effect on our business and results of operations.

 

Failure in our information technology systems, including by cybersecurity attacks or other data security incidents, could significantly disrupt our operations.

 

Our operations depend, in part, on the continued performance of our information technology systems. Our information technology systems are potentially vulnerable to physical or electronic break-ins, computer viruses and similar disruptions. Failure of our information technology systems could adversely affect our business, profitability and financial condition.

 

A successful cybersecurity attack or other data security incident could result in the misappropriation and/or loss of confidential or personal information, create system interruptions, or deploy malicious software that attacks our systems. It is possible that a cybersecurity attack might not be noticed for some period of time. The occurrence of a cybersecurity attack or incident could result in business interruptions from the disruption of our information technology systems, or negative publicity resulting in reputational damage with our clinical trial participants, customers, stockholders and other stakeholders and/or increased costs to prevent, respond to or mitigate cybersecurity events. In addition, the unauthorized dissemination of sensitive personal information or proprietary or confidential information could expose us or other third-parties to regulatory fines or penalties, litigation and potential liability, or otherwise harm our business. 

 

 

 

 

 

 40 
 

 

PROPOSAL ONE

 

PROPOSAL ONE: THE TRANSACTION PROPOSAL

 

On March 4, 2019, the Company announced its agreement to acquire the novel CAR T platform technology, called “XCART,” a proximity-based screening platform capable of identifying CAR constructs that can target patient-specific tumor neoantigens, with a demonstrated proof of mechanism in B-cell non-Hodgkin lymphomas. The XCART technology, developed by the Institute in collaboration with 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.

 

The XCART technology platform was designed by its originators to utilize an established screening technique to identify peptide ligands that bind specifically to the unique B-cell receptor (“BCR”) on the surface of an individual patient’s malignant tumor cells. The peptide is then inserted into the antigen-binding domain of a CAR, and a subsequent transduction/transfection process is used to engineer the patient’s T cells into a CAR T format which redirects the patient’s T cells to attack the tumor. Essentially, the XCART screening platform is the inverse of a typical CAR T screening protocol wherein libraries of highly specific antibody domains are screened against a given target. In the case of XCART screening, the target is itself an antibody domain, and hence highly specific by its nature. The XCART technology creates the possibility of personalized treatment of lymphomas utilizing a CAR with an antigen-binding domain that should only recognize, and only be recognized by, the unique BCR of a particular patient’s B-cell lymphoma. An expected result for XCART is limited off-tumor toxicities, such as B-cell aplasia. Xenetic’s clinical development program will seek to confirm the early preclinical results, and to demonstrate a more attractive safety profile than existing therapies.

 

A description of the Transaction Documents and the transactions contemplated thereby are set forth below. Subject to the satisfaction of the closing conditions, the Transaction is expected to close in the first half of 2019.

 

The Share Purchase Agreement

 

The following includes a summary of the material provisions of the Share Purchase Agreement, a copy of which is attached to this proxy statement/prospectus as Appendix A. This summary may not contain all of the information about the Share Purchase Agreement and Hesperix Acquisition that is important to you. We encourage you to read carefully the Share Purchase Agreement in its entirety, as the rights and obligations of the parties thereto are governed by the express terms of the Share Purchase Agreement and not by this summary or any other information contained in this proxy statement/prospectus. Certain portions of Appendix A have been omitted. The omitted information is not material and would likely cause competitive harm to the Company if publicly disclosed.

 

On the Signing Date, the Company entered into the Share Purchase Agreement with Hesperix, the Sellers, and the Sellers’ Representative. Pursuant to the terms and subject to the conditions set forth in the Share Purchase Agreement, the Company has agreed to purchase, and the Sellers have agreed to sell to the Company, all of the issued and outstanding shares of Hesperix in exchange for the Company issuing to Sellers an aggregate of Four Million Eight Hundred Seventy-Five Thousand (4,875,000) shares of Common Stock, regardless of the trading price per share of the Common Stock at the time of the closing.

 

Closing

 

We are working towards completing the transaction as soon as possible. The closing is required to take place no later than two business days after the last of the conditions set forth in the Share Purchase Agreement (other than those conditions that by their nature are to be satisfied at the closing, but subject to the satisfaction or waiver of those conditions) have been satisfied or, to the extent permissible, waived by the party or parties entitled to the benefit of such conditions, or at such other time or on such other date or at such other place as the Company and Hesperix may mutually agree.

 

As described below, if the Share Purchase Agreement has not closed on or prior to July 1, 2019, the Share Purchase Agreement may be terminated by the Company or by Sellers’ Representative.

 

 

 

 

 41 
 

 

Representations and Warranties

 

The Share Purchase Agreement contains representations and warranties made by (a) each Seller to the Company; (b) Hesperix and each Seller to the Company; and (c) by the Company to Sellers. Certain of the representations and warranties in the Share Purchase Agreement are subject to knowledge qualifications, which means that those representations and warranties would not be deemed untrue, inaccurate or incorrect as a result of matters of which any director, managing member, manager, or officer, as may be applicable, of the party making the representation did not and do not have actual knowledge, or the knowledge that such person would have reasonably obtained in the due exercise of care in the performance of their duties to such person without having made any search or investigation. In addition, the representations and warranties contained in the Share Purchase Agreement are subject to specified exceptions and qualifications and the confidential disclosure schedules that Sellers have provided to the Company in connection with signing the Share Purchase Agreement, which such disclosures are not reflected in the Share Purchase Agreement or otherwise publicly disclosed. You should not rely on the representations, warranties, covenants or any description thereof as actual characterizations of the actual state of facts or conditions of the Company, Hesperix, or any of their respective subsidiaries or affiliates. Moreover, the information concerning the subject matter of the representations and warranties may change after the Signing Date. The representations and warranties should not be read alone but, instead, should be read only in conjunction with the information provided elsewhere in this proxy statement/prospectus.

 

For purposes of the Share Purchase Agreement, a “material adverse effect” with respect to Hesperix means any event, occurrence, fact, condition or change that is, or could reasonably be expected to become, individually or in the aggregate, materially adverse to (a) the business, results of operations, condition (financial or otherwise), or assets of Hesperix and/or its subsidiaries, or (b) the ability of Sellers to consummate the transaction; provided, however, that none “material adverse effect” will not include any event, occurrence, fact, condition or change, directly or indirectly, arising out of or attributable to:

 

·general economic or political conditions (except such event, occurrence, fact, condition or change will be taken into account in determining whether a material adverse effect has occurred or could reasonably be expected to occur to the extent such event, occurrence, fact, condition or change disproportionately effects Hesperix and/or any of its subsidiaries compared to other companies in the industries in which Hesperix and/or its subsidiaries conduct their respective businesses);
·general conditions affecting the industries in which Hesperix and/or any of its subsidiaries operate (except such event, occurrence, fact, condition or change will be taken into account in determining whether a material adverse effect has occurred or could reasonably be expected to occur to the extent such event, occurrence, fact, condition or change disproportionately effects Hesperix and/or any of its subsidiaries compared to other companies in the industries in which Hesperix and/or its subsidiaries conduct their respective businesses);
·any changes in financial or securities markets in general (except such event, occurrence, fact, condition or change will be taken into account in determining whether a material adverse effect has occurred or could reasonably be expected to occur to the extent such event, occurrence, fact, condition or change disproportionately effects Hesperix and/or any of its subsidiaries compared to other companies in the industries in which Hesperix and/or its subsidiaries conduct their respective businesses);
·acts of war (whether or not declared), armed hostilities or terrorism, or any escalation or worsening thereof (except such event, occurrence, fact, condition or change will be taken into account in determining whether a material adverse effect has occurred or could reasonably be expected to occur to the extent such event, occurrence, fact, condition or change disproportionately effects Hesperix and/or any of its subsidiaries compared to other companies in the industries in which Hesperix and/or its subsidiaries conduct their respective businesses); or
·changes in applicable laws or accounting rules, including the Internal Financial Reporting Standards (the “IFRS”) (except such event, occurrence, fact, condition or change will be taken into account in determining whether a material adverse effect has occurred or could reasonably be expected to occur to the extent such event, occurrence, fact, condition or change disproportionately effects Hesperix and/or any of its subsidiaries compared to other companies in the industries in which Hesperix and/or its subsidiaries conduct their respective businesses).

 

 

 

 

 42 
 

 

The Share Purchase Agreement contains representations and warranties made by each Seller, severally but not jointly, to the Company relating to a number of matters, including, among other things, the following:

 

·requisite corporate authority of each Seller, and in the case of any Seller that is an individual, the requisite legal capacity, relating to the execution, delivery and performance of the Share Purchase Agreement and each of the other Transaction Documents, the consummation of the contemplated transactions, and the enforceability of the Share Purchase Agreement and each of the other Transaction Documents;
·the absence of conflicts with, or violations of, organizational documents, contracts or applicable laws as a result of the execution, delivery and performance of the Share Purchase Agreement and each of the other Transaction Documents and the transactions contemplated by the Share Purchase Agreement and each of the other Transaction Documents;
·the number of Shares held and beneficially owned by each Seller, and each such Share being owned free and clear of any encumbrances, subscriptions, commitments and restrictions of any kind; and
·brokers’ or similar fees payable in connection with the Hesperix Acquisition.

 

The Share Purchase Agreement also contains representations and warranties by Hesperix and each Seller, severally but not jointly, made to the Company, relating to a number of matters, including, the following:

 

·organization, good standing, and qualification to do business of Hesperix;
·requisite corporate authority relating to the execution, delivery and performance of the Share Purchase Agreement and each of the other Transaction Documents, and the consummation of the contemplated transactions and the enforceability of the Share Purchase Agreement and each of the other Transaction Documents;
·capital structure of Hesperix and matters relating to the shares of Hesperix stock being acquired by the Company;
·the organization and existence of any subsidiaries;
·consents and approvals relating to the execution, delivery and performance of the Share Purchase Agreement and each of the other Transaction Documents, including required filings with, and the consents and approvals of, government entities in connection with the transactions contemplated by the Share Purchase Agreement and each of the other Transaction Documents;
·financial statements compliance with the IFRS and fair representation of consolidated financial positions and results of operations of Hesperix and its subsidiaries;
·the ownership of no other assets other than certain patent applications held by Hesperix and no other activities or liabilities other than those contained in the Hesperix Assignment Agreement;
·conduct of business and absence of a material adverse effect since December 31, 2017;
·matters with respect to certain material contracts;
·intellectual property matters;

 

 

 

 

 

 

 43 
 

 

·compliance with applicable regulatory laws, including anti-bribery and data protection and privacy laws;
·absence of certain litigation, governmental orders, injunctions by or before any governmental entity;
·compliance with applicable law and permits;
·tax matters;
·the books and records of Hesperix and its subsidiaries;
·brokerage, finder’s or other fee or commission payable in connection with the Hesperix Acquisition;
·related party transaction matters;
·absence of any untrue statement of material fact or omission to state any material fact necessary to make the statements therein, in light of the circumstances in which they are made, not misleading; and
·the independent investigation, review and analysis of the business, results of operation, and condition of the Company by each Seller.

 

The Share Purchase Agreement also contains representations and warranties made by the Company to the Sellers relating to a number of matters, including, the following:

 

·the organization, good standing and qualification to do business of the Company;
·requisite corporate authority relating to the execution, delivery and performance of the Share Purchase Agreement and the consummation of the contemplated transactions and the enforceability of the Share Purchase Agreement;
·the absence of conflicts with, or violations of, organizational documents, contracts or applicable laws as a result of the execution, delivery and performance of the Share Purchase Agreement and the other transactions contemplated by the Share Purchase Agreement;
·broker, finder and investment banker fees payable in connection with the Hesperix Acquisition;
·absence of certain litigation;
·the issuance of the Hesperix Transaction Shares;
·matters relating to the reports, financial statements, schedules, forms, statements and other documents required to be filed by the Company under the Securities Act and the Exchange Act (the “Exchange Act”);
·tax matters; and
·the independent investigation, review and analysis of the business, results of operation, and condition of Hesperix by the Company.

 

 

 

 

 44 
 

 

Subject to the limitations and other provisions in the Share Purchase Agreement, the representations and warranties in the Share Purchase Agreement will survive the closing and remain in full force and effect until the date that is twenty-four (24) months from the closing date; provided, however, certain representations and warranties, including, among others, (i) with respect to the Sellers and Hesperix, those relating to the organization and authority of Sellers and Hesperix, conflicts and approvals of third parties, the capitalization of Hesperix and ownership by the Sellers of Hesperix, subsidiaries of Hesperix, no activities or liabilities of Hesperix, the Hesperix intellectual property, brokers and related party transactions (collectively, the “Hesperix Fundamental Representations”), and (ii) with respect to the Company, the organization and authority of the Company, conflicts and approvals of third parties and brokers (collectively the “Company Fundamental Representations” and together with Hesperix Fundamental Representations, the “Fundamental Representations”), all of which will survive indefinitely. If the Share Purchase Agreement is validly terminated, there will be no liability under the representations and warranties of the parties, except with respect to any willful breach or material breach of any provision, or for fraud or criminal misconduct of any party.

 

Conduct of Hesperix’s Business

 

Sellers have agreed as to itself, Hesperix and its subsidiaries that, except as otherwise expressly required by the Share Purchase Agreement or approved in writing by the Company, after the Signing Date, and until the earlier to occur of the termination of the Share Purchase Agreement or the closing of the transactions contemplated thereby, the business of Hesperix and its subsidiaries will be conducted in the ordinary and usual course consistent with past practice and, to the extent consistent therewith, Hesperix and its subsidiaries will use their commercially reasonable efforts to (i) maintain and preserve intact the current organization, business, Hesperix intellectual property and franchise of Hesperix and its subsidiaries, and (ii) maintain the existing relationships and goodwill of Hesperix and its subsidiaries.

 

In addition to the general covenants above, Sellers have agreed that after the Signing Date, and prior to the earlier of the termination of the Share Purchase Agreement or the closing of the transactions contemplated thereby, except as expressly required by the Share Purchase Agreement or as otherwise approved in writing by the Company (such approval not to be unreasonably withheld or delayed), Sellers will cause Hesperix and/or its subsidiaries to:

 

·preserve and maintain all of their permits;
·pay all of their debts, taxes and other obligations when due;
·maintain their properties and assets and the intellectually property owned, operated or used by Hesperix and its subsidiaries, in the same condition as they were on the Signing Date, subject to reasonably wear and tear;
·defend and protect their properties and assets from infringement or usurpation;
·perform all their obligations under all contracts relating to or affecting its properties, assets or business;
·maintain their books and records in accordance with past practice;
·comply in all material respects with all applicable laws; and
·not take any action that would cause any of the foregoing changes, events or conditions.

 

No Solicitation of Other Bids

 

Sellers and Hesperix were required upon the execution of the Share Purchase Agreement to, and to cause its affiliates and representatives to, immediately cease and cause to be terminated any discussions and negotiations with any person, other than the Company, concerning any acquisition proposal.

 

 

 

 

 45 
 

 

Non-competition; Non-solicitation

 

For a period of five (5) years commencing on the closing date (the “Restricted Period”), each Seller has agreed to not, and will not permit and of its affiliates to, directly, or indirectly (i) engage in or assist others in engaging in the inventing, developing, use or commercialization of any process or product covered by any claim as filed as part of Hesperix’s patents (the “Restricted Business”); (ii) have an interest in any person that engages directly or indirectly in the Restricted Business in any capacity, including as partner, stockholder, member, manager, inventor, employee, or consultant; and (iii) intentionally interfere in any material respect with the business relationships (past or present) of Hesperix, the Company or any of their subsidiaries.

 

During the Restricted Period, each Seller will not, and will not permit any of its affiliates to, directly or indirectly, hire or solicit any inventor or scientist of Hesperix or any affiliate or any party involved in the creation or development of Hesperix’s intellectual property (irrespective of whether any such party performed work on behalf of Hesperix or any affiliate), or interfere with the relationship between any such party and Hesperix or any affiliate or hire any such party who is no longer involved with Hesperix or any affiliate; however, these provisions will not prevent a Seller or affiliate from hiring (i) an inventor or scientist whose employment has been terminated by Hesperix or the Company, or (ii) after 180 days from termination, any inventor or scientist who has terminated his employment with Hesperix or the Company.

 

IBCH and Pharmsynthez who are each being provided royalties by Hesperix pursuant that certain Assignment Agreement with IBCH, Pharmsynthez, and certain other parties thereto will each execute separate non-competition and non-solicitation agreements at the closing containing the same or similar language (the “Royalty Restrictive Covenant Agreement”).

 

Other Covenants and Agreements

 

The Share Purchase Agreement contains certain other covenants and agreements, including, among others, covenants relating to:

 

·Hesperix affording the Company reasonable access to Hesperix’s intellectual property, premises, books and records as well as information concerning itself and its subsidiaries;
·the resignation of certain officers and managers of Hesperix effective as of the closing upon the prior written request of the Company;
·press releases and public statements relating to the Share Purchase Agreement or the transactions contemplated by the Share Purchase Agreement;
·the availability of Hesperix scientist or inventors for any “road show” and/or presentation;
·the retention of Hesperix’s books and records; and
·tax matters.

 

 

 

 

 46 
 

 

Conditions to Each Party’s Obligations

 

The respective obligations of each of the parties to consummate the transactions contemplated by the Share Purchase Agreement are subject to the satisfaction or waiver at or prior to closing of the following conditions:

 

·no governmental entity having enacted, issued, promulgated, enforced or entered into any law or any action having been instituted by a governmental entity or order effected, in any case, having the effect of restraining, conditioning, challenging the legality or validity of, or making the transaction contemplated by the Share Purchase Agreement illegal or otherwise prohibited;
·the Company having received approval of its listing application to have the Transaction Shares listed on NASDAQ, subject to official notification;
·the approvals from all governmental authorities required for the consummation of the transactions contemplated by the Share Purchase Agreement;
·the approval by the stockholders of the Company of Proposals 1, 2 and 3; and
·the proxy statement/prospectus becoming effective under the Securities Act and no stop order suspending the effectiveness of the proxy statement/prospectus has been issued by the SEC and no proceedings for that purpose and no similar proceeding in respect of the proxy statement/prospectus have been initiated or, to the knowledge of Buyer, threatened by the SEC.

 

Conditions to Obligations of the Company

 

The obligations of the Company to consummate the transactions contemplated by the Share Purchase Agreement are also subject to the satisfaction or waiver by the Company at or prior to the closing of the following conditions:

 

·Hesperix or Sellers, as applicable, have effected the transactions contemplated by the lock-up agreement, duly executed by each of the Sellers and the stockholder’s agreement pursuant to which certain stockholders of Hesperix agreed to vote or cause to be voted, or consent or cause to be consented, with respect to the election of the Company’s directors;
·other than the Hesperix Fundamental Representations, the representations and warranties of Hesperix and each Seller contained in the Share Purchase Agreement, the representations and warranties of Hesperix and each Seller must be true and correct in all respects (in the case of any representation or warranty qualified by materiality or material adverse effect) or in all material respects (in the case of any representation or warranty not qualified by materiality or material adverse effect), both on the Signing Date and at the closing date with the same effect as though made at and as of such date (except those representations and warranties that address matters only as of a specified date, the accuracy of which would be determined as of that specified date in all respects);
·the Hesperix Fundamental Representations must, both on the Signing Date and at the closing date (except those representations and warranties that address matters only as of a specified date, the accuracy of which shall be determined as of that specified date in all respects), be true and correct in all respects;
·Hesperix and Sellers have each duly performed and complied in all material respects with all agreements, covenants and conditions required by the Share Purchase Agreement and each of the other Transaction Documents to be performed or complied with by them prior to or on the closing date;
·all necessary approvals, consents and waivers shall have been received, and executed counterparts thereof shall have been delivered to the Company in form and substance acceptable to the Company at or prior to the closing;
·there not having occurred any change, event, circumstance or development that individually or in the aggregate, has had or would reasonably be expected to have a material adverse effect between the Signing Date and the closing date;
·the Company’s board of directors having received the fairness opinion supporting the enterprise valuation of Hesperix indicated by the consideration paid under the Share Purchase Agreement for the Shares;

 

 

 

 

 47 
 

 

·the Company having received adequate financing, as reasonably determined by the Company, whether in the form of a private or public offering of debt or equity securities to fund future working capital obligations of the Company and Hesperix following the closing;
·IBCH having executed the sponsored research agreement and delivered the same to the Company;
·the Royalty Restrictive Covenant Agreements having been executed by the appropriate parties thereto and delivered to the Company;
·the Company having received a certificate on behalf of Hesperix signed by a duly authorized officer of Hesperix and each Seller, that each of the conditions set forth in the Share Purchase Agreement have been satisfied;
·the Company having received a certificate on behalf of Hesperix signed by the secretary of Hesperix, certifying the following: (i) a correct and complete copy of all resolutions duly adopted by the board of directors and shareholders authorizing the execution, delivery and performance of the Share Purchase Agreement and the consummation of the transactions contemplated and (ii) the incumbency of all of the officers of Hesperix executing the Share Purchase Agreement and any document executed and delivered in connection therewith;
·Hesperix delivering to the Company a good standing certificate (or its equivalent) for Hesperix and each of its subsidiaries from the secretary of state or similar governmental authority of the jurisdiction under the laws in which Hesperix and each subsidiary is organized; and
·the OPKO Assignment Agreement and the transactions contemplated thereunder being consummated.

 

Conditions to Obligations of Hesperix and each Seller

 

The obligations of Hesperix and each Seller to consummate the transactions contemplated by the Share Purchase Agreement is also subject to the satisfaction or waiver by the Seller Representative at or prior to the closing of the following conditions:

 

·the Company having delivered to the Seller’s Representative the Hesperix Transaction Shares;
·other than the Company Fundamental Representations, the representations and warranties of the Company must, both on the Signing Date and at the closing date, be true and correct in all respects (in the case of any representation or warranty qualified by materiality) or in all materials respects (in the case of any representation or warranty not qualified by materiality) (except those representations and warranties that address matters only as of a specified date, the accuracy of which would be determined as of that specified date in all respects);
·the Company Fundamental Representations must be true and correct in all respects on and as of the Signing Date and as of the closing date with the same effect as though made at and as of such date;
·the Company having duly performed and complied in all material respects with all agreements, covenants and conditions required by the Share Purchase Agreement and each of the other transaction documents to be performed or complied with by it prior to or on the closing date;
·Hesperix having received a certificate on behalf of the Company signed by the secretary of the Company, certifying the following: (i) resolutions adopted by stockholders evidencing the Stockholder Approval and (ii) the incumbency of all of the officers of the Company executing the Share Purchase Agreement and any document executed and delivered in connection therewith; and
·Hesperix receiving a certificate on behalf of the Company signed by a duly authorized officer of the Company, that each of the conditions set forth in the Share Purchase Agreement have been satisfied.
·the Company delivering to Dmitry Genkin an amount equal to the outstanding amount actually advanced by Dmitry Genkin under his loan agreement with Hesperix, not to exceed $150,000; and
·the Company financing shall have been completed.

 

 

 

 

 48 
 

 

Indemnification

 

From and after the closing, the Sellers will indemnify and defend each of the Company and its affiliates (including Hesperix) and their respective representatives against, and will hold each of them harmless, including the reimbursement for any and all losses, damages, liabilities, awards, including reasonable attorneys’ fees and the cost of enforcing any right of indemnification (“Losses”), arising out of, with respect to or by reason of (i) any inaccuracy in or breach of any of the representations or warranties of Hesperix or any Seller contained in the Share Purchase Agreement or in any certificate or instrument delivered by or on behalf of the Company pursuant to the Share Purchase Agreement (other than such representations or warranties relating to taxes as the sole remedy for any such breach are pursuant to such tax covenants contained in the Share Purchase Agreement); (ii) any breach, alleged breach or non-fulfillment of any covenant, agreement or obligation to be performed by Hesperix or any Seller pursuant to the Share Purchase Agreement (other than any breach or violation of, or failure to perform, any covenant, agreement, undertaking or obligation relating to taxes as the sole remedy for any such breach are pursuant to such tax covenants contained in the Share Purchase Agreement); and (iii) any Hesperix indebtedness and transaction expenses to the extent not paid at closing.

 

From and after the closing, the Company will indemnify and defend Sellers and its affiliates and their respective representatives against, and will hold each of them harmless, including the reimbursement for all Losses, arising out of, with respect to or by reason of (i) any inaccuracy in or breach of any of the representations or warranties of the Company contained in the Share Purchase Agreement or in any certificate or instrument delivered by or on behalf of the Company pursuant to the Share Purchase Agreement; or (ii) any breach, alleged breach or non-fulfillment of any covenant, agreement or obligation to be performed by the Company pursuant to the Share Purchase Agreement.

 

The indemnification provided for in the Share Purchase Agreement are subject to the following limitations:

 

·Sellers will not be liable to the Company indemnitees for indemnification until the aggregate amount of all Losses under the Share Purchase Agreement exceeds Fifty Thousand Dollars ($50,000), in which event Seller will be required to pay or be liable for all such Losses in excess of Fifty Thousand Dollars ($50,000) (except such limitation shall not apply to Losses based upon, arising out of, or by reason of (i) any inaccuracy in or breach of any Hesperix Fundamental Representations; or (ii) intentional breach, intentional misrepresentation, criminal misconduct or fraud). The total aggregate amount of all Losses for which Sellers will be liable under the Share Purchase Agreement will not exceed fifteen percent (15%) of the Hesperix Transaction Shares, based on the volume weighted average closing trading price of the Common Stock over a ten day period (the “Closing Price”) (except such limitation shall not apply to Losses based upon, arising out of, or by reason of (i) any inaccuracy in or breach of any Hesperix Fundamental Representations; or (ii) intentional breach, intentional misrepresentation, criminal misconduct or fraud).
·The Company will not be liable to the Seller indemnities for indemnification under the Share Purchase Agreement until the aggregate amount of all Losses exceeds Fifty Thousand Dollars ($50,000), in which event the Company will be required to pay or be liable for all such Losses in excess of Fifty Thousand Dollars ($50,000) (except such limitation shall not apply to Losses based upon, arising out of, or by reason of (i) any inaccuracy in or breach of any Company Fundamental Representations; or (ii) intentional breach, intentional misrepresentation, criminal misconduct or fraud). The total aggregate amount of all Losses for which the Company will be liable under the Share Purchase Agreement will not exceed fifteen percent (15%) of the Hesperix Transaction Shares, based on the Closing Price (except such limitation shall not apply to Losses based upon, arising out of, or by reason of (i) any inaccuracy in or breach of any Company Fundamental Representations; or (ii) intentional breach, intentional misrepresentation, criminal misconduct or fraud).

 

 

 

 

 49 
 

 

Termination of the Share Purchase Agreement

 

The Share Purchase Agreement may be terminated at any time prior to the closing:

 

·by mutual written consent of the Company and Sellers’ Representative;
·by the Company, subject to certain conditions, if: (i) any of the representations and warranties of Hesperix or any Seller fails to be true and correct as of the date made; or (ii) there is a breach by Hesperix or any Seller of any covenant or agreement of Hesperix or any Seller that is not curable or, if curable, is not cured within the cure period;
·by the Company, subject to certain conditions, if any of the conditions set forth in the Share Purchase Agreement of Hesperix or any Seller to effect the closing will not have been, or becomes apparent that any such condition will not be, fulfilled by July 1, 2019, unless such failure is due to the failure of the Company to perform or comply with any of the covenants, agreements or conditions therein;
·by Sellers’ Representative, subject to certain conditions, if: (i) any of the representations and warranties of the Company fails to be true and correct as of the date made; or (ii) there is a breach by the Company of any covenant or agreement of the Company that is not curable or, if curable, is not cured within the cure period;
·by Sellers’ Representative, subject to certain conditions, if any of the conditions set forth in the Share Purchase Agreement of the Company to effect the closing will not have been, or becomes apparent that any such condition will not be, fulfilled by July 1, 2019, unless such failure is due to the failure of Hesperix or any Seller to perform or comply with any of the covenants, agreements or conditions therein; or
·by the Company or Sellers’ Representative in the event that (i) there is any law that makes the consummation of the transactions contemplated by the Share Purchase Agreement illegal or otherwise prohibited, or (ii) any governmental authority has issued a governmental order (that is final and non-appealable) restraining or enjoining the transactions contemplated by the Share Purchase Agreement.

 

Effect of Termination

 

If the Share Purchase Agreement is terminated, the Share Purchase Agreement will become void and of no effect with no liability to any person on the part of any party except that the provisions of the Share Purchase Agreement relating to termination and certain technical provisions will continue in effect. The effect of the termination of the Share Purchase Agreement will not relieve any party from any liability for any willful breach or material breach of any provision therein, or for fraud or criminal misconduct.

 

Amendments and Waivers

 

Subject to the limitations of the Share Purchase Agreement, the Share Purchase Agreement may be amended or modified by a written instrument executed by the Company and the Sellers’ Representative on behalf of the Sellers, or in the case of a waiver, any such extension or waiver will be valid only if set forth in an instrument in writing signed by Buyer or Sellers’ Representative on behalf of Sellers, as the case may be.

 

 

 

 50 
 

 

Specific Performance

 

If for any reason any of the provisions of the Share Purchase Agreement are not performed in accordance with their specific terms or are otherwise breached or threatened to be breached, each party to the Share Purchase Agreement will be entitled to seek equitable relief, including an injunction or injunctions or orders for specific performance to prevent breaches of the Share Purchase Agreement and to enforce specifically the terms and provisions of the Share Purchase Agreement, in addition to any other remedy such party would be entitled to at law or in equity as a remedy for any such breach or threatened breach.

 

The Hesperix Assignment Agreement

 

Upon completion of the Hesperix Acquisition, Hesperix will be a wholly-owned subsidiary of the Company and as such, the Company will assume the rights and obligations of the Hesperix Assignment Agreement. The following includes a summary of the material provisions of the Hesperix Assignment Agreement, a copy of which is attached to this proxy statement/prospectus as Appendix B. This summary may not contain all of the information about the Hesperix Assignment Agreement and related transactions that is important to you. We encourage you to read carefully the Hesperix Assignment Agreement in its entirety, as the rights and obligations of the parties thereto are governed by the express terms of the Hesperix Assignment Agreement and not by this summary or any other information contained in this proxy statement/prospectus. Certain portions of Appendix B have been omitted. The omitted information is not material and would likely cause competitive harm to the Company if publicly disclosed.

 

On the Signing Date, Hesperix entered into the Hesperix Assignment Agreement with Alexey Vyacheslavovich Stepanov, Alexander Gabibovich Gabibov, Ivan Vitalievich Smirnov, Dmitry Dmitrievich Genkin, Richard A. Lerner, Alexey Anatolievich Belogurov, Alexey Vinogradov, IBCH, and Pharmsynthez (Stepanov, Gabibov, Genkin, Belogurov, and Pharmsynthez, collectively “Assignors”). Pursuant to the terms and subject to the conditions set forth in the Hesperix Assignment Agreement, 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 the following patents relating to the “Articles And Methods Directed To Personalized Therapy Of Cancer,” (the “Assignor Patent Rights”) and the related know-how: (i) RU2017134483 filed October 4, 2017 (C1256.70030RU00); (ii) RU2018112009 filed April 4, 2018 (C1256.70031RU00); (iii) RU2018134321 filed October 1, 2018 (C1256.70033RU00); and (iv) PCT/RU2018/000653 filed October 4, 2018 (C1256.70030WO00), in exchange for Hesperix paying each of IBCH and Pharmsynthez a running royalty in the low single digit range based on net sales of products in each country in which, in absence of the Hesperix Assignment Agreement, the manufacture, use, offer for sale, sale, or importation of such product would infringe a valid claim of an issued patent; provided, that the running royalty would be reduced by one half (1/2) in each country in which, the manufacture, use, offer for sale, sale or importation of such product would infringe a valid claim of a pending patent application, if such claim were a claim of an issued patent.

