ITEM 1 – BUSINESS

Trademarks

Xenetic Biosciences, Inc.’s brand and product names, including but not limited to PolyXen®, OncoHist™ and ImuXen® contained in this document are trademarks, registered trademarks or service marks of Xenetic Biosciences, Inc. and or its subsidiaries in the United States of America (“USA” or “US”) and certain other countries. This document contains references to trademarks and service marks of other companies that are the property of their respective owners.

2014 Developments

Acquisition

On January 23, 2014, the Company consummated an acquisition pursuant to a written plan of reorganization, in which we 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 (the “Acquisition”). Upon completion of the Acquisition, we acquired all issued and outstanding shares of capital stock of Xenetic UK. As a result, 132,545,504 shares of our 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.

Stock Purchase Agreement

On January 29, 2014 the Company entered into a stock purchase agreement (the “Purchase Agreement”) with Baxter Healthcare SA (“Baxter SA”), pursuant to which the Company sold to Baxter SA 10,695,187 shares of the Company’s common stock, par value $0.01 per share, (the “Shares”) for $10 million (the “Purchase Price”) at a price of $0.935 per share yielding a market cap of approximately $140 million.

The Shares were sold in a private placement and were not registered under the Securities Act, or the securities laws of any state, and were offered and sold in reliance on the exemption from registration afforded by Section 4(a)(2) and Regulation D (Rule 506) under the Securities Act and corresponding provisions of state securities laws, which exempt transactions by an issuer not involving any public offering. Baxter SA is an “Accredited Investor” as such term is defined in Regulation D promulgated under the Securities Act. For a further discussion of the Purchase Agreement please refer to “Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities – Recent Sales of Unregistered Securities” in this Annual Report filed on Form 10-K.

Overview of Business

The Company, carrying on business in a single operating segment, is a clinical stage biopharmaceutical company that is focused on the research and development of certain pharmaceutical products for use in humans that incorporate the use of its patented and proprietary platform technologies that we believe will enable the creation of novel and next generation drug therapies primarily for orphan indications.

We hold over 147 US and international patents issued, more than 90 patents pending and other proprietary rights to three distinct platform technologies that are designed to treat a variety of indications with potential use advantages over competing products.

The Company’s three distinct technologies are summarized below:

All of the Company’s drug candidates are in the development stage and none has yet received regulatory approval for marketing in the U.S. by the U.S. Food and Drug Administration (the “FDA”) or by any applicable agencies in other countries.

First formed in 1997 as a spin out from University College London School of Pharmacy, our laboratories were based in London, England, until the end of 2013. In January 2014, the Company completed the relocation of its research base from England to the U.S. The Company made its first move towards the U.S. when, in early 2013, it committed to set up a Drug Development Centre of Excellence in the Boston area, a decision that resulted in the physical relocation of its scientific level of effort to its newly opened laboratory in Lexington, Massachusetts. The next pivotal stage of corporate strategy was also concluded in January 2014 when the Company completed a listing in the US on the OTC markets that resulted in its present operations as a clinical stage biopharmaceutical business. The Company believes that it will be better able to attract and retain qualified scientific researchers and other staff in its new Lexington location due to the Boston area having a wealth of talent in orphan drug development and market launch expertise.

Our Business Strategy

The Company intends to advance the clinical development of its drug candidates through a combination of conducting its own in-house research and through the use of the outside services of contract manufacturing and research organizations. The OncoHist™ drug candidate for AML has been granted orphan drug designation by the FDA and European Medicines Agency (“EMA”). The Company expects to seek further orphan drug designations relating to this novel potential cancer therapeutic over the next twelve months, working in concert with the Dana Farber Cancer Institute. The advancement of its drug candidates is dependent, in part, on several important co-development collaborations and strategic arrangements. Together with its collaborative partners, Baxter Healthcare SA and Baxter Healthcare Corporation (together referred to as “Baxter”), a shareholder in the Company, SynBio LLC (“SynBio”), a Russian pharmaceutical company and significant shareholder in the Company, OJSC (“Open Joint Stock Company”) Pharmsynthez (“Pharmsynthez”), a Russian pharmaceutical company and related party to SynBio and Serum Institute of India Limited (“Serum Institute”), one of India’s largest biotech companies and a shareholder in the Company, the Company is focused on developing its pipeline of next generation bio-therapeutics and novel orphan drugs in oncology based on the Company’s PolyXen ^® , OncoHist™ and ImuXen ^® technology platforms.

As part of the Company’s strategy, it out-licensed the rights to twelve drug candidates for research, development and commercialization within certain defined territories including the Russian Federation and Commonwealth of Independent States (“CIS”), with respect to SynBio and Pharmsynthez, and India, with respect to Serum Institute. SynBio, Pharmsynthez and Serum Institute are responsible for funding the research, development and commercialization of each drug candidate in those territories at their own expense. The out-license agreements contain provisions that allow the Company access to all underlying research materials and to receive royalties related to any of these drug candidates that may be approved and marketed in those territories. The Company utilizes its access to that data to determine which of those twelve drug candidates it believes are worthwhile to pursue for research, development and commercialization in the US and elsewhere.

The Company’s strategy is to develop its orphan drug candidates through to regulatory approval. The Company then plans to commercialize those orphan drug candidates. Non-orphan drug candidates vested in its pipeline via its collaborations include ErepoXen ^® ; polysialylated oxyntomodulin, for diabetes and obesity; and a Multiple Sclerosis vaccine candidate, MyeloXen ^™ . The Company intends to develop these candidates to a stage that will enable it to seek profitable out-licensing arrangements with major pharmaceutical companies for further development and eventual commercialization, in exchange for milestone payments and royalties from product sales. Its collaborative out-licensing agreements relating to the platforms are an integral part of its early-stage strategy.

Even with regard to its strategy of current and planned future co-development collaborations and out-licensing, the Company must raise additional capital in order to develop its drug candidates to the point of commercialization. The Company’s management will regularly make evaluations in concert with the Company’s Board of Directors as to when to seek additional capital through various financing structures for the purpose of pursuing its business strategy. Although the Company is optimistic, there can be no assurance that it will be successful in raising additional working capital in the future. If not successful, the Company’s business could be adversely affected.

Reliance on Principal Customer

Since August 2005, Baxter has been a principal customer of the Company, accounting for the substantial portion of the Company’s revenue, through up-front payments and fee for services. Please refer to the agreement with Baxter under the caption “Significant Co-Development Collaborations and Strategic Arrangements” below for further information regarding the importance of the Company’s relationship with Baxter.

Our Technologies

PolyXen®

PolyXen ^® is a platform technology based on the concept of polysialylation. PSA is a polymer chain composed of sialic acids linked together. Sialic acid is found on the external membrane of a number of cell types in the body. In addition, it is a natural component expressed on the external membrane on a number of bacterial types. The chain of sialic acid molecules can be anywhere from 4 to over 200 individual sialic acid molecules in length. The Company uses the linear form of PSA called colominic acid. It is a natural, hydrophilic polymer isolated from a bacterial strain of E. coli K1. This natural glycan is negatively charged, non-toxic and is biodegradable. The PSA chain is extensively purified from large-scale bacterial cultures under Current Good Manufacturing Practices conditions, modified to specified sizes and then attached to defined sites on the therapeutic. Both the site of attachment and the length of the PSA chain can enhance the properties of the therapeutic.

