Background

Xenetic Biosciences, Inc. (the “Company”), incorporated in the state of Nevada and based in Lexington, Massachusetts, is a clinical stage biopharmaceutical company that is focused on the discovery, development and planned commercialization of a new generation of human drug therapies for the treatment of a variety of conditions including anemia, refractory Acute Myeloid Leukemia, Cystic Fibrosis and certain cancers based upon its proprietary and patented drug delivery platform systems and drug development collaborations with major third party pharmaceutical companies around the world.

The Company’s drug delivery platform systems include PolyXen^® for creating next generation biologic drugs by extending the efficacy, safety and half-life of existing biologic drugs, OncoHist™ for the development of novel oncology drug therapies focused on orphan indications in humans and ImuXen^® for the development of vaccines that can simultaneously deliver multiple active pharmaceutical ingredients. The Company is also developing a broad pipeline of drug candidates for next generation biologics and novel oncology therapeutics in a number of orphan disease indications.

With the Company’s relocation to the United States from the United Kingdom, the Company, having historically been a research organization, is now focused on employing United States based drug development expertise leveraging off its 140 issued patents and 90 patent applications to develop a proprietary drug pipeline of next generation products.  All the rights over the Company’s patents and licenses are controlled in the United Kingdom.

Going Concern

At December 31, 2014 and 2013 the Company had approximately $78,000 and $1.7 million of working capital (current assets minus current liabilities), respectively. At December 31, 2014, the Company had approximately $2.5 million in cash and $2.7 million in total current liabilities, which includes $395,000 due to an affiliate of the Company, which the Company does not expect to repay prior to a registered equity offering by the Company, and balances of approximately $635,000 currently disputed by the Company. At December 31, 2013, the Company had cash and current liabilities of $4.8 million and $3.6 million, respectively. The Company’s working capital has been reduced in 2014 due to its net loss of $14.3 million that includes $12.3 million net cash used in operating activities comprised of approximately $4.1 million applied to external research and development and clinical program costs, approximately $3.0 million applied to salaries and wages, approximately $1.0 million in general and administrative consultants and contractors and approximately $3.7 million in legal and other professional fees, partially offset financing cash inflows from the sale of $10 million of equity to Baxter in 2014. The $4.1 million applied to external research and development and clinical program costs primarily related to the Company’s ErepoXen® and OncoHist™ drug candidates. The $3.7 million legal and other professional fees cash outflows in 2014 includes $1.9 million of costs that were incurred during 2013 but paid in 2014. Based on current cash on hand at the date of filing this Annual Report, the Company estimates it has sufficient funds to continue operations through the end of April 2015.

The Company has historically relied principally upon equity financing to fund its operations. Since 2005 the Company has raised approximately $47 million in equity financing, including $10 million from the sale of shares to Baxter in January 2014. From 2005 to date the Company also generated approximately $10 million from fee-for-service and license milestone revenues; however, the Company is not currently engaged in any fee-for service activities; consequently the Company expects that the majority of any new funding raised in the foreseeable future will arise from a combination of:

In relation to these possible sources of new capital/cash:

There can be no assurance that the Company will be successful in our efforts to raise additional working capital by way of a bridge financing, or on any future equity transaction or, even if the Company is successful, that the Company will be able to do so on commercially reasonable terms. Further, due to the uncertainties inherent in the clinical research process and unknown future market conditions, there can be no assurance that either the Company’s ErepoXen® candidate will lead to any future fees or that Baxter itself will be successful in initiating human clinical trials in the estimated timeframe or that the underlying product will meet the clinical milestones necessary to trigger any payment to the Company under the terms of its license agreement with them.

While the financial statements have been prepared on a going concern basis, if the Company does not successfully conclude the planned bridge financing during April 2015 and the planned follow on public offering by September 2015, there is no assurance that the Company would be able to continue planned operations and these conditions raise substantial doubt about its ability to continue as a going concern. Under such circumstances, the Company would have to further reduce the planned scale of, or possibly suspend, all of its pre-clinical development initiatives and clinical trials delivered by external service providers. In addition, the Company would have to reduce general and administrative expenses, and delay or cease the purchase of clinical research services until the Company is able to obtain additional financing. The recoverability and classification of the Company’s intangible assets and goodwill could also be adversely affected.

Recent Significant Transaction

On January 23, 2014, the Company consummated a reverse merger (the “Acquisition”) pursuant to a written plan of reorganization, in which the Company merged with Xenetic Biosciences (UK) Limited (formerly Xenetic Biosciences plc) (“Xenetic UK”), a company incorporated in England and Wales under the Companies Act of 1985, such that Xenetic UK became a wholly owned subsidiary of the Company. Upon completion of the Acquisition, the Company acquired all issued and outstanding shares of capital stock of Xenetic UK. As a result, 132,545,504 shares of the Company’s common stock were newly issued and, immediately following the Acquisition, there were 136,045,504 shares of common stock issued and outstanding. At that time, because former Xenetic UK shareholders owned approximately 97% of the combined company on a fully diluted basis and all members of the combined company’s executive management were from Xenetic UK, Xenetic UK was deemed to be the acquiring company for accounting purposes and the transaction was accounted for as a reverse acquisition in accordance with accounting principles generally accepted in the United States (“US GAAP”).

Prior to the Acquisition, the Company changed its name from General Sales and Leasing, Inc. to Xenetic Biosciences, Inc. As used in these consolidated financial statements, unless otherwise indicated, all references herein to “Xenetic”, the “Company”, “we” or “us” refer to Xenetic Biosciences, Inc. and its wholly owned subsidiaries.