 

Assignments; Certain Representations

 

Prior to the Hesperix Assignment Effective Date, each of Stepanov, Gabibov and Belogurov will have granted to IBCH an irrevocable assignment of certain patents owned by each relating to the Assignor Patent Rights and Genkin will have granted to Pharmsynthez an irrevocable assignment of certain Assignor Patent Rights owned by him.

 

Collectively, the Assignors own all right, title, and interest, throughout the word in all inventions in and to the Assignor Patent Rights and the related know-how, free and clear of all liens or other encumbrances of any nature whatsoever other than those rights, title and interests that the Institute has in the Assignor Patent Rights and related know-how (the “Institute Rights”). Subject to the terms and the conditions set forth in the Hesperix Assignment Agreement, Hesperix will purchase all of the Assignor’s collective rights, title, interests in and to the Assignor Patent Rights, and each Assignor will irrevocably, sell, assign, transfer, and convey unto Hesperix all of their individual right, title, and interest throughout the world in and to the Assignor Patent Rights and related know-how (including the right to sue for past infringement), including any patent application whether conventional, design, divisional, continuation, continuation-in-part, and continued prosecution applications, requests for continued examination, substitutions, patents of additions, reissues, renewals, or re-exams thereof, and in and to all inventions, preparatory to obtaining Letters Patent of the United States and patents throughout the world.

 

 

 

 

 51 
 

 

In addition, Assignors have each authorized the United States Commissioner of Patents and Trademarks, and will request that all patent authorities throughout the world, to issue any and all patents, including in or resulting from the Assignor Patent Rights, to Hesperix for its interest and for the sole use and benefit of Hesperix and its assigns and representative, in each case provided that the parties acknowledge and agree that their respective rights, title, interests and obligations pursuant to the assignment and the Hesperix Assignment Agreement are subject to the rights of the United States government, which may arise from the Institute’s and the Institute’s assignors receipt of research support from the United States government.

 

No Other Technology Rights

 

Each of the parties to the Hesperix Assignment Agreement have agreed that the Hesperix Assignment Agreement does not grant any party thereto any license, covenant, or other right in the intellectual property of any other party other than as expressly provided in the Hesperix Assignment Agreement.

 

Further Acts; Cooperation

 

Each Assignor has agreed, at no further cost or expense to Hesperix other than as provided by the Hesperix Assignment Agreement, that he/she/it will undertake all legal acts at any time necessary to:

 

·vest all right, title, and interest in the Assignor Patent Rights and know-how in Hesperix or Hesperix’s designee;
·enable Hesperix or Hesperix’s designee to prosecute the patents and to issue patents from the Assignor Patent Rights;
·enable Hesperix or Hesperix’s designee to enforce the Assignor Patent Rights against any infringers or to defend against any challenges to the validity or enforceability of the Assignor Patent Rights; and
·do all other acts as any be reasonable or necessary to satisfy the intent of the parties of the Hesperix Assignment Agreement.

 

The Assignors have also agreed to cooperate with Hesperix and its counsel in connection with prosecuting and maintaining the Assignor Patent Rights by providing all pertinent information and data with respect to the Assignor Patent Rights, assisting in reviewing and responding to any actions issued by any patent office, and executing applications, specifications, declarations, and all similar instruments which Hesperix may deem necessary.

 

Running Royalties

 

In consideration of the assignments by IBCH and Pharmsynthez of the Assignor Patent Rights and subject to the terms and conditions of the Hesperix Assignment Agreement, Hesperix has agreed to pay each of IBCH and Pharmsynthez during the term of the Hesperix Assignment Agreement, a running royalty rate in the low single-digit range based on the net sales of any active pharmaceutical, chemical or biological ingredient, or any component thereof disclosed in an Assignor Patent Right or encompassed by the claims of the Assignor Patent Rights (the “Product”), in each country in which the absence of the Hesperix Assignment Agreement, the manufacture, use, offer for sale, sale, or importation of the Product would infringe on a claim of an issued and unexpired patent or a claim of a pending patent application within the Assignor Patent Rights which has not been held un-patentable, invalid or unenforceable by a court or other government agency of competent jurisdiction (a “Valid Claim”). The running royalty to each of IBCH and Pharmsynthez, would be reduced by one half in each country in which, the manufacture, use, offer for sale, sale or importation of such product would infringe a valid claim of a pending patent application, if such claim were a claim of an issued patent. The running royalty to each of IBCH and Pharmsynthez would be further reduced for any royalty term in which neither of the foregoing running royalty rates applicable. The running royalty rate will be paid only once for each unit of Product no matter how many times such unit is sold or how many Assignor Patent Rights, absent of the Hesperix Assignment Agreement, would be infringed by the manufacture, use, offer for sale, sale, or importation of such Product.

 

 

 

 

 52 
 

 

Royalty Term

 

The running royalties due under the Hesperix Assignment Agreement will commence on the Signing Date through, Product-by-Product and country-by-country bases, the later of (i) the expiration of the last-to-expire Assignor Patent Right, a Valid Claim of which, absent the Hesperix Assignment Agreement, be infringed by the manufacture, use, offer for sale, sale or import of a Product, or (ii) ten (10) years from the date of first commercial sale by Hesperix or any licensee of any of Hesperix’s right, title or interest in the Assignor Patent Rights to a third party.

 

Royalty Payments and Reports

 

The running royalties under the Hesperix Assignment Agreement will be due forty-five (45) calendar days after the end of each calendar quarter. Each payment of the running royalty will be accompanied by a report setting forth, on a Product-by-Product and country-by-country bases, the amount of gross sales of each Product, a calculation of corresponding net sales and the information used to make such calculation, the currency conversion rate used, if applicable, the United States dollar equivalent of such net sales, and a calculation of the royalty payment due on the such net sales.

 

Interest on Late Payments

 

Any payments or portions due under the Hesperix Assignment Agreement which are not paid when such payment is due will bear interest at the lower of (a) the U.S. Prime Rate in effect on the due date plus one (1) percentage point, or (b) the maximum rate permitted by applicable law, calculated on the number of calendar days such payment is delinquent.

 

Currency

 

The royalty payments due under the Hesperix Assignment Agreement will be paid in U.S. dollars by bank wire transfer of immediately available funds to such bank account as designated in writing by IBCH and Pharmsynthez.

 

Other Agreements regarding Payments and Payment Terms

 

The Hesperix Assignment Agreement contains certain other agreements relating to the payment and payments terms of the running royalty, including, among others, agreements relating to:

 

·IBCH and Pharmsynthez being responsible for any and all of their respective income or other similar taxes owed by them and required by applicable law to be withheld or deducted from any payments made by or on behalf of Hesperix to each of them;
·IBCH and Pharmsynthez agreeing to take all lawful acts and sign all lawful deeds and documents as may be reasonably requested to enable Hesperix, IBCH, and Pharmsynthez to take advantage of any applicable legal provision or double taxation treaties;
·Hesperix agreeing to maintain complete and accurate books, records, and accounts used for the determination of expenses, deductions, credits or other relevant factors in connection with the calculation of the net sales;
·Hesperix agreeing to allow IBCH and Pharmsynthez the right to have an independent certified public accounting firm have access during normal business hours, and upon reasonable prior written notice, to the records of Hesperix as such independent certified public accounting firm deems reasonably necessary to verify the accuracy of the calculation of net sales by Hesperix; and
·Hesperix agreeing to promptly making any such additional payments owed to IBCH or Pharmsynthez as of the result of any audit.

 

 

 

 

 

 53 
 

 

Allocation of Shares in Hesperix

 

Each of Hesperix, Gabibov, Stepanov, Smirnov, Belogurov, Genkin, Vinogradov, and Lerner have agreed that upon executing the Hesperix Assignment Agreement, to reallocate the ownership of all the issued and outstanding shares of Hesperix in all classes, whether by issuance of additional shares or otherwise, in which Gabibov, Stepanov, Smirnov, Belogurov, Genkin, Vinogradov, and Lerner will receive approximately 12.3%, 4.6%, 3.1%, 3.1%, 23.1%, 46.1%, and 7.7% of the issued and outstanding shares of Hesperix, respectively. These Hesperix shares will be exchanged pro rata and on a one-for-one basis for the Hesperix Transaction Shares upon closing of the Hesperix Acquisition.

 

Representations and Warranties

 

The Hesperix Assignment Agreement contains representations and warranties made by Hesperix to the other parties relating to a number of matters, including, the following:

 

·the organization, good standing and qualification to do business;
·requisite corporate authority relating to the execution, delivery and performance of the Share Purchase Agreement, the consummation of the contemplated transactions;
·the enforceability of the Hesperix Assignment Agreement against Hesperix in accordance with its terms, except to the extent enforceability is limited by bankruptcy, insolvency or similar laws affecting creditors rights and remedies or equitable principals;
·the performance of Hesperix’s obligations under the Hesperix Assignment Agreement will not conflict with its organizational documents, as amended, and will not result in a breach of any material agreement to which it is party; and
·Hesperix not have entering and will not be entering into any material agreements that would be inconsistent with its obligations under the Hesperix Assignment during the term of the Hesperix Assignment Agreement.

 

The Hesperix Assignment Agreement also contains representations and warranties made by each Assignor to the other parties relating to a number of matters, including, the following:

 

·the requisite legal capacity, relating to the execution, delivery and performance of the Hesperix Assignment Agreement, and the enforceability of the Hesperix Assignment Agreement;
·to the knowledge of such Assignor, the making, having made, using, or selling or products claimed in the Assignor Patent Rights as of the Hesperix Assignment Effective Date, or the practicing of any technology or inventions claimed in the Assignor Patent Rights as of the Hesperix Assignment Effective Date, will not infringe any patent or any other right of any third party (other than the Institute Rights) or contribute to the infringement of other rights of any Third Party (other than the Institute Rights) in the United States or elsewhere;
·with respect to Stepanov, Gabibov, and Belogurov, each of their assignments to IBCH of their right, title, and interest in to the Assignor Patent Rights is valid and binding;
·with respect to Genkin, his assignment to Pharmsynthez of his right, title, and interest in and to the Assignor Patent Rights is valid and binding;
·with respect to Lerner, his assignment to the Institute of his right, title, and interest in and to the Assignor Patent Rights is valid and binding;
·the enforceability of the Hesperix Assignment Agreement against Hesperix in accordance with its terms, except to the extent enforceability is limited by bankruptcy, insolvency or similar laws affecting creditors rights and remedies or equitable principals;
·the performance of such Assignor’s obligations under the Hesperix Assignment Agreement will not result in a breach of any material agreement to which such Assignor is party to; and
·each Assignor not having entered and will not be entering into any material agreements that would be inconsistent with its obligations under the Hesperix Assignment Agreement during the term of the Hesperix Assignment Agreement.

 

 

 

 

 54 
 

 

The Hesperix Assignment Agreement also contains representations and warranties made by IBCH to the other parties relating to a number of matters, including, the following:

 

·the organization, good standing and qualification to do business;
·to the knowledge of IBCH, it does not own any patents or patent applications other than its ownership interest in the Assignor Patent Rights that would be infringed by the making, having made, using or selling of products claimed in the Assignor Patent Rights as of the Hesperix Assignment Effective Date;
·to the knowledge of IBCH, the making, having made, using, or selling or products claimed in the Assignor Patent Rights as of the Hesperix Assignment Effective Date, or the practicing of any technology or inventions claimed in the Assignor Patent Rights as of the Hesperix Assignment Effective Date, will not infringe any patent or any other right of any third party (other than the Institute Rights) or contribute to the infringement of other rights of any Third Party (other than the Institute Rights) in the United States or elsewhere;
·to the knowledge of IBCH, IBCH is unaware of any inventions that were invented or may be invented by members of its faculty, or other employees, other than the Assignors;
·requisite corporate authority relating to the execution, delivery and performance of the Share Purchase Agreement, the consummation of the contemplated transactions;
·the enforceability of the Hesperix Assignment Agreement against IBCH in accordance with its terms, except to the extent enforceability is limited by bankruptcy, insolvency or similar laws affecting creditors rights and remedies or equitable principals;
·the performance of IBCH’s obligations under the Hesperix Assignment Agreement will not conflict with its organizational documents, as amended, and will not result in a breach of any material agreement to which it is party; and
·IBCH not having entered and will not be entering into any material agreements that would be inconsistent with its obligations under the Hesperix Assignment during the term of the Hesperix Assignment Agreement.

 

The Hesperix Assignment Agreement also contains representations and warranties made by Pharmsynthez to the other parties relating to a number of matters, including, the following:

 

·the organization, good standing and qualification to do business;
·to the knowledge of Pharmsynthez, it does not own any patents or patent applications other than its ownership interest in the Assignor Patent Rights that would be infringed by the making, having made, using or selling of products claimed in the Assignor Patent Rights as of the Hesperix Assignment Effective Date;
·to the knowledge of Pharmsynthez, the making, having made, using, or selling or products claimed in the Assignor Patent Rights as of the Hesperix Assignment Effective Date, or the practicing of any technology or inventions claimed in the Assignor Patent Rights as of the Hesperix Assignment Effective Date, will not infringe any patent or any other right of any third party (other than the Institute Rights) or contribute to the infringement of other rights of any Third Party (other than the Institute Rights) in the United States or elsewhere;
·to the knowledge of Pharmsynthez, Pharmsynthez is unaware of any inventions that were invented or may be invented by its employees, other than the Assignors;
·requisite corporate authority relating to the execution, delivery and performance of the Share Purchase Agreement, the consummation of the contemplated transactions;
·the enforceability of the Hesperix Assignment Agreement against Pharmsynthez in accordance with its terms, except to the extent enforceability is limited by bankruptcy, insolvency or similar laws affecting creditors rights and remedies or equitable principals;
·the performance of Pharmsynthez’s obligations under the Hesperix Assignment Agreement will not conflict with its organizational documents, as amended, and will not result in a breach of any material agreement to which it is party; and
·Pharmsynthez not having entered and will not be entering into any material agreements that would be inconsistent with its obligations under the Hesperix Assignment during the term of the Hesperix Assignment Agreement.

 

 

 

 

 

 55 
 

 

Warranty Disclaimer

 

Except as expressly set forth in the Hesperix Assignment Agreement, no party thereto has made any representations or extends any warranties of any kind, either express or implied, including any express or implied warranties of merchantability or fitness for a particular purpose with respect to the Assignor Patent Rights, technology, or any materials or information provided with respect to any Product or services.

 

Limitation of Liability

 

Except for any breach of confidentiality, no party to the Hesperix Assignment Agreement will be liable to any other party for special, indirect, incidental, or punitive damages, or consequential damages, including damages resulting from loss of use, loss of profits, or interruption or loss of business or other similar economic loss arising out of the Hesperix Assignment Agreement or with a party’s performance or non-performance of its obligations under the Hesperix Assignment Agreement.

 

Termination without Cause

 

Hesperix may exclusively terminate the Hesperix Assignment Agreement with any or all parties thereto without cause immediately upon written notice to the appropriate party(ies). No other party will be able to terminate the Hesperix Assignment Agreement without cause.

 

Termination for Financial Reasons

 

To the extent permitted by applicable law, upon the filing or institution of bankruptcy, reorganization, liquidation or receivership proceedings by and party to the Hesperix Assignment Agreement, Hesperix may terminate the Hesperix Assignment Agreement, provided, that, in the case of an involuntary bankruptcy, the right to terminate will only become effective if the subject party consents to the involuntary bankruptcy or such proceeding is not dismissed within ninety (90) days after the filing thereof.

 

Assignment

 

Under the Hesperix Assignment Agreement, Hesperix will have the right to assign the Hesperix Assignment Agreement, without the consent of any other Party, to (i) any Affiliate; (ii) any successor in interest by reason of any merger, acquisition, partnership, or license agreement, or (iii) any other third party, where the assignee would succeed to such rights and would assume the obligations of Hesperix under the Hesperix Assignment Agreement to the same extent if such assignee was an original party to the Hesperix Assignment Agreement.

 

The OPKO Assignment Agreement

 

The following includes a summary of the material provisions of the OPKO Assignment Agreement, a copy of which is attached to this proxy statement/prospectus as Appendix C. This summary may not contain all of the information about the OPKO Assignment Agreement and related transactions that is important to you. We encourage you to read carefully the OPKO Assignment Agreement in its entirety, as the rights and obligations of the parties thereto are governed by the express terms of the OPKO Assignment Agreement and not by this summary or any other information contained in this proxy statement/prospectus.

 

On the Signing Date the Company entered into the OPKO Assignment Agreement with OPKO. Pursuant to the terms and subject to the conditions set forth in the OPKO Assignment Agreement, the Company has agreed to 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 pursuant to 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 running royalty in the low single-digit range based on net sales of products in each country in which, in 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.

 

 

 

 

 56 
 

 

Under the terms of the OPKO Assignment Agreement, the Company will issue to OPKO the OPKO Transaction Shares, and to the Institute the Institute Transaction Shares, regardless of the trading price per share of the Common Stock at the time of the closing.

 

Closing

 

We are working towards completing the transaction as soon as possible. The closing is required to take place no later than two business days after the last of the conditions set forth in the OPKO Assignment Agreement (other than those conditions that by their nature are to be satisfied at the closing, but subject to the satisfaction or waiver of those conditions) have been satisfied or, to the extent permissible, waived by the party or parties entitled to the benefit of such conditions, or at such other time or on such other date or at such other place as the Company and OPKO may mutually agree.

 

As described below, if the OPKO Assignment Agreement has not closed on or prior to July 1, 2019, the OPKO Assignment Agreement may be terminated by the Company or by OPKO.

 

Representations and Warranties

 

The OPKO Assignment Agreement contains representations and warranties made by, on the one hand, OPKO to the Company, and on the other hand, by the Company to OPKO. Certain of the representations and warranties in the OPKO Assignment Agreement are subject to knowledge qualifications, which means that those representations and warranties would not be deemed untrue, inaccurate or incorrect as a result of matters of which the Chief Patent Counsel or its executive officers, as may be applicable, did not and do not have actual knowledge. In addition, the representations and warranties contained in the OPKO Assignment Agreement are subject to specified exceptions and qualifications in connection with signing the OPKO Assignment Agreement, which such disclosures are not reflected in the OPKO Assignment Agreement or otherwise publicly disclosed. You should not rely on the representations, warranties, covenants or any description thereof as actual characterizations of the actual state of facts or conditions of the Company, OPKO, or any of their respective subsidiaries or affiliates. Moreover, the information concerning the subject matter of the representations and warranties may change after the Signing Date. The representations and warranties should not be read alone but, instead, should be read only in conjunction with the information provided elsewhere in this proxy statement/prospectus.

 

For purposes of the OPKO Assignment Agreement, a “material adverse effect” with respect to OPKO means any event, occurrence, fact, condition or change that is, or could reasonably be expected to become, individually or in the aggregate, materially adverse to the IP License Agreement or the OPKO intellectual property licensed thereunder, or the ability of OPKO to consummate the transaction; provided, however, that none of the following, will be deemed to constitute a material adverse effect nor be considered in determining whether a material adverse effect has occurred:

 

·changes in economic or political conditions (except such event, occurrence, fact, condition or change will be taken into account in determining whether a material adverse effect has occurred or could reasonably be expected to occur to the extent such event, occurrence, fact, condition or change disproportionately effects OPKO and/or any of its subsidiaries compared to other companies in the industries in which OPKO and/or its subsidiaries conduct their respective businesses);

 

 

 

 

 

 

 

 57 
 

 

·general conditions affecting the industries in which OPKO and/or any of its Subsidiaries conduct their respective businesses (except such event, occurrence, fact, condition or change will be taken into account in determining whether a material adverse effect has occurred or could reasonably be expected to occur to the extent such event, occurrence, fact, condition or change disproportionately effects OPKO and/or any of its subsidiaries compared to other companies in the industries in which OPKO and/or its subsidiaries conduct their respective businesses);
·any changes in financial or securities markets in general (except such event, occurrence, fact, condition or change will be taken into account in determining whether a material adverse effect has occurred or could reasonably be expected to occur to the extent such event, occurrence, fact, condition or change disproportionately effects OPKO and/or any of its subsidiaries compared to other companies in the industries in which OPKO and/or its subsidiaries conduct their respective businesses);
·any acts of war (whether or not declared), armed hostilities or terrorism, or any escalation or worsening thereof (except such event, occurrence, fact, condition or change will be taken into account in determining whether a material adverse effect has occurred or could reasonably be expected to occur to the extent such event, occurrence, fact, condition or change disproportionately effects OPKO and/or any of its subsidiaries compared to other companies in the industries in which OPKO and/or its subsidiaries conduct their respective businesses); or
·changes in applicable laws or accounting rules, (except such event, occurrence, fact, condition or change will be taken into account in determining whether a material adverse effect has occurred or could reasonably be expected to occur to the extent such event, occurrence, fact, condition or change disproportionately effects OPKO and/or any of its subsidiaries compared to other companies in the industries in which OPKO and/or its subsidiaries conduct their respective businesses).

 

The OPKO Assignment Agreement contains representations and warranties by OPKO, made to the Company, relating to a number of matters, including, the following:

 

·the organization and requisite corporate authority relating to the execution, delivery and performance of the OPKO Assignment Agreement, and the consummation of the contemplated transactions and the enforceability of the OPKO Assignment Agreement;
·consents and approvals relating to the execution, delivery and performance of the OPKO Assignment Agreement, including required filings with, and the consents and approvals of, government entities in connection with the transactions contemplated by the OPKO Assignment Agreement;
·intellectual property matters, including the intellectual property licensed to OPKO pursuant to the IP License Agreement;
·absence of certain litigation, governmental orders, injunctions by or before any governmental entity;
·compliance with applicable law and permits;
·absence of any untrue statement of material fact or omission to state any material fact necessary to make the statements therein, in light of the circumstances in which they are made, not misleading;
·the independent investigation, review and analysis of the business, results of operation, and condition of the Company; and
·customary investor representations.

 

 

 

 

 

 58 
 

 

The OPKO Assignment Agreement also contains representations and warranties made by the Company to OPKO relating to a number of matters, including, the following:

 

·the organization, good standing and qualification to do business;
·requisite corporate authority relating to the execution, delivery and performance of the OPKO Assignment Agreement and the consummation of the contemplated transactions and the enforceability of the OPKO Assignment Agreement;
·the absence of conflicts with, or violations of, organizational documents, contracts or applicable laws as a result of the execution, delivery and performance of the OPKO Assignment Agreement and the other transactions contemplated by the OPKO Assignment Agreement;
·broker, finder and investment banker fees payable in connection with the transaction;
·absence of certain litigation;
·the issuance of the OPKO Transaction Shares;
·matters relating to the reports, financial statements, schedules, forms, statements and other documents required to be filed by the Company under the Exchange Act;
·tax matters; and
·the independent investigation, review and analysis of the business, results of operation, and condition of OPKO by the Company.

 

Subject to the limitations and other provisions in the OPKO Assignment Agreement, the representations and warranties in the OPKO Assignment Agreement will survive the closing and remain in full force and effect until the date that is eighteen (18) months from the closing date; provided, however, certain representations and warranties, including, among others, those relating to the organization and authority of OPKO and the Company and conflicts and approvals of third parties and issuance of OPKO Transaction Shares will survive indefinitely. If the OPKO Assignment Agreement is validly terminated, there will be no liability under the representations and warranties of the parties, except with respect to any willful breach or material breach of any provision, or for fraud or criminal misconduct of any party.

 

Conduct of OPKO’s Business

 

OPKO has agreed as to itself and its subsidiaries that, except as otherwise expressly required by the OPKO Assignment Agreement or approved in writing by the Company, after the Signing Date, and until the earlier to occur of the termination of the OPKO Assignment Agreement or the closing of the transactions contemplated thereby, OPKO and its subsidiaries will (i) maintain and preserve intact the IP License Agreement and the licensed intellectual property (without any amendments thereto or modifications thereof) and any permits therewith; (ii) pay any obligations thereunder when due; (iii) defend and protect their properties and assets relating to the IP License Agreement and the licensed intellectual property from infringement or usurpation; and (iv) comply in all material respects with all applicable laws relating to the IP License Agreement and the licensed intellectual property.

 

Conditions to Each Party’s Obligations

 

The respective obligations of each of the parties to consummate the transactions contemplated by the OPKO Assignment Agreement are subject to the satisfaction or waiver at or prior to closing of the following conditions:

 

·no governmental entity having enacted, issued, promulgated, enforced or entered into any law or any action having been instituted by a governmental entity or order effected, in any case, having the effect of restraining, conditioning, challenging the legality or validity of, or making the transaction contemplated by the OPKO Assignment Agreement illegal or otherwise prohibited;
·the Company having received approval of its listing application to have the OPKO Transaction Shares listed on NASDAQ, subject to official notification;
·the approvals from all governmental authorities required for the consummation of the transactions contemplated by the OPKO Assignment Agreement;
·the receipt of the Stockholder Approval; and
·the proxy statement/prospectus becoming effective under the Securities Act.

 

 

 

 

 

 59 
 

 

Conditions to Obligations of the Company

 

The obligations of the Company to consummate the transactions contemplated by the OPKO Assignment Agreement are also subject to the satisfaction or waiver by the Company at or prior to the closing of the following conditions:

 

·OPKO has effected the transactions contemplated by (i) the lock-up agreement, duly executed by OPKO, which includes OPKO agreeing to vote or cause to vote or consenting or causing to be consented, with respect to the election of directors, and (ii) the confirmatory assignment;
·certain representations and warranties of OPKO with respect to its licensed intellectual property, legal proceedings and compliance with laws and permits, contained in the OPKO Assignment Agreement, the other transaction documents and any certificate or other writing delivered pursuant to the OPKO Assignment Agreement must be true and correct in all respects (in the case of any representation or warranty qualified by materiality or material adverse effect) or in all material respects (in the case of any representation or warranty not qualified by materiality or material adverse effect), both on the Signing Date and at the closing date with the same effect as though made at and as of such date (except those representations and warranties that address matters only as of a specified date, the accuracy of which would be determined as of that specified date in all respects);
·certain representations and warranties of OPKO with respect to its organization, good standing, corporate authority, and approvals, must, both on the Signing Date and at the closing date (except those representations and warranties that address matters only as of a specified date, the accuracy of which shall be determined as of that specified date in all respects), be true and correct in all respects;
·OPKO duly performed and complied in all material respects with all agreements, covenants and conditions required by the OPKO Assignment Agreement and each of the other transaction documents to be performed or complied with by them prior to or on the closing date;
·there not having occurred any change, event, circumstance or development that individually or in the aggregate, has had or would reasonably be expected to have a material adverse effect between the Signing Date and the closing date;
·the Company having received adequate financing, as reasonably determined by the Company, whether in the form of a private or public offering of debt or equity securities to fund future working capital obligations of the Company and Hesperix following the closing; and
·the Share Purchase Agreement and the transactions contemplated thereunder being consummated.

 

Conditions to Obligations of OPKO

 

The obligations of OPKO to consummate the transactions contemplated by the OPKO Assignment Agreement is also subject to the satisfaction or waiver by OPKO at or prior to the closing of the following conditions:

 

·the Company having delivered to OPKO the OPKO Transaction Shares;
·the representations and warranties of the Company with respect to legal proceedings, the issuance of the OPKO Transaction Shares, its SEC reports and financial statement, and taxes, must, both on the Signing Date and at the closing date, be true and correct in all respects (in the case of any representation or warranty qualified by materiality) or in all materials respects (in the case of any representation or warranty not qualified by materiality);

 

 

 

 

 60 
 

 

·the representations and warranties of the Company with respect to its organization, good standing, corporate authority and brokers and finders must, be true and correct in all respects on and as of the Signing Date and as of the closing date with the same effect as though made at and as of such date;
·the Company having duly performed and complied in all material respects with all agreements, covenants and conditions required by the OPKO Assignment Agreement and each of the other transaction documents to be performed or complied with by it prior to or on the closing date.
·the Share Purchase Agreement and the transactions contemplated thereunder being consummated; and
·the Company having received adequate financing, as reasonably determined by the Company, to fund future working capital obligations of the Company and Hesperix following the closing.

 

Indemnification

 

From and after the closing, the OPKO will indemnify and defend each of the Company and its affiliates and their respective representatives against, and will hold each of them harmless, including the reimbursement for any and all losses, damages, liabilities, awards, including reasonable attorneys’ fees and the cost of enforcing any right of indemnification (“Losses”), arising out of, with respect to or by reason of (i) any inaccuracy in or breach of any of the representations or warranties of OPKO contained in the OPKO Assignment Agreement or in any certificate or instrument delivered by or on behalf of the Company pursuant to the OPKO Assignment Agreement; (ii) any breach, alleged breach or non-fulfillment of any covenant, agreement or obligation to be performed by OPKO to the OPKO Assignment Agreement; (iii) any amounts owed under the IP License Agreement and any OPKO transaction expenses to the extent not paid at closing; and (iv) any taxes of OPKO arising from the transfer of the IP License Agreement to the Company.

 

From and after the closing, the Company will indemnify and defend OPKO and its affiliates and their respective representatives against, and will hold each of them harmless, including the reimbursement for all Losses, arising out of, with respect to or by reason of (i) any inaccuracy in or breach of any of the representations or warranties of the Company contained in the OPKO Assignment Agreement or in any certificate or instrument delivered by or on behalf of the Company pursuant to the OPKO Assignment Agreement; (ii) any breach, alleged breach or non-fulfillment of any covenant, agreement or obligation to be performed by the Company pursuant to the OPKO Assignment Agreement; or (iii) any amounts owed under the IP License Agreement following the closing date.

 

The indemnification provided for in the OPKO Assignment Agreement are subject to the following limitations:

 

·OPKO will not be liable to the Company indemnitees for indemnification until the aggregate amount of all Losses under the OPKO Assignment Agreement exceeds Fifty Thousand Dollars ($50,000), in which event OPKO will be required to pay or be liable for all such Losses in excess of Fifty Thousand Dollars ($50,000) (except such limitation shall not apply to Losses based upon, arising out of, or by reason of (i) any inaccuracy in or breach of certain representations and warranties, including, among others, those relating to the organization and authority, and conflicts and approvals of third parties; or (ii) intentional breach, intentional misrepresentation, criminal misconduct or fraud). The total aggregate amount of all Losses for which OPKO will be liable under the OPKO Assignment Agreement will not exceed fifteen percent (15%) of the OPKO Transaction Shares, based on the Closing Price (except such limitation shall not apply to Losses based upon, arising out of, or by reason of (i) any inaccuracy in or breach of certain representations and warranties, including, among others, those relating to the organization and authority, and conflicts and approvals of third parties; or (ii) intentional breach, intentional misrepresentation, criminal misconduct or fraud).

 

 

 

 

 

 61 
 

 

·The Company will not be liable to OPKO indemnitees for indemnification under the OPKO Assignment Agreement until the aggregate amount of all Losses exceeds Fifty Thousand Dollars ($50,000), in which event the Company will be required to pay or be liable for all such Losses in excess of Fifty Thousand Dollars ($50,000) (except such limitation shall not apply to Losses based upon, arising out of, or by reason of (i) any inaccuracy in or breach of certain representations and warranties, including, those relating to the organization and authority, conflicts and approvals of third parties, and issuance of OPKO Transaction Shares; or (ii) intentional breach, intentional misrepresentation, criminal misconduct or fraud). The total aggregate amount of all Losses for which the Company will be liable under the OPKO Assignment Agreement will not exceed fifteen percent (15%) of the OPKO Transaction Shares, based on the Closing Price (except such limitation shall not apply to Losses based upon, arising out of, or by reason of (i) any inaccuracy in or breach of certain representations and warranties, including, those relating to the organization and authority, conflicts and approvals of third parties, and issuance of OPKO Transaction Shares; or (ii) intentional breach, intentional misrepresentation, criminal misconduct or fraud).