The major effect of PSA addition to a therapeutic is to change the apparent hydrodynamic radius of the molecule. This physical alteration then changes a number of the biological characteristics of the therapeutic. The most noticeable, and perhaps the most relevant, is an extension of the lifetime of the therapeutic in blood circulation. This is due to the increase in the size of the drug which results in a decrease in the clearance rate of the molecule in the kidney by glomerular filtration. In addition, studies have shown changes in other biological characteristics such as protease sensitivity and temperature sensitivity. An added benefit is that the conjugated molecules are less viscous in solution than comparable other technologies, providing the potential for easier injections and fewer injection site reactions. Furthermore, we believe that adding PSA to an existing marketed drug may allow for patent extension, thereby potentially creating a patent-protected next generation candidate.

The current standard for certain biologic delivery agents is Polyethylene Glycol (“PEG”) which is attached similarly to therapeutics. The mode of action between PSA and PEG is similar, increasing the apparent size of the molecule and thereby increasing the circulating time of the drug in the blood. PEGylation is a proven technology that can offer advantages in terms of pharmacokinetics and pharmacodynamics for therapeutics over non-modified, first generation molecules. There are a number of PEG-modified molecules on the market, in clinical trials and under development. However, PEGylation is considered to have limitations, such as non-biodegradability and, at high doses, may thereby result in intra-cellular accumulation, potentially leading to vacuole formation in the cells. In contrast, because PSA is a chain of sialic acids, which are natural constituents of the human body, it is biodegradable into individual sialic acid units. In addition, PEG in many cases has been shown to be immunogenic when coupled to proteins and can activate the complement system. PEG has also demonstrated limitations on a few select molecules. PSA has to date been shown to be non-immunogenic. We believe PSA may provide the advantages of PEG without many of its disadvantages, offering a potential advance over PEG molecules.

OncoHist™

OncoHist™ is based on research covered under our patent portfolio related to novel functions of histones. Histone H1 has strong anti-proliferative properties against cancer cells of different histological origin. This has been demonstrated extensively for hematologic malignancies, such as leukemias, lymphomas, and myelomas, and also for tumors from other tissues. Susceptibility of cells to the cytotoxic effect of histones is determined by the ability of histone H1 to selectively destabilize the tumor cell membrane, which results in cell death.

A novel form of the molecule was developed by the Company and a patent filed for the protection of the new chemical entity, N-bis-met-histone 1.3 (OncoHist™) in use against cancer, providing patent protection at least until 2027. The activity of the new molecule was tested on 58 tumor cell lines derived from various tissues. Hematopoietic tumor cell lines were found to be among the most sensitive cell lines. The mechanism of action appears to be novel, involving the binding of OncoHist™ to the cell membrane, which is completely different than that of other therapeutic agents on the market for hematopoietic cancers. Confirmatory work on this mode of action with more detailed analyses is being completed by Dana-Farber Cancer Institute (“Dana-Farber”). Hematopoietic tumor lines resistant to current chemotherapeutic agents have shown sensitivity to OncoHist™.

OncoHist™’s potency and potential to inhibit growth of cells from various histological origins were confirmed through in-vitro testing against the US National Cancer Institute 60 (“NCI-60”). OncoHist™ was awarded orphan drug designation (Orphan Medicinal Product Designation (“OMPD”)) for treatment of AML by the European Commission in December 2007 and by the FDA in October 2008. OncoHist™ was awarded an additional OMPD status for Acute Lymphocytic Leukemia (“ALL”) by the EMA.

A Phase I-II trial to evaluate the safety and tolerability of OncoHist™ was conducted in 2008 at Saarland University, in Germany with 22 AML patients. Tolerability and safety results were favorable with indications of the drug being immunologically safe. Clinical effects were noted in seven patients with three partial remissions. Most notably, two patients who had received two treatment cycles each experienced stabilization of their disease for 7 and 17 months.

A clinical safety trial with a planned 120 AML patients was in progress and being performed by SynBio in clinical centers in the Russian Federation. The aim of this trial was to examine the potential benefits of OncoHist™ in combination with standard HAM chemotherapy: high dose cytarabine with mitoxantrone. During execution of the SynBio AML trial the Russian Ministry of Health issued changes in their standard of care for treating AML patients. High dose cytarabine chemotherapy was determined to offer no benefits in terms of efficacy as compared to lower dose therapy and was discontinued. The study was stopped and the study report is now in progress.

Based upon our analysis of data from the preliminary AML trial performed by SynBio in the Russian Federation, and data developed in Germany at Saarland University, the Company has undertaken pre-clinical development and IND-enabling animal studies in the US in support of a planned phase I/II(a) IND filing with the FDA in the first half of 2016. Xenetic has had a pre-IND meeting with the FDA to discuss the OncoHist AML program. The FDA comments will be addressed by time of IND submission. A Phase I/II Non-Hodgkin’s Lymphoma (“NHL”) safety trial has been completed in Russia. As an integral part of the Company’s strategy, we intend to await later stage clinical data on NHL to determine whether to progress this candidate into US FDA trials.

Other Technologies

ImuXen ^®

ImuXen ^® is a patented platform technology based on the concept of simultaneous delivery of multiple Active Pharmaceutical Ingredients (“APIs”) as antigens within the same liposome. The liposomes are composed of lipids that encapsulate an aqueous core. The APIs can be trapped in the core, be associated with the lipids, or both. Proteins, peptides, nucleic acids, polysaccharides and live or inactivated infectious agents can all be used as an API with the same liposome. Both the size and the lipid composition can be controlled which affects the biological properties of the liposome. Manufacturing involves the passive entrapment of the vaccine APIs by freeze drying commercially available liposomes with the antigens of interest.

Having multiple APIs formulated with the same liposome allows simultaneous delivery of the antigens to the same antigen-presenting cell. This may allow a more efficient immune response to all the agents presented. In addition, it is possible that multiple vaccines can be delivered with a single injection. Relevant pre-clinical studies have indicated a reduction in the dose required, a reduction in the number of doses required and a faster immune response time. This efficient immune response also may allow for use of antigens that traditionally give a poor antibody response.

This technology is not currently the focus of clinical development for the Company. However through a license agreement with Pharmsynthez, there is a novel Multiple Sclerosis vaccine that is in clinical development in Russia.

A Phase I/II clinical trial to treat Relapsing Remitting Multiple Sclerosis and Secondary Progressive Multiple Sclerosis is in progress by Synbio in the Russian Federation. Peptides corresponding to antigenic sections of basic myelin protein were encapsulated within liposomes to be used as the therapeutic agent (MyeloXen™). Administration of MyeloXen™ to patients has occurred and follow-up monitoring is in progress. As an integral part of the Company’s strategy, we await later stage clinical data on MyeloXen™ to determine whether to progress this candidate into FDA trials and eventual out-licensing.

Significant Co-Development Collaborations and Strategic Arrangements:

Baxter Healthcare SA and Baxter Healthcare Corporation

In August 2005, the Company entered into an exclusive research, development, license and supply agreement with Baxter Healthcare SA (“Baxter SA”) and Baxter Healthcare Corporation (together referred to as “Baxter”) to develop products with an extended half-life of certain proteins and molecules using the Company’s patent protected PolyXen ^® technology whereby polysialic acid (“PSA” – a chain of polysialic acids) is conjugated with Baxter’s proprietary molecule(s) designed to create a longer-acting haemophilia drug, a polysialylated recombinant Factor VIII (“rFVIII”) protein than what is currently available on the market. Baxter also has rights that extend to treatments of the failure of blood to coagulate. Baxter expects to commence human clinical trials on this novel drug candidate during the first half of 2016.

This agreement has been amended several times since 2005, most recently in January 2014. The January 2014 amendment provides for increased future development, regulatory, sales and deadline extension receipts, restructured target deadlines and royalty receipts on potential net sales. The Company is entitled to up to $100 million in potential development, regulatory, sales and deadline extension receipts, which are contingent on the performance of Baxter achieving certain milestones. The Company is also entitled to royalties on potential net sales. In connection with this amendment, Baxter SA also made a $10 million equity investment at a price of $0.935 per share, which is a post money market cap of approximately $140 million in the Company in exchange for 10,695,187 shares of the Company’s common stock during January 2014.

Through December 31, 2014, the Company and Baxter continued to engage in research and development activities. No amounts were recognized as revenue during the year ended December 31, 2014. $1 million was received and recognized as revenue during the year ended December 31, 2013 related to this collaboration as the Company’s continued performance or future obligations were considered inconsequential or perfunctory. Since August 2005, the Company has received approximately $19 million from Baxter that includes milestone receipts, fees for services and a $10 million purchase of common stock of the Company in January 2014. The Company received a non-refundable $2 million payment from Baxter in 2010 and granted Baxter warrants to purchase approximately 4.6 million new shares of common stock of the Company in connection with the 2010 amendment to the Baxter Agreement.

Baxter is in the pre-clinical phase of its development effort in connection with this collaboration. Baxter has agreed to meet a number of clinical milestones with strict timelines under the 2014 amendment relating to: Clinical Trial Authorization submission, Final Clinical Study Report and Biologics License Application (“BLA”) submission. There are very limited provisions to further modify the Baxter Agreement. There can be no assurance if or when Baxter will actually achieve any of the due diligence milestones.

Baxter is a related party of the Company, with a share ownership of approximately 8.7% of the total issued common stock as of December 31, 2014.

SynBio LLC

In August 2011 the Company entered into a stock subscription and collaborative development agreement with SynBio (the “Co-Development Agreement”) pursuant to which the Company granted SynBio an exclusive license to develop, market and commercialize certain drug candidates utilizing molecules based on the Company’s PolyXen® and OncoHist™ technologies in the Russian market and the Commonwealth of Independent States (the “CIS”) (including Armenia, Azerbaijan, Belarus, Kazakhstan, Kyrgyzstan, Republic of Moldova, Tajikistan, Turkmenistan and Uzbekistan), collectively the “SynBio Market”. In exchange for the Company granting to SynBio those certain license rights, SynBio granted an exclusive license to the Company to use any SynBio pre-clinical and clinical data generated by SynBio, at its own expense, in connection with those development efforts and to engage in the development and commercialization of drug candidates that may arise from the collaboration in any territory outside of Russia and the CIS based upon the Co-Development Agreement.

The Company hopes and expects to mitigate certain risks of drug development by reviewing human clinical data arising out of this collaboration with SynBio before the Company considers taking the particular drug candidate into FDA and EMA trials. 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 EMA/FDA clinical trials by the Company. The primary goal of the Co-Development Agreement is to research and develop drug candidates for planned commercialization using SynBio and the Company’s 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 the Company, where the Company has 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 are responsible for funding and conducting their own research and clinical development activities in Russia as the Company is wholly responsible for funding and conducting their own research and clinical development activities in the US, Europe and elsewhere ex-Russia and the ex-CIS regions. 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 and royalties payable to the Company based on SynBio sales. For the years ended December 31, 2014 and 2013, the Company has recognized no supply service revenues in connection with the Co-Development Agreement.

Concurrent with entering into the Co-Development Agreement, the Company entered into a stock subscription agreement with SynBio pursuant to which the Company sold SynBio approximately 35.5 million shares of newly issued common stock for cash of approximately $18.6 million.

In furtherance of our co-development clinical objectives, on December 31, 2014 the Company granted to SynBio certain warrants that contain vesting triggers based on the achievement by SynBio of certain clinical development objectives within specific timeframes. This grant consisted of a warrant to purchase 6,745,000 new shares of common stock at an exercise price of $0.77 per share (“SynBio 2014 Warrant”). Simultaneously with the SynBio 2014 Warrant grant, the Company granted additional warrants to purchase 320,000 aggregate new shares of common stock to SynBio and Pharmsynthez non-director designees under the same terms and conditions of the SynBio 2014 Warrant. Pharmsynthez is a related party of SynBio and a collaboration partner of the Company. As part of this transaction, the warrant granted to SynBio in 2011 was canceled and of no further force and effect. The SynBio 2014 Warrant expires on December 30, 2019 and no warrants were exercised during the year ended December 31, 2014.

Pursuant to the Relationship Deed signed concurrent with the 2011 Co-Development Agreement and subscription, the Company granted SynBio (as Controlling Shareholder) the right to appoint two directors to the extent their shareholding is greater than 40% in the Company. The Relationship Deed of 2011 was replaced in January 2014 with a Director Appointment Agreement containing that same provision. Further undertakings therein state that, as long as the Controlling Shareholder holds more than 25% of the Company’s common stock, all transactions and relationships between it and the Company will, (a) be at arm’s length and on a normal commercial basis; (b) it will not seek to exercise any day-to-day operational or managerial control over the business of the Company, nor, (c) influence any director or non-executive director in any way in regard to the conduct of the Company’s business. The agreement contains further provisions relating, inter alia , to: nominee board appointments, conflicts of interest, acting in good faith and terms of confidentiality. SynBio is an affiliate of the Company, with a share ownership of approximately 41.6% of the total issued common stock as of December 31, 2014.

Serum Institute of India Limited

In the period from 2004 through 2011, the Company entered into and amended certain license and supply agreements with Serum Institute. The original license agreement with Serum Institute was a collaborative Development and Manufacturing Arrangement (“DMA”) to develop agreed upon potential commercial product candidates using the Company’s PolyXen ^® technology. Serum Institute then endeavored to further develop the potential commercial product candidates and eventually initiate pre-clinical and clinical trials at their own cost. The agreement was amended in 2011, resulting in the surrender of development rights for 14 potential commercial product candidates in 2012, which were vested to Serum Institute under the terms of the previous agreements, back to the Company.

Following the 2011 amendment, Serum Institute retained an exclusive license to use the Company’s PolyXen ^® technology to research and develop one potential commercial product, Polysialylated Erythropoietin (“PSA-EPO”). Serum Institute will be responsible for conducting all pre-clinical and clinical trials required to achieve regulatory approvals within territories outside of certain predetermined territories assigned to the Company, which include the US, the European Economic Area, and Japan, among other territories, at Serum Institute’s own expense. The royalty payment schedule based on net revenues on the future commercial sales of PSA-EPO under the DMA was also modified as a result of the 2011 amendment. Royalty payments are payable by Serum Institute to the Company for net sales to certain customers in the Serum Institute sales territory. Royalty payments are payable by the Company to Serum Institute for net sales received by the Company over the term of the license. No royalty revenue or expense was recognized by the Company related to the Serum Institute arrangement during the years ended December 31, 2014 and 2013. There are no milestone or other research-related payments due under the DMA. Through December 31, 2014, the Company and Serum Institute continued to engage in research and development activities with no resultant commercial products.

In furtherance of our co-development clinical objectives, on December 31, 2014 the Company granted to Serum Institute certain warrants that contain vesting triggers based on the achievement by Serum Institute of certain clinical development objectives within specific timeframes. This grant consisted of a warrant to purchase 3,200,000 new shares of common stock at an exercise price of $0.77 per share (“Serum 2014 Warrant”). Simultaneously with the Serum 2014 Warrant grant, the Company granted additional warrants to purchase 160,000 aggregate new shares of 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 the year ended December 31, 2014.