 

Termination of the OPKO Assignment Agreement

 

The OPKO Assignment Agreement may be terminated at any time prior to the closing:

 

·by mutual written consent of the Company and OPKO;
·by the Company, subject to certain conditions, if: (i) any of the representations and warranties of OPKO fails to be true and correct as of the date made; or (ii) there is a breach by OPKO of any covenant or agreement of OPKO that is not curable or, if curable, is not cured within the cure period;
·by the Company, subject to certain conditions, if any of the conditions set forth in the OPKO Assignment Agreement of OPKO to effect the closing will not have been, or becomes apparent that any such condition will not be, fulfilled by July 1, 2019, unless such failure is due to the failure of the Company to perform or comply with any of the covenants, agreements or conditions therein;
·by OPKO, subject to certain conditions, if: (i) any of the representations and warranties of the Company fails to be true and correct as of the date made; or (ii) there is a breach by the Company of any covenant or agreement of the Company that is not curable or, if curable, is not cured within the cure period;
·by OPKO, subject to certain conditions, if any of the conditions set forth in the OPKO Assignment Agreement of the Company to effect the closing will not have been, or becomes apparent that any such condition will not be, fulfilled by July 1, 2019, unless such failure is due to the failure of OPKO to perform or comply with any of the covenants, agreements or conditions therein; or
·by the Company or OPKO in the event that (i) there is any law that makes the consummation of the transactions contemplated by the OPKO Assignment Agreement illegal or otherwise prohibit, or (ii) any governmental authority has issued a governmental order (that is final and non-appealable) restraining or enjoining the transactions contemplated by the OPKO Assignment Agreement.

 

Effect of Termination

 

If the OPKO Assignment Agreement is terminated, the OPKO Assignment Agreement will become void and of no effect with no liability to any person on the part of any party except that the provisions of the OPKO Assignment Agreement relating to termination and certain technical provisions will continue in effect. The effect of the termination of the OPKO Assignment Agreement will not relieve any party from any liability for any willful breach or material breach of any provision therein, or for fraud or criminal misconduct.

 

 

 

 

 

 62 
 

 

Amendments and Waivers

 

Subject to the limitations of the OPKO Assignment Agreement, the OPKO Assignment Agreement may be amended or modified by a written instrument executed by the Company and OPKO, or in the case of a waiver, any such extension or waiver will be valid only if set forth in an instrument in writing signed by Buyer or OPKO, as the case may be.

 

Specific Performance

 

If for any reason any of the provisions of the OPKO Assignment Agreement are not performed in accordance with their specific terms or are otherwise breached or threatened to be breached, each party to the OPKO Assignment Agreement will be entitled to seek equitable relief, including an injunction or injunctions or orders for specific performance to prevent breaches of the OPKO Assignment Agreement and to enforce specifically the terms and provisions of the OPKO Assignment Agreement, in addition to any other remedy such party would be entitled to at law or in equity as a remedy for any such breach or threatened breach.

 

The IP License Agreement

 

The following includes a summary of the material provisions of the IP License Agreement, a copy of which is attached to this proxy statement/prospectus as Appendix D. This summary may not contain all of the information about the IP License Agreement and related transactions that is important to you. We encourage you to read carefully the IP License Agreement in its entirety, as the rights and obligations of the parties thereto are governed by the express terms of the IP License Agreement and not by this summary or any other information contained in this proxy statement/prospectus. Upon completion of the Transaction, Xenetic will assume all of the rights and obligations of OPKO under the IP License Agreement. Certain portions of Appendix D have been omitted. The omitted information is not material and would likely cause competitive harm to the Company if publicly disclosed.

 

On February 25, 2019 (the “IP License Effective Date”), OPKO entered into the IP License Agreement with the Institute. Pursuant to the terms and subject to the conditions set forth in the IP License Agreement, the Institute has agreed to grant an exclusive worldwide royalty-bearing license to OPKO of the Institute’s interest in and to certain patents related to the “Articles And Methods Directed To Personalized Therapy Of Cancer” (PCT/RU2018/000653) and the priority applications of the same title having Russian Application No. 2017134483 filed October 4, 2017; Russian Application No. 2018112009 filed April 4, 2018 and Russian Application No. 2018134321 filed October 1, 2018 and all applications claiming priority to such filings (collectively, the “Institute Patent Rights”) and the technology that is described therein (the “Institute Technology”) in exchange for OPKO paying the Institute a running royalty in the low single digit range based on net sales of products in each country in which, in 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.

 

Warranty and Limitation of Liability

 

The Institute makes no representations or warranties with respect to Institute Patent Rights or the Institute Technology, including express, implied, or statutory warranties of merchantability, fitness for a particular purpose, non-infringement of third party rights, title, accuracy, or arising out of course of conduct or trade customs. In addition, the Institute makes no representations or warranties as to the validity, scope, or enforceability of the Institute Patent Rights or the Institute Technology, or that any licensed product, licensed process, Institute Patent Rights or the Institute Technology would be free of infringement on patents or other intellectual property rights of third parties, or that no third party are in any way infringing upon any Parent Right or Institute Technology.

 

 

 

 

 

 63 
 

 

The Institute’s aggregate liability, if any, under the IP License Agreement or relating to the subject therein will not exceed the amount paid by OPKO to the Institute under the IP License Agreement.

 

License

 

The Institute has agreed to grant to OPKO (A) an exclusive, worldwide, royalty-bearing license to the Institute Patent Rights to develop, make use, offer to sell, and import products that (i) the manufacture, importation, sale, offer for sale or use would, but for the IP License Agreement, infringe on the Institute Patent Rights, (ii) comprises of, utilizes, or incorporates any Institute Technology, or (iii) is made using any process or method claimed in the Institute Patent Rights (collectively, the “Licensed Product”), and (B) a non-exclusive worldwide license to the Institute Technology, each subject to:

 

·the rights of the United States Government which may arise or result from the Institute’s receipt of support from the United States Government, including but not limited to, 37 CFR 401, the National Institutes of Health (the “NIH”) Grants Policy Statement, and the NIH Guidelines for Obtaining and Disseminating Biomedical Research Resources;
·the Institute’s rights to use the Institute Patent Rights and the Institute Technology for any internal, non-commercial, research or educational purposes without the Institute being obligated to pay OPKO any royalties or other compensation, provided that the Institute and the non-exclusive licensees are prohibited from developing, making having made, using, exporting, distributing, selling or offering for sale the Licensed Product; and
·the Institute’s right to grant non-exclusive licenses to use the Institute Patent Rights or the Institute Technology for internal, non-commercial research and education purposes to other nonprofit or academic institutions, without the other nonprofit or academic institution being obligated to pay OPKO any royalties or other compensation, provided that the Institute and the non-exclusive licensees are prohibited from developing, making having made, using, exporting, distributing, selling or offering for sale the Licensed Product.

 

OPKO may grant sublicenses to any party with respect to the rights conferred upon OPKO under the IP License Agreement. Any sublicenses granted by OPKO will not have the right to further sublicense without the Institute’s prior written consent, which shall not be unreasonably withheld, and will be subject in all respects to the applicable provisions contained in the IP License Agreement.

 

Payments and Reports

 

In consideration of the rights granted to OPKO by the Institute, OPKO has agreed to pay or deliver to the Institute a royalty in the low single-digit range based on net sales for all Licensed Products. In consideration of the sublicense rights granted to OPKO under the IP License Agreement, OPKO has agreed to pay or deliver the Institute a non-creditable, non-refundable percentage of the sublicense revenues.

 

In connection with the transactions contemplated by the OPKO Assignment Agreement, OPKO has directed that the Company issue to the Institute the Institute Transaction Shares as the sole sublicense payment for the OPKO Assignment Agreement. The Institute has agreed to execute a lock-up agreement in favor of the Company, which will restrict such recipient’s sale or transfer of any of the Company’s common shares ultimately received by such recipient as provided therein and as otherwise required by law.

 

OPKO has agreed to make payments to the Institute upon the attainment of certain milestones.

 

OPKO has agreed to keep complete and accurate records of its and its sublicensees’ net sales under the license granted pursuant to the IP License Agreement in sufficient detail to enable the royalties and milestones payable thereunder to be determined. Beginning after the first commercial sale of a Licensed Product or licensed process, OPKO must deliver to the Institute a written report, even if no payments are due, giving the particulars of the business conducted by OPKO and its sublicensees, if any, during certain preceding times.

 

 

 

 

 

 64 
 

 

Payment Increase in the Event of a Challenge

 

In the event that OPKO or its sublicensee directly (a) institutes or maintains any interference, opposition, re-examination, post-grant review or similar proceeding with respect to any Institute Patent Right with the U.S. Patent and Trademark Office, or (b) makes any filing or institutes any action or legal proceeding with a court or other governmental body (including the U.S. Patent and Trademark Office or any foreign patent office) (collectively, a “Challenge”) alleging that any Institute Patent Rights are invalid or unenforceable, the royalty obligations will be increased from the date the challenging party first institutes or makes such Challenge and during the pendency of such Challenge, and will continue to apply after the conclusion of such Challenge in the event that at least one (1) claim of the Institute Patent Rights being challenged that covers a Licensed Product or licensed process is held to be valid and enforceable.

 

Diligence; Regulatory Matters

 

OPKO has agreed to use (whether directly or through its sublicensees) commercially reasonable efforts to develop and commercialize, or have developed and commercialized, the Licensed Products throughout the world.

 

Term; Termination

 

The IP License Agreement will become effective on the IP License Effective Date and will continue until the later of (a) the IP License Agreement is terminated, (b) the expiration of the last-to-expire patent within the Institute Patent Rights, or (c) an agreed upon number of years from the first commercial sale of a Licensed Product, in each case on a country-by-country basis.

 

The IP License Agreement may be terminated, subject to temporal limitations:

 

·automatically if OPKO becomes bankrupt and/or if the business of OPKO is placed in the hands of a receiver, assignee, or trustee, whether by a voluntary act of OPKO or otherwise, OPKO makes an assignment for the benefit of creditors, or has any other proceeding filed against it under any bankruptcy or insolvency laws;
·upon written notice from the Institute, if OPKO becomes insolvent, unless OPKO provides the Institute evidence of its solvency within a specified period of time;
·upon written notice from the Institute if OPKO breaches or defaults on its obligations to make payments or reports in accordance with the terms of the IP License Agreement, unless OPKO has cured the breach or default within a specified period of time;
·upon written notice from the Institute if OPKO breaches or defaults on any other obligation under the IP License Agreement, unless OPKO has cured the breach or default within a specified period of time;
·at any time by mutual written agreement between OPKO and the Institute;
·if OPKO defaults upon its indemnification or insurance requirements under the IP License Agreement, unless OPKO has contested and/or cured the default and notifies the Institute of such cure;
·if OPKO is convicted of a felony relating to the development, manufacture, use, marketing, distribution or sale of the Licensed Product.
·at any time upon within a specified period of time written notice by OPKO to the Institute, provided that OPKO pays an agreed upon termination fee to the Institute before the expiration of such time period.

 

 

 

 65 
 

 

If the IP License Agreement is terminated, the IP License Agreement will be deemed to release either party of any obligations matured prior to the effective date of the termination. After the effective date of the termination, OPKO has agreed to provide the Institute with a written inventory of Licensed Products in process of manufacture, in use or in stock. OPKO may sell any such Licensed Product following the termination of the IP License Agreement provided that OPKO pays the Institute any earned royalties any other amount due pursuant to the terms of the IP License Agreement.

 

Assignment

 

OPKO may not assign the IP License Agreement without the prior written consent of the Institute; provided, however, OPKO will be able to assign the IP License Agreement in connection with (i) the assignment of the IP License Agreement to an affiliate; (ii) as part of a sale, regardless of whether such sale occurs through an asset sale, stock sale, merger or other combination or transfer of OPKO’s entire business; or (iii) the assignment of the IP License Agreement to the Company.

 

 

 

 

 66 
 

 

Patent Markings

 

OPKO has agreed to permanently and legibly mark all products, packaging and documentation manufactured or sold under the IP License Agreement with a patent notice as may be permitted or required under Title 25, United States Code.

 

Indemnification and Insurance

 

OPKO has agreed to indemnify, defend, and hold harmless the Institute and any parent, subsidiary, or other affiliated entity of the Institute and their respective trustees, officers, directors, employees, scientist, students, and other representatives from and against and all losses, damages, liabilities, awards, including reasonable attorneys’ fees and the cost of enforcing any right of indemnification, arising out of, with respect to, or resulting from (a) the exercise or practice of the license granted under the IP License Agreement by OPKO and its sublicensees and affiliates; (b) alleged defects or other problems with any of the Licensed Product, licensed processes, or manufactured, sold, distributed, or rendered by or on behalf of OPKO or any sublicensee; (c) the research, development, manufacture, use, marketing, advertising, distribution, sale or importation of any Licensed Product, licensed process, by on or behalf of OPKO or any of its sublicensees; (d) the negligent or willful acts or omissions of OPKO or any of its sublicensees; (e) any allegations that the Licensed Product, licensed processes, by or on behalf of OPKO or any sublicensee and/or any trademarks, service marks, logos symbols, slogans, or other materials used in connection with or to market the Licensed Products, licensed processes, violate or infringe upon the trademarks, service marks, trade dress, trade names, copyrights, patents or any other intellectual or industrial property right of any third party; (f) OPKO’s or any of its affiliate’s or sublicensee’s failure to comply with any applicable laws, rules or regulations, and/or (g) OPKO’s or any of its affiliate’s or sublicensee’s labeling, packaging or patent marking of the any Licensed Product or containers thereof by or on behalf of OPKO or any sublicensee.

 

Use of Name

 

OPKO has agreed to not use any name of the Institute, without the Institute’s prior written consent except in such instances required by governmental law, rule or regulation.

 

Export Control

 

OPKO has agreed to abide by the United States laws and regulations (including the Export Administration Act of 1979 and Arms Export Control Act) controlling the export of technical data, computer software, laboratory prototypes, biological material and other commodities.

 

 

 

 

 67 
 

 

Alternative Dispute Resolution

 

The Institute and OPKO have agreed that any controversy or claiming arising out of the IP License Agreement, or the breach thereof, will first be referred to senior management of each party for resolution. In the event that senior management fails to resolve such controversy or claim within thirty (30) days, then such controversy or claim will be submitted to mediation in San Diego County, California in which the mediator will be a retired judge or other neutral third party mutually selected by OPKO and the Institute who has at least ten (10) years’ experience in mediating or arbitrating cases in the biopharmaceutical industry and regarding the same or substantially similar subject matter as the dispute between OPKO and the Institute if such dispute is not resolved through mediation, either party may refer the dispute to a court of competent jurisdiction in San Diego County, California.

 

Parties to the Hesperix Acquisition

 

The Company

 

Xenetic Biosciences, Inc., a Nevada corporation, was originally incorporated as General Aircraft, Inc. on August 9, 2011. In 2013, the Company changed its name to “General Sales and Leasing, Inc.,” and in 2014 the Company changed its name “Xenetic Biosciences, Inc.” Our principal executive offices are located at 40 Speen Street, Suite 102, Framingham, Massachusetts 01701 and our telephone number is (781) 778-7720. The Company’s securities trade on the Nasdaq Capital Markets under the symbol “XBIO.”

 

The Company is a clinical - stage biopharmaceutical company focused on the discovery, research and development of next -generation biologic drugs and novel orphan oncology therapeutics. Xenetic’s lead investigational product candidate is oncology therapeutic XBIO-101 (sodium cridanimod) for the treatment of progesterone resistant endometrial cancer. Xenetic is also developing a proprietary drug development platform, PolyXen, which enables next –generation biologic drugs by improving their half - life and other pharmacological properties. The Company has ongoing business development activities to explore partnerships utilizing its PolyXen delivery platform.

 

Hesperix SA

 

Hesperix SA, a Swiss corporation, is a biotechnology company created as a holding company with assets recently assigned specifically for this transaction. These assets consist primarily of the intellectual property supporting a new CAR T technology, which is capable of addressing multiple tumor types (including but not limited to B-cell lymphomas and leukemias) through targeting of personalized patient specific tumor neoantigens. Hesperix does not have executive offices, but its mailing address is Agus Corporate Services SA, Via Luganetto 4, P.O. Box 433, CH-6962.

 

Background of the Hesperix Acquisition and the Transaction

 

Highlighted below is a detailed chronology of events leading up to and subsequent to the execution of the Share Purchase Agreement and the Transaction Documents.

 

On July 11, 2017, Dr. Dmitry Dmitrievich Genkin met with Dr. Phillip Frost and Steven Rubin of OPKO. Jeffrey Eisenberg was also invited to join the meeting where one of the agenda items was Genkin describing a new CAR T technology.

 

On July 13, 2017, Genkin contacted Frost, Rubin, Dr. Alexander Gabibov, Dr. Richard Lerner and Aleksei Stepanov indicating that Genkin would begin work on a development plan for the new technology. Around that time Genkin suggested to Eisenberg that perhaps the Company was the right vehicle to acquire and develop the technology and provided Eisenberg with additional information on CAR T development generally.

 

In July 2017, OPKO’s patent counsel began working with Genkin and the inventor group to prepare a draft patent application.

 

On October 9, 2017, Genkin contacted Frost and Rubin to discuss a proposed preclinical development plan for the new CAR T technology.

 

 

 

 

 68 
 

 

From October 2017 until March 2018, there was no activity relating to the CAR T technology involving the Company.

 

On March 16, 2018, Company’s Board formed the Strategic Alternatives Committee (the “SAC”) to evaluate an alternative transaction (the “Alternative Transaction”) and other strategic alternatives for the Company should they arise. James Callaway, an independent outside director of the Company, was appointed Chair of the SAC.

 

On March 20, 2018, the Company engaged Akerman LLP (“Akerman”) to represent the SAC in connection with the Alternative Transaction.

 

On April 2, 2018, the SAC signed (i) an engagement letter with Maxim Group LLC (“Maxim”) to serve as exclusive advisor in connection with a potential transaction and (ii) a separate engagement letter with Maxim to issue a fairness opinion in connection with the potential transaction.

 

On April 16, 2018, Genkin discussed with Mr. Eisenberg a proposed structure for a transaction in which Company would acquire Hesperix. The proposal contemplated a financing by the Company to fund development of the CAR T technology. Genkin discussed this proposal with Maxim, who would serve as financial advisor. On the same day, Eisenberg scheduled a call with Jim Alfaro and Chris Avery of Maxim to discuss the proposal.

 

On April 17, 2018, Genkin and Eisenberg held a webconference with Alfaro and Avery to review the proposal. Eisenberg requested that Maxim propose a fee structure for the Hesperix Acquisition and any related financing.

 

Also on April 17, 2018, the SAC convened a meeting and discussed the potential transaction. Immediately following the SAC meeting a Board meeting was convened, and the Board discussed the Hesperix Acquisition and potential need for additional financing.

 

On April 27, 2018, Eisenberg provided the chairs of the SAC and Board a general update on the potential transactions.

 

On April 30, 2018, the Company began working with Akerman to set up an electronic data room (the “Data Room”) to facilitate the due diligence process.

 

Between April and May 2018, Genkin discussed the allocation of share ownership in Hesperix by the inventor/ownership group of the CAR T technology with OPKO.

 

On May 3, 2018, Maxim sent drafts of revised engagement letters relating to a potential acquisition and any related financing, respectively, to Eisenberg and Callaway. Over the next two weeks, Akerman negotiated the new engagement letters with Maxim and on May 21, 2018, the SAC approved the new engagement letters with Maxim. Both engagement letters were executed on May 22, 2018, and became effective as of May 16, 2018.

 

On June 14, 2018, Company and Hesperix entered into a Non-Disclosure Agreement, effective as of June 1, 2018, to commence due diligence on Hesperix and its technology. Over the next two weeks, the Data Room was populated and the Company began its due diligence review.

 

On July 11, 2018, Genkin and Eisenberg discussed at a high level the process required to complete pre-clinical development of the new technology.

 

In late July 2018, Company management and Maxim engage in discussions regarding financing working capital and development costs in connection with the Hesperix Acquisition. The Company’s due diligence process continued through August 2018.

 

 

 

 

 69 
 

 

In late August 2018, Company, Akerman and Maxim prepared a draft letter of intent (“LOI”) for the Hesperix Acquisition, which reflected a purchase price of up to $13 million, payable in shares of Company, with a stipulation that if Company’s share price remained at or above $2 per share at the Closing, then Hesperix’s equity holders would receive shares equaling a value of $13 million; provided however, if Company’s share price falls below $2 per share, then Hesperix’s equity holders would receive 6.5 million shares with a value equal to the product of 6.5 million multiplied by the current share price, which is an aggregate value of less than $13 million (with the exact consideration to be received dependent on the actual Company share price at the Closing).

 

On August 29, 2018, Company’s SAC and Board convened meetings to discuss, among other things, the terms of the draft LOI, potential financing, the Company’s forecast for the remainder of the year, and certain other matters relating to the 2018 annual stockholder meeting.

 

On August 30, 2018, Eisenberg sent the draft of the LOI for the Hesperix Acquisition to Genkin.

 

From August 2018 to September 2018, Company’s advisors accessed the Data Room to assist with the due diligence review of Hesperix.

 

On September 7, 2018, Genkin informed Eisenberg by email that the ownership group was expected to meet on September 17, 2018 to review the proposed LOI. Genkin told Eisenberg to expect a counterproposal on two points: (1) consideration would be $15 million and (2) the exclusivity period would be reduced from 120 to 60 days. Eisenberg informed Callaway of the communication. Following this communication, Akerman began drafting Transaction Documents, including a first draft of the Share Purchase Agreement.

 

On September 24, 2018, Genkin sent a counterproposal to the LOI to Eisenberg by email. The Sellers proposed a purchase price of $15 million in Common Stock based on the trailing four week stock price of Company or 6.5 million shares, whichever is greater. In addition, the Sellers proposed an aggregate royalty at a low single-digit rate of net sales, potential board representation, and a sponsored research agreement in the amount of $1.5 million per year for three years. Eisenberg shared this counterproposal with Callaway.

 

On September 24, 2018, Eisenberg discussed the counterproposal with Genkin, and on September 25, 2018, Eisenberg met with Callaway to discuss the latest proposals. Akerman revised the LOI accordingly to include, among other things (i) exclusivity by Hesperix for 90 days rather than 120 days, (ii) changes to the value of Hesperix and the ultimate amount of Common Stock to be issued in the transaction regardless of the trading price of the Common Stock at closing, (iii) a royalty arrangement, (iv) the entering into of a sponsored research agreement with IBCH upon the receipt by the Company of a certain level of capital, and (v)  the Board composition post-closing.

 

On September 28, 2018, Eisenberg sent the revised LOI to Genkin, which was largely accepted with certain minor changes including (i) IBCH as one of the parties receiving the royalty arrangement, (ii) that following the closing, the Company would use commercially reasonable efforts to develop the technology subject to the Company raising adequate capital to do so, and (iii) making certain changes to the terms of the proposed sponsored research agreement. Akerman makes such changes and Eisenberg sent the LOI back to Genkin for his final review and approval.

 

On October 5, 2018, Genkin sent Eisenberg the LOI executed on behalf of the Sellers.

 

On October 5, 2018, the SAC met to review and approve the final LOI, after which Eisenberg executed the LOI and sent a fully executed version to Genkin.

 

On October 12, 2018, Eisenberg began drafting a Company investor presentation deck with Maxim.

 

In October 2018, OPKO began negotiations with the Institute on an exclusive license of the Institute’s rights in the technology and associated intellectual property. These negotiations continue through January 2019.

 

Between October 2018 and January 2019, the Company and its advisors continued to work on the Company investor presentation, which was intended to support the bridge financing efforts after signing the Transaction Documents.

 

 

 

 

 70 
 

 

On November 5, 2018, Genkin sent the first draft of the Hesperix Assignment Agreement to Eisenberg and, at Genkin’s request, shared the draft with OPKO.

 

In early November 2018, Jim Parslow, Chief Financial Officer of the Company, and Genkin corresponded and coordinated on Hesperix financial statement requirements for proposed acquisition.

 

From November 20, 2018 to November 27, 2018, Akerman and Troutman exchanged drafts of the Share Purchase Agreement and Hesperix Assignment Agreement.

 

On November 30, 2018, Maxim sent a draft Letter of Engagement for the proposed bridge financing (the “LOE”) to Eisenberg and Parslow.

 

During the week of December 3, 2018, Akerman and Troutman met via teleconference to review open issues on the Transaction Documents.

 

On December 6, 2018, Maxim provided Eisenberg and Parslow with due diligence requests prepared by its counsel Ellenoff, Grossman & Schole LLP (“EGS”), in connection with the proposed financing (the “Bridge Financing”). The following week, Company, Maxim, and EGS had several teleconferences related to due diligence items.

 

On December 12, 2018, Parslow negotiated the final terms of bridge financing LOE with Maxim.

 

On December 19, 2018, Company engaged BodmerFischer Ltd. as Swiss counsel to work with Akerman on the Hesperix Acquisition.

 

On December 20, 2018, Eisenberg contacted Genkin, requesting details on, among other things, a loan Genkin advanced to Hesperix, which Genkin was requesting to be repaid at closing of the Transaction, and potential Board representation.

 

During December 2018, Akerman’s tax counsel determined that there may be a tax issue with the proposed transaction structure that would cause the Hesperix Acquisition to be taxable to US shareholders.

 

Between December 2018 and January 2019, Troutman and Akerman exchanged additional drafts of the various Transaction Documents, such revisions primarily relating to (i) holdback provisions, representation and warranties, tax structure, consideration, indemnification and the definition of restricted business, with respect to the Share Purchase Agreement, (ii) royalty payments and liability limitations, (iii) the OPKO Assignment Agreement, and (iv) exclusivity, royalty and termination payments, and assignment consent, with respect to the IP License Agreement.

 

On January 3, 2019, Eisenberg and Genkin met via webconference to resolve open issues on the Share Purchase Agreement, primarily related to definition of “Restricted Business.” Over the next few weeks, Eisenberg and Genkin exchanged several emails on this issue, and reached an agreement as reflected in the Final Share Purchase Agreement. In those email exchanges, Eisenberg and Genkin also discussed issues regarding the lockup, holdback, tax treatment, and post-closing development efforts standards.

 

On January 9, 2019, the Expense Management and Financing Oversight Committee of the Board received an update from Akerman on the material changes to the Share Purchase Agreement, the Hesperix Assignment Agreement, and the IP License Agreement discussed below.

 

 

 

 

 71 
 

 

On January 10, 2019, the SAC and the Board each convened a meeting, regarding the material changes or issues to the (i) Share Purchase Agreement, which included, among other things, a reduced hold back of Hesperix Transaction Shares to secure indemnification claims and reduced indemnification obligations of Hesperix and the Sellers and changes to the intellectual property representations; (ii) the Hesperix Assignment Agreement, which included the Company’s desire to mirror royalty provisions with the IP License Agreement, the limitation on liability provisions and the Company’s desire to remove certain parties from the Hesperix Assignment Agreement; and (iii) the IP License Agreement, which included further negotiations regarding the amount of the sublicense revenue fee percentage and milestones of net sales, the Institute’s termination fee request, the Institute’s consent rights on assignments and equity share allocations between OPKO and the Institute.

 

Also, on January 16, 2019, the Company executed the Maxim bridge financing LOE.

 

In late January 2019, Akerman begins drafting the proxy statement/prospectus to be filed in connection with the Hesperix Transaction.

 

On January 30, 2019, OPKO informed Akerman that it is not be part of the Hesperix Acquistion. During that week, the holdback provision was removed from the OPKO Assignment Agreement as a result of the Institute objection and Akerman and Troutman exchanged drafts of disclosure schedules.

 

Also, on January 30, 2019, IP Counsel commenced due diligence of the Company.

 

On February 1, 2019, the Company’s management and Akerman met with Callaway via teleconference to review the final Share Purchase Agreement and secure Callaway’s approval.

 

On February 5, 2019, Eisenberg and other members of Xenetic management discussed with the Pharmsynthez board of directors, Xenetic’s plans for the XCART technology.

 

On February 6, 2019, Maxim provided the Company with a target list of potential investors in the Bridge Financing.

 

On February 7, 2019, Genkin informed Troutman that the sellers have signed off on the final changes to the Share Purchase Agreement and the Hesperix Assignment Agreement.

 

On February 8, 2019, EGS provided initial drafts of documents in connection with the proposed Bridge Financing.

 

On February 9, 2019, the Company, Maxim, Akerman, and EGS met via teleconference to discuss the process for the Bridge Financing.

 

During the week of February 11, 2019, OPKO agreed to enter into the OPKO Assignment Agreement which is separate from the Hesperix Assignment Agreement. The parties also finalized disclosure schedules to the Share Purchase Agreement during that week.

 

On February 14, 2019, the Hesperix Sellers agreed on the final share allocation in connection with the Hesperix Acquisition.

 

On February 19, 2019, the Expense Management and Financing Oversight Committee of the Board convened a meeting and discussed and recommended to the Board for approval, the terms of the Securities Purchase Agreement to be entered into in connection with Bridge Financing (the “Bridge SPA”).

 

Also on February 19, 2019, the Company’s Board convened a meeting and discussed, among other things, the Hesperix Acquisition, Bridge SPA, and the registration of shares in connection with the Transaction. The Board approved the form of Bridge SPA, subject to the final approval of the Pricing Committee of the Board (the “Pricing Committee”), which was established at the Board meeting.

 

 

 

 

 72 
 

 

One February 25, 2019, Eisenberg, Akerman, and Callaway met via teleconference to review drafts of the Transaction Documents.

 

Between February 18, 2019 and March 1, 2019, the Company, Hesperix Sellers, OPKO, and the Institute finalized the Transaction Documents and exchanged signature pages to be held in escrow.

 

On February 26, 2019, Akerman and EGS met via teleconference to discuss the Bridge Financing, and Akerman sent drafts of the disclosure schedules to the Bridge SPA.

 

The signature pages to the Transaction Documents were released, effective March 1, 2019.

 

Between March 1, 2019 and March 5, 2019, EGS and Akerman exchanged drafts of the Bridge SPA and the warrants to be issued in connection with the Bridge Financing.

 

On March 4, 2019, the Company issued a press release announcing the Hesperix Acquisition and filed a Current Report on Form 8-K in connection with the signing of the Hesperix Acquisition.

 

On March 5, 2019, the Pricing Committee met via teleconference and, among other things, approved the Bridge SPA and priced the securities to be issued in the Bridge Financing. On the same day, the Company entered into the Bridge SPA and the parties agreed to close the Bridge Financing “T+2.”

 

Also on March 5, 2019, the Company issued a press release announcing the pricing of Bridge Financing and filed a Current Report on Form 8-K in connection with the pricing of the Bridge Financing.

 

On March 7, 2019, the Bridge Financing closed, and the Company filed a Current Report on Form 8-K in connection with the closing of the Bridge Financing.

 

On March 29, 2019, the Company filed a preliminary proxy statement/prospectus with the SEC with respect to the Transaction and the share issuance in connection with the Transaction.

 

Reasons for the Transaction

 

By acquiring this novel and differentiated CAR T technology, the Company will be positioned in a field that is at the forefront in the development of new oncology therapeutics, which the Company believes has the potential to drive significant value for shareholders. The XCART platform was designed to target personalized, patient-specific tumor neoantigens and has demonstrated proof of mechanism in B-cell lymphoma, an area of significant unmet medical need. In addition, the acquisition of XCART fits with the Company’s current strategy of focusing on research addressing unmet needs in oncology. The Company’s R&D efforts will focus initially on leveraging the XCART platform to develop cell-based therapeutics for the treatment of B-cell Non-Hodgkin lymphomas, an initial global market opportunity estimated to exceed $5 billion per year.