In addition, the DMA allows for Serum Institute to nominate a non-executive director to the Board of Directors of the Company as long as Serum Institute or its subsidiaries holds at least 6% of the Company’s common stock. Serum Institute is a related party of the Company, with a share ownership of approximately 9.2% of the total issued common stock as of December 31, 2014.

OJSC Pharmsynthez

In November 2011, the Company entered into a collaborative research and development license agreement with OJSC Pharmsynthez (the “Pharmsynthez Arrangement”) pursuant to which the Company granted an exclusive license to Pharmsynthez to develop, commercialize and market six product candidates based on the Company’s PolyXen® and ImuXen® technology anywhere within Russia and the CIS. In exchange, Pharmsynthez granted an exclusive license to the Company to use any pre-clinical 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 the Company’s own expense.

In accordance with the terms of the Pharmsynthez Arrangement, the Company licensed certain PolyXen® and ImuXen® technology rights for use in Russia and the CIS as well as certain clinical and research data developed by the Company on the six product candidates to Pharmsynthez.

The Company hopes and expects to mitigate certain risks of drug development by reviewing human clinical data arising out of this collaboration with Pharmsynthez before the Company takes the particular drug candidate into FDA and EMA trials, a strategy designed to mitigate drug development risks. Under the agreement, 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 the Company outside of Russia. The license agreement will operate alongside the current arrangements which the Company has entered into with SynBio, discussed above.

A joint steering committee where the Company has the right to appoint the Chair who has the casting vote was established to facilitate the communication of scientific data and to assist generally with each party’s research decisions and to monitor research and development progress under the Pharmsynthez Arrangement.

Pharmsynthez is wholly responsible for funding and conducting their own research and clinical development activities in Russia. The Company is wholly responsible for funding and conducting its own research and clinical development activities in the US, 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 Co-Development Agreement other than royalties.

Pharmsynthez is a related party of SynBio, which is an affiliate of the Company. In addition, one of the Company’s directors is also a director of SynBio and Pharmsynthez.

Most advanced product candidate in the Company pipeline: ErepoXen®

The Company’s drug candidate that is currently the most advanced in its clinical pipeline is ErepoXen® (polysialylated erythropoietin (“PSA-EPO”)) which uses the Company’s PolyXen® technology for the treatment of anemia in Chronic Kidney Disease (“CKD”) patients. ErepoXen® is in a Company-sponsored Phase II escalating repeat subcutaneous dose-ranging study in Australia and New Zealand for pre-dialysis CKD patients. This trial is designed to be compliant with the International Conference on Harmonization of Technical Requirements for Registration of Pharmaceuticals for Human Use (“ICH”). ErepoXen® has also been a co-development project with our long-established strategic partner, Serum Institute, and is in Phase II(a) clinical trials in India for intravenous administration to patients on dialysis. In addition, ErepoXen® is also in a 150 patient Phase II(b)/III clinical trial in Russia to directly compare ErepoXen® to Aranesp. The Company expects SynBio to enter the commercialization and marketing stage of ErepoXen® in the Russian and CIS markets, as the first market launch for a PSA candidate.

The Company’s commercialization strategy for ErepoXen®, being a potentially mainstream drug addressing a substantial global market, includes seeking an out-license arrangement for the continuing development of ErepoXen® as either a Phase II(b) or Phase III candidate with a well-capitalized license partner more experienced at taking drug candidates through the latter stages of human clinical trials and better able to execute a global market launch. If successful, this strategy could:

The ErepoXen® strategy, when implemented, should have the effect of decreasing demands on the Company’s own financial and working capital resources, allowing those resources to be applied towards the in-house development and marketing of new orphan and rare disease candidates where the Company is better able to maintain financial and clinical control throughout the process from pre-clinical development, through IND filing, human clinical trials, and potentially market approval and product launch.

In addition, ErepoXen® has also received regulatory approval to enter Phase II(b)/III human clinical trials in Russia. The Company expects SynBio (one of its Russian co-development partners) to enter the commercialization and marketing stage of ErepoXen® in the Russian and CIS markets as the first market launch for a PSA candidate.

Second most advanced product candidate in the Company pipeline: OncoHist™

The Company’s second most advanced drug candidate is OncoHist™ AML. Continuing development of OncoHist™ is the top 2015 priority for the Company in the US. The Company, utilizing clinical material supplied by SynBio, commenced pre-clinical toxicity studies during 2014 that are expected to be completed in the first half of 2015. In addition, the Company is in the process of establishing a second source supplier of OncoHist™ cGMP material suitable for humans in Phase I/II(a) clinical trials. We intend to commence clinical trials in the US upon completion of IND enabling studies, establishment of a source of cGMP material suitable for those trials and upon raising additional working capital to support those trials. Based on current estimates, we do not expect to commence clinical trials before the end of 2015. Certain OncoHist™ data, generated by SynBio, that is available to us for analysis has advanced our understanding of this drug candidate at a reduced cost to the Company when compared to the cost of the Company generating the same data using its own capital.

Other product candidates in the Company pipeline

The Company believes certain additional orphan and non-orphan oncology drug candidates may be developed utilizing certain of our existing and future pre-clinical and clinical data. Specifically, we expect to be able to utilize the results from substantially all of our pre-clinical toxicity and certain other pre-clinical data generated in the development of OncoHist™ AML for several other blood cancer indications focused on orphan indications.

We also believe that the platform nature of our technologies should allow us to pursue additional drug candidates by leveraging certain existing and future scientific data to be developed under our PolyXen® and ImuXen® technology programs.

Xenetic Corporate Programs

PSA-EPO-06: Xenetic ErepoXen® Clinical Trial

This is designed to be an ICH compliant Phase II open label clinical, sequential multiple dose finding study for subcutaneously administered PSA-EPO in CKD patients not on dialysis and not receiving erythropoiesis stimulating agents. It is being conducted in Australia and New Zealand. Patients with hemoglobin levels between 8 and 10 grams per deciliter (“g/dL”) were given the drug candidate once every two weeks. If the hemoglobin level increases to between 10 and 12 g/dL, the patient is moved to once every four weeks administration. The patient’s pharmacodynamic, pharmacokinetic and immunogenic parameters are followed for the duration of the trial. Dose levels in an escalating form will then be administered. Safety and other parameters will be examined at the end of each dosing cohort before moving onto the next dose level. The first two cohorts of patients have been completed. There were no Serious Adverse Events (“SAEs”) attributable to PSA-EPO reported thus far. The third cohort of patients at a higher dose level is in progress. The endpoint is to determine a dose of PSA-EPO that is safe and will move the patient’s hemoglobin level into the 10 to 12 g/dL range.

The costs for this trial are being borne by the Company. Costs will be dependent on how many cohorts will be treated. The final results from the second cohort are expected to be reported during the first half of 2015. Clinical material was manufactured for the Company by Serum Institute. The trial is being run by Novotech Pty Limited (“Novotech”) of Australia.

ONC-AML-01: Xenetic OncoHist™ Clinical Trial

The Company expects to submit an IND filing for Phase I/II(a) clinical trials for AML to the FDA and commence clinical trials, but not before the end of 2015. We expect this to be an open label increasing dose ranging study to assess the safety, tolerability and efficacy of OncoHist™ for adult patients with refractory or relapsed AML. This trial will be conducted in the US. Data from the previously completed work by Saarland University’s Phase I clinical trial and the SynBio clinical trials will be used to aid in the design of the clinical protocol. We expect the Phase I/II(a) clinical trial material to be produced by a cGMP compliant manufacturing facility. Selection of the Clinical Research Organization (“CRO”) to run the trial is in progress.

The costs for the clinical trial are being borne by the Company. The Company will need to raise additional capital prior to commencing Phase I/II(a) clinical trials. The OncoHist™ technology was acquired as part of the Company’s acquisition of SymbioTec GmbH (“SymbioTec”) in January 2012 and was valued at $9.6 million as of the acquisition date.

Xenetic Collaborative Partner Programs

Under the terms of the relevant license agreements with the various parties, the Company provides neither capital nor human resources to the clinical developments of the various product candidates thus licensed for development by our collaborative partners whose sole responsibility is to meet the timelines associated with each program.   We use the data generated from these jurisdictions as a means of understanding the clinical validity-human response of the drug before pursuing FDA and EMA trials, this having been a long-established development strategy for the Company as a means of maximizing the development potential of the Company’s product pipeline while minimizing the capital exposure associated with such objective.

Notwithstanding that there has been a history of delays in the clinical programs being pursued by our partners in both Russia and India, based on the data that has been available to us, we have accomplished this objective with both OncoHist™ and ErepoXen®, the two product candidates which are currently the primary focus of our efforts and upon which we are now devoting our capital and human resources.  Accordingly, any program delays on these candidates outside the purview of the FDA or EMA will not have a negative impact on the Company pipeline.

PSA-FVIII: Baxter Factor VIII Pre-Clinical Program

PSA-recombinant Factor VIII has been developed as a long acting therapeutic to treat hemophilia A. Baxter is running this program, which is in the IND development phase. Baxter has agreed to meet strict due diligence time milestones based on: Clinical Trial Authorization submission in respect of Phase I/II clinical trials, Final Clinical Study Report Phase I/II and BLA submission all by fixed dates per the contract. The total cost of this program is being borne by Baxter. There can be no assurance if or when Baxter will actually achieve any of these due diligence milestones. We expect Baxter will file an IND for clinical trials in the US or Europe during the first half of 2016. The stated goal of Baxter is to have a significantly longer-acting FVIII to remain the world’s leader in Hemophilia therapies.

PMO-CF-01: Pharmsynthez PulmoXen™ Clinical Trial

This is a Phase I(a) open label two dose safety study for inhaled PSA-DNase 1 in healthy volunteers and has been completed and reported on April 7, 2014. The study is being conducted in Russia. No adverse events were reported so far and lung function was reported to be normal. A clinical trial with CF patients is in start-up stage (regulatory applications). The total cost of the trial is being borne by Pharmsynthez. The trial is being run by a partner-sponsored CRO in Russia, Belarus and Ukraine.

If and when satisfactory human clinical data comes out of this collaboration, and provided that the Company is sufficiently confident that the drug candidate is well-tolerated and effective for this indication, the Company plans to pursue its own development program for this candidate. However, the Company would have to raise additional capital to pursue its own development of this drug candidate.

IMU-MS-01: Pharmsynthez MyeloXen™ Clinical Trial (Multiple Sclerosis)

This was a Phase I open label clinical sequential dose finding study for subcutaneously administered MyeloXen™ (liposomes containing peptides for basic myelin protein) in healthy volunteers and patients. This was a proof-of-concept study to show the influence of MyeloXen™ on catalytic anti-MBP levels and activities. The study was conducted in Russia and is complete. The study report is under final review to be submitted to the Russian MoH. The total cost for the clinical trial was borne by Pharmsynthez. The clinical material was manufactured by Pharmsynthez. The clinical trial was run by a partner-sponsored CRO in Russia.

If and when satisfactory clinical patient data comes out of this collaboration that provides the Company a level of comfort that the drug candidate is well-tolerated and effective, the Company plans to pursue its own development program for this candidate. However, the Company would have to raise additional capital to pursue its own development of this drug candidate.

PSA-EPO-03: Serum Institute ErepoXen® Clinical Trial

This is a Phase II(a) open label clinical, sequential single dose finding study for intravenously administered PSA-EPO for CKD patients who are on dialysis. This trial follows the successful completion of two subcutaneous PSA-EPO clinical trials in India. The first was a Phase I single dose range finding study for subcutaneously administered PSA-EPO in healthy volunteers. The second was a Phase II single dose range finding study for subcutaneously administered PSA-EPO in CKD patients not on dialysis. All trials are being conducted in India. The first two cohorts of patients have been completed. There were no Serious Adverse Events (“SAEs”) attributable to PSA-EPO reported thus far. The third cohort of patients at a higher dose level is in progress. The endpoint of the trial is to determine the maximum tolerated single dose of PSA-EPO. The total cost of the clinical trial is being borne by Serum Institute and the clinical material was manufactured by Serum Institute. The clinical trial is being run by a partner-sponsored CRO in India.

PSA-EPO-05: SynBio ErepoXen® (Epolong) Clinical Trial

This is a Phase II(b)/III open label clinical, randomized, comparative, multiple dose study for subcutaneously administered ErepoXen® in CKD patients not on dialysis and not receiving erythropoiesis stimulating agents. Patients are compared to a control arm with Aranesp® (darbepoetin alfa). The study is being conducted in the Russian Federation and is currently in progress. In 2014, a protocol amendment was implemented and the starting dose was increased based on interim data and the data monitoring board decision. The new protocol amendment is ready to be submitted to the Russian Ministry of Health (the “Russian MoH”). The total cost for this clinical trial is being borne by SynBio. The clinical material was manufactured by Serum Institute. The clinical trial is being run by a partner-sponsored CRO in Russia.

ONC-AML-02: SynBio Arahist-09 Clinical Trial

This was a Phase II open label two dose level, randomized comparative study to assess the safety, tolerability and efficacy of OncoHist™ in combination with HAM (high dose cytarabine chemotherapy) in adult patients with refractory or early relapsed AML. This study was conducted in Russia. Patients received one cycle of HAM regimen (one week) and one cycle of OncoHist™ regimen (three times per week for three weeks). The HAM regimen was based on the then current standard of care in Russia. This standard of care was changed by the Russian Ministry of Health. The study has be stopped and the study report is currently in progress. The total cost of the trial was borne by SynBio. The clinical material for this OncoHist™ trial was manufactured at the Shemyakin Institute in Moscow for SynBio. The trial was run by a partner-sponsored CRO in Russia.

ONC-NHL-01: SynBio Anahoret Clinical Trial

This was a Phase II open label increasing dose ranging study to assess the safety, tolerability and efficacy of OncoHist™ as a single agent in treating NHL. This study was conducted in Russia. The trial is complete and the report submitted to the Russian MoH. It was shown that OncoHist™ was well tolerated in this trial. The total cost of the trial was borne by SynBio. The clinical OncoHist™ drug product was manufactured at the Shemyakin Institute in Moscow for SynBio. The trial was run by a partner-sponsored CRO in Russia.

If and when satisfactory clinical patient data comes out of this collaboration that provides the Company a level of comfort that the drug candidate is well-tolerated and effective, the Company plans pursue its own development program for this candidate. However, the Company would have to raise additional capital to pursue its own development of this drug candidate.

Patents and Proprietary Rights

The Company has several drug product candidates under development, each protected by patent and pending patent applications in the United States and the rest of the world.

Xenetic has received patent protection for several therapeutics that have been linked to a polysialic acid.  These include PSA-erythropoietin, PSA-insulin and PSA-insulin like protein, PSA-Factor VIII, PSA-DNAse I and PSA-granulocyte colony stimulating factor.  Further Xenetic’s portfolio includes patents cover methods to prepare proteins that are linked to a polysialic acid.  These patents include coverage for linking a PSA to a protein in a high pH solution and through a process for producing an aldehyde derivative of a sialic acid through the opening and oxidation of a sialic acid unit.  The linkage can be at the N-terminus.