 

We believe that our development efforts with XCART should benefit from the fact that the approvals of Kymriah™ and Yescarta™ have validated CAR T as a clinical therapeutic option. As a result, there are a significant number of companies advancing CAR T research, and the field is attracting large amounts of capital. Given the variety and, often, complementary nature of technical and clinical approaches under investigation, the Company also believes that early successes in development of XCART should generate significant collaboration potential.

 

Anticipated Accounting Treatment

 

The Transaction is expected to be treated as an asset acquisition by the Company. To determine the accounting for this transaction under United States (U.S.) generally accepted accounting principles (GAAP), a company must assess whether an integrated set of assets and activities should be accounted for as an acquisition of a business or an asset acquisition. Substantially all of the fair value is included in in-process research and development and no substantive processes are being acquired. As such, the Transaction is expected to be treated as an asset acquisition. Asset acquisitions are to be accounted for by allocating costs, including transaction costs, of the acquisition to the acquired assets based on their relative fair value basis.

 

 

 

 

 

 

 73 
 

 

Opinion of Xenetic’s Financial Advisor

 

On May 22, 2018, Xenetic retained Maxim to act as financial adviser to Xenetic in connection with the Transaction. As part of this engagement, Xenetic requested that Maxim evaluate the fairness of the Transaction consideration to be paid by Xenetic pursuant to the Share Purchase Agreement, from a financial point of view, to Xenetic. As discussed in the following paragraph, on January 10, 2019, Maxim delivered to the Xenetic Board its oral opinion, confirmed by its delivery of a written opinion dated January 10, 2019, that as of the date thereof, and subject to the assumptions, limitations, qualifications and conditions set forth in Maxim’s written opinion, the Transaction consideration being paid to Hesperix stockholders in accordance with the Share Purchase Agreement is fair from a financial point of view to Xenetic and its stockholders.

 

The full text of Maxim’s written opinion, dated January 10, 2019, which sets forth, among other things, the assumptions made, procedures followed, matters considered and qualifications and limitations on the scope of review undertaken by Maxim in delivering its opinion, is attached as Appendix E to this proxy statement/prospectus and is incorporated herein by reference in its entirety. The description of Maxim’s written opinion set forth in this proxy statement/prospectus is qualified in its entirety by the full text of such opinion. Maxim’s opinion does not constitute a recommendation to the Xenetic Board or to any other persons in respect of the Transaction, including as to how any holder of Xenetic Common Shares should vote or act with respect to the Transaction and Share Issuance Proposal. We encourage you to read Maxim’s opinion carefully and in its entirety.

 

Maxim’s opinion was provided for the information and benefit of the Strategic Alternatives Committee and was delivered to the Strategic Alternatives Committee in connection with their evaluation of whether the Transaction consideration to be paid by Xenetic pursuant to the Share Purchase Agreement is fair, from a financial point of view to Xenetic, and did not address any other aspect of the Share Purchase Agreement or the transactions contemplated thereby, including the Transaction. Maxim’s opinion did not address the relative merits of the Transaction as compared to other business or financial strategies that might be available to Xenetic, nor did it address the underlying business decision of Xenetic to engage in the Transaction. Maxim also provided the Xenetic Board with a presentation in connection with their evaluation.

 

Maxim’s opinion necessarily was based upon information made available to Maxim as of January 10, 2019 and financial, economic, monetary, market, regulatory and other conditions and circumstances as they existed and as could be evaluated on such date. Maxim has no obligation to update, revise or reaffirm its opinion based on subsequent developments. Maxim’s opinion did not express any opinion as to the price at which the shares of Xenetic Common Shares will trade at any time.

 

The following is a summary of Maxim’s opinion, and is qualified in its entirety by the full text of such opinion attached as Appendix E to this proxy statement/prospectus. We encourage you to read Maxim’s written opinion carefully in its entirety:

 

In connection with delivering its opinion, Maxim, among other things:

 

·Reviewed certain publicly available filings relating to Xenetic, including Annual Reports on Form 10-K of Xenetic; certain interim reports to stockholders and Quarterly Reports on Form 10-Q of Xenetic;
·Reviewed certain business agreements;

 

 

 

 

 74 
 

 

·Reviewed certain non-public financial analyses and projected cash-based data relating to Hesperix under alternative business assumptions that were provided to Maxim by Xenetic (and were prepared by Xenetic and the Sellers and further revised and adjusted by the Xenetic management team, as approved for use by the Xenetic Strategy Alternatives Committee) (the “Forecasts”).
·Reviewed the reported prices and the historical trading activity for Xenetic common shares;
·compared certain financial and stock market information for Xenetic with similar information for certain other companies the securities of which are publicly traded; Maxim did not include publicly traded comparable companies in its analysis since there were no relevant companies utilizing a comparable technology and in the same stage of development
·reviewed the financial terms of certain recently completed Series A Venture Capital Investment, strategic transactions, business combinations, and acquisitions within the Biotechnology industry;
·reviewed a draft of the Share Purchase Agreement dated November 20, 2018, which Maxim assumed was in substantially final form and from which Maxim assumed the final form would not vary in any respect material to its analysis; and
·performed such other analyses and examinations and considered such other factors that Maxim deemed appropriate.

 

For purposes of its analysis and opinion, Maxim assumed and relied upon, without undertaking any independent verification of, the accuracy and completeness of all of the information publicly available, and all of the information supplied or otherwise made available to, discussed with, or reviewed by Maxim, and Maxim assumes no liability therefor. Maxim was not requested to, and did not, explore alternatives to the Transaction or solicit interest of any other parties in pursuing transactions with Xenetic.

 

Maxim was not asked to pass upon, and expressed no opinion with respect to, any matter other than the fairness of the Transaction consideration to be paid by Xenetic pursuant to the Share Purchase Agreement, from a financial point of view, to Xenetic. Maxim did not express any view on, and its opinion did not address, the fairness of the Transaction to, or any consideration received in connection therewith by, the holders of any other securities, creditors or other constituencies of Xenetic or Hesperix, or as to the fairness of the amount or nature of any compensation to be paid or payable to any of the officers, directors or employees of Xenetic or Hesperix or any of the other parties to the Share Purchase Agreement or any affiliates thereof, or any class of such persons, whether relative to the Transaction consideration or otherwise. Maxim assumed that any modification to the structure of the Transaction would not vary in any respect material to its analysis. Maxim’s opinion did not address the relative merits of the Transaction as compared to other business or financial strategies that might be available to Xenetic, nor did it address the underlying business decision of Xenetic to engage in the Transaction. Maxim’s opinion does not constitute a recommendation to the Xenetic Board, or Strategic Alternatives Committee or to any other persons in respect of the Transaction, including as to how any holder of shares of Xenetic Common Stock should vote or act in respect of the Transaction. Maxim expressed no opinion as to the price at which Xenetic Common Stock will trade at any time. Maxim is not a legal, regulatory, accounting or tax expert and assumed the accuracy and completeness of assessments by the management of Xenetic and its advisors with respect to legal, regulatory, accounting and tax matters.

 

Maxim provides a multitude of financial services including investment banking; private wealth management; and global institutional equity, fixed-income and derivatives sales and trading as well as equity research. Maxim and its affiliates, or other related entities or individuals, may at any time purchase, sell, hold or vote long or short positions and investments in securities, derivatives, loans, commodities, currencies, credit default swaps and other financial instruments of the Company, and any of their respective affiliates and third parties, or any currency or commodity that may be involved in the Transaction. Maxim will receive a fee from the Company for delivering the Opinion as well as reimbursement of certain expenses. Maxim's fee will be due in its entirety upon the delivery of the Opinion, irrespective of whether the Transaction is completed. The Company has agreed to indemnify Maxim against certain liabilities, and to reimburse it for certain liabilities in connection with Maxim providing the Opinion. No controlling person of Maxim is directly personally receiving compensation or other remuneration from any of the Parties. On March 5, 2019, Xenetic Biosciences announced pricing of $3.1 million registered direct offering and Maxim acted as the exclusive placement agent for the offering.

 

 

 

 

 75 
 

 

In rendering its opinion, Maxim relied upon and assumed, without assuming any responsibility for independent verification, the accuracy and completeness of all the financial, legal, regulatory, tax, accounting and other documentation and information provided to, discussed with, or reviewed by Maxim and has relied on such information as being complete and accurate in all material respects, including any documentation and information originally produced by Xenetic or Hesperix and provided by Xenetic to Maxim. In that regard, Maxim assumed that the Forecasts have been reasonably prepared on a basis reflecting the best currently available estimates and judgments of the management of Xenetic and those financial projections originally produced by Xenetic and Hesperix and provided by Xenetic to Maxim. Maxim assumed that there were no material changes in the assets, liabilities, financial condition, results of operations, reserves, business operations since the date of the financial statements referenced herein. Moreover, it is understood that the Forecasts are based on numerous variables and assumptions that are inherently uncertain, including without limitation, factors related to general economic, market and competitive conditions. Accordingly, actual results could vary significantly from those set forth in such Forecasts, and as noted previously, Maxim has relied on these Forecasts without independent verification or analyses and does not in any respect assume any responsibility for the accuracy or completeness thereof. Maxim has not made an independent evaluation or appraisal of the assets and liabilities (including any joint ventures, contingent, derivative or other off-balance-sheet assets and liabilities) of Xenetic or any of its subsidiaries, Hesperix or any of its subsidiaries, joint ventures and Maxim has not been furnished with any such evaluation or appraisal. Maxim has assumed that all governmental, regulatory or other consents and approvals necessary for the consummation of the Transaction will be obtained without any adverse effect on the expected benefits of the Transaction in any way meaningful to their analysis. Maxim is not an actuary and its services did not include any actuarial determination or evaluation by Maxim or any attempt to evaluate actuarial assumptions, and Maxim has relied on Xenetic with respect to the appropriateness and adequacy of reserves of Xenetic and forecast assumptions used by Xenetic in connection with the Forecasts. In that regard, Maxim has made no analysis of, and expressed no opinion as to, the appropriateness or adequacy of reserves or forecast assumptions. Maxim has relied upon assurances by Xenetic and Hesperix that they are unaware of any facts that would make their respective information incomplete or misleading. Maxim has no obligation to update or modify its opinion.

 

Maxim was not requested to, and did not, explore alternatives to the transaction or solicit interest of any other parties in pursuing transactions with Xenetic.

 

Maxim’s Analysis of Hesperix

 

Maxim performed a series of analyses to derive indicative valuation ranges for Hesperix’ Common Stock.

 

Series A Venture Valuation Analysis

 

Maxim analyzed precedent Series A investments in preclinical oncology and immunotherapy companies that were announced between January 1, 2015 and December 17, 2018. Given the nature of this type of investment, many transactions do not disclose a valuation. Transactions that did not disclose any deal size or valuation details were not considered as part of this analysis.

 

The analysis of the pre-market valuation of the peer group yielded an implied equity value of $18.7 million using the mean of the peer group and an implied equity valuation of $20.0 million using the median of the peer group.

 

Discounted Cash Flow Analysis

 

Maxim performed a discounted cash flow analysis of XCART to calculate the present value of XCART based on the sum of the present values of the projected available cash flow streams and the terminal value of the equity using the Forecasts.

 

 

 

 

 76 
 

 

Maxim’s discounted cash flow analysis is based on Xenetic management’s and Hesperix management’s clinical stage & commercial financial cash flow projections up to 2037, year of peak sales. Maxim has assumed that the financial projections have been reasonably prepared on a basis reflecting the best currently available estimates and judgments of Xenetic Management and Hesperix and provided by Xenetic to Maxim. Maxim applied risk adjustments for clinical Probability of Success (“PoS”) using Maxim’s assumption for the risk of achieving positive clinical outcomes and obtaining regulatory approval. Different PoSs are applied to the entirety of the cash flows for the corresponding stage of the development when the cash flow incurs. The derivation of PoSs is based on multiple literature: Schuhmacher, Grassmann, Hinder 2016, Wong, Siah, Lo 2018, Clinical Development Success Rates 2006-2015 – BIO, Biomedtracker, Amplion 2016. Maxim applied the success rates that are most relevant to Xenetic’s pathway to FDA approval.

 

The projected values were discounted using a Maxim derived discount rate of 24.86% to 27.48%. Given the Target’s current capital structure, Maxim assumes no debt. Therefore, the weighted average cost of capital (“WACC”) equals the cost of equity ranging from 12.76% to 14.28% plus size risk premium 11.63% (Zanni 2017, Duff & Phelps, 2017 Valuation Handbook: U.S. Guide to Cost of Capital). Maxim also determined the terminal value assuming a perpetuity growth rate of 3.0% at the end of the forecast period (ending in 2037) reflecting the historical inflation rate of 3%.

 

Maxim utilized a discounted cash flow analysis that calculates the present value of XCART based on the sum of the present values of the probability weighted projected available cash flow streams and the terminal value of the equity. The range of implied equity value is driven by the range of WACC.

 

The result of the analysis yielded an equity value of $13.8 million to $19.3 million.

 

Maxim received additional information provided by the Xenetic management on January 21, 2019 and did not consider it to have a material impact on the valuation.

 

Precedent M&A Transactions Analysis

 

The universe of pure-play comparable M&A precedent transactions for pre-clinical biotech companies is limited. Hence, Maxim included all pre-clinical biotechology precedents and not limiting our analysis to purely oncology and immunotherapy. The analysis covers the period January 1, 2012 to December 17, 2018. In order to ensure that the right precedent transactions for comparison were selected, only transactions including pre-clinical drugs were selected, and all others including drugs in clinical trial were excluded. In addition, 6 out of 10 selected transactions were structured to pay an upfront payments upon closing of the transaction and additional contingent payment upon the achievement of certain development, regulatory and sales milestones (“Earnout”) and some include additional royalties. Maxim conservatively has utilized only the upfront payment as the implied enterprise value of the transactions, and Maxim notes that the Transaction does not have any additional contingent payment other than the previously mentioned royalties.

 

Public Comparable Companies Valuation

 

Maxim analyzed comparable companies listed on the NASDAQ and NYSE in the biotechnology sector. The peer group was then condensed to only include biotechnology companies that have not yet entered clinical stage of development for any of their drug candidate(s).

 

Maxim believes the selected public comparable companies are not relevant to the overall analysis due to their outsized valuations, as a result of having somewhat of a self-selected ability to go public due to their unique position in the marketplace.

 

 

 

 

 77 
 

 

Company   Ticker   Exchange
Anixa Biosciences, Inc.   ANIX   NasdaqCM
Arvinas Holding Company, LLC   ARVN   NasdaqGS
Cue Biopharma, Inc.   CUE   NasdaqCM
Editas Medicine, Inc.   EDIT   NasdaqGS
Homology Medicines, Inc.   FIXX   NasdaqGS
Intellia Therapeutics, Inc.   NTLA   NasdaqGM
LogicBio Therapeutics, Inc.   LOGC   NasdaqGM
Rubius Therapeutics, Inc.   RUBY   NasdaqGS

 

Other Factors

 

In arriving at its opinion, Maxim did not draw, in isolation, conclusions from or with regard to any factor or analysis considered by it. Rather, Maxim made its determination as to fairness on the basis of its experience and professional judgment after considering the results of all of the analyses. The order of the analyses and reviews described in the summary above and the results thereof do not represent the relative importance or weight given to these analyses and reviews by Maxim. Considering selected portions of the analyses and reviews in the summary set forth above, without considering the analyses and reviews as a whole, could create an incomplete or misleading view of the analyses and reviews underlying Maxim’s opinion. Maxim may have considered various assumptions more or less probable than other assumptions, so the range of valuations resulting from any particular analysis or combination of analyses described above should not be taken to represent Maxim’s view with respect to the actual value of XCART or Xenetic Common Share.

 

For purposes of its analyses and reviews, Maxim considered industry performance, general business, economic, market and financial conditions and other matters, many of which are beyond the control of Hesperix, Xenetic and their advisors. No company or business used in Maxim’s analyses and reviews as a comparison is identical to Hesperix or Xenetic, and an evaluation of the results of those analyses and reviews is not entirely mathematical. Rather, the analyses and reviews involve complex considerations and judgments concerning financial and operating characteristics and other factors that could affect the acquisition, public trading or other values of the companies, businesses or transactions used in Maxim’s analyses and reviews. The estimates contained in Maxim’s analyses and reviews and the ranges of valuations resulting from any particular analysis or review are not necessarily indicative of actual values or predictive of future results or values, which may be significantly more or less favorable than those suggested by Maxim’s analyses and reviews. In addition, analyses and reviews relating to the value of companies, businesses or securities do not purport to be appraisals or to reflect the prices at which companies, businesses or securities actually may be sold. Accordingly, the estimates used in, and the results derived from, Maxim’s analyses and reviews are inherently subject to substantial uncertainty, and Maxim assumes no responsibility if future results or values are materially different from those forecasted in such estimates.

 

From 2016 to early 2018, no material relationship existed between Maxim and its affiliates and Xenetic or Hesperix pursuant to which compensation was received by Maxim or its affiliates as a result of such a relationship. On May 22, 2018, Maxim was retained by Xenetic to serve as financial advisor to Xenetic and to assist the Strategic Alternatives Committee of the Board of Directors in its evaluation of potential strategic alternatives. Maxim will receive a fee in the form of $275,000 cash or $300,000 of Xenetic Common Stock upon the successful close of the Transaction. On March 5, 2019, Maxim acted as the exclusive placement agent for $3.1 million registered directed offering by Xenetic and received compensation. In the future, Maxim may provide financial advisory or other services to Hesperix, Xenetic or their respective affiliates, and in connection with any such services Maxim may receive compensation.

 

 

 

 

 78 
 

 

With respect to the Transaction, Maxim did not recommend any specific transaction consideration to the Xenetic Board or Xenetic management or that any specific consideration constituted the only appropriate consideration in the Transaction.

 

In the ordinary course of business, Maxim or its affiliates may actively trade the securities, or related derivative securities, or financial instruments of Xenetic, Hesperix and their respective affiliates, for its own account and for the accounts of its customers and, accordingly, may at any time hold a long or short position in such securities or instruments.

 

Certain Financial Forecasts

 

Xenetic does not publicly disclose long-term forecasts as to future revenue, earnings or other results due to, among other reasons, the uncertainty and subjectivity of the underlying assumptions and estimates. As a result, Xenetic does not provide the unaudited forecast financial information as a reliable indication of future results. Xenetic is including certain unaudited forecast financial information in this document solely because it was among the financial information made available to the Xenetic Board of Directors and the SAC and used by Xenetic's financial advisor in connection with its evaluation of the Transaction. The unaudited forecast financial information presented below includes forecasts for XCART prepared by Xenetic management in consultation with certain of the Sellers as part of Transaction process. Except to the extent required by applicable law, Xenetic undertakes no obligation to update the forecast financial information included in this proxy statement/prospectus and has not done so and does not intend to do so. The inclusion of this information should not be regarded as an indication that any of Xenetic, Xenetic's financial advisor, Hesperix, or any other recipient of this information considered, or now considers, it in any way predictive of actual future results. There can be no assurance that the forecast results will be realized or that actual results will not be significantly higher or lower than set forth below.

 

Since the unaudited forecast financial information covers multiple years beginning in 2026, such information, by its nature, is in no way predictive at the start, and becomes less predictive with each successive year. The unaudited forecast financial information was not prepared with a view toward public disclosure, nor was it prepared with a view toward compliance with applicable securities laws, published guidelines of the SEC, or the guidelines established by the American Institute of Certified Public Accountants for preparation and presentation of forecast financial information. Neither Xenetic's independent registered public accounting firm, nor any other independent accounting firm has audited, reviewed, compiled, or performed any procedures with respect to the unaudited forecast financial information for the purpose of its inclusion herein and, accordingly, neither Xenetic's independent registered public accounting firm nor any other independent accounting firm express an opinion or provide any form of assurance with respect thereto for the purpose of this proxy statement/prospectus. The report of Xenetic's independent registered public accounting firm included in this proxy statement/prospectus, relates only to the historical financial information of Xenetic. Such report does not extend to the unaudited forecast financial information set forth below and should not be read to do so. Furthermore, the unaudited forecast financial information does not take into account any circumstances or events occurring after the date it was prepared.

XCART Unaudited Forecast Financial Information (1)

 

   (amounts in millions) 
   Year Ending December 31, 
   2026   2027   2028   2029   2030   2031   2032   2033   2034   2035   2036   2037 
Revenue  $291.1   $585.7   $882.9   $1,183.1   $1,486.2   $1,792.4   $1,801.4   $1,819.4   $1,819.4   $1,828.5   $1,837.7   $1,846.9 
Total Expenses   179.1    344.9    453.0    591.7    725.1    853.8    842.0    827.8    831.5    835.3    839.2    843.1 
Net Income (2)   100.8    187.8    335.3    461.3    593.7    732.1    748.3    766.5    770.5    774.7    778.8    783.0 
Free Cash Flows
from Operations
   100.8    187.8    335.3    461.3    593.7    732.1    748.3    766.5    770.5    774.7    778.8    783.0 
                                                             

_______________

(1)The Unaudited Forecast Financial Information was further adjusted at an assumed probability of success rate of 9.7%. 
(2)Assuming an effective tax rate of 22%, net of NOLs.

 

Vote Required

 

The affirmative vote of a majority of the votes cast affirmatively or negatively at the Special Meeting by the holders of our Common Stock is required to approve the Transaction Proposal.

 

THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE “FOR” THE TRANSACTION PROPOSAL

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 79 
 

 

PROPOSAL TWO

 

PROPOSAL TWO: THE SHARE ISSUANCE PROPOSAL

 

The Share Issuance Proposal is a proposal to approve under the listing rules of NASDAQ the issuance of shares of Common Stock in connection with the Transaction to be voted on in the Transaction Proposal.

 

The Company’s Common Stock is listed on the NASDAQ Capital Market and, as such, the Company is subject to the NASDAQ listing rules.

 

Under NASDAQ listing rules, a company whose stock is listed on NASDAQ, such as the Company, is required to obtain stockholder approval prior to certain issuances of common stock or securities convertible into or exchangeable for common stock, in connection with an acquisition, if such issuance (i) equals 20% or more of the common stock or voting power of the company outstanding before the transaction or (ii) in connection with the acquisition of assets of another company where any director, officer or a “substantial shareholder” (generally defined as a 5% or greater shareholder) has a 5% or greater interest (or such persons collectively have a 10% or greater interest), directly or indirectly, in the consideration to be paid in the transaction, and the present or potential issuance of common shares could result in an increase in outstanding common shares or voting power of 5% or more.

 

Immediately after the completion of the Transaction, the number of outstanding shares of Common Stock and the outstanding voting power of the Company will exceed 20% of the shares of Common Stock outstanding before such issuance and issuances to certain stockholders will result in an increase in such stockholders’ outstanding common shares or voting power of 5% or more. For this reason, the Company must obtain the approval of its stockholders, in accordance with the NASDAQ listing rules, for the issuance of shares of Common Stock in connection with such conversion. Accordingly, the Company is asking its stockholders to approve the issuance of shares of Common Stock in the Transaction.

 

Effects of the Share Issuance Proposal on Stockholders

 

The issuance of the Transaction Shares will result in (i) an additional 7,500,000 shares of Common Stock and (ii) additional shares of Common Stock valuing $300,000 which, based on closing per share price on the Record Date would result in an additional [●] shares. After giving effect to all shares of Common Stock issued in or in connection with the Transaction, Company stockholders immediately before completion of the Transaction will hold approximately [●]% of the issued and outstanding Common Stock and Sellers will hold approximately [●]% of the issued and outstanding Common Stock.

 

Because the shares of Common Stock issued to the Sellers will be issued in a transaction registered under the Securities Act, the Sellers, other than the Sellers who are affiliates of the Company, may be able to resell their shares. Subsequent resales of such shares of Common Stock may cause the market price of our Common Stock to decline. The issuance would also increase the number of shares of Common Stock outstanding, which may have the effect of reducing the Company’s loss per share.

 

The OPKO Transaction Shares and Institute Transaction Shares will be issued in a transaction exempt from the registration requirements of the Securities Act. We have agreed, as soon as practicable after closing the Transaction, to register for resale the Transaction Shares issued to OPKO and the Institute.

 

Consequences if Stockholder Approval is Not Obtained

 

If the Company’s stockholders do not approve the Share Issuance Proposal, the shares of Common Stock will not be issued unless the Company’s stockholders subsequently approve the Share Issuance Proposal by the required vote under the NASDAQ listing rules.

 

The Share Issuance Proposal is conditioned upon and subject to the approval of the Transaction Proposal. If the Transaction Proposal is not approved, the Share Issuance Proposal will have no effect, even if approved by our stockholders.

 

Vote Required

 

The affirmative vote of a majority of the votes cast affirmatively or negatively at the Special Meeting by the holders of our Common Stock is required to approve the Share Issuance Proposal.

 

THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE “FOR” THE SHARE ISSUANCE PROPOSAL

 

 

 80 
 

 

PROPOSAL THREE

 

PROPOSAL THREE: THE DIRECTOR PROPOSAL

 

At the Special Meeting, one director will be voted on to serve until the 2020 annual meeting of stockholders or until a successor for such director is elected and qualified, or until the death, resignation or removal of such director. There is only one nominee for the Board of Directors in this special election.

 

 

Dr. Vinogradov has agreed to serve, if elected, and the Board has no reason to believe that the nominee will be unavailable or will decline to serve. In the event, however, that the nominee is unable or declines to serve as a director at the time of the annual meeting, the proxies will be voted for any nominee who is designated by the current Board. Unless otherwise instructed, the proxy holders will vote the proxies received by them “FOR” the following nominee:

 

Alexey Vinogradov, 48, currently serves as Business Development Director and Operations Director at Cantreva LLC, a Russian company with extensive specialized experience of delivering services in the field of renewable energy (solar, wind, hydro power), performing works on a “turnkey” basis, since September 2017. Dr. Vinogradov previously served as General Manager at Togas Middle East LLC in Dubai, UAE from May 2015 to May 2017. Prior to that, Dr. Vinogradov served as branch manager at Togas Group LLC in Russia from March 2012 to November 2016. We believe Dr. Vinogradov’s experience in business communication, international business development and financial analytics provides him with the appropriate set of skills to serve as a member of our Board. Dr. Vinogradov has been nominated pursuant to the terms of the Share Purchase Agreement.

 

The following is a biographical description of each of the members of our board of directors and our executive officers:

 

Name Age Position
Jeffrey Eisenberg 53 Chief Executive Officer and Director
Dr. Curtis Lockshin 58 Chief Scientific Officer
James Parslow 54 Chief Financial Officer and Corporate Secretary
Dr. James E. Callaway 62 Director (1), (2), (3)
Firdaus Jal Dastoor, FCS 66 Director (1), (2)
Dr. Dmitry Genkin 50 Director
Roman Knyazev 38 Director
Dr. Roger Kornberg 72 Director (3)
Mr. Adam Logal 41 Director (1), (2), (3)
       

 

(1)       Member of the Audit Committee

(2)       Member of the Compensation Committee

(3)       Member of the Nominating and Corporate Governance Committee

 

Jeffrey F. Eisenberg was appointed our Chief Executive Officer on October 26, 2017, after serving as Chief Operating Officer since December 2, 2016, and has served as a member of our Board since July 2016. Mr. Eisenberg previously worked at Noven Pharmaceuticals, Inc. (“Noven”), a subsidiary of Hisamitsu Pharmaceutical, Inc., where he held various positions of increasing responsibility, most recently serving from 2009-2016 as Noven’s president, chief executive officer and as a member of its board of directors. Mr. Eisenberg obtained his J.D. at Columbia University Law School and a B.S. in Economics from the Wharton School, University of Pennsylvania. We believe Mr. Eisenberg’s significant life science executive experience and leadership experience in the areas of R&D, operations, manufacturing/quality, business development, strategic partnering, product development, commercialization, and human resources provides him with the appropriate set of skills to serve as a member of our Board.

 

 

 

 

 

 81 
 

  

Dr. Curtis A. Lockshin initially joined us on a part-time basis in March 2014 as our Vice President of Research & Operations and was appointed our Chief Scientific Officer effective January 1, 2017. Dr. Lockshin has held several management positions at development and commercial stage biotechnology companies, with experience including discovery, preclinical and clinical development, as well as commercial manufacturing. Since May 2013, he has held the position of president and chief executive officer of Guardum Pharmaceuticals LLC (“Guardum”), a wholly owned subsidiary of PJSC Pharmsynthez, our controlling stockholder, a position which he continues to hold in addition to his position with us. Dr. Lockshin does not receive a salary for these services but did receive medical benefits and was covered under Guardum’s health plan through July 31, 2018. In addition, Dr. Lockshin has served as an officer or consultant of several biotechnology companies on a part-time basis, including as an officer of a series of related companies following multiple mergers beginning as chief executive officer and director of SciVac Therapeutics, Inc. and its subsidiary SciVac, Ltd., from September 2014 until July 2016. After SciVac Therapeutics, Inc.’s merger with VBI Vaccines, Inc. in July 2016, Dr. Lockshin served as chief technical officer of the merged company until December 2016. Dr. Lockshin is currently serving as a member of the board of directors of Phio Pharmaceuticals Corporation, a publicly traded clinical-stage RNAi company, a position he has held since April 2013. Dr. Lockshin has an S.B. in Life Sciences and a Ph.D. in Biological Chemistry from the Massachusetts Institute of Technology. Since April 2004, Dr. Lockshin has also served as a member of the board of directors of the Ruth K. Broad Biomedical Research Foundation, a Duke University Support Corporation that supports basic research related to Alzheimer’s disease and neurodegeneration via intramural, extramural and international grants.

 

James Parslow was appointed our Chief Financial Officer on April 3, 2017. Mr. Parslow most recently served as Chief Financial Officer, Treasurer and Secretary of World Energy Solutions, Inc., a publicly-traded business-to-business e-commerce company brokering energy and environmental commodities, from 2006 until its acquisition by EnerNOC, Inc. in 2015. Since 2015, he has served as an independent consultant providing interim chief financial officer services to multiple emerging technology companies. Mr. Parslow is a Certified Public Accountant with 30 years of experience serving private and public companies in the biotech, alternative energy, online auction, and high-tech manufacturing industries. He holds an A.B. in Economics and Accounting from the College of the Holy Cross and an M.B.A. with a concentration in Finance from Bentley University.

 

James E. Callaway was appointed to the Board on August 14, 2017. Dr. Callaway has over 30 years of experience in the execution of product development operations for biotherapeutics and currently serves as CEO of KalGene, a privately-held preclinical company focused on delivery of a proprietary development candidate to alter the course of Alzheimer’s Disease. Dr. Callaway is a seasoned CEO within the venture-backed biotech community and over the course of his career he has built and operated several companies, transforming each from research companies to clinical stage operating entities. Since 2016, he has also served as a Corporate Strategy Consultant at Callaway Innovations. From 2012 until 2016, Dr. Callaway was President and Chief Executive Officer of ArmaGen, Inc. and from 2008 until 2012, served as President and CEO of CEBIX, Inc. Prior to these efforts, Dr. Callaway held multiple senior leadership positions at Elan Pharmaceuticals, including simultaneously acting as Head of Development and overseeing the complex partnership with Wyeth Pharmaceuticals in the Alzheimer’s disease immunotherapy program. He has developed antibodies for a wide-range of therapeutic applications over the past two decades, including treatments of multiple sclerosis (Tysabri®: pharmaceutical development), Alzheimer’s disease (bapineuzumab: Program Executive), and blood-brain barrier transport, and has worked with the United States Food and Drug Administration on multiple orphan drug development programs. We believe Dr. Callaway’s significant life sciences executive, leadership and strategic experience in the area of biotherapeutics provides him with the appropriate set of skills to serve as a member of our Board.