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

Xenetic also has patents that cover its OncoHist™ product.  These include recently allowed patents covering the OncoHist™ composition and claims for the use of OncoHist™ to treat cancer, including leukemia. The OncoHist™ portfolio also includes patents that cover the use of a histone protein as an antibiotic and to threat thrombocytopenia and further as an antimicrobial component of a personal care product.

The Company’s portfolio also includes in-licensed patents from Ploughshare Innovations, a licensing arm of the United Kingdom Department of Defense, in connection with MyeloXen™ technology. The Company has no current clinical development efforts ongoing at this time that fall within the bounds of the Ploughshare Innovations in-license. To the extent that such efforts are ongoing, such efforts are being undertaken by a collaborative partner, though the rights under the in-license (e.g. for the patents) lie with the Company and are subject to a sublicense provided to the collaborative partner. This includes a method used to entrap a water soluble drug within a liposome when the drug is mixed with a mono or disaccharide.  This patent portfolio fits well with the Company’s liposome patents and pending applications that include those that cover using liposomes with an entrapped complex of a DNA operatively encoding antigen to induce an immune response in a human or animal and methods to form liposomes.

The Company currently owns 147 US and international patents and over 90 pending patent applications 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® technology platform covering polysialylation and advanced polymer conjugate technologies, as well as proprietary product candidates including ErepoXen® and PulmoXen™. Additionally, our patents and patent applications cover polymer architecture, drug conjugates, formulations, methods of manufacturing polymers and polymer conjugates and methods of administering polymer conjugates. In addition, our patent portfolio contains patents and patent applications that encompass our OncoHist™ technology platform including use of histones for the treatment of different cancers. The OncoHist™ patent portfolio, acquired as part of our acquisition of SymbioTec GmbH in January 2012, includes OncoHist™, a bis-Met histone. Our patent strategy is to file patent applications on innovations and improvements to cover a significant majority of the major pharmaceutical markets in the world. Generally, patents have a term of 20 years from the earliest priority date (assuming all maintenance fees are paid). In some instances, patent terms can be increased or decreased, depending on the laws and regulations of the country or jurisdiction that issued the patent.

We also rely on trade secret protection for our confidential and proprietary information. No assurance can be given that we can meaningfully protect our trade secrets. Others may independently develop substantially equivalent confidential and proprietary information or otherwise gain access to, or disclose, our trade secrets. Thus, while we rely on trade secret protection and other unpatented proprietary rights for important proprietary technologies, any loss of such rights could harm our business, results of operations and financial condition.

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 in 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 a products encompassed by our patent(s). We may have to participate in interference proceedings declared by the U.S. Patent and Trademark Office, 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.

US 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 US 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

The Company does not maintain the capability to manufacture its own material necessary to support its drug candidate development programs nor does it intend to acquire such capability as part of its present business strategy. The Company currently has agreements in place with Serum Institute whereby Serum Institute produces clinical materials for use in the development of drug candidates involving our PolyXen® technology. The Company is currently dependent on SynBio for clinical materials with respect to its OncoHist™ AML research programs. The Company is investigating second source alternative suppliers for its clinical materials. There can be no assurance that it will be successful or that if a second source is secured that it would be available on commercially reasonable terms or in a timely fashion should any disruption in supply from Serum Institute or SynBio occur.

Government Regulation

General

The development, testing, manufacture, labeling, marketing, and promotion of any drug, including all of our drug candidates, are subject to extensive regulation in the US by the FDA under the Federal Food, Drug and Cosmetic Act and by other federal, state, local and foreign government laws and regulations including in the UK, Germany, Russia and other countries in which we conduct business.

The NDA Review Process

The steps ordinarily required before a new drug, that is subject to NDA approval, may be marketed in the US include pre-clinical laboratory tests, further relevant testing, formulation studies, the submission to the FDA of an IND filing (which must become effective before clinical testing may commence) and adequate and well controlled clinical trials on human subjects to establish the safety and effectiveness of the drug for each indication for which FDA approval is sought. Satisfaction of FDA pre-market approval requirements typically takes several years and the actual time required may vary substantially based upon the type, complexity and novelty of the product, disease or condition for which the new drug is indicated.

Government regulation may delay or prevent marketing of potential products for a considerable period of time and requires substantial time, effort and financial resources on the part of a manufacturer. Success in early stage clinical trials does not assure success in later stage clinical trials. Data obtained from clinical activities is not always conclusive and may be susceptible to varying interpretations that could delay, limit, or prevent regulatory approval. Even if a product receives regulatory approval, 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.

Pre-clinical tests include laboratory evaluation of product chemistry and formulation, as well as additional relevant trials to assess the potential safety and efficacy of the product. The conduct of the pre-clinical tests and formulation of compounds for testing must comply with federal regulations and requirements. The results of pre-clinical testing are submitted to the FDA as part of an IND.

A 30 day waiting period after the filing of each IND is required prior to the commencement of clinical testing in humans. If the FDA has not commented on or questioned the IND within this 30 day period, clinical trials may begin. If the FDA has comments or questions, the questions must be answered to the satisfaction of the FDA before initial clinical testing can begin. In addition the FDA may, at any time, impose a clinical hold on ongoing clinical trials. If the FDA imposes a clinical hold, clinical trials cannot commence or recommence without FDA authorization and then only under terms authorized by the FDA. In some instances, the IND process can result in substantial delay and expense.

Clinical trials typically involve the administration of the IND to volunteers or patients under the supervision of a qualified investigator. Clinical trials must be conducted in compliance with federal regulations and requirements, under protocols detailing the objectives of the trial and the parameters to be used in monitoring safety and effectiveness. Each protocol involving testing on US subjects must be submitted to the FDA as part of the IND. The study protocol and informed consent information for patients in clinical trials must also be approved by the Institutional Review Board at each institution where the trials will be conducted.

Clinical trials to support NDAs for marketing approval are typically conducted in three sequential phases, but the phases may overlap. In Phase I, the initial introduction of the drug into healthy human subjects or patients, the drug is tested to assess metabolism, pharmacokinetics and pharmacological actions and safety, including side effects associated with increasing doses. Phase II usually involves trials in limited patient populations to determine dosage tolerance and optimum dosage, identify possible adverse effects and safety risks, and provide preliminary support for the efficacy of the drug in the indication being studied. If a compound demonstrates evidence of effectiveness and an acceptable safety profile in Phase II evaluations, Phase III trials are undertaken to further evaluate clinical efficacy and to further test for safety within an expanded patient population, typically at geographically dispersed clinical trial sites. It is possible that Phase I, Phase II, or Phase III testing of product candidates may not be completed successfully within any specified time period, if at all.

After successful completion of the required clinical testing, generally an NDA is prepared and submitted to the FDA. FDA approval of the NDA is required before marketing of the product may begin in the US. The NDA must include the results of extensive clinical and other testing and a compilation of data relating to the product's pharmacology, chemistry, manufacture, and controls. The cost of preparing and submitting an NDA is substantial. Under federal law, the submission of an NDA is additionally subject to a substantial application user fee (unless eligible for a waiver or reduction), which currently range from $1,084,550 to $2,169,100, and the manufacturer and/or sponsor under an approved NDA are also subject to annual product and establishment user fees, currently exceeding $104,000 per product and $554,000 per establishment. These fees are typically increased annually.

The FDA has 60 days from its receipt of an NDA to determine whether the application will be accepted for filing based on the agency's threshold determination that the NDA is sufficiently complete to permit substantive review. Once the submission is accepted for filing, the FDA begins an in-depth review of the NDA. Under federal law, the FDA has agreed to certain performance goals in the review of NDAs. The user fee goal for review of most non-priority applications is ten months. However, the review process is often significantly extended by FDA requests for additional information or clarification of information already provided in the submission. The FDA may also refer applications for novel drug products or drug products which present difficult questions of safety or efficacy to an advisory committee, typically a panel that includes clinicians and other experts, for review, evaluation, and a recommendation as to whether the application should be approved. The FDA is not bound by the recommendation of an advisory committee.

If FDA evaluations of the NDA and the manufacturing facilities and procedures, which typically involves an FDA on-site inspection, are favorable, the FDA may issue an approval letter or, in some cases, an approvable letter followed by an approval letter. An approvable letter generally contains a statement of specific conditions that must be met in order to secure final approval of the NDA. If and when those conditions have been met to the FDA's satisfaction, the FDA will typically issue an approval letter. An approval letter authorizes commercial marketing of the drug with specific prescribing information for specific indications in an approved label. If the FDA's evaluation of the NDA submission or manufacturing facilities is not favorable, the FDA may refuse to approve the NDA or issue a not approvable letter. The not approvable letter outlines the deficiencies in the submission and often requires additional testing or information in order for the FDA to reconsider the application. Even with submission of this additional information, the FDA ultimately may decide that the application does not satisfy the regulatory criteria for approval. With limited exceptions, the FDA may withhold approval of an NDA regardless of prior advice it may have provided or commitments it may have made to the sponsor. As a condition of NDA approval, the FDA may require post-approval testing and surveillance to monitor the drug's safety or efficacy and may impose other conditions, including labeling restrictions. Such labeling restrictions can materially impact the potential market and profitability of the drug. Once granted, product approvals can still be withdrawn if compliance with regulatory standards is not maintained or problems are identified following initial marketing.

Once the NDA is approved, a product will be subject to certain post-approval requirements, including requirements for adverse event reporting and submission of periodic reports. Persons responsible for manufacture or distribution are subject to FDA inspections to assess compliance with applicable statutory and regulatory requirements. The Food and Drug Administration Amendments Act of 2007 also provides the FDA enhanced post-marketing authority, including the authority to require post-marketing studies and clinical trials, labeling changes based on new safety information, and compliance with risk evaluations and mitigation strategies approved by the FDA.

Additionally, the FDA also strictly regulates the promotional claims that may be made about drug products. The FDA requires substantiation of any claims of superiority of one product over another including, in many cases, requirements that such claims be proven by adequate and well controlled head-to-head clinical trials. To the extent that market acceptance of the Company’s products may depend on their superiority over existing therapies, any restriction imposed by FDA on the Company’s ability to advertise or otherwise promote claims of superiority, or requirements to conduct additional expensive clinical trials to provide proof of such claims, could negatively affect the sales of the Company's products and/or its costs.

Orphan Drug Act

The Orphan Drug Act provides incentives to manufacturers to develop and market drugs for rare diseases and conditions affecting fewer than 200,000 persons in the US at the time of application for Orphan Drug Designation. The first developer to receive FDA marketing approval for an orphan drug is entitled to a seven year exclusive marketing period in the US 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 US 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.

Legislation similar to the Orphan Drug Act has been enacted in other countries outside the US, including the European Union (“EU”). The orphan legislation in the EU is available for therapies addressing chronic debilitating or life threatening conditions that affect five or fewer out of 10,000 persons or are financially not viable to develop. The market exclusivity period is for ten years, although that period can be reduced to six years if, at the end of the fifth year, available evidence establishes that the product is sufficiently profitable not to justify maintenance of market exclusivity. The market exclusivity may be extended to 12 years if sponsors complete a pediatric investigation plan agreed upon with the relevant committee of the EMA.

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.

Foreign Regulation

In addition to regulations in the US, we are subject to a variety of foreign regulatory requirements governing human clinical trials and marketing approval for drugs. The foreign regulatory approval process includes all of the risks associated with FDA approval set forth above, as well as additional country specific regulations. Whether or not we obtain FDA approval for a product, we must obtain approval of a product by the comparable regulatory authorities of foreign countries before we can commence clinical trials or marketing of the product in those countries. The approval process varies from country to country, and the time may be longer or shorter than that required for FDA approval. The requirements governing the conduct of clinical trials, product licensing, pricing and reimbursement vary greatly from country to country.

Environmental Regulation

In addition to being subject to extensive regulation by the FDA, the Company must also comply with environmental regulation insofar as such regulation applies to the Company or its 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 production of any of our drug candidates. The Company currently uses unaffiliated manufacturers to produce all of its 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 product candidate materials comply with the environmental standards required by state and federal laws and regulations, we cannot completely eliminate the risk of accidental contamination or injury from these materials. We do not carry a specific insurance policy to mitigate this risk to us or to the environment.

Employees

At April 10, 2015 the Company employed seven full time persons and one part time person. The Company is not a party to any collective bargaining agreement with its employees; nor are any of its employees a member of any labor unions. The Company is subject to certain statutory and contractual obligations in instances where it terminates UK based employees. These obligations, which are ordinary and customary in the UK, generally range from one to six months wages for terminated employees and would not be expected to represent a material adverse effect to the Company.

Competition

We are engaged in a rapidly evolving field. If our drug candidate development reaches the level of commercialization and marketing, we expect to compete primarily with established pharmaceutical companies such as Amgen Inc., Bristol-Myers Squibb Company, F. Hoffmann-La Roche Ltd, Nektar Therapeutics and others. We also expect to compete with established pharmaceutical companies as well as academic institutions and other smaller pharmaceutical companies during the drug development stage of our progress. Competition is intense and expected to increase.

The large and rapidly growing market for new drug therapies for use in humans is likely to attract new entrants. Numerous biotechnology and pharmaceutical companies are focused on developing new drug therapies and many of these companies have greater financial and other resources and development capabilities than we do. Our competitors also have greater collective experience in undertaking pre-clinical and clinical testing of products, obtaining regulatory approvals and manufacturing and marketing prescription pharmaceutical products. Accordingly, certain of these competitors may succeed in obtaining approval for drug products and therapies more rapidly than us.

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 product candidates will be more effective or achieve greater market acceptance than competitive products, or that these companies will not succeed in developing products and technologies that are more effective than those being developed for us or that would render our products and technologies less competitive or obsolete.

Available Information

Our website address is www.xeneticbio.com . The information in, or that can be accessed through, our website is not part of this Annual Report on Form 10-K. Our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K and amendments to those reports are available, free of charge, on or through our website as soon as practicable after we electronically file such forms, or furnish them to, the SEC. The public may read and copy any materials we file with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, D.C. 20549. Information on the operations of the Public Reference Room can be obtained by calling 1-800-SEC-0330. The SEC maintains an internet site that contains reports, proxy and information statements and other information regarding our filings at www.sec.gov .