 

Firdaus Jal Dastoor, FCSwas initially appointed as a member of our Board in January 2014 pursuant to terms of the agreement of our acquisition of Xenetic U.K. He has been employed by the Cyrus Poonawalla Group, a conglomerate in India with interests in horse racing and breeding, biotech, engineering and hotels, in business development strategies and operational roles since October 1981. Mr. Dastoor is currently a Group Director in charge of Finance and Corporate Affairs and Company Secretary of the Serum Institute of India Private Limited at the Cyrus Poonawalla Group, one of our significant stockholders. He is a Fellow Member of The Institute of Company Secretaries of India since 1990. Mr. Dastoor is on the board of several private companies operating in the fields of engineering products, life sciences and biotech, international trade, financial services and quality standards certifications. Mr. Dastoor received a B.A. in Commerce from the University of Poona. We believe Mr. Dastoor’s knowledge of investments in the life sciences and biotechnology industries, and his finance and business development background provide him with the appropriate set of skills to serve as a member of our Board.

 

 

 

 

 

 82 
 

 

Dmitry Genkin was appointed to the Board on August 14, 2017. Dr. Genkin currently serves on the Company’s Scientific Advisory Board and previously served on the Company’s Board of Directors from 2004-2016. He has the Russian equivalent of an MD in Internal Therapy and studied drug delivery under Professor Gregory Gregoriadis at The School of Pharmacy, University of London in 1992, as well as the Department of Clinical Pharmacology at Karolinska Hospital, Stockholm from 1992 until 1993. Since 2005, Dr. Genkin has served as Executive Chairman of PJSC Pharmsynthez, a public company and Xenetic’s majority stockholder. Prior to that time, Dr. Genkin headed a number of Russia’s largest pharmaceutical companies including Pharmavit, which had 27% of the Russian pharmaceutical market. In 1998, he was awarded the silver medal by the Russian Natural Science Academy. We believe Dr. Genkin’s significant life sciences, biotechnology and international background provide him with the appropriate set of skills to serve as a member of our Board.

 

Roman Knyazev has served as a member of our Board since April 2014. Mr. Knyazev has served in various positions at Rusnano Moscow since 2009, most recently as its Investment Director. He also serves on the boards of directors of Nanolek, PETAR, PJSC Pharmsynthez, and SynBio LLC. Mr. Knyazev is a Fellow of the Kauffman Fellows Program. We believe Mr. Knyazev’s experience investing in clinical stage biotechnology companies provides him with the appropriate set of skills to serve as a member of our Board.

 

Dr. Roger Kornberg has served as a member of our Board since February 2016. Dr. Kornberg is a member of the U.S. National Academy of Sciences and the Winzer Professor of Medicine in the Department of Structural Biology at Stanford University. He earned his B.S. in chemistry from Harvard University in 1967 and his Ph.D. in chemical physics from Stanford in 1972. He became a postdoctoral fellow at the Laboratory of Molecular Biology in Cambridge, England and then an assistant professor of biological chemistry at Harvard Medical School in 1976, before moving to his present position as professor of structural biology at Stanford Medical School in 1978. In 2006, Dr. Kornberg was awarded the Nobel Prize in Chemistry in recognition for his studies of the molecular basis of Eukaryotic Transcription, the process by which DNA is copied to RNA. Dr. Kornberg is also the recipient of several awards, including the 2001 Welch Prize, the highest award granted in the field of chemistry in the United States, and the 2002 Leopald Mayer Prize, the highest award granted in the field of biomedical sciences from the French Academy of Sciences. We believe Dr. Kornberg’s prior experience serving on the boards of directors of large organizations as well as his scientific background provides him with the appropriate set of skills to serve as a member of our Board.

 

Adam Logal was appointed to the Board in August 2017. Mr. Logal has over 16 years of experience in the biopharmaceuticals industry. Since April 2014, Mr. Logal has served as Senior Vice President, Chief Financial Officer, Chief Accounting Officer and Treasurer of OPKO Health, Inc. and from March 2007 until April 2014 served as OPKO’s Vice President of Finance, Chief Accounting Officer and Treasurer. Mr. Logal served as a director of VBI Vaccines, Inc., a publicly-traded company, from May 2015 through October 2018 and served as its Audit Committee Chairman. Prior to joining OPKO, Mr. Logal served in various financial management roles at Nabi Biopharmaceuticals, a commercial stage biopharmaceutical company. Mr. Logal is a strategic finance executive with extensive experience in SEC compliance and reporting, domestic and international finance, strategic planning, cash flow management, budgeting, taxation, treasury and business development. We believe Mr. Logal’s extensive financial experience with public companies in the life sciences industry provides him with appropriate set of skills to serve as a member of our Board.

 

 

 

 

 83 
 

 

There are no family relationships among any of our directors, the director nominee and executive officers and, to the best of our knowledge, none of our directors, the director nominee or executive officers has, during the past ten years, been involved in any legal proceedings which are required to be disclosed pursuant to the rules and regulations of the SEC.

 

Committees of the Board

 

The Board has three standing committees: an Audit Committee, a Compensation Committee, and a Nominating and Corporate Governance Committee. The Board also has two special committees: an Expense Management and Financing Oversight Committee and a Strategic Alternatives Committee. The Expense Management and Financing Oversight Committee was formed in October 2017. The Strategic Alternatives Committee was formed in March 2018. The Company has adopted charters to govern the conduct, authority and responsibilities of each of the Audit Committee, Compensation Committee and Nominating and Corporate Governance Committee. The Board has not determined, if elected at the Special Meeting, on what committees Dr. Vinogradov will serve.

 

Audit Committee

 

The Audit Committee of the Board of Directors was established by the Board in accordance with Section 3(a)(58)(A) of the Exchange Act, to oversee the Company’s corporate accounting and financial reporting processes and audits of its financial statements. For this purpose, the Audit Committee performs several functions. The Audit Committee evaluates the performance of and assesses the qualifications of the independent auditors; determines and approves the engagement of the independent auditors; determines whether to retain or terminate the existing independent auditors or to appoint and engage new independent auditors; reviews and approves the retention of the independent auditors to perform any proposed permissible non-audit services; monitors the rotation of partners of the independent auditors on the Company’s audit engagement team as required by law; reviews and approves or rejects transactions between the Company and any related persons; confers with management and the independent auditors regarding the effectiveness of internal control over financial reporting; establishes procedures, as required under applicable law, for the receipt, retention and treatment of complaints received by the Company regarding accounting, internal accounting controls or auditing matters and the confidential and anonymous submission by employees of concerns regarding questionable accounting or auditing matters; and meets to review the Company’s annual audited financial statements and quarterly financial statements with management and the independent auditor, including a review of the Company’s disclosures under the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section of the Company’s Annual Report to Stockholders on Form 10-K.

 

For the fiscal year 2018, the Audit Committee was composed of three directors: Mr. Dastoor, Dr. Callaway, and Mr. Logal (chair). The Audit Committee met five times during fiscal year 2018. The Board has adopted a written Audit Committee charter that is available to stockholders on the Company’s website at http://ir.xeneticbio.com/.

 

The Board of Directors reviews the NASDAQ listing standards definition of independence for Audit Committee members on an annual basis and has determined that all current members of our Audit Committee are independent (as independence is currently defined in Rule 5605(c)(2)(A)(i) and (ii) of the NASDAQ listing standards).

 

The Board of Directors has also determined that Mr. Logal qualifies as an “audit committee financial expert,” as defined in applicable SEC rules. The Board made a qualitative assessment of Mr. Logal’s level of knowledge and experience based on a number of factors, including his formal education and experience as a chief financial officer.

 

 

 

 

 84 
 

 

Report of the Audit Committee of the Board of Directors

 

The Audit Committee has reviewed and discussed the audited financial statements for the fiscal year ended December 31, 2018 with management of the Company. The Audit Committee has discussed with the independent registered public accounting firm the matters required to be discussed by Auditing Standard No. 1301, Communications with Audit Committees, as adopted by the Public Company Accounting Oversight Board (“PCAOB”). The Audit Committee has also received the written disclosures and the letter from the independent registered public accounting firm required by applicable requirements of the PCAOB regarding the independent accountants’ communications with the audit committee concerning independence, and has discussed with the independent registered public accounting firm the accounting firm’s independence. Based on the foregoing, the Audit Committee has recommended to the Board of Directors that the audited financial statements be included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2018.

 

Mr. Adam Logal, Chairman

Dr. James E. Callaway

Mr. Firdaus Jal Dastoor, FCS

 

Compensation Committee

 

For the fiscal year 2018, the Compensation Committee was composed of three directors: Mr. Dastoor, Dr. Callaway (chair), and Mr. Logal. All current members of our Compensation Committee are independent (as independence is currently defined in Rule 5605(d)(2) of the NASDAQ listing standards). The Board has adopted a written Compensation Committee charter that is available to stockholders on the Company’s website at http://ir.xeneticbio.com/. The Compensation Committee of the Board acts on behalf of the Board to review, recommend for adoption and oversee our compensation strategy, policies, plans and programs, including:

 

·establishment of corporate and individual performance objectives relevant to the compensation of our executive officers and directors and evaluation of performance in light of these stated objectives;
·review and approval of the compensation and other terms of employment or service of our Chief Executive Officer; and
·administration of our equity compensation plans, pension and profit-sharing plans, deferred compensation plans and other similar plan and programs.

 

The Compensation Committee determines salaries, incentives and other forms of compensation for the Chief Executive Officer and our executive officers and reviews and makes recommendations to the Board with respect to director compensation. The Compensation Committee meets without the presence of executive officers when approving or deliberating on executive officer compensation, but may invite the Chief Executive Officer to be present during the approval of, or deliberations with respect to, other executive officer compensation. The Compensation Committee reviews and approves the terms of offer letters, employment agreements, severance agreements, change-in-control agreements, indemnification agreements and other material agreements between us and our executive officers. In addition, the Compensation Committee administers our stock incentive compensation and equity-based plans.

 

Nominating and Corporate Governance Committee

 

The Nominating and Corporate Governance Committee of the Board is responsible for identifying, reviewing and evaluating candidates to serve as directors of the Company (consistent with criteria approved by the Board), reviewing and evaluating incumbent directors, recommending to the Board for selection candidates for election to the Board of Directors, making recommendations to the Board regarding the membership of the committees of the Board, and developing a set of corporate governance principles for the Company. For the fiscal year 2018, the Nominating and Corporate Governance Committee was composed of three directors: Dr. Kornberg, Dr. Callaway (chair), and Mr. Logal. All current members of the Nominating and Corporate Governance Committee are independent (as independence is currently defined in Rule 5605(a)(2) of the NASDAQ listing standards). The Nominating and Corporate Governance Committee met once during 2018. The Board has adopted a written Nominating and Corporate Governance Committee charter that is available to stockholders on the Company’s website at http://ir.xeneticbio.com/.

 

 

 

 

 85 
 

 

The Nominating and Corporate Governance Committee believes that candidates for director should have certain minimum qualifications, including the ability to read and understand basic financial statements, being over 21 years of age and having the highest personal integrity and ethics. The Nominating and Corporate Governance Committee also intends to consider such factors as possessing relevant expertise upon which to be able to offer advice and guidance to management, having sufficient time to devote to the affairs of the Company, demonstrated excellence in his or her field, having the ability to exercise sound business judgment and having the commitment to rigorously represent the long-term interests of the Company’s stockholders. However, the Nominating and Corporate Governance Committee retains the right to modify these qualifications from time to time. Candidates for director nominees are reviewed in the context of the current composition of the Board, the operating requirements of the Company and the long-term interests of stockholders. In conducting this assessment, the Nominating and Corporate Governance Committee typically considers diversity, age, skills and such other factors as it deems appropriate, given the current needs of the Board and the Company, to maintain a balance of knowledge, experience and capability.

 

While we do not have a formal diversity policy with respect to Board composition, the Board believes it is important for the Board to have diversity of knowledge base, professional experience and skills, and the Nominating and Corporate Governance Committee takes these qualities into account when considering director nominees for recommendation to the Board.

 

The Nominating and Corporate Governance Committee will consider director candidates recommended by stockholders. A stockholder who wishes to suggest a prospective nominee for the Board of Directors should notify the Company’s Secretary or any member of the Nominating and Corporate Governance Committee in writing and include any supporting material the stockholder considers appropriate. In addition, the Company’s Amended and Restated Bylaws contain provisions addressing the process by which a stockholder may nominate an individual to stand for election to the Board of Directors at its Annual Meeting of Stockholders. In order to nominate a candidate for director, a stockholder must give timely notice in writing to the Company’s Secretary and otherwise comply with the provisions of our Amended and Restated Bylaws. To be timely, our Amended and Restated Bylaws provide that we must have received the notice not less than 90 days or more than 120 days prior to the one-year anniversary of the date of the previous year’s Annual Meeting of Stockholders (the “Anniversary”); provided, however, that in the event that the date of next year’s Annual Meeting is more than 30 days before or more than 30 days after the Anniversary, notice must be delivered not earlier than the close of business on the 120th day prior to next year’s Annual Meeting and not later than the close of business on the later of (i) the 90th day prior next year’s Annual Meeting or (ii) the close of business on the 10th day following the day on which public announcement of the date of next year’s Annual Meeting is first made by us. Information required by our Amended and Restated Bylaws to be in the notice includes: (A) all information relating to such person that is required to be disclosed in solicitations of proxies for election of directors, or is otherwise required, in each case, pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended (including such person’s written consent to being named in the proxy statement/prospectus as a nominee and to serving as a director, if elected); (B) a description of all direct and indirect compensation and other material monetary agreements, arrangements and understandings during the past three (3) years, and any other material relationships, between or among such stockholder, the beneficial owner, if any, on whose behalf any such proposal or nomination is being made, and their respective affiliates and associates, on the one hand, and each proposed nominee, and his or her respective affiliates and associates, on the other hand, including, without limitation, all information that would be required to be disclosed pursuant to Item 404 of Regulation S-K promulgated under the Securities Act of 1933, as amended, if such stockholder, such beneficial owner, or any affiliate or associate thereof, were the “registrant” for purposes of such rule and the nominee were a director or executive officer of such registrant; (C) to the extent known by the stockholder, the name and address of any other security holder of the Company who owns, beneficially or of record, any securities of the Company and who supports any nominee proposed by such stockholder; and (D) a questionnaire and a representation and agreement, completed and signed by such person, as required by our Amended and Restated Bylaws.

 

Stockholder nominations must be made in accordance with the procedures outlined in, and include the information required by, our Amended and Restated Bylaws and must be addressed to our Corporate Secretary, c/o Xenetic Biosciences, Inc., 40 Speen Street, Suite 102, Framingham, Massachusetts 01701. You can obtain a copy of our Amended and Restated Bylaws by writing to the Corporate Secretary at this address.

 

 

 

 

 86 
 

 

Independence of The Board of Directors

 

As required under the NASDAQ listing standards, a majority of the members of a listed company’s board of directors must qualify as “independent,” as affirmatively determined by the Board of Directors. The Board consults with advisors to ensure that the Board’s determinations are consistent with relevant securities and other laws and regulations regarding the definition of “independent,” including those set forth in pertinent listing standards of NASDAQ, as in effect from time to time.

 

Consistent with these considerations, after review of all relevant identified transactions or relationships between each director, or any of his or her family members, and the Company, its senior management and its independent auditors, the Board affirmatively determined that the following directors were independent directors within the meaning of the applicable NASDAQ listing standards for the period during which they served as a member of the Board during fiscal year 2018: Dr. Callaway, Mr. Dastoor, Dr. Kornberg, and Mr. Logal. In addition, the Board has determined that Dr. Vinogradov will be an independent director within the meaning of the applicable NASDAQ listing standards.

 

During fiscal year 2018, all members of our Audit Committee, Nominating and Corporate Governance Committee, and Compensation Committee were independent (as independence is currently defined in Rule 5605 of the NASDAQ listing standards).

 

Board Leadership Structure

 

Prior to August 2017, we combined the positions of Chief Executive Officer and Board Chair. As of August 2017, we separated the roles of Chief Executive Officer and Board Chair in recognition of the differences between the two roles. The Board of Directors is currently chaired by independent director, Adam Logal, and our current Chief Executive Officer, Jeffrey Eisenberg, is our only employee-director. The Chief Executive Officer is responsible for setting the strategic direction for the Company and the day to day leadership and performance of the Company, while the Board Chair is responsible for leading the Board in the execution of its fiduciary duties. The Board Chair presides over meetings of the full Board. While we recognize that different board leadership structures may be appropriate for companies in different situations, we believe our current leadership structure is the optimal structure for the Company at this time.

 

Role of the Board in Risk Oversight

 

Our management is principally responsible for defining the various risks facing the Company, formulating risk management policies and procedures, and managing our risk exposures on a day-to-day basis. The Board’s principal responsibility in this area is to ensure that sufficient resources, with appropriate technical and managerial skills, are provided throughout the Company to identify, assess and facilitate processes and practices to address material risk and to monitor our risk management processes by informing itself concerning our material risks and evaluating whether management has reasonable controls in place to address the material risks. The involvement of the Board in reviewing our business strategy is an integral aspect of the Board’s assessment of management’s tolerance for risk and its determination of what constitutes an appropriate level of risk for the Company.

 

Stockholder Communications With The Board Of Directors

 

Historically, we have not provided a formal process related to stockholder communications with the Board. All communications to our Board, our Board committees or any individual director, must be in writing and addressed to our Corporate Secretary, c/o Xenetic Biosciences, Inc., 40 Speen Street, Suite 102, Framingham, Massachusetts 01701. All communications will be reviewed by the Secretary and, unless otherwise indicated in such communication, submitted to the Board or an individual director, as appropriate.

 

 

 

 

 87 
 

 

Code of Business Conduct and Ethics

 

We have adopted the Xenetic Biosciences, Inc. Code of Business Conduct and Ethics that applies to all of our employees, officers and directors, including our principal executive officer, principal financial officer and principal accounting officer. The Code of Business Conduct and Ethics is available on our website, www.xeneticbio.com, under “Investors” at “Corporate Governance.” If we make any substantive amendments to the Code of Business Conduct and Ethics or grant any waiver from a provision of the Code of Business Conduct and Ethics to any executive officer or director, we intend to promptly disclose the nature of the amendment or waiver on our website, to the extent required by the applicable rules and exchange requirements.

 

Meetings of The Board of Directors

 

The Board of Directors met five times during the last fiscal year. Each Board member attended 75% or more of the aggregate number of meetings of the Board and of the committees on which she or he served that were held during the portion of the last fiscal year for which she or he was a director or committee member, except as follows: Dr. Kornberg attended 40% of the Board meetings during 2018. At the Company’s last annual meeting of stockholders, which was held in November of 2018, six of our Board members attended the meeting and were available to be heard by those present at the meeting.

 

Delinquent Section 16(a) Reports

 

Section 16(a) of the Exchange Act requires our directors and executive officers, and persons who own more than ten percent of a registered class of our equity securities, to file with the SEC initial reports of ownership and reports of changes in ownership of our ordinary shares and other equity securities. Such persons are required by SEC regulations to furnish us with copies of all Section 16(a) forms they file.

 

To our knowledge, based solely on a review of the copies of such reports furnished to us and written representations that no other reports were required, during the fiscal year ended December 31, 2018, we believe that all Section 16(a) filing requirements applicable to our executive officers, directors and greater than 10% beneficial owners were complied with, except that one report, covering an aggregate of one transaction, was filed late by Dr. Dmitry Genkin.

 

 

 

 

 

 

 

 

 

 88 
 

 

Executive Compensation

 

Summary Compensation Table

 

The following table sets forth, for the years ended December 31, 2018 and 2017, the compensation information for Jeffrey Eisenberg, our Chief Executive Officer, Dr. Curtis Lockshin, our Chief Scientific Officer, and James Parslow, our Chief Financial Officer. We refer to Messrs. Eisenberg, Lockshin, and Parslow herein, collectively, as our “named executive officers.”

 

Name and Principal Position  Year  

Salary

($)

  

Bonus

($)

  

Stock Awards

($)

  

Option Awards(1)

($)

   Non-Equity Incentive Plan Compensation ($)   All Other Compensation ($)  

Total

($)

 
Jeffrey F. Eisenberg,   2018   $300,000   $   $   $   $   $18,333(2)  $318,333 
Chief Executive Officer   2017   $300,000(3)  $   $105,720   $375,389   $   $34,381   $815,490 
                                         
James Parslow,   2018   $265,000   $   $   $   $   $22,595(4)  $287,595 
Chief Financial Officer   2017   $198,750(5)  $   $   $667,216   $   $24,830   $890,796 
                                         
Dr. Curtis Lockshin,   2018   $250,000   $   $   $   $   $9,584(6)  $259,584 
Chief Scientific Officer   2017   $250,000(7)  $   $   $625,316   $   $2,523   $877,839 
  
(1)The amounts represent the aggregate grant date fair value of stock options granted in the applicable fiscal year, computed in accordance with FASB ASC Topic 718, excluding the effect of estimated forfeitures. Assumptions used in the calculation of this amount are set forth in Note 10 to our audited consolidated financial statements included in Item 8 of the Annual Report to Stockholders. Mr. Eisenberg, Mr. Parslow, and Dr. Lockshin were granted options to purchase 250,000 shares, 175,000 shares and 175,000 shares of Common Stock, respectively, during 2017. In addition, Mr. Eisenberg was granted 50,000 restricted stock units in 2017.
(2)For 2018, includes $18,333 for health and welfare plans.
(3)Mr. Eisenberg was appointed our Chief Operating Officer in December 2016 and Chief Executive Officer in October 2017. Mr. Eisenberg served as a director of the Company from July 2016 through November 2016. As an employee, Mr. Eisenberg no longer receives compensation for serving as a member of our Board.
(4)Includes $22,595 for health and welfare plans.
(5)Mr. Parslow was appointed our Chief Financial Officer in April 2017.
(6)Includes $9,584 for health and welfare plans.
(7)Dr. Lockshin was appointed our Chief Scientific Officer in January 2017.

 

 

 

 

 

 89 
 

 

Outstanding Equity Awards at Fiscal Year-End

 

The following table sets forth certain information with respect to outstanding equity awards held by our named executive officers at December 31, 2018.

 

    Option Awards   Stock Awards
Name   Number of
Securities
Underlying
Unexercised
Options,
Exercisable
    Number of
Securities
Underlying
Unexercised
Options,
Unexercisable
    Option
Exercise
Price ($)
    Option
Expiration
Date
  Number of
Shares or
Units of
Stock That
Have Not
Vested
    Market Value
of Shares
or Units
of Stock
That Have
Not Vested ($)
Jeffrey F. Eisenberg   154,900 (1)   75,100 (1)   3.40     12/2/2026      
    41,667 (2)   208,333 (2)   2.11     10/26/2027      
                  33,333 (3)   $70,480
                                 
James Parslow   58,333 (4)   116,667 (4)   4.57     4/3/2027      
                                 
Curtis Lockshin   14,546 (5)       4.59     12/31/2024      
    15,152 (6)       4.59     9/6/2025      
    58,333 (7)   116,667 (7)   4.30     1/1/2027      

 

(1) 4,700 shares vested 100% on the date of grant. Remainder vests one-third upon the first anniversary of the grant date, one-third of the remaining amount upon the second anniversary of the grant date and one-third of the remaining amount on the third anniversary of the grant date.
(2) 125,000 of the options granted vest one-third upon the first anniversary of the grant date, one-third upon the second anniversary of the grant date and one-third upon the third anniversary of the grant date. 100,000 of the options granted vest upon the achievement of key clinical milestones for XBIO-101 and 25,000 of the options granted vest upon the achievement of key development milestones related to PSA.
(3) References restricted stock units (“RSUs”) granted on October 26, 2017. Each RSU represents the right to receive one share of the Company’s Common Stock upon settlement, as defined. The RSUs vest one-third upon the first anniversary of the grant date, one-third upon the second anniversary of the grant date and one-third upon the third anniversary of the grant date.
(4) Vests one-third upon the first anniversary of the grant date, one-third upon the second anniversary of the grant date and one-third upon the third anniversary of the grant date.
(5) Vested one-third upon March 3, 2015, one-third upon March 15, 2016 and one-third upon March 15, 2017.
(6) Vested one-third upon the first anniversary of the grant date, one-third upon the second anniversary of the grant date and one-third upon the third anniversary of the grant date.
(7) Vests one-third upon the first anniversary of the grant date, one-third upon the second anniversary of the grant date and one-third upon the third anniversary of the grant date.
   

 

 

 

 

 

 90 
 

 

Employment Agreements with our Named Executive Officers

 

Employment Agreement with Mr. Eisenberg

 

We entered into an employment agreement with Mr. Eisenberg effective as of December 1, 2016 for him to serve as Chief Operating Officer (the “Original Agreement”). The Original Agreement was for an initial term of one year, and automatically renewed for successive one year periods unless either party gave notice to the other no later than 90 days prior to the expiration of the then-applicable term; provided, however, that we could terminate the Original Agreement at any time. Mr. Eisenberg’s annual salary under the Original Agreement was $300,000, and was subject to annual review and upward adjustment only by the Compensation Committee of the Board. Mr. Eisenberg was also eligible to receive a bonus equal to 35% of his annual salary based on the attainment of certain individual and/or Company goals established by the Board or a committee thereto. Mr. Eisenberg was also eligible to participate in our employee benefit, welfare and other plans, as may be maintained by us from time to time, on a basis no less favorable than those provided to other similarly situated executives of the Company. Mr. Eisenberg was also subject to certain customary confidentiality, non-solicitation and non-competition provisions.

 

Under the Original Agreement, if Mr. Eisenberg’s employment was terminated by us without “Cause” (as defined in the Original Agreement) or if he resigned for “Good Reason” (as defined in the Original Agreement), he was entitled to receive (i) six months of his then current base salary, paid over time in accordance with our payroll practices then in effect if he had been employed by us for six months or less, (ii) 12 months of his then current base salary, paid over time in accordance with our payroll practices then in effect if he had been employed by us for more than six months, (iii) a pro-rated annual bonus and (iv) payment of premiums for continued health benefits under COBRA for up to six months.

 

On October 26, 2017, the Company amended and restated the Original Agreement in order to employ Mr. Eisenberg as the Chief Executive Officer of the Company, effective as of the same date (the “Amended Agreement”). The terms of the Amended Agreement were substantially similar to the terms of the Original Agreement, except that Mr. Eisenberg is now eligible to receive a bonus equal to 50% of his annual salary based on the attainment of certain individual and/or Company goals established by the Board or a committee thereto, and if Mr. Eisenberg’s employment is terminated by us without “Cause” (as defined in the Amended Agreement) or if he resigns for “Good Reason” (as defined in the Amended Agreement), he will be entitled to receive (i) within thirty days following the date of termination, an amount equal to one times his then current base salary, (ii) a pro-rated annual bonus and (iii) payment of premiums for continued health benefits under COBRA for up to twelve months.

 

Employment Agreement with Mr. Parslow

 

We entered into an employment agreement with Mr. Parslow effective as of April 3, 2017 (the “Parslow Employment Agreement”). The Parslow Employment Agreement does not provide for a specified term of employment and Mr. Parslow’s employment will be on an at-will basis. Mr. Parslow will receive an initial annual base salary of $265,000 and is eligible to earn an annual cash incentive bonus, which is initially set at a target aggregate bonus amount of 35% of Mr. Parslow’s base salary, upon achievement of certain individual and/or Company performance goals set by the Compensation Committee. Mr. Parslow is also eligible to participate in the Company’s employee benefit, welfare and other plans, as may be maintained by the Company from time to time, on a basis no less favorable than those provided to other similarly-situated executives of the Company. Mr. Parslow is also subject to certain customary confidentiality, non-solicitation and non-competition provisions.

 

If Mr. Parslow’s employment is terminated by the Company without “cause” (as defined in the Parslow Employment Agreement) or Mr. Parslow resigns for “good reason” (as defined in the Parslow Employment Agreement), after six months of employment but before his first anniversary with the Company, he will be entitled to receive (i) six months of his then current base salary, paid over time in accordance with the Company’s payroll practices then in effect and (ii) payment of premiums for continued health benefits under COBRA for up to six months. If Mr. Parslow’s employment is terminated by the Company without “cause” (as defined in the Parslow Employment Agreement) or Mr. Parslow resigns for “good reason” (as defined in the Parslow Employment Agreement), after his first anniversary with the Company, he will be entitled to receive (i) one year of his then current base salary, paid over time in accordance with the Company’s payroll practices then in effect and (ii) payment of premiums for continued health benefits under COBRA for up to one year.

 

 

 

 

 

 91 
 

 

Employment Agreement with Dr. Lockshin

 

We entered into an employment agreement with Dr. Lockshin effective as of January 1, 2017 (the “Lockshin Employment Agreement”). The Lockshin Employment Agreement does not provide for a specified term of employment and Dr. Lockshin’s employment will be on an at-will basis. Dr. Lockshin will receive an initial annual base salary of $250,000 and is eligible to earn an annual performance-based cash incentive bonus, which is initially set at a target aggregate bonus amount of 35% of Dr. Lockshin’s base salary, upon achievement of certain individual and/or Company performance goals established by the Board or a committee thereto. Dr. Lockshin is also eligible to participate in the Company’s employee benefit, welfare and other plans, as may be maintained by the Company from time to time, on a basis no less favorable than those provided to other similarly-situated executives of the Company. Dr. Lockshin is also subject to certain customary confidentiality, non-solicitation and non-competition provisions.

 

If Dr. Lockshin’s employment is terminated by the Company without “Cause” (as defined in the Lockshin Employment Agreement) or Dr. Lockshin terminates his employment for “Good Reason” (as defined in the Lockshin Employment Agreement) and Dr. Lockshin executes and does not revoke a general release of claims against the Company, then he will be entitled to receive (i) one year of his then current base salary, paid over time in accordance with the Company’s payroll practices then in effect and (ii) payment of premiums for continued health benefits under COBRA for up to twelve months.

 

Potential Payments Upon Termination or Change of Control

 

Our named executive officers may be entitled to payments upon termination or change in control. The details of such payments are included in the description of their employment agreements above.

 

Director Compensation

 

Each of our non-employee, independent directors is currently entitled to receive an annual retainer of $50,000, payable in equal quarterly installments, an option to acquire 25,000 shares of the Company’s common stock upon initial appointment to the Board, and an additional option to acquire 25,000 shares each year thereafter on the date of the Company’s annual meeting of stockholders. All members of our board are reimbursed for their usual and customary expenses incurred in connection with their service on the Board, including out-of-pocket expenses, transportation, and airfare on the Company’s business.

 

 

 

 

 

 

 

 92 
 

 

Director Compensation Table

 

As our employee director during fiscal 2018, Mr. Eisenberg did not receive any compensation for his Board service during the last completed year. The following table sets forth information for the year ended December 31, 2018 regarding the compensation awarded to, earned by or paid to our non-employee directors:

 

Name  

Fees Earned or Paid in Cash

($)

   


Stock Awards

($)

   

Option
Awards(1)(2)

($)

   

All Other Compensation

($)

    Total
($)
                             
Dr. James E. Callaway   $ 50,000         $ 65,642         $ 115,642  
Firdaus J. Dastoor   $ 50,000         $ 65,642         $ 115,642  
Dr. Dmitry Genkin   $         $         $  
Roman Knyazev   $         $         $  
Dr. Roger Kornberg   $ 50,000         $ 65,642         $ 115,642  
Mr. Adam Logal   $ 50,000         $ 65,642         $ 115,642  

_______________

(1) The amounts represent the aggregate grant date fair value of stock options granted during 2018. For a discussion of the assumptions and methodology used to calculate the value of our stock options, see Note 10 to our audited financial statements included in Item 8 of the Original Filing.
(2) The table below shows the aggregate number of option awards outstanding for each of our non-employee directors as of December 31, 2018:

 

Name Option Awards (#)
Dr. James Callaway 50,000
Firdaus J. Dastoor 95,455
Dr. Dmitry Genkin 37,879
Roman Knyazev 37,879
Dr. Roger Kornberg 75,000
Adam Logal 50,000

 

In addition to the option awards described above, Mr. Dastoor holds a warrant to purchase 48,485 shares of our common stock at $7.92 per share. These warrants are fully vested and expire in December 2019. In addition, Dr. Genkin holds a warrant to purchase 30,304 shares of our common stock at $13.86 per share. These warrants are fully vested and expire in April 2021.

 

See “Certain Relationships and Related Transactions” below for compensation arrangements involving specific members of the Board.

 

 

 

 

 

 93 
 

 

Certain Relationships and Related Transactions

 

During the fiscal year ended December 31, 2018 and the fiscal year ended December 31, 2017, there was not, nor is there any currently proposed transaction or series of similar transactions to which Xenetic was or is to be a party in which the amount involved exceeded or exceeds the lesser of $120,000 or 1% of the average of our total assets at year end for the last two completed fiscal years and in which any executive officer, director or holder of more than 5% of any class of voting securities of Xenetic and members of that person’s immediate family had, has or will have a direct or indirect material interest, other than as set forth in “Executive Compensation” and “Director Compensation Table” above and disclosed below.

 

Policy Regarding Related Party Transactions

 

Our Board has adopted a written related party transaction policy to set forth the policies and procedures for the review and approval or ratification of related party transactions. Any transaction between the Company and its officers, directors, principal stockholders or affiliates is required to be on terms no less favorable to us than could be reasonably obtained in arms-length transactions with independent third-parties, and any such material related party transactions must also be reviewed and approved by a majority of the Board of Directors. All of the actions described in this section occurred prior to the adoption of this policy, except for the acquisition of the XCART Technology. On March 16, 2018, our Board formed the Strategic Alternatives Committee (the “SAC”) to evaluate an alternative transaction and other strategic alternatives for the Company should they arise. James Callaway, an independent outside director of the Company, was appointed Chair of the SAC. The SAC had primary oversight over the XCART Technology acquisition.

 

PJSC Pharmsynthez

 

Pharmsynthez (formerly, OJSC Pharmsynthez) is our largest and controlling stockholder with a share ownership of [43.5]% of the total issued and outstanding common stock as of the Record Date. In addition to its common stock ownership, Pharmsynthez holds outstanding warrants to purchase our common stock and approximately 1.5 million shares of our issued and outstanding Series B Preferred Stock as of the Record Date. Pharmsynthez was a related party of SynBio, which is related party of ours, and acquired 100% of SynBio in February 2017. The combined ownership of Pharmsynthez and SynBio was [51.4]% as of the Record Date. In addition, one of our directors, Dr. Dmitry Genkin, is the Executive Chairman of the board of directors of Pharmsynthez, a second director of ours, Mr. Roman Knyazev, is also a director of Pharmsynthez and one of our executive officers, Dr. Curtis Lockshin, is an officer of a wholly-owned subsidiary of Pharmsynthez. In November 2009, the Company entered into a collaborative research and development license agreement with Pharmsynthez (the “Pharmsynthez Arrangement”) pursuant to which the Company granted an exclusive license to Pharmsynthez to develop, commercialize and market six drug candidates based on the Company’s PolyXen and ImuXen technology in certain territories. In exchange, Pharmsynthez granted an exclusive license to the Company to use any preclinical and clinical data developed by Pharmsynthez, within the scope of the Pharmsynthez Arrangement, and to engage in further research, development and commercialization of drug candidates outside of certain territories at the Company’s own expense.

 

SynBio LLC

 

SynBio is one of our largest stockholders and owns approximately [7.9%] of our total issued and outstanding common stock as of the Record Date and all of our outstanding Series A Preferred Stock. In 2017, SynBio became a wholly-owned subsidiary of Pharmsynthez.

 

In August 2011, SynBio and the Company entered into a stock subscription and collaborative development of pharmaceutical products agreement (the “Co-Development Agreement”). The Company granted an exclusive license to SynBio to develop pharmaceutical products using certain molecule(s) based on SynBio’s technology and the Company’s proprietary technology (PolyXen, OncoHist and ImuXen) that prolongs the active life and/or improves the pharmacokinetics of certain therapeutic proteins and peptides (as well as conventional drugs). In return, SynBio granted an exclusive license to the Company to use the pre-clinical and clinical data generated by SynBio in certain agreed products and engage in the development of commercial candidates.

 

 

 

 

 

 94 
 

 

SynBio and the Company are each responsible for funding their own research activities. There are no milestone or other research-related payments due under the agreement other than fees for the supply of each company’s respective research supplies based on their technology, which, when provided, are due to mutual convenience and not representative of an ongoing or recurring obligation to supply research supplies. Serum Institute of India Limited (“Serum Institute”) has agreed to directly provide the research supplies to SynBio, where the Company is not liable for any failure to supply the research supplies as a result of any act or fault of Serum Institute. Upon successful commercialization of any resultant products, the Company is entitled to receive royalties on sales in certain territories and pay royalties to SynBio for sales outside those certain territories.

  

Through December 31, 2018, the Company and SynBio continued to engage in research and development activities with no resultant commercial products. The Company did not recognize revenue in connection with the Co-Development Agreement during the years ended December 31, 2018 and 2017.

 

Serum Institute

 

Serum Institute owns approximately [6.0%] of our total issued and outstanding common stock as of the Record Date. In addition to its common stock ownership, Serum Institute holds outstanding warrants to purchase our common stock. One of our directors, Firdaus Jal Dastoor, is currently a Group Director in charge of Finance and Corporate Affairs and Company Secretary of Serum Institute. In August 2011, we entered into a collaborative research and development agreement with Serum Institute providing Serum Institute an exclusive license to use our PolyXen technology to research and develop one potential commercial product, Polysialylated Erythropoietin (“PSA-EPO”). Serum Institute is responsible for conducting all preclinical and clinical trials required to achieve regulatory approvals within the certain predetermined territories at Serum Institute’s own expense. Royalty payments are payable by Serum Institute to us for net sales to certain customers in the Serum Institute sales territory. Royalty payments are payable by us to Serum Institute for net sales received by us over the term of the license. There are no milestone or other research-related payments due under the collaborative arrangement.

 

Through December 31, 2018, we continued to engage in research and development activities with no resultant commercial products. No royalty revenue or expense was recognized by us related to the Serum Institute arrangement during the years ended December 31, 2018 and 2017.

 

Director Fees and Consulting Services Agreement with Dr. Dmitry Genkin

 

Dr. Genkin provided research and consulting services to the Company, for which he was paid approximately $50,000 during the year ended December 31, 2017. The agreement was terminated on July 31, 2017 prior to Mr. Genkin being reappointed to the Board in August 2017.

 

XCART Technology

 

On March 1, 2019, we entered into the Transaction. In connection with the Transaction, on March 1, 2019, we entered into the Share Purchase Agreement with Hesperix pursuant to which the Company will complete the Hesperix Acquisition. Dr. Dmitry Genkin, one of our directors, is a director and significant shareholder of Hesperix. In addition, in connection with the Transaction, the Company has agreed to repay a $150,000 loan that Dr. Genkin entered into with Hesperix.

 

In addition, and in connection with the Transaction, Hesperix entered into the Hesperix Assignment Agreement with 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 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. Dr. Dmitry Genkin, one of our directors, is the Executive Chairman of the board of directors of Pharmsynthez. A second director of ours, Mr. Roman Knyazev, is also a director of Pharmsynthez and one of our executive officers, Dr. Curtis Lockshin is an officer of a wholly-owned subsidiary of Pharmsynthez.

 

 

 

 

 

 95 
 

 

Concurrent with the Share Purchase Agreement, we also entered into the OPKO Assignment Agreement pursuant to which the Company will acquire and accept all of OPKO’s right, title and interest in an Intellectual Property License Agreement entered into between the Institute and OPKO related to the XCART technology. 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.

 

In total, we will issue 7.5 million shares of our common stock in the Transaction, including 4.875 million shares to be issued to the shareholders of Hesperix and 2.625 million shares of common stock to be issued in connection with the OPKO Assignment Agreement. The closing of the Transaction is subject to customary closing conditions as well as conditions regarding (i) the Company having adequate financing to fund its future working capital obligations following the closing and (ii) the Company obtaining necessary and appropriate stockholder approvals, evidencing among other matters, approval of the Share Purchase Agreement and the transactions contemplated thereunder, including the issuance of the Transaction Shares. Subject to the satisfaction of the closing conditions, the Transaction is expected to close in the first half of 2019.

 

Empery Asset Management

 

Empery Tax Efficient II, LP (“ETE II Fund”), Empery Asset Management, LP (“Empery Asset”), Ryan M. Lane, and Martin D. Hoe (collectively, “Empery Asset Management”) own approximately 9.96% of our total issued and outstanding common stock at March 31, 2019. On March 5, 2019 Empery Asset Management purchased 1,040,000 shares of our common stock, as well as prefunded warrants to purchase 509,000 shares of our common stock resulting in net proceeds to the Company of $2.7 million. In addition to its common stock and prefunded warrant ownership, Empery Asset Management holds outstanding warrants to purchase our common stock.

 

The Director Proposal is conditioned upon and subject to the approval of the Transaction Proposal and Share Issuance Proposal. If the Transaction Proposal or the Share Issuance Proposal are not approved, the Director Proposal will not be consummated and our current directors will continue to comprise our Board of Directors.

 

Vote Required

 

A plurality of the votes cast at the Special Meeting by the holders of our Common Stock is required to approve the Director Proposal.

 

THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE “FOR” THE ELECTION OF DR. ALEXEY VINOGRADOV TO THE BOARD OF DIRECTORS

 

 

 

 

 

 96 
 

 

PROPOSAL FOUR

 

PROPOSAL FOUR: THE STOCK INCREASE PROPOSAL

 

Our Board of Directors has adopted a resolution (i) approving an amendment to Article III of our articles of incorporation that would increase the number of authorized shares of Common Stock, par value $0.001 per share, from 45,454,546 shares to 150,000,000 shares (the “Common Stock Amendment”) and (ii) directing that the Common Stock Amendment be submitted to the stockholders for approval at the Special Meeting.

 

The Proposed Common Stock Amendment

 

If the proposed Common Stock Amendment is approved by our stockholders and subsequently filed with the Nevada Secretary of State, Article III of the articles of incorporation would be amended and restated in its entirety to read:

 

“Section 1. Authorized Shares. The aggregate number of shares which the Corporation shall have authority to issue is one hundred and sixty million (160,000,000) shares, consisting of two classes to be designated, one hundred and fifty million (150,000,000) shall be designated as “Common Stock” and ten million (10,000,000) shares shall be designated as undifferentiated blank check “Preferred Stock,” with all of such shares have a par value of $.001 per share.

 

The Preferred Stock may be issued in one or more series, each series to be appropriately designated by an distinguishing letter or title, prior to the issuance of any shares thereof. The voting powers, designations, preferences, limitations, restrictions, and relative, participating, optional and other rights, and the qualifications, limitations, or restrictions thereof, of the Preferred Stock shall hereinafter be prescribed by resolution of the board of directors pursuant to Section 3 of this Article III.”

 

Only the number of shares of Common Stock the Company is authorized to issue would be affected by this Common Stock Amendment. Except for this change, the proposed Common Stock Amendment would not affect any other provision of the articles of incorporation. If approved by a majority of holders of our outstanding shares of Common Stock entitled to vote as of the Record Date, we will file the Common Stock Amendment, in substantially the form attached hereto as Appendix F, with the Nevada Secretary of State.

 

Reasons for the Common Stock Amendment

 

Our Board believes that an increase in the number of authorized shares of the Company’s Common Stock from 45,454,546 shares to 150,000,000 shares is in the best interests of our stockholders. Increasing the number of authorized shares of Common Stock will enable us to engage in capital raising transactions and other strategic transactions involving the issuance of equity securities. We have limited capital and in order for us to execute on our business plan, including the continued research and development relating to the Transaction described in this proxy statement/prospectus, and remain viable as a going concern, we must have the flexibility to engage in capital raising transactions until we are able to generate sufficient revenue and cash flow.

 

As discussed in more detail below in the section titled “Number of Shares of Common Stock Currently Outstanding and Subject to Issuance,” we significantly rely on our authorized Common Stock. If we do not increase the number of shares of our Common Stock authorized for issuance, we may be limited in future capital raising opportunities that would require the issuance of shares of our Common Stock. Increasing the number of authorized shares of Common Stock will enable us to issue Common Stock or securities convertible or exercisable into Common Stock to investors and other strategic partners. These transactions, if they can be successfully negotiated and consummated, will help us fund our business plan. You should be aware that these potential capital raising transactions or other strategic transactions involving the issuance of additional shares of Common Stock will have a dilutive effect on our existing stockholders, as further described in the section below titled “Effects of Increase.”

 

 

 

 

 

 97 
 

 

If the increase is not approved, we will be limited in our efforts to raise additional capital and engage in strategic transactions. In such event, our operations, financial condition and our ability to continue as a going concern may be materially and adversely affected.

 

Number of Shares of Common Stock Currently Outstanding and Subject to Issuance

 

As of the Record Date, we had [●] shares of Common Stock issued and outstanding, and excludes:

 

·970,000 shares of Common Stock underlying outstanding Series A Preferred Stock, which are convertible into Common Stock on a one-for-one basis;

 

·1,804,394 shares of Common Stock underlying outstanding Series B Preferred Stock, which are convertible into Common Stock on a two-for-one basis;

 

·509,000 shares of Common Stock issuable upon the exercise of outstanding pre-funded warrants;

 

·5,240,427 shares of Common Stock issuable upon the exercise of outstanding warrants;

 

·1,833,011 shares of Common Stock issuable upon the exercise of outstanding options;

 

·50,000 shares of Common Stock underlying outstanding restricted stock units;

 

· 97,036 shares of Common Stock issuable in connection with the Common Stock awards; and

 

·7,500,000 shares of Common Stock to be issued in connection with the Transaction, including 4,875,000 shares of Common Stock to be issued to the Hesperix Sellers and 2,625,000 shares of Common Stock to be issued in connection with the OPKO Assignment Agreement.

 

Effects of Increase

 

The additional authorized but unissued shares of Common Stock may generally be issued from time to time for such proper corporate purposes as may be determined by our Board or, as required by law or the rules of the Nasdaq Stock Market, with the approval and authorization of our stockholders. Our Board does not intend to solicit further stockholder approval prior to the issuance of additional shares of Common Stock, except as may be required by applicable law or by the rules of the Nasdaq Stock Market.

 

The possible future issuance of shares of our Common Stock or securities convertible or exercisable into our Common Stock could affect our current stockholders in a number of ways. The issuance of new shares of Common Stock will cause immediate dilution of the ownership interests and the voting power of our existing stockholders. New issuances of Common Stock may also affect the number of dividends, if any, paid to such stockholders and may reduce the share of the proceeds that they would receive upon the future liquidation, if any, of the Company.

 

 

 

 

 

 

 98 
 

 

In addition, the future issuance of shares of our Common Stock or securities convertible or exercisable into shares of our Common Stock could:

 

  ·   dilute and affect the market value of our trading securities;
  ·   dilute the earnings per share, if any, and book value per share of the outstanding shares of our Common Stock; and
  ·   make the payment of dividends on Common Stock, if any, potentially more expensive.

 

Anti-Takeover Effects

 

Although the Common Stock Amendment is not motivated by anti-takeover concerns and is not considered by our Board to be an anti-takeover measure, the availability of additional authorized shares of Common Stock could enable the Board to issue shares defensively in response to a takeover attempt or to make an attempt to gain control of our Company more difficult or time-consuming. For example, shares of Common Stock could be issued to purchasers who might side with management in opposing a takeover bid that the Board determines is not in the best interests of our stockholders, thus diluting the ownership and voting rights of the person seeking to obtain control of our Company. In certain circumstances, the issuance of Common Stock without further action by the stockholders may have the effect of delaying or preventing a change in control of the Company, may discourage bids for our Common Stock at a premium over the prevailing market price and may adversely affect the market price of our Common Stock. As a result, increasing the authorized number of shares of our Common Stock could render more difficult and less likely a hostile takeover of our Company by a third-party, or a tender offer or proxy contest, assumption of control by a holder of a large block of our stock, and the possible removal of our incumbent management. We are not aware of any proposed attempt to take over the Company or of any present attempt to acquire a large block of our Common Stock.

 

Vote Required

 

The affirmative vote of stockholders that represent a majority of the voting power entitled to vote on the Common Stock Amendment is required to approve the Stock Increase Proposal.

 

 

THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE “FOR” THE STOCK INCREASE PROPOSAL.

 

 

 

 

 

 

 

 99 
 

 

PROPOSAL FIVE

 

PROPOSAL FIVE: THE ADJOURNMENT PROPOSAL.

 

The adjournment proposal allows Xenetic’s board of directors to submit a proposal to adjourn the Special Meeting to a later date or dates, if necessary, to permit further solicitation of proxies in the event, based on the tabulated votes, there are not sufficient votes at the time of the special meeting to approve any of the proposals. In no event will Xenetic solicit proxies to adjourn the Special Meeting or consummate the Transaction beyond the date by which it may properly do so under Nevada law. The purpose of the adjournment proposal is to provide more time for the Xenetic to solicit proxies in favor of the proposals.

 

In addition to an adjournment of the Special Meeting upon approval of an Adjournment Proposal, the board of directors of Xenetic is empowered under Nevada law to postpone the meeting at any time prior to the meeting being called to order. In such event, Xenetic will issue a press release and take such other steps as it believes are necessary and practical in the circumstances to inform its stockholders of the postponement.

 

Consequences if the Adjournment Proposal is not Approved

 

If an adjournment proposal is presented at the Special Meeting and such proposal is not approved by its stockholders, Xenetic’s board of directors may not be able to adjourn the Special Meeting to a later date in the event, based on the tabulated votes, there are not sufficient votes at the time of the Special Meeting to approve the consummation of the Transaction and the proposals relating thereto.

 

Vote Required

 

The affirmative vote of a majority of the votes cast affirmatively or negatively at the Special Meeting by the holders of our Common Stock is required to approve the Adjournment Proposal.

 

THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE “FOR” THE ADJOURNMENT PROPOSAL

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 100 
 

 

 

XENETIC’S BUSINESS

 

Overview

 

We are a clinical stage biopharmaceutical company focused on the discovery, research and development of next-generation biological drugs and novel oncology therapeutics. We have an extensive patent portfolio of over 170 issued patents in the U.S. and worldwide, covering various aspects of our PolyXen™ platform technology and advanced polymer conjugate technologies, as well as our proprietary biologic drugs and novel oncology drug candidates. We believe our portfolio positions us well for strategic partnership and commercialization opportunities. Our objective is to leverage our portfolio to maximize opportunities to out-license assets from our portfolio in order to generate working capital to both build long-term stockholder value and provide us with the funding necessary for clinical development of our oncology drug candidates through market launch.

 

We incorporate our patented and proprietary technologies into a number of drug candidates currently under development with biotechnology and pharmaceutical industry collaborators to create what we believe will be next-generation biologic drugs with improved pharmacological properties over existing therapeutics. While we primarily focus on researching and developing oncology drugs, we also have significant interests in drugs being developed by our collaborators to treat other conditions.

 

Our most advanced investigational drug candidate is oncology therapeutic XBIO-101 (sodium cridanimod) for the treatment of progestin resistant endometrial cancer. We have exclusive rights to develop and commercialize XBIO-101 worldwide, except for specified countries in the Commonwealth of Independent States ("CIS"). XBIO-101 has been granted orphan drug designation by the U.S. Food and Drug Administration ("FDA") for the potential treatment of progesterone receptor negative ("PrR-") endometrial cancer in conjunction with progesterone therapy. We commenced a Phase II trial for XBIO-101 under an IND in 2017, with the first patient dosed in October 2017. We closed patient enrollment in the trial in March 2019 as a result of slower than expected progress on the trial resulting from patient enrollment and retention challenges.

 

Our lead proprietary technology is PolyXenTM, 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. PolyXen has been demonstrated in human clinical trials to confer prolonged half-life on biotherapeutics such as recombinant human erythropoietin and recombinant Factor VIII ("rFVIII"). We believe this technology may be applied to a variety of drug candidates to enhance the properties of the therapeutic, potentially providing advantages over competing products.

 

Our drug candidates have resulted from our research activities or that of our collaborators and are in the development stage. As a result, we continue to commit a significant amount of our resources to our research and development activities and anticipate continuing to do so for the near future. To date, none of our drug candidates have received regulatory marketing authorization in the U.S. by the FDA nor in any other territories by any applicable agencies. Although we hold a broad patent portfolio, because of capital constraints the focus of our internal development efforts in 2018 was limited to research and development of our primary product candidate XBIO-101.

 

We were incorporated under the laws of the State of Nevada in August 2011. We, directly or indirectly, through our wholly-owned subsidiary, Xenetic Biosciences (U.K.) Limited ("Xenetic U.K."), and its wholly-owned subsidiaries, Lipoxen Technologies Limited ("Lipoxen"), Xenetic Bioscience, Incorporated ("XTI") and SymbioTec, GmbH ("SymbioTec"), own various U.S. federal trademark registrations and applications, and unregistered trademarks and service marks, including but not limited to OncoHist™, PolyXen, ErepoXen™ and ImuXen™.

 

Our Strategy

 

The acquisition of the XCART platform technology is expected to close in the first half of 2019, subject to the approvals and other conditions discussed in this proxy statement/prospectus. We plan to initially apply the XCART technology to develop cell-based therapeutics for the treatment of B-cell Lymphomas. We believe these personalized T cell therapies have the potential to offer cancer patients substantial benefits over the existing standard of care and currently approved CAR T therapies. We anticipate that our primary focus once the Transaction is completed will be on advancing this technology through regulatory approval and commercialization.

 

 

 

 

 

 101 
 

 

Our strategy is to develop oncology drug candidates through regulatory approval and commercialization, and to opportunistically pursue a continuous and ongoing out-licensing effort for our PolyXen platform technology to drive incremental shareholder value and generate working capital to assist in providing the funding required to support our drug development efforts.

 

We intend to pursue orphan drug designations and accelerated approval pathways for relevant oncology indications as appropriate in both the U.S. and Europe. If our orphan oncology drug candidates are granted orphan drug designation, then we may benefit from certain key advantages of orphan status including certain market exclusivities.

 

We intend to opportunistically advance our PolyXen platform technology by entering into collaborative out-license arrangements with global pharmaceutical companies who could apply the necessary resources for advancing drug candidates through to worldwide commercialization, or by entering into arrangements with other partners that would in-license our technology on a restrictive-market basis. The latter arrangement would provide support to the Company in the form of access to partner-generated clinical data, which is informative when contemplating potential monetization of our proprietary technology in larger markets.

 

We intend to advance development of our drug candidates primarily through the use of contract manufacturing and contract research organizations ("CROs") in order to efficiently manage our resources. Continuous pipeline growth and advancement of out-licensed drug candidates is dependent, in part, on our ability to raise sufficient capital and to advance our existing co-development collaborations and strategic arrangements as well as enter into new such arrangements.

 

We intend to pursue development efforts of the XCART technology once the acquisition is consummated and pursue other development efforts around CAR T technology. We also plan to pursue collaborations with immuno-oncology ("I-O") companies in which we would seek to use XBIO-101 in combination with approved or developmental I-O compounds such as checkpoint inhibitors subject to adequate funding.

 

Closing of Patient Enrollment in XBIO-101 Phase II EC Trial

 

We commenced the Phase II trial for XBIO-101 in 2017, with the first patient dosed in October 2017. We closed patient enrollment in the trial in March 2019 as a result of slower than expected progress on the trial resulting from patient enrollment and retention challenges. We are in the process of identifying development paths for XBIO-101, particularly those that can efficiently leverage our existing human data and regulatory status to extend development into I-O settings.

 

Our Technology and Drug Candidates

 

The Technologies

 

We incorporate our patented and proprietary technologies into a number of drug candidates which are currently under development with our biotechnology and pharmaceutical collaborators, with the goal of creating what we believe will be the next generation of biologic drugs and therapeutics. While we primarily focus on researching and developing oncology drugs, we also have ownership and other economic interests in drugs being developed by our collaborators to treat other conditions. Our patent portfolio spans four core proprietary technologies including two platforms, small molecules and biologics covering multiple drug candidates and indications including XBIO-101, PolyXen, OncoHist and ImuXen. We have primarily been focused on the advancement of XBIO-101 through clinical trials. We have not been actively pursuing development efforts for PolyXen, OncoHist and ImuXen due to capital restraints. We anticipate that the focus of our future internal development efforts will be limited to research and development of our XCART technology as well as potential I-O applications for our product candidate XBIO-101.

 

 

 

 

 102 
 

 

XBIO-101 A small molecule therapeutic with the potential to confer sensitivity to hormone therapeutics upon cancer cells that are otherwise insensitive to such treatments.  XBIO-101 (sodium cridanimod) belongs to a class of low-molecular weight synthetic interferon inducers. In addition to its immunomodulatory properties, XBIO-101 has been shown to increase levels of progesterone receptor, or PrR, expression in tumor tissue of patients who are PrR-, and thus may restore sensitivity of non-responsive endometrial cancers to hormonal (e.g., progestin) therapy. Based on preclinical observations, XBIO-101 may also be therapeutically relevant in other hormone-therapy resistant cancers, such as triple-negative breast cancer. XBIO-101 has been granted an orphan drug designation by the FDA for the potential treatment of progesterone receptor negative endometrial cancer in conjunction with progesterone therapy. Sodium cridanimod has been the subject of numerous nonclinical studies as well as 21 foreign controlled clinical trials totaling 750 subjects, which supported marketing authorizations in ex-Soviet territories, as well as enablement of our active US IND. We believe that XBIO-101 may also have utility, alone or in combination, in immuno-oncology approaches. The Company is therefore seeking to advance the compound in collaboration with I-O focused partners.  
   
PolyXen An enabling biological platform technology designed to extend the circulation time of drug molecules in the human body by chemically attaching polysialic acid, or PSA, to the drug molecule by a process termed polysialylation, thereby creating potentially superior next generation therapeutic candidates. PSA, a biopolymer, comprising a chain of sialic acid molecules, is a natural constituent of the human body, although we obtain our PSA from a bacterial source.
   
OncoHist A novel therapeutic platform technology that utilizes the properties of modified human histone H1.3 for targeted cell apoptosis (programmed cell death), which may enable OncoHist to treat a broad range of cancer indications. OncoHist, unlike many competing oncology therapies, is based on a molecule occurring naturally in the human body, primarily in the cell nucleus, and is therefore hypothesized to be better tolerated and less immunogenic than other oncology therapies. 
   
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.

 

Though we hold a broad patent portfolio, the focus of our internal development efforts in 2018 was limited to research and development of XBIO-101.

 

Research, Outside Services and Collaborations

 

Through partner efforts, we are developing our pipeline of next-generation bio-therapeutics and novel oncology drugs based on our XBIO-101 and PolyXen proprietary technologies. In order to do this while efficiently managing our overhead, we rely on the services of contract manufacturers and CROs and our strategic collaborations. We currently do not have in-house research facilities to pursue these initiatives. Accordingly, continuous pipeline growth and advancement of our technologies and drug candidates is dependent on several important collaborations and strategic arrangements including our arrangements with:

 

·Pharmsynthez, a Russian pharmaceutical company and presently our majority stockholder;
·Serum Institute, one of the world's largest vaccine manufacturers and one of India's largest biotech companies, as well as a beneficial owner of over 5% of our Common Stock; and
·Takeda Pharmaceuticals Co. Ltd (formerly Shire plc) ("Takeda"), a global biopharmaceutical leader.

 

 

 

 

 103 
 

 

Accordingly, in addition to pursuing the development of our pipeline of next-generation bio-therapeutics and novel oncology drugs, we also have significant interests in drug candidates being developed by our collaborators to treat other conditions. We may collect milestone payments and royalties pursuant to these collaborations to the extent that these drugs are successfully developed and marketed. However, other than potential royalty payments under a sublicense with Takeda, we do not anticipate any milestone or royalty payments in the near term, if at all. For further detail, please read the section titled "Significant Co-Development Collaborations and Strategic Arrangements" below.

 

Our Drug Candidate Pipeline

 

Our product pipeline contains a number of drug candidates under development with our biotechnology and pharmaceutical collaborators. The following discussion summarizes key information regarding our current drug candidates, organized by our internal programs and our collaborators' programs:

XBIO-101

 

XBIO-101 is our most advanced internal candidate with an orphan drug designation from the FDA for the potential treatment of progesterone receptor negative endometrial cancer in conjunction with progesterone therapy. An IND application was submitted for XBIO-101 and is in effect for our Phase II clinical trial in the U.S.

 

We acquired certain IP rights with respect to XBIO-101, and the worldwide rights to develop, market and license XBIO-101 for certain uses, except for excluded uses within the CIS, from AS Kevelt ("Kevelt"), a wholly-owned subsidiary of Pharmsynthez. We also acquired Kevelt's orphan drug designation from the FDA for the use of XBIO-101 in the treatment of PrR- endometrial cancer in conjunction with progesterone therapy.

 

XBIO-101 (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. We believe XBIO-101 may also prove to be therapeutically relevant in hormone-resistant cancers by increasing the levels of PrR expression in tumor tissue of patients who are PrR deficient. As such, it may restore the sensitivity of non-responsive endometrial cancers to hormonal (e.g., progestin) therapy. Accordingly, we were pursuing the use of XBIO-101 for the treatment of endometrial cancer.

 

Our decision to investigate XBIO-101 for the treatment of endometrial cancer was based in part on the history of sodium cridanimod in preclinical and clinical research conducted by others, including prior clinical trials conducted and completed in Russia that assessed the efficacy and safety of sodium cridanimod. Sodium cridanimod has been authorized for medicinal use in the Russian Federation for over 20 years with millions of doses estimated to have been sold for the treatment of non-cancer indications. XBIO-101 is also known under the brand names Neovir, Camedon and Primavir.

 

The extensive clinical testing conducted by others, as well as the marketing history of sodium cridanimod, provided support for our authorization to proceed directly with a Phase II efficacy study under our U.S. IND for the use of sodium cridanimod in conjunction with progestin therapy in patients with progestin resistant, recurrent or persistent endometrial cancer. We commenced the Phase II trial under the IND in 2017, with the first patient dosed in October 2017. We closed patient enrollment of the trial in March 2019 as a result of slower than expected progress on the trial resulting from patient enrollment and retention challenges. We are in the process of identifying development paths for XBIO-101, particularly those that can efficiently leverage our existing human data and regulatory status to extend development into immune-oncology settings.

 

ErepoXen

 

ErepoXen, or PSA-EPO, uses our PolyXen platform technology for the treatment of anemia in chronic kidney disease (“CKD”) patients. It is designed to reduce the dosing frequency by extending the circulating half-life of the therapeutic in the body. We terminated our clinical development efforts of ErepoXen and continue to seek out-license opportunities for the drug candidate in our licensed territories.

 

 

 

 

 104 
 

 

We have collaboration agreements with SynBio LLC (“SynBio”) and Serum Institute to develop and launch ErepoXen in limited markets pursuant to which we will collect royalties if they are successful in these efforts.

 

Serum Institute conducted Phase I and Phase II clinical trials in 95 human subjects. These safety trials, which had no significant drug-related adverse events, provided us with the data to commence a Phase II, repeat dosing, ICH compliant clinical trial for ErepoXen in Australia, New Zealand and South Africa for CKD patients not on dialysis. We completed three cohorts of this study and then terminated the study. Each cohort represents an increased dose of ErepoXen that is given on a repeat schedule until therapeutic levels of hemoglobin are achieved. In our study there were no serious Treatment Emergent Adverse Events (“TEAE”) related to ErepoXen in either cohort 1 or 2. There was one serious TEAE in cohort 3 judged to be possibly related, but not unexpected given the safety profile of other Erythropoietin Stimulating Agents.

 

In addition, Serum Institute finished Phase I/II clinical trials in India of ErepoXen for in-center-dialysis patients. Serum Institute has submitted a clinical trial application to conduct a Phase II(b)/III clinical trial for PSA-EPO in India.

 

SynBio received regulatory approval to commence ErepoXen Phase II(b)/III human clinical trials in Russia, is currently recruiting patients and intends to commence the commercialization and marketing stages of ErepoXen in the Russian and CIS markets subject to approval in such markets.

 

Drug Candidates in the Pipeline that are not Currently Active Internally or with Third Party Collaborators

 

OncoHist

 

Our drug candidate OncoHist, which has clinical proof of concept, utilizes the properties of modified human histone H1.3 for targeted cell killing. We were previously researching and developing OncoHist for the treatment of relapsed or resistant acute myeloid leukemia (“AML”). Currently, all our development efforts regarding OncoHist remain on hold due to capital constraints. We would expect to file an IND application for OncoHist for AML once we are able to raise sufficient capital and reactivate our development efforts.

 

We have worked with Dana Farber Cancer Institute intending to elucidate OncoHist's mechanism of action as well as to characterize the responsiveness of various AML cell lines to OncoHist. Dr. Richard Stone, MD, Professor of Medicine at Harvard Medical School and Clinical Director of the Adult Leukemia Program at Dana-Farber Cancer Institute, presented data at the 2014 American Society of Hematology meeting (Blood, 2014 124(21):3604 OncoHist, an rh Histone 1.3, Is Cytotoxic to Acute Myeloid Leukemia Cells and Results in Altered Downstream Signaling).

 

We have completed non-clinical toxicity studies and had a productive, in-person pre-IND meeting with the FDA in August 2015 where manufacturing and clinical matters were addressed, including guidance from the FDA regarding inclusion of an additional indication besides AML in our proposed Phase I clinical trial. However, our efforts in developing this drug candidate have been on hold since 2016 due to our focus on other product candidates and limited capital resources.

 

Pipeline Expansion Opportunities

 

Operating under licenses from us within their home markets, our collaborators can potentially generate preclinical and clinical data related to our technologies across a wide spectrum of therapeutic areas. Under these agreements, we retain all rights for major markets and co-own the clinical data. We therefore have the opportunity to utilize the data in our decision-making process regarding development and commercialization in major markets. We expect to be able to utilize the results from substantially all of our clinical toxicity data and other clinical data generated in the development of XBIO-101 and PolyXen, and potentially for OncoHist, and ImuXen, if any, for a variety of orphan oncology indications and next generation biologic drugs.

 

For example, we believe that we may be able to develop XBIO-101 for other indications. Results from preclinical and exploratory studies conducted by a collaborative partner suggest that XBIO-101 can up-regulate (i.e., increase the levels of) estrogen receptor ("ER") in certain tissue types. Proof of concept studies are being planned to investigate additional therapeutic opportunities for XBIO-101 in hormone therapy resistant tumor types other than endometrial cancer.

 

 

 

 

 

 105 
 

 

We are in the process of identifying development paths for XBIO-101, particularly those that can efficiently leverage our existing human data and regulatory status to extend development into immuno-oncology settings. We are seeking partners for conducting preclinical and Phase I – Phase II studies, such as human clinical dose ranging and biomarker studies of XBIO-101, alone and in combination with I-O therapeutics including checkpoint inhibitors.

 

We also believe that the nature of our technologies, including the PolyXen platform, will allow us to pursue additional drug candidates for new indications based on existing and future scientific data.

 

Significant Co-Development Collaborations and Strategic Arrangements

 

Takeda Pharmaceuticals Co. Ltd. ("Takeda") (f/k/a Shire plc)

 

We are a party to an exclusive research, development and license agreement with Baxalta US Inc. and Baxalta AB (collectively "Baxalta"), wholly-owned subsidiaries of Takeda, related to the development of a novel series of polysialylated blood coagulation factors. This collaboration with Takeda relies on the Company's PolyXen technology to conjugate PSA to therapeutic blood-clotting factors, with the goal of improving the pharmacokinetic profile and extending the active life of these biologic molecules. The agreement grants Takeda a worldwide, exclusive, royalty-bearing license to our PSA patented and proprietary technology in combination with Takeda's proprietary molecules designed for the treatment of blood and bleeding disorders. The first program under this agreement was a next generation Factor VIII protein product candidate.

 

In May 2017, we announced that Takeda had terminated further development of SHP656, its polysialylated rFVIII drug candidate for the treatment of hemophilia, being developed using our proprietary PolyXen technology. While Takeda's Phase I/II trial demonstrated SHP656's efficacy and pharmacokinetic data commensurate with the profile of an extended half-life rFVIII product, the pre-defined once-weekly dosing criterion set forth in the research, development, license and supply agreement was not met. To our knowledge, there were no drug-related adverse events, serious adverse events, or rFVIII inhibitors reported to date. Though the trial's pre-defined once-weekly dosing criterion was not met, we intend to continue to explore the potential for future collaborations with Takeda and Takeda has commenced a new, undisclosed project under the agreement.

 

In October 2017, we entered into a right to sublicense agreement (the "Sublicense Agreement") with Baxalta. Pursuant to the sublicense agreement, we granted to Baxalta the right to grant a nonexclusive sublicense to licensed patents in connection with products related to the treatment of blood and bleeding disorders ("Covered Products"). Pursuant to the sublicense agreement, Baxalta paid us a one-time payment of seven million five hundred thousand dollars ($7,500,000) in November 2017 and agreed to pay us single digit royalty payments based upon net sales of the Covered Products throughout the term, each of which is conditioned upon the performance of the sublicense contemplated by the sublicense agreement. No royalties have been received to date.

 

SynBio LLC

 

In August 2011, we entered into a stock subscription and collaborative development agreement with SynBio (the "Co-Development Agreement"), pursuant to which we granted SynBio an exclusive license to develop, market and commercialize certain drug candidates utilizing molecules based on our PolyXen and OncoHist platform technologies in Russia and the CIS, collectively referred to herein as the SynBio Market. In exchange for our granting to SynBio those certain license rights, SynBio granted an exclusive license to us to use any SynBio preclinical and clinical data generated by SynBio and to engage in the development and commercialization of drug candidates that may arise from the collaboration in any territory outside of the SynBio Market based upon the Co-Development Agreement.

 

We hope and expect to mitigate certain technical and commercial risks of drug development by working in collaboration with SynBio. Under the Co-Development Agreement, SynBio is responsible for progressing six new product candidates through human proof of concept trials in Russia as primary validation for the initiation of European Medicines Agency ("EMA") or FDA clinical trials by us.

 

 

 

 

 106 
 

 

The primary goal of the Co-Development Agreement is to research and develop drug candidates for planned commercialization using SynBio and our combined respective expertise and technologies. Drug candidates must meet the success criteria as decided upon by a joint steering committee, which includes representation from both SynBio and us, where we have the right to appoint the chair who has the casting vote. Once a potential drug candidate is selected, clinical trials will be separately conducted by each company in their respective territories with the goal to achieve regulatory approval of the products for commercial sale.

 

SynBio is wholly responsible for funding and conducting their own research and clinical development activities in Russia, and we are wholly responsible for funding and conducting our own research and clinical development activities in the U.S., Europe and elsewhere outside the SynBio Market. There are no milestones or other research-related payments provided for under the Co-Development Agreement other than fees for the provision of each party's respective research supplies based on their technology. For the years ended December 31, 2018 and 2017, we have recognized no supply service revenues in connection with the Co-Development Agreement. Among other provisions, the parties may terminate the Co-Development Agreement in relation to a particular product upon 30 days' written notice, if such party, in its reasonable opinion, believes that a third-party IP right exists, which would have a material effect on the research and/or development of the relevant product. Further, the parties may terminate the Co-Development Agreement if the other party is in material breach of the Co-Development Agreement and, in the case of a breach capable of remedy, the breach is not remedied within 90 days of receiving notice specifying the breach and requiring its remedy, or if the other party becomes insolvent. The parties also may terminate the Co-Development Agreement by immediate written notice to the other party in relation to a specific product such if product does not meet the relevant success criteria for the product.

 

In furtherance of our co-development clinical objectives, on December 31, 2014, we granted SynBio a warrant to purchase 204,394 shares of our Common Stock that contain vesting triggers based on the achievement by SynBio of certain clinical development objectives within specific timeframes (the "SynBio 2014 Warrant"). Simultaneously with the issuance of the SynBio 2014 Warrant, we granted additional warrants to purchase 9,697 aggregate new shares of our Common Stock to SynBio and Pharmsynthez non-director designees under the same terms and conditions of the SynBio 2014 Warrant. No warrants were exercised during the years ended December 31, 2018 and 2017. The vesting criteria for these warrants were not met and, as a result, the warrants expired during the year ended December 31, 2018.

 

In 2017, SynBio became a wholly-owned subsidiary of Pharmsynthez and all ownership percentages previously held by SynBio are combined with Pharmsynthez.

 

PJSC Pharmsynthez

 

In November 2009, we entered into a collaborative research and development license agreement with Pharmsynthez (the "Pharmsynthez Arrangement") pursuant to which we granted an exclusive license to Pharmsynthez to develop, commercialize and market six product candidates based on our PolyXen and ImuXen technology anywhere within Russia and the CIS, as well as certain clinical and research data developed by us on the six product candidates. In exchange, Pharmsynthez granted us an exclusive license to use any preclinical and clinical data developed by Pharmsynthez, within the scope of the Pharmsynthez Arrangement, and to engage in further research, development and commercialization of drug candidates in any territory outside of Russia and the CIS at our own expense.

 

We expect to mitigate certain risks of drug development by reviewing human clinical data arising out of this collaboration with Pharmsynthez before we take a particular drug candidate into FDA and EMA trials. Under the Pharmsynthez Arrangement, Pharmsynthez is responsible for progressing six new drug candidates through human proof of concept trials in Russia as primary validation prior to the initiation of EMA/FDA clinical trials by us outside of Russia. A joint steering committee, where we have the right to appoint the chair who has the casting vote, was established to facilitate the communication of scientific data and to assist generally with each party's research decisions and to monitor research and development progress under the Pharmsynthez Arrangement.

 

 

 

 

 107 
 

 

Pharmsynthez is wholly responsible for funding and conducting its own research and clinical development activities in Russia. We are wholly responsible for funding and conducting our own research and clinical development activities in the U.S., Europe and the rest of the world outside of Russia and the ex-CIS regions. There are no milestones or other research related payments provided for under the Pharmsynthez Arrangement other than royalties. Among other provisions, the parties may terminate the agreement in relation to a particular product upon 30 days' written notice, if such party, in its reasonable opinion, believe that a third-party intellectual property right exists which would have a material effect on the research and/or development of the relevant product. Further, the parties may terminate the agreement if the other party is in material breach of the agreement and, in the case of a breach capable of remedy, the breach is not remedied within 90 days of receiving notice specifying the breach and requiring its remedy, or if the other party becomes insolvent. The parties also may terminate the agreement by immediate written notice to the other party in relation to a specific product if such product does not meet the relevant success criteria for the product.

 

Serum Institute

 

In August 2011, we entered into a collaborative research and development agreement (the "Serum Agreement") with Serum Institute amending and restating a series of earlier agreements and providing Serum Institute an exclusive license to use our PolyXen technology to research and develop one potential commercial product, PSA-EPO. Serum Institute is responsible for conducting all preclinical and clinical trials required to achieve regulatory approvals within territories outside of certain predetermined territories assigned to us, which include the U.S., the European Economic Area, and Japan, among other territories, at Serum Institute's own expense. Royalty payments are payable by Serum Institute to us for net sales to certain customers in the Serum Institute sales territory. Royalty payments are payable by us to Serum Institute for net sales received by us over the term of the license. No royalty, revenue or expense was recognized by us related to the Serum Institute arrangement during the years ended December 31, 2018 and 2017 and the three months ended March 31, 2019. There are no milestone or other research-related payments due under the Serum Agreement.

 

Through March 31, 2019, we and Serum Institute continued to engage in research and development activities with no resultant commercial products. Among other reasons, the parties may terminate the Serum Agreement by written notice if the other party is in material breach of the Serum Agreement and, in the case of a breach capable of remedy, the breach is not remedied within 90 days of the other party receiving notice specifying the breach and requiring its remedy.

 

In furtherance of our co-development clinical objectives, on December 31, 2014, we granted to Serum Institute certain warrants to purchase 96,970 shares of our Common Stock that contain vesting triggers based on the achievement by Serum Institute of certain clinical development objectives within specific timeframes ("Serum 2014 Warrant"). Simultaneously with the issuance of the Serum 2014 Warrant, we issued additional warrants to purchase an aggregate of 4,852 shares of our Common Stock to Serum Institute non-director designees under the same terms and conditions of the Serum 2014 Warrant. The Serum 2014 Warrant expires on December 30, 2019 and no warrants were exercised during any of the years ended December 31, 2018 and 2017 and the three months ended March 31, 2019.

 

In addition, the Serum Agreement allows for Serum Institute to nominate a non-executive director to our Board of Directors as long as Serum Institute or its subsidiaries holds at least 6% of our Common Stock. Serum Institute is a related party of ours, with a share ownership of approximately [ ]% of our total issued Common Stock as of the Record Date.

 

Our Intellectual Property

 

We strive to protect and enhance the proprietary technology, inventions, and improvements that are commercially important to our business, including seeking, maintaining and defending patent rights, whether developed internally or licensed from our collaborators or other third-parties. Our policy is to seek to protect our proprietary position by, among other methods, filing patent applications in the U.S. and in jurisdictions outside of the U.S. covering our proprietary technology, inventions, improvements and product candidates that are important to the development and implementation of our business. We also rely on trade secrets and know-how relating to our proprietary technology and product candidates, continuing innovation, and in-licensing opportunities to develop, strengthen and maintain our proprietary position in the field of oncology. We also plan to rely on data exclusivity, market exclusivity, and patent term extensions when available. Our commercial success will depend in part on our ability to obtain and maintain patent and other proprietary protection for our technology, inventions, and improvements; to preserve the confidentiality of our trade secrets; to obtain and maintain licenses to use intellectual property owned by third-parties; to defend and enforce our proprietary rights, including any patents that we may own in the future; and to operate without infringing on the valid and enforceable patents and other proprietary rights of third-parties.

 

 

 

 

 108 
 

 

Our drug candidates are in various stages of development, each protected by patent and pending patent applications in the U.S. with the U.S. Patent and Trademark Office ("USPTO") and in certain other developed countries. Our first issued patents begin to expire starting in 2022 with the majority of the existing issued patents expiring between 2025 and 2030.

 

Our patent strategy is to file patent applications on innovations and improvements in those jurisdictions that comprise the major pharmaceutical markets in the world or locations where a pharmaceutical may be manufactured. These jurisdictions include, but are not limited to, the U.S., U.K., Australia, Japan, Canada, South Korea, China, India, Russia and certain other countries in the European Union (“E.U.”) and Asia, though we do not necessarily file a patent application in each of these jurisdictions for every patent family.

 

As of February 28, 2019, we directly or indirectly own, through our wholly-owned subsidiary, Xenetic U.K., and its wholly-owned subsidiaries, Lipoxen, XTI and SymbioTec, more than 170 U.S. and international patents that cover various aspects of our technologies. We have filed patent applications, and plan to file additional patent applications, covering various aspects of our PolyXen platform technology covering polysialylation and advanced polymer conjugate technologies, respectively, as well as our other product candidates, including XBIO-101. More specifically, our patents and patent applications cover polymer architecture, drug conjugates, formulations, methods of manufacturing polymers and polymer conjugates and methods of administering polymer conjugates. We may also file additional patent applications, where possible, for XBIO-101 and OncoHist for additional uses and indications.

 

Our patent portfolio contains patents and patent applications that encompass our OncoHist platform technology including use of histones for the treatment of different cancers. The OncoHist patent portfolio, acquired as part of our acquisition of SymbioTec in January 2012, includes OncoHist, a bis-Met histone H1.3. In addition, our licensed patent portfolio includes patents issued in jurisdictions outside of the U.S. and licensed patent applications pending in jurisdictions outside of the U.S. that are foreign counterparts to one or more of the foregoing U.S. patents and patent applications. The OncoHist portfolio also includes patents that cover the use of a histone protein as an antibiotic and to treat thrombocytopenia and further as an antimicrobial component of a personal care product.

 

We have received patent protection for certain therapeutics that use our PolyXen technology linking the specific therapeutic to a PSA. These include, but are not limited to, PSA-EPO, PSA-insulin and PSA-insulin like protein, SHP656 (PSA-rFVIII), PSA-DNase I and PSA-granulocyte colony stimulating factor (PSA-GCSF). Further patents cover methods to prepare proteins that are linked to a PSA. These method patents include those that link a PSA to a protein in a high pH solution as well as patents that use a process for producing an aldehyde derivative of a sialic acid through the opening and oxidation of a sialic acid unit. For instance, we have patent protection for a PSA linkage that can be at the N-terminus.

 

We have received patent protection for the production of PSA and the removal of endotoxin during the purification process. The removal of endotoxin occurs through the addition of a high pH solution to the PSA and a process to separate a polydisperse ionically charged polysaccharide, such as PSA, into fractions of different average molecular weight. This is accomplished through the use of a column and elution buffers with different and constant ionic strength and pH, resulting in a fractionated polysaccharide that has a molecular weight polydispersity of 1.1 or lower.

 

Issued patents can provide protection for varying periods of time, depending upon the date of filing of the patent application, the date of patent issuance, and the legal term of patents in the countries in which they are obtained. In general, patents issued for applications filed in the U.S. can provide exclusionary rights for 20 years from the earliest effective filing date. In addition, in certain instances, the term of an issued U.S. patent that covers or claims an FDA approved product can be extended to recapture a portion of the term effectively lost as a result of the FDA regulatory review period, which is called patent term extension. The restoration period cannot be longer than five years and the total patent term, including the restoration period, must not exceed 14 years following FDA approval. The term of patents outside of the U.S. varies in accordance with the laws of the foreign jurisdiction, but typically is also 20 years from the earliest effective filing date. However, the actual protection afforded by a patent varies on a product-by-product basis, from country-to-country, and depends upon many factors, including the type of patent, the scope of its coverage, the availability of regulatory-related extensions, the availability of legal remedies in a particular country, and the validity and enforceability of the patent.

 

 

 

 109 
 

 

In certain situations, where we work with drugs covered by one or more patents, our ability to develop and commercialize our technologies may be affected by limitations of our access to these proprietary drugs. Even if we believe we are free to work with a proprietary drug, we cannot guarantee that we will not be accused of, or be determined to be, infringing a third-party's rights and be prohibited from working with the drug or found liable for damages. Any such restriction on access or liability for damages would have a material adverse effect on our business, results of operations and financial condition.

 

The patent positions of pharmaceutical and biotechnology companies, such as ours, are uncertain and involve complex legal and factual issues. There can be no assurance that patents that have issued will be held valid and enforceable in a court of law. Even for patents that are held valid and enforceable, the legal process associated with obtaining such a judgment is time consuming and costly. Additionally, issued patents can be subject to opposition or other proceedings that can result in the revocation of the patent or maintenance of the patent in amended form (and potentially in a form that renders the patent without commercially relevant and/or broad coverage). Further, our competitors may be able to circumvent and otherwise design around our patents. Even if a patent is issued and enforceable, because development and commercialization of pharmaceutical products can be subject to substantial delays, patents may expire early and provide only a short period of protection, if any, following the commercialization of products encompassed by our patent(s). We may have to participate in interference proceedings declared by the USPTO, which could result in a loss of the patent and/or substantial cost to us. Further, we understand that if any of our pending patent applications do not issue, or are deemed invalid following issuance, we may lose valuable IP protection.

 

U.S. and foreign patent rights and other proprietary rights exist that are owned by third-parties and relate to pharmaceutical compositions and reagents, medical devices and equipment and methods for preparation, packaging and delivery of pharmaceutical compositions. We cannot predict with any certainty which, if any, of these rights will be considered relevant to our technology by authorities in the various jurisdictions where such rights exist, nor can we predict with certainty which, if any, of these rights will or may be asserted against us by third-parties. We could incur substantial costs in defending ourselves and our partners against any such claims. Furthermore, parties making such claims may be able to obtain injunctive or other equitable relief, which could effectively block our ability to develop or commercialize some or all of our products in the U.S. and in other countries and could result in the award of substantial damages. In the event of a claim of infringement, we or our partners may be required to obtain one or more licenses from third-parties. There can be no assurance that we can obtain a license to any technology that we determine we require on reasonable terms, if at all, or that we could develop or otherwise obtain alternative technology. The failure to obtain licenses, if required, may have a material adverse effect on our business, results of operations and financial condition. Further, we may not be able to obtain IP licenses related to the development of our drug candidates on a commercially reasonable basis, if at all.

 

It is our policy to require our employees and consultants, outside scientific collaborators, sponsored researchers and other advisors who receive confidential information from us to execute confidentiality agreements upon the commencement of employment or consulting relationships with us. These agreements provide that all confidential information developed or made known to the individual during the course of the individual's relationship with us is to be kept confidential and not disclosed to third-parties except in specific circumstances. The agreements provide that all inventions conceived by an employee shall be our property. There can be no assurance, however, that these agreements will provide meaningful protection or adequate remedies for our trade secrets in the event of unauthorized use or disclosure of such information.

 

Manufacturing and Supply

 

We do not have the capability to manufacture our own materials necessary to support our drug candidate development programs nor do we intend to acquire such capability as part of our present business strategy. We currently have agreements in place with Serum Institute whereby Serum Institute produces clinical materials for use in the development of drug candidates involving our PolyXen technology. We are currently dependent on Kevelt for clinical materials with respect to our XBIO-101 research program.

 

 

 

 

 110 
 

 

Government Regulation

 

General

 

Government authorities in the U.S., at the federal, state and local level, and other countries extensively regulate, among other things, the research, development, testing, manufacture, quality control, approval, labeling, packaging, storage, record-keeping, promotion, advertising, distribution, marketing and export and import of products such as those we are developing. Generally, a new drug must be approved by the FDA through the NDA process and a new biologic must be licensed by the FDA through the biologics license application ("BLA") process before it may be legally marketed in the U.S.

 

U.S. Regulation

 

Drug Development Process

 

In the U.S., the FDA regulates drugs under the Federal Food, Drug, and Cosmetic Act ("FDCA"), and in the case of biologics, also under the Public Health Service Act, and their implementing regulations. The process of obtaining regulatory approvals and the subsequent compliance with appropriate federal, state, local and foreign statutes and regulations require the expenditure of substantial time and financial resources. Failure to comply with the applicable U.S. requirements at any time during the product development process, approval process or after approval may subject an applicant to administrative or judicial sanctions. These sanctions could include the FDA's refusal to approve pending applications, withdrawal of an approval, license revocation, a clinical hold, warning letters or untitled letters, product recalls, product seizures, total or partial suspension of production or distribution, injunctions, fines, refusals of government contracts, restitution, disgorgement or civil or criminal penalties. Any agency or judicial enforcement action could have a material adverse effect on us.

 

The process required by the FDA before a drug or biologic may be marketed in the U.S. generally involves the following:

 

·completion of preclinical laboratory tests, animal studies and formulation studies in accordance with Good Laboratory Practices ("GLP") regulations and other applicable regulations;
·submission to the FDA of an IND, which must become effective before human clinical trials may begin;
·performance of adequate and well-controlled human clinical trials in accordance with Good Clinical Practice ("GCP") regulations to establish the safety and efficacy of the proposed drug for its intended use;
·submission to the FDA of an NDA or BLA;
·satisfactory completion of an FDA inspection of the manufacturing facility or facilities at which the drug is produced to assess compliance with current Good Manufacturing Practices ("cGMP") requirements to assure that the facilities, methods and controls are adequate to preserve the drug's identity, strength, quality and purity; and
·FDA review and approval of the NDA or BLA.

 

Once a pharmaceutical candidate is identified for development, it enters the preclinical testing stage. Preclinical tests include laboratory evaluations of product chemistry, toxicity and formulation, as well as animal studies. An IND sponsor must submit the results of the preclinical tests, together with manufacturing information and analytical data, to the FDA as part of the IND. The sponsor will also include a protocol detailing, among other things, the objectives of the first phase of the clinical trial, the parameters to be used in monitoring safety, and the effectiveness criteria to be evaluated, if the first phase lends itself to an efficacy evaluation. Some preclinical testing may continue even after the IND is submitted. The IND automatically becomes effective 30 days after receipt by the FDA, unless the FDA, within the 30-day time period, places the clinical trial on a clinical hold. In such a case, the IND sponsor and the FDA must resolve any outstanding concerns before the clinical trial can begin. Clinical holds also may be imposed by the FDA at any time before or during clinical trials due to safety concerns about ongoing or proposed clinical trials or noncompliance with specific FDA requirements, and the trials may not begin or continue until the FDA notifies the sponsor that the hold has been lifted.

 

 

 

 

 111 
 

 

All clinical trials must be conducted under the supervision of one or more qualified investigators in accordance with GCP regulations. They must be conducted under protocols detailing the objectives of the trial, dosing procedures, subject selection and exclusion criteria and the safety and effectiveness criteria to be evaluated. Each protocol must be submitted to the FDA as part of the IND, and timely safety reports must be submitted to the FDA and the investigators for serious and unexpected adverse events. An institutional review board (IRB) at each institution participating in the clinical trial must review and approve each protocol before a clinical trial commences at that institution and must also approve the information regarding the trial and the consent form that must be provided to each trial subject or his or her legal representative, monitor the study until completed and otherwise comply with IRB regulations.

 

Human clinical trials are typically conducted in three sequential phases that may overlap or be combined:

 

·Phase I: The drug candidate is initially introduced into healthy human subjects and tested for safety, dosage tolerance, absorption, metabolism, distribution and excretion. In the case of some products for severe or life-threatening diseases, such as cancer, especially when the product may be too inherently toxic to ethically administer to healthy volunteers, the initial human testing is often conducted in patients.
·Phase II: This phase involves clinical trials in a limited patient population to identify possible adverse effects and safety risks, to preliminarily evaluate the efficacy of the product for specific targeted diseases and to determine dosage tolerance and appropriate dosage.
·Phase III: Clinical trials are undertaken to further evaluate dosage, clinical efficacy and safety in an expanded patient population at geographically dispersed clinical study sites. These clinical trials are intended to establish the overall risk-benefit ratio of the drug candidate and provide, if appropriate, an adequate basis for product labeling.

 

Post-approval trials, sometimes referred to as Phase IV studies, may be conducted after initial marketing approval. These trials are used to gain additional experience from the treatment of patients in the intended therapeutic indication. In certain instances, the FDA may mandate the performance of Phase IV clinical trials as a condition of approval of an NDA or BLA.

 

The FDA or the sponsor may suspend a clinical trial at any time on various grounds, including a finding that the research subjects or patients are being exposed to an unacceptable health risk. Similarly, an IRB can suspend or terminate approval of a clinical trial at its institution if the clinical trial is not being conducted in accordance with the IRB's requirements or if the drug has been associated with unexpected serious harm to patients. In addition, some clinical trials are overseen by an independent group of qualified experts organized by the sponsor, known as a data safety monitoring board or committee. Depending on its charter, this group may determine whether a trial may move forward at designated check points based on access to certain data from the trial.

 

Concurrent with clinical trials, companies usually complete additional animal studies and must also develop additional information about the chemistry and physical characteristics of the drug and finalize a process for manufacturing the product in commercial quantities in accordance with cGMP requirements. The manufacturing process must be capable of consistently producing quality batches of the drug candidate and, among other things, the manufacturer must develop methods for testing the identity, strength, quality and purity of the final drug. In addition, appropriate packaging must be selected and tested and stability studies must be conducted to demonstrate that the drug candidate does not undergo unacceptable deterioration over its shelf life.

 

 

 

 

 

 112 
 

 

While the IND is active and before approval, progress reports summarizing the results of the clinical trials and nonclinical studies performed since the last progress report must be submitted at least annually to the FDA, and written IND safety reports must be submitted to the FDA and investigators for serious and unexpected suspected adverse events, findings from other studies suggesting a significant risk to humans exposed to the same or similar drugs, findings from animal or in-vitro testing suggesting a significant risk to humans, and any clinically important increased incidence of a serious suspected adverse reaction compared to that listed in the protocol or investigator brochure.

 

There are also requirements governing the reporting of ongoing clinical trials and completed trial results to public registries. Sponsors of certain clinical trials of FDA-regulated products are required to register and disclose specified clinical trial information, which is publicly available at www.clinicaltrials.gov. Information related to the product, patient population, phase of investigation, trial sites and investigators and other aspects of the clinical trial is then made public as part of the registration. Sponsors are also obligated to discuss the results of their clinical trials after completion. Disclosure of the results of these trials can be delayed until the new product or new indication being studied has been approved.

 

U.S. Market Approval Process

 

The results of product development, preclinical and other non-clinical studies and clinical trials, along with descriptions of the manufacturing process, analytical tests conducted on the chemistry of the drug, proposed labeling and other relevant information are submitted to the FDA as part of an NDA or BLA requesting approval to market the product. The submission of an NDA or BLA is subject to the payment of user fees; a waiver of such fees may be obtained under certain limited circumstances. The FDA reviews all NDAs and BLAs submitted to ensure that they are sufficiently complete for substantive review before it accepts them for filing. The FDA may request additional information rather than accept an NDA or BLA for filing. In this event, the NDA or BLA must be resubmitted with the additional information. The resubmitted application also is subject to review before the FDA accepts it for filing.

 

Once the submission is accepted for filing, the FDA begins an in-depth substantive review. The FDA may refer the NDA or BLA to an advisory committee for review, evaluation and recommendation as to whether the application should be approved and under what conditions. The FDA is not bound by the recommendation of an advisory committee, but it generally follows such recommendations. The approval process is lengthy and often difficult, and the FDA may refuse to approve an NDA or BLA if the applicable regulatory criteria are not satisfied or may require additional clinical or other data and information. Even if such data and information are submitted, the FDA may ultimately decide that the NDA or BLA does not satisfy the criteria for approval. The FDA reviews an NDA to determine, among other things, whether a product is safe and effective for its intended use and whether its manufacturing is cGMP-compliant to assure and preserve the product's identity, strength, quality and purity. The FDA reviews a BLA to determine, among other things whether the product is safe, pure and potent and the facility in which it is manufactured, processed, packed or held meets standards designed to assure the product's continued safety, purity and potency. Before approving an NDA or BLA, the FDA will inspect the facility or facilities where the product is manufactured.

 

After the FDA evaluates an NDA or BLA, it will issue an approval letter or a Complete Response Letter. An approval letter authorizes commercial marketing of the drug with prescribing information for specific indications. A Complete Response Letter indicates that the review cycle of the application is complete and the application will not be approved in its present form. A Complete Response Letter usually describes the specific deficiencies in the NDA or BLA identified by the FDA and may require additional clinical data, such as an additional pivotal Phase 3 trial or other significant and time-consuming requirements related to clinical trials, nonclinical studies or manufacturing. If a Complete Response Letter is issued, the sponsor must resubmit the NDA or BLA, addressing all of the deficiencies identified in the letter, or withdraw the application. Even if such data and information are submitted, the FDA may decide that the NDA or BLA does not satisfy the criteria for approval.

 

 

 

 

 113 
 

 

If a product receives regulatory approval, the approval may be significantly limited to specific diseases and dosages or the indications for use may otherwise be limited, which could restrict the commercial value of the product. In addition, the FDA may require a sponsor to conduct Phase 4 testing, which involves clinical trials designed to further assess a drug's safety and effectiveness after NDA or BLA approval, and may require testing and surveillance programs to monitor the safety of approved products which have been commercialized. The FDA may also place other conditions on approval including the requirement for a risk evaluation and mitigation strategy (REMS) to assure the safe use of the drug. If the FDA concludes a REMS is needed, the sponsor of the NDA or BLA must submit a proposed REMS. The FDA will not approve the NDA or BLA without an approved REMS, if required. A REMS could include medication guides, physician communication plans or elements to assure safe use, such as restricted distribution methods, patient registries and other risk minimization tools. Any of these limitations on approval or marketing could restrict the commercial promotion, distribution, prescription or dispensing of products. Marketing approval may be withdrawn for noncompliance with regulatory requirements or if problems occur following initial marketing.

 

Orphan Drug Act

 

The Orphan Drug Act provides incentives to manufacturers to develop and market drugs or biologics for rare diseases and conditions affecting fewer than 200,000 persons in the U.S. at the time of application for orphan drug designation, or for a patient population greater than 200,000 in the U.S. where there is no reasonable expectation that the cost of developing the drug or biologic will be recovered from sales in the U.S. The first developer to receive FDA marketing approval for an orphan drug is entitled to a seven-year exclusive marketing period in the U.S. for that product. However, a drug that the FDA considers to be clinically superior to, or different from, another approved orphan drug, even though for the same indication, may also obtain approval in the U.S. during the seven-year exclusive marketing period. In addition, holders of exclusivity for orphan drugs are expected to assure the availability of sufficient quantities of their orphan drugs to meet the needs of patients. Failure to do so could result in the withdrawal of marketing exclusivity for the drug.

 

Pediatric Information

 

Under the Pediatric Research Equity Act of 2007 ("PREA"), NDAs or BLAs or supplements to NDAs or BLAs must contain data to assess the safety and effectiveness of the drug for the claimed indication(s) in all relevant pediatric sub-populations and to support dosing and administration for each pediatric sub-population for which the drug is safe and effective. The FDA may grant deferrals for submission of data or full or partial waivers. Unless otherwise required by regulation, PREA does not apply to any drug for an indication for which orphan drug designation has been granted. The Best Pharmaceuticals for Children Act ("BPCA") provides sponsors of NDAs with an additional six-month period of market exclusivity for all unexpired patent or non-patent exclusivity on all forms of the drug containing the active moiety if the sponsor submits results of pediatric studies specifically requested by the FDA under BPCA within required timeframes. The Biologics Price Competition and Innovation Act provides sponsors of BLAs an additional six-month extension for all unexpired non-patent market exclusivity on all forms of the biologic containing the active moiety pursuant to the BPCA if the conditions under the BPCA are met.

 

The Food and Drug Administration Safety and Innovation Act ("FDASIA"), which was signed into law on July 9, 2012, amended the FDCA. FDASIA requires that a sponsor who is planning to submit a marketing application for a drug or biological product that includes a new active ingredient, new indication, new dosage form, new dosing regimen or new route of administration submit an initial Pediatric Study Plan ("PSP") within sixty days of an end-of-Phase II meeting or as may be agreed between the sponsor and FDA. The initial PSP must include an outline of the pediatric study or studies that the sponsor plans to conduct, including study objectives and design, age groups, relevant endpoints and statistical approach, or a justification for not including such detailed information, and any request for a deferral of pediatric assessments or a full or partial waiver of the requirement to provide data from pediatric studies along with supporting information. FDA and the sponsor must reach agreement on the PSP. A sponsor can submit amendments to an agreed-upon initial PSP at any time if changes to the pediatric plan need to be considered based on data collected from nonclinical studies, early phase clinical trials, and/or other clinical development programs.

 

 

 

 

 114 
 

 

Expedited Development and Review Programs

 

The FDA has a Fast Track program that is intended to expedite or facilitate the process for reviewing new drugs and biological products that meet certain criteria. Specifically, new drugs and biological products are eligible for Fast Track designation if they are intended to treat a serious or life-threatening condition and demonstrate the potential to address unmet medical needs for the condition. Fast Track designation applies to the combination of the product and the specific indication for which it is being studied. The sponsor of a new drug or biologic may request the FDA to designate the drug or biologic as a Fast Track product at any time during the clinical development of the product. Unique to a Fast Track product, the FDA may consider for review sections of the marketing application on a rolling basis before the complete application is submitted, if the sponsor provides a schedule for the submission of the sections of the application, the FDA agrees to accept sections of the application and determines that the schedule is acceptable, and the sponsor pays any required user fees upon submission of the first section of the application.

 

Any product submitted to the FDA for marketing, including under a Fast Track program, may be eligible for other types of FDA programs intended to expedite development and review, such as priority review and accelerated approval. Fast Track designation, priority review and accelerated approval do not change the standards for approval but may expedite the development or approval process. Any product is eligible for priority review if it has the potential to provide safe and effective therapy where no satisfactory alternative therapy exists or a significant improvement in the treatment, diagnosis or prevention of a disease compared to marketed products. The FDA will attempt to direct additional resources to the evaluation of an application for a new drug or biological product designated for priority review in an effort to facilitate the review. Additionally, a product may be eligible for accelerated approval. Drug or biological products studied for their safety and effectiveness in treating serious or life-threatening illnesses and that provide meaningful therapeutic benefit over existing treatments may receive accelerated approval, which means that they may be approved on the basis of adequate and well-controlled clinical trials establishing that the product has an effect on a surrogate endpoint that is reasonably likely to predict a clinical benefit, or on the basis of an effect on a clinical endpoint other than survival or irreversible morbidity. As a condition of approval, the FDA may require that a sponsor of a drug or biological product receiving accelerated approval perform adequate and well-controlled post-marketing clinical trials. In addition, the FDA currently requires as a condition for accelerated approval pre-approval of promotional materials, which could adversely impact the timing of the commercial launch of the product. If the FDA concludes that a drug shown to be effective can be safely used only if distribution or use is restricted, it will require such post-marketing restrictions as it deems necessary to assure safe use of the drug, such as distribution restricted to certain facilities or physicians with special training or experience; or distribution conditioned on the performance of specified medical procedures.

 

FDASIA established a new category of drugs and biologics referred to as "breakthrough therapies" that may be eligible to receive Breakthrough Therapy Designation. A sponsor may seek FDA designation of a drug or biologic candidate as a "breakthrough therapy" if the product is intended, alone or in combination with one or more other products, to treat a serious or life-threatening disease or condition and preliminary clinical evidence indicates that the product may demonstrate substantial improvement over existing therapies on one or more clinically significant endpoints, such as substantial treatment effects observed early in clinical development. The designation includes all of the Fast Track program features, as well as more intensive FDA interaction and guidance. The Breakthrough Therapy Designation is a distinct status from both accelerated approval and priority review, which can also be granted to the same drug if relevant criteria are met. If a product is designated as breakthrough therapy, the FDA will expedite the development and review of such drug. All requests for breakthrough therapy designation will be reviewed within 60 days of receipt, and the FDA will either grant or deny the request.

 

Post-Approval Requirements

 

Once an approval is granted, the FDA may withdraw the approval if compliance with regulatory requirements or standards is not maintained or if problems occur after the product reaches the market. Later discovery of previously unknown problems with a product may result in restrictions on the product or even complete withdrawal of the product from the market. After approval, some types of changes to the approved product, such as adding new indications, certain manufacturing changes and additional labeling claims, are subject to further FDA review and approval. Drug and biologics manufacturers and other entities involved in the manufacture and distribution of approved drugs and biologics are required to register their establishments with the FDA and certain state agencies, and are subject to periodic unannounced inspections by the FDA and certain state agencies for compliance with cGMP regulations and other laws and regulations.

 

 

 

 

 115 
 

 

U.S. Patent Term Restoration and Marketing Exclusivity

 

Depending upon the timing, duration and specifics of the FDA approval of our drug candidates, some of our U.S. patents may be eligible for limited patent term extension under the Drug Price Competition and Patent Term Restoration Act of 1984, commonly referred to as the Hatch-Waxman Amendments. The Hatch-Waxman Amendments permit a patent restoration term of up to five years as compensation for patent term lost during product development and the FDA regulatory review process. However, patent term restoration cannot extend the remaining term of a patent beyond a total of 14 years from the product's approval date. The patent term restoration period is generally one-half the time between the effective date of an IND and the submission date of an NDA or BLA plus the time between the submission date of an NDA or BLA and the approval of that application. Only one patent applicable to an approved drug is eligible for the extension and the application for the extension must be submitted prior to the expiration of the patent. The USPTO, in consultation with the FDA, reviews and approves the application for any patent term extension or restoration. In the future, we intend to apply for restoration of patent term for one of our currently owned or licensed patents to add patent life beyond its current expiration date, depending on the expected length of the clinical trials and other factors involved in the filing of the relevant NDA or BLA.

 

Marketing exclusivity provisions under the FDCA can also delay the submission or the approval of certain marketing applications. The FDCA provides a five-year period of non-patent marketing exclusivity within the U.S. to the first applicant to obtain approval of an NDA for a new chemical entity. A drug is a new chemical entity if the FDA has not previously approved any other new drug containing the same active moiety, which is the molecule or ion responsible for the action of the drug substance. During the exclusivity period, the FDA may not accept for review an abbreviated new drug application (ANDA), or a 505(b)(2) NDA submitted by another company for another drug based on the same active moiety, regardless of whether the drug is intended for the same indication as the original innovator drug or for another indication, where the applicant does not own or have a legal right of reference to all the data required for approval. However, an application may be submitted after four years if it contains a certification of patent invalidity or non-infringement to one of the patents listed with the FDA by the innovator NDA holder. The FDCA also provides three years of marketing exclusivity for an NDA, or supplement to an existing NDA if new clinical investigations, other than bioavailability studies, that were conducted or sponsored by the applicant are deemed by the FDA to be essential to the approval of the application, for example new indications, dosages or strengths of an existing drug. This three-year exclusivity covers only the modification for which the drug received approval on the basis of the new clinical investigations and does not prohibit the FDA from approving ANDAs for drugs containing the active agent for the original indication or condition of use. Five-year and three-year exclusivity will not delay the submission or approval of a full NDA. However, an applicant submitting a full NDA would be required to conduct or obtain a right of reference to all of the preclinical studies and adequate and well-controlled clinical trials necessary to demonstrate safety and effectiveness.

 

Pediatric exclusivity is another type of regulatory market exclusivity in the U.S. under the BPCA. Pediatric exclusivity provides for an additional six months of marketing exclusivity if a sponsor conducts clinical trials in children as addressed in the section named "Pediatric Information" above. In addition, orphan drug exclusivity, as described above, may offer a seven-year period of marketing exclusivity, except in certain circumstances.

 

Foreign Regulation

 

In addition to regulations in the U.S., we will be subject to a variety of regulations in other jurisdictions governing, among other things, clinical trials and any commercial sales and distribution of our drug candidates.

 

Whether or not we obtain FDA approval for our drug candidates, we must obtain the requisite approvals from regulatory authorities in foreign countries prior to the commencement of clinical trials or marketing of the drug candidates in those countries. Certain countries outside of the U.S. have a similar process that requires the submission of a clinical trial application much like the IND prior to the commencement of human clinical trials. In the European Union, for example, a CTA must be submitted to each country's national health authority and an independent ethics committee, much like the FDA and the IRB, respectively. Once the CTA is approved in accordance with a country's requirements, clinical study development may proceed.

 

The requirements and process governing the conduct of clinical trials, product approval and licensing, pricing and reimbursement vary from country to country. In all cases, the clinical trials are conducted in accordance with GCP and the applicable regulatory requirements and the ethical principles that have their origin in the Declaration of Helsinki.

 

 

 

 

 116 
 

 

To obtain regulatory approval of an investigational drug or biological product under European Union regulatory systems, we must submit a marketing authorization application. The application used to file the NDA or BLA in the U.S. is similar to that required in the European Union, with the exception of, among other things, country-specific document requirements. The European Union also provides opportunities for market exclusivity. For example, in the European Union, upon receiving marketing authorization, new chemical entities generally receive eight years of data exclusivity and an additional two years of market exclusivity. If granted, data exclusivity prevents regulatory authorities in the European Union from referencing the innovator's data to assess a generic application. During the additional two-year period of market exclusivity, a generic marketing authorization can be submitted, and the innovator's data may be referenced, but no generic product can be marketed until the expiration of the market exclusivity. However, there is no guarantee that a product will be considered by the European Union's regulatory authorities to be a new chemical entity, and products may not qualify for data exclusivity. Products receiving orphan designation in the European Union can receive ten years of market exclusivity, during which time no similar medicinal product for the same indication may be placed on the market. An orphan product can also obtain an additional two years of market exclusivity in the European Union for pediatric studies. No extension to any supplementary protection certificate can be granted on the basis of pediatric studies for orphan indications.

 

The criteria for designating an "orphan medicinal product" in the European Union are similar in principle to those in the U.S. Under Article 3 of Regulation (EC) 141/2000, a medicinal product may be designated as orphan if (1) it is intended for the diagnosis, prevention or treatment of a life-threatening or chronically debilitating condition; (2) either (a) such condition affects no more than five in 10,000 persons in the European Union when the application is made, or (b) the product, without the benefits derived from orphan status, would not generate sufficient return in the European Union to justify investment; and (3) there exists no satisfactory method of diagnosis, prevention or treatment of such condition authorized for marketing in the European Union, or if such a method exists, the product will be of significant benefit to those affected by the condition, as defined in Regulation (EC) 847/2000. Orphan medicinal products are eligible for financial incentives such as reduction of fees or fee waivers and are, upon grant of a marketing authorization, entitled to ten years of market exclusivity for the approved therapeutic indication. The application for orphan drug designation must be submitted before the application for marketing authorization. The applicant will receive a fee reduction for the marketing authorization application if the orphan drug designation has been granted, but not if the designation is still pending at the time the marketing authorization is submitted. Orphan drug designation does not convey any advantage in, or shorten the duration of, the regulatory review and approval process.

 

The 10-year market exclusivity may be reduced to six years if, at the end of the fifth year, it is established that the product no longer meets the criteria for orphan designation, for example, if the product is sufficiently profitable not to justify maintenance of market exclusivity. In addition, marketing authorization may be granted to a similar product for the same indication at any time if:

 

·the second applicant can establish that its product, although similar, is safer, more effective or otherwise clinically superior;
·the applicant consents to a second orphan medicinal product application; or
·the applicant cannot supply enough orphan medicinal product.

 

For other countries outside of the European Union, such as countries in Eastern Europe, Latin America or Asia, the requirements governing the conduct of clinical studies, product licensing or approval, pricing and reimbursement vary from country to country. In all cases, again, the clinical studies are conducted in accordance with GCP and the applicable regulatory requirements and the ethical principles that have their origin in the Declaration of Helsinki.

 

If we fail to comply with applicable foreign regulatory requirements, we may be subject to, among other things, fines, suspension or withdrawal of regulatory approvals, product recalls, seizure of products, operating restrictions and criminal prosecution.

 

 

 

 

 

 117 
 

 

Other Regulatory Matters

 

Manufacturing, sales, promotion and other activities following product approval are also potentially subject to regulation by numerous regulatory authorities in addition to the FDA, including, in the U.S., the Centers for Medicare & Medicaid Services, other divisions of the Department of Health and Human Services, the Drug Enforcement Administration, the Consumer Product Safety Commission, the Federal Trade Commission, the Occupational Safety & Health Administration, the Environmental Protection Agency and state and local governments. In the U.S., sales, marketing and scientific/educational programs must also comply with state and federal fraud and abuse laws, including state and federal anti-kickback, false claims, data privacy and security and physician payment transparency laws. Pricing and rebate programs must comply with the Medicaid rebate requirements of the U.S. Omnibus Budget Reconciliation Act of 1990 and more recent requirements in the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act of 2010, collectively the Affordable Care Act. If products are made available to authorized users of the Federal Supply Schedule of the General Services Administration, additional laws and requirements apply. The handling of any controlled substances must comply with the U.S. Controlled Substances Act and Controlled Substances Import and Export Act. Products must meet applicable child-resistant packaging requirements under the U.S. Poison Prevention Packaging Act. Manufacturing, sales, promotion and other activities are also potentially subject to federal and state consumer protection and unfair competition laws.

 

The distribution of pharmaceutical products is subject to additional requirements and regulations, including extensive record-keeping, licensing, storage and security requirements intended to prevent the unauthorized sale of pharmaceutical products.

 

The failure to comply with regulatory requirements may subject us to possible legal or regulatory action. Depending on the circumstances, failure to meet applicable regulatory requirements can result in criminal prosecution, fines or other penalties, injunctions, recall or seizure of products, total or partial suspension of production, denial or withdrawal of product approvals, or refusal to allow a firm to enter into supply contracts, including government contracts. In addition, even if a firm complies with FDA and other requirements, new information regarding the safety or efficacy of a product could lead the FDA to modify or withdraw product approval. Prohibitions or restrictions on sales or withdrawal of future products marketed by us could materially affect our business in an adverse way.

 

Changes in regulations, statutes or the interpretation of existing regulations could impact our business in the future by requiring, for example: (i) changes to our manufacturing arrangements; (ii) additions or modifications to product labeling; (iii) the recall or discontinuation of our products; or (iv) additional record-keeping requirements. If any such changes were to be imposed, they could adversely affect the operation of our business.

 

Environmental Regulation

 

In addition to being subject to extensive regulation by the FDA, we must also comply with environmental regulation insofar as such regulation applies to us or our drug candidates. Our costs of compliance with environmental regulation as applied to similar pharmaceutical companies are minimal, since we do not currently, nor do we intend to, engage in the manufacturing of any of our drug candidates. We currently use unaffiliated manufacturers to produce all of our drug candidate material and receive final material from such manufacturer, without any involvement on our part in the manufacturing process at any stage of the process.

 

Although we believe that our safety procedures for using, handling, storing and disposing of our drug candidate materials comply with the environmental standards required by state and federal laws and regulations, we cannot completely eliminate the risk of accidental contamination or injury from these materials. We do not carry a specific insurance policy to mitigate this risk to us or to the environment.

 

Research and Development Expenses

 

Research and development activities include personnel costs, research supplies, clinical and preclinical study costs. Such expenses related to the research and development of our drug candidates totaled $0.5 million for the three months ended March 31, 2019 and $0.7 million for the three months ended March 31, 2018.

 

Research and development activities include personnel costs, research supplies, clinical and preclinical study costs. Such expenses related to the research and development of our drug candidates totaled $2.9 million for the year ended December 31, 2018 and $4.1 million for the year ended December 31, 2017.

 

 

 

 

 118 
 

 

Employees

 

At March 31, 2019, we employed four full-time employees. We are not a party to any collective bargaining agreement with our employees; nor are any of our employees a member of any labor unions. We are subject to certain statutory and contractual obligations in instances where we terminate U.K.-based employees. These obligations, which are ordinary and customary in the U.K., generally range from one to 12 months of wages for terminated employees and would not be expected to represent a material adverse effect to us.

 

To complement our own professional staff, we utilize specialists in regulatory affairs, pharmacovigilance, process engineering, manufacturing, quality assurance, preclinical and clinical development, accounting and business development. These individuals include scientific advisors as well as independent consultants.

 

Competition

 

The pharmaceutical and biotechnology industries are characterized by intense competition and rely heavily on the ability to move quickly, adapt to changing medical and market needs, and to develop and maintain strong intellectual property positions. We believe that the development experience of our scientific and management team, as well as the strength and promise of our drug candidates, provide us with a competitive advantage; nevertheless, we face potential competition from a myriad of sources many of which operate with greater resources and more mature products. These include pharmaceutical and biotechnology companies, academic institutions, governmental agencies and public and private research institutions. Competition is intense and is expected to increase.

 

Product and Technology Specific Competition

 

XBIO-101 for Endometrial Cancer (“EC”) and Triple Negative Breast Cancer (“TNBC”)

 

Current standard of care treatments for EC and TNBC include radiation, surgery as well as certain chemotherapeutic and antineoplastic agents, particularly platinum-based agents, including but not limited to Taxol, Taxane, anthracycline, carboplatin, doxorubicin, cisplatin, ifosfamide, and topotecan.

 

A number of additional therapeutic classes are in development worldwide, including but not limited to antibodies, antibody-drug conjugates, and immunotherapies. Additionally, there are a number of targeted agents including PARP inhibitors and other agents that target the PI3K/Akt/mTOR pathway and other kinase inhibitors. The aforementioned therapeutics and therapeutic classes may be used either alone or in combination.

 

PSA for Drug Delivery

 

Current competing platforms include PEGylation, Fc-fusion, albumin -fusion, HESylation, PASylation and CTP-fusion, among others.

 

We also expect to compete with academic institutions and other smaller pharmaceutical companies during the drug development stage of our progress. In addition to competing with universities and other research institutions in the development of drug products, therapies, technologies and processes, we may compete with other companies in acquiring rights to products or technologies from universities. There can be no assurance that our products or drug candidates will be more effective or achieve greater market acceptance than competitive products, or that these companies will not succeed in developing products and technologies that are more effective than those being developed for us or that would render our products and technologies less competitive or obsolete.

 

Properties

 

We occupied a facility consisting of approximately 4,000 square feet in the Ledgemont Technology Center in Lexington, Massachusetts. The premises were divided into approximately 50% laboratory and 50% office space and were leased by our subsidiary, Xenetic Bioscience, Incorporated. The lease provided for an initial term of 61 months which commenced in January 2014 and expired on January 31, 2019. Commencing February 1, 2019, we occupy a facility consisting of approximately 1,700 square feet of office space at 40 Speen Street in Framingham, Massachusetts. The sublease is for 21 months through September 2020. We believe that this space is adequate for our current needs and that if additional space is required, it can be obtained at commercially reasonable terms nearby.

 

 

 

 

 119 
 

 

In addition, we lease 450 sq. ft. of office space in Miami, Florida. The lease provided for an initial term of 12 months, which commenced on December 1, 2016, and was extended for an additional two years through November 30, 2019. We believe that this space is adequate for our current needs and that if additional space is required, it can be obtained at commercially reasonable terms either within its current space or nearby.

 

Legal Proceedings

 

From time to time, we may be a party to litigation and subject to claims incident to the ordinary course of business. Although the results of litigation and claims cannot be predicted with certainty, we currently believe that the final outcome of these ordinary course matters will not have a material adverse effect on our business. Regardless of the outcome, litigation can have an adverse impact on us because of defense and settlement costs, diversion of management resources and other factors.

 

There are no matters, as of March 31, 2019, that, in the opinion of management, might have a material adverse effect on our financial position, results of operations or cash flows.

 

Market Price And Dividend Information

 

Our Common Stock is listed for trading on The NASDAQ Capital Market under the symbol "XBIO."

 

Holders of Record

 

As of May 6, 2019, there were 409 holders of record of our Common Stock.

 

Dividends

 

There are no restrictions in our articles of incorporation or bylaws that prevent us from declaring dividends. The Nevada Revised Statutes, however, do prohibit us from declaring dividends where after giving effect to the distribution of the dividend:

 

·We would not be able to pay our debts as they become due in the usual course of business; or
·Our total assets would be less than the sum of our total liabilities plus the amount that would be needed to satisfy the rights of stockholders who have preferential rights superior to those receiving the distribution.

 

We have never previously declared or paid any cash dividends on our Common Stock. We currently intend to retain earnings and profits, if any, to support our business strategy and do not intend to pay any cash dividends within the foreseeable future. Any future determination to pay cash dividends will be at the sole discretion of our Board of Directors and will depend upon the financial condition of the Company, our operating results, capital requirements, general business conditions and any other factors that the Board of Directors deems relevant.

 

 

 

 

 120 
 

 

XENETIC’S MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The management’s discussion and analysis of financial condition and results of operations should be read in conjunction with the financial statements and accompanying notes included in this proxy statement/prospectus.

 

BUSINESS OVERVIEW

 

Our Phase II trial for our novel oncology product, XBIO-101, commenced patient dosing in October 2017. We closed patient enrollment of the trial in March 2019 as a result of slower than expected progress on the trial resulting from patient enrollment and retention challenges.

 

We continue to commit a significant amount of our resources to our research and development activities and anticipate continuing to do so for the near future. Although we hold a broad patent portfolio, the focus of our internal development efforts during 2018 was limited to research and development of XBIO-101 due to capital constraints.

 

On March 1, 2019, the Company entered into an agreement to acquire XCART, a proximity-based screening platform capable of identifying CAR constructs that can target patient-specific tumor neoantigens, with a demonstrated proof of mechanism in B-cell Non-Hodgkin lymphomas. The XCART technology, developed by the Institute in collaboration with the 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. The closing of the Transaction is subject to customary closing conditions as well as conditions regarding (i) the Company having adequate financing to fund its future working capital obligations following the closing and (ii) the Company obtaining necessary and appropriate stockholder approvals, evidencing among other matters, approval of the Share Purchase Agreement and the transactions contemplated thereunder, including the issuance of the transaction shares. Subject to the satisfaction of the closing conditions, the Transaction is expected to close in the first half of 2019.

 

Critical Accounting Estimates

 

The preparation of our financial statements in conformity with U.S. generally accepted accounting principles ("U.S. GAAP") requires us to make estimates, judgments and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue, costs and expenses during the reporting period. On an ongoing basis, we evaluate our estimates that are based on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. The result of these evaluations forms the basis for making judgments about the carrying values of assets and liabilities and the reported amount of expenses that are not readily apparent from other sources. Because future events and their effects cannot be determined with certainty, actual results and outcomes could differ materially from our estimates, judgments and assumptions.

 

Management believes that the following accounting estimates are the most critical to aid in fully understanding and evaluating our reported financial results, and they require management's most difficult subjective or complex judgments, resulting from the need to make estimates about the effect of matters that are inherently uncertain. The following narrative describes these critical accounting estimates, judgments and assumptions and the effect if actual results differ from these assumptions.

 

Revenue Recognition

 

We enter into supply, license and collaboration arrangements with pharmaceutical and biotechnology partners, some of which include royalty agreements based on potential net sales of approved commercial pharmaceutical products.

 

Effective January 1, 2018, we adopted Accounting Standards Codification ("ASC") Topic 606, Revenue from Contracts with Customers ("ASC 606"), using the modified retrospective transition method. Under this method, results for reporting periods beginning after January 1, 2018 are presented under ASC 606, while prior period amounts are not adjusted and continue to be reported in accordance with ASC 605. This standard applies to all contracts with customers, except for contracts that are within the scope of other standards, such as leases, insurance, collaboration arrangements and financial instruments. We did not have any revenue generating contracts with customers and, therefore, the adoption of this new revenue standard did not have a material impact on the consolidated financial statements. Under ASC 605, we recognized revenue when all of the following criteria were met: (i) persuasive evidence of an arrangement existed; (ii) delivery had occurred or services had been rendered; (iii) the seller's price to the buyer was fixed or determinable; and (iv) collectability was reasonably assured.

 

 

 

 121 
 

 

The terms of our license agreements may include delivery of an IP license to a collaboration partner. We may be compensated under license arrangements through a combination of non-refundable upfront receipts, development and regulatory objective receipts and royalty receipts on future product sales by partners. We anticipate recognizing non-refundable upfront license payments and development and regulatory milestone payments received by us in license and collaboration arrangements that include future obligations, such as supply obligations, ratably over our expected performance period under each respective arrangement. We make our best estimate of the period over which we expect to fulfil our performance obligations, which may include technology transfer assistance, research activities, clinical development activities, and manufacturing activities from development through the commercialization of the product. Given the uncertainties of these collaboration arrangements, significant judgment is required to determine the duration of the performance period.

 

When we enter into an arrangement to sublicense some of our patents, we will consider the performance obligations to determine if there is a single element or multiple elements to the arrangement as we determine the proper method and timing of revenue recognition. We consider the terms of the license or sublicense for such elements as price adjustments or refund clauses in addition to any performance obligations for us to provide such as services, patent defense costs, technology support, marketing or sales assistance or any other elements to the arrangement that could constitute an additional deliverable to us that could change the timing of the revenue recognition. Non-refundable upfront license and sublicense fees received, whereby continued performance or future obligations are considered inconsequential or perfunctory to the relevant licensed technology, are recognized as revenue upon delivery of the technology.

 

We expect to recognize royalty revenue in the period of sale, based on the underlying contract terms, provided that the reported sales are reliably measurable, we have no remaining performance obligations, and all other revenue recognition criteria are met.

 

We anticipate reimbursements for research and development services completed by us related to the collaboration agreements to be recognized in operations as revenue on a gross basis.

 

Our license, sublicense and collaboration agreements with certain collaboration partners could also provide for future milestone receipts to us based solely upon the performance of the respective collaboration partner in consideration of deadline extensions or upon the achievement of specified sales volumes of approved drugs. For such receipts, we expect to recognize the receipts as revenue when earned under the applicable contract terms on a performance basis or ratably over the term of the agreement. These receipts may also be recognized as revenue when continued performance or future obligations by us are considered inconsequential or perfunctory.

 

Under ASC 606, an entity recognizes revenue when its customer obtains control of promised goods or services, in an amount that reflects the consideration which the entity expects to receive in exchange for those goods or services. To determine revenue recognition for arrangements that an entity determines are within the scope of ASC 606, the entity performs the following five steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue at a point in time, or over time, as it satisfies a performance obligation. We only apply the five-step model to contracts when it is probable that we will collect the consideration we are entitled to in exchange for the goods or services we transfer to the customer. At contract inception, once the contract is determined to be within the scope of ASC 606, we assess the goods or services promised within each contract, determine those that are performance obligations, and assess whether each promised good or service is distinct. We then recognize as revenue the amount of the transaction price that is allocated to the respective performance obligation when (or as) the performance obligation is satisfied.

 

As part of the accounting for these arrangements, we must use significant judgment to determine: a) the number of performance obligations based on the determination under step (ii) above; b) the transaction price under step (iii) above; and c) the stand-alone selling price for each performance obligation identified in the contract for the allocation of transaction price in step (iv) above. We use judgment to determine whether milestones or other variable consideration should be included in the transaction price as described further below. The transaction price is allocated to each performance obligation on a relative stand-alone selling price basis, for which we recognize revenue as or when the performance obligations under the contract are satisfied. In developing the stand-alone price for a performance obligation, we consider applicable market conditions and relevant entity-specific factors, including factors that were contemplated in negotiating the agreement with the customer and estimated costs. We validate the stand-alone selling price for performance obligations by evaluating whether changes in the key assumptions used to determine the stand-alone selling prices will have a significant effect on the allocation of transaction price between multiple performance obligations. We recognize a contract asset or liability for the difference between our performance (i.e., the goods or services transferred to the customer) and the customer's performance (i.e., the consideration paid by, and unconditionally due from, the customer).

 

 

 

 122 
 

 

Research and Development Expenses

 

Research and development expenses consist of expenses incurred in performing research and development activities, including compensation and benefits, facilities expenses, overhead expenses, clinical trial and related clinical manufacturing expenses, fees paid to Clinical Research Organizations (“CROs”) and contract manufacturing organizations and other outside expenses. We expense research and development costs as incurred. We expense upfront, non-refundable payments made for research and development services as obligations are incurred. The value ascribed to intangible assets acquired but which have not met capitalization criteria is expensed as resear