Michael Scott Maguire

Mr. Maguire has been President, Chief Executive Officer and Director of the Company since January 2014 having been appointed pursuant to terms included in the Company’s acquisition of Xenetic UK. Mr. Maguire served with Xenetic UK as its Chief Executive Officer from April 2004 to the present. His background is in life science and healthcare investment banking and he has advised many US and European companies on capital raisings and commercial development over his 26 year career. Mr. Maguire began his banking career with Merrill Lynch in 1987 in New York, and after receiving his MBA from the Babson Graduate School in 1993, he joined the healthcare division of W.R. Grace National Medical Care (“NMC”) where he helped develop the international healthcare division. During his time in charge of international business development, he helped double NMC’s international revenues through Mergers and Acquisitions. In 1996 he co-founded the Arthur Andersen global healthcare corporate finance practice based in London, a practice that he built to include a staff of 36 across the US and Europe, elevating to the role of managing director. Mr. Maguire is currently a director of Healthcare Capital Partners Limited, a healthcare corporate finance and proprietary investment boutique he co-founded in 2002 and a non-executive director of Renal Services (UK) Limited, a company focused on dialysis service provision in the UK. Based on Mr. Maguire’s experience within the biotechnology sector and his executive experience, specifically his experience as an executive officer at other companies, as well as his service on other boards of directors, the Board believes Mr. Maguire has the appropriate set of skills to serve as a member of our Board.

Colin W. Hill

Mr. Hill has been Secretary, Treasurer, Chief Financial Officer and Director of the Company since January 2014 having been appointed pursuant to terms included in the Company’s acquisition of Xenetic UK. Mr. Hill served as Chief Financial Officer of Xenetic UK from June 2007 to the present. Prior to joining Xenetic UK, he was Finance Director from 2001 to 2003 and non-executive Chairman from 2003 to 2006 of Greenchip Investments plc. Mr. Hill has been a member of the Chartered Institute of Management Accountants since 1968 and spent 15 years in industry specializing in corporate turnaround and development work before becoming a freelance consultant in 1981. Since that time, he has focused on due diligence relating to corporate finance assignments in small and medium enterprises and public companies with small market capitalizations in the UK, US, and overseas. Between 1998 and 2008 Mr. Hill was Group Finance Director of Arlington Group plc, a company listed on the London Alternative Investments Market (“AIM”) stock exchange. Based upon Mr. Hill’s extensive financial experience, including his experience working with quoted companies on AIM and participation on other boards of directors, the Board believes that Mr. Hill has the appropriate set of skills to serve as a member of our Board.

Firdaus Jal Dastoor, FCS

Mr. Dastoor was appointed as a Director of the Company in January 2014 pursuant to terms included in the Company’s acquisition of Xenetic UK. Mr. Dastoor was appointed non-executive Director of Xenetic UK in July 2007. He has been a Fellow Member of The Institute of Company Secretaries of India since 2008 and began his career as a company secretary. He was Company Secretary of the Poonawalla Group until 1994. He then took on assignments involved in business development strategies and operations. Mr. Dastoor is on the board of several companies operating in the field of engineering products, life sciences and biotech, international trade, financial services and quality standards certifications. Currently, he is a Group Director of the Poonawalla Group of Companies in charge of Finance and Corporate Affairs. Based on Mr. Dastoor’s experience in the field of life sciences and biotechnology, finance and business development, the Board believes Mr. Dastoor has the appropriate set of skills to serve as a member of our Board.

Artur Isaev

Mr. Isaev was appointed as a Director of the Company in January 2014 pursuant to terms included in the Company’s acquisition of Xenetic UK. Mr. Isaev has been a General Director and a majority shareholder of Human Stem Cells Institute OJSC Russia’s public biotech company, headquartered in Moscow. Mr. Isaev has a degree in Medicine and an MBA. He started his business career as a top manager in brokerage, investment and auditing companies. In 2003 he founded Human Stem Cells Institute and from the very beginning has occupied the post of its General Director. Mr. Isaev is a vice president of a non-governmental organization of experts in cell technologies and regenerative medicine. Based on Mr. Isaev’s medical education and his experience in clinical stage biotechnology companies, the Board believes Mr. Isaev has the appropriate set of skills to serve as a member of our Board.

Roman Knyazev

Mr. Knyazev was appointed to the Board of Directors of the Company in April 2014. Mr. Knyazev has been a Senior Investment Manager for Rusnano Moscow since 2009 and is currently on the board of several biotechnology companies. In his current role, he provides technical expertise, asset valuation, financial modelling and business valuation as well as develops and presents investment strategies and project financing to clients. In 2003, he began his career as Chief Financial Officer of Biotec Pharma Moscow where he gained experience in both the financial and management sector. Mr. Knyazev led the development and implementation of management accounting and budgeting processes as well facilitated internal audits of regional branches. Based on Mr. Knyazev’s experience in clinical stage biotechnology companies, the Board believes Mr. Knyazev has the appropriate set of skills to serve as a member of our Board.

Mark Leuchtenberger

Mr. Leuchtenberger was appointed to the Board of Directors of the Company in April 2014. Mr. Leuchtenberger joined Chiasma, Inc., a privately held pharmaceutical company based in Newton, Massachusetts, as the Chief Executive Officer in 2015. Prior to that, Mr. Leuchtenberger joined Acusphere, Inc. as President and Chief Executive Officer in 2013, bringing experience in commercial operations, business development and preparing biopharmaceutical companies for product approval and commercialization. Mr. Leuchtenberger most recently served as President, Chief Executive Officer and a member of the board of directors at Rib-X Pharmaceuticals (now Melinta) until its acquisition. Prior to Rib-X, Mr. Leuchtenberger served as President and Chief Executive Officer of Targanta Therapeutics Corporation, where he led the company’s initial public offering in 2007 and its acquisition in 2009. From 2006 to 2009 Mr. Leuchtenberger served as the President and Chief Executive Officer of Therion Biologics Corporation, a privately held cancer vaccine company. Mr. Leuchtenberger received his M.B.A. from the Yale School of Management and his B.A. from Wake Forest University. He is a director and past chairman of the Massachusetts Biotechnology Council Board of Directors and currently serves as a trustee for Beth Israel Deaconess Medical Center and Chairman of the Advisory Committee for the MassDevelopment Emerging Technology Fund. Based on Mr. Leuchtenberger’s experience in multiple biotechnology companies, the Board believes Mr. Leuchtenberger has the appropriate set of skills to serve as a member of our Board.

Dr. Timothy R. Coté

Dr. Coté was appointed to the Board of Directors of the Company in February 2014. Dr. Coté is a leading national regulatory expert in orphan drug development. Mr. Coté has 22 years of federal service at the FDA, the National Institute of Health, and the Center for Disease Control. Most recently, Dr. Coté served as the Director of the FDA Office of Orphan Products Development from 2007 to 2011. Dr. Coté was instrumental in implementing the Orphan Drug Act and personally signed more than 800 orphan drug designations. Since leaving his position with the FDA in 2011 to the present, Dr. Coté has been engaged as Chief Executive Officer and Principal of Coté Orphan Consulting, LLC, a regulatory affairs advisory firm based in Silver Spring, Maryland, that provides valuable strategic planning and execution services to companies developing or seeking to develop orphan products. Based on his extensive experience in FDA matters, including with the FDA’s Orphan Products Development Program, the Board believes that Dr. Coté has the appropriate set of skills to serve as a member of our Board.

Darlene Deptula-Hicks

Ms. Deptula-Hicks was appointed to the Board of Directors of the Company in April 2014. Ms. Deptula-Hicks is a strategic senior financial executive with extensive experience in both public and private companies, including experience in fund raising, mergers and acquisitions, public and private offerings and with operational management focused in life sciences. Since November 2014, Ms. Deptula-Hicks is the Acting Chief Financial Officer of Pieris Pharmaceuticals, Inc. (OTCQB:PIRS) pursuant to a consulting agreement with the financial advisory firm of Danforth Advisors, LLC. Prior to that and since June 2012, Ms. Deptula-Hicks served as Vice President and Chief Financial Officer of Microline Surgical, Inc. From 2006 to 2011, Ms. Deptula-Hicks was the Vice President, Chief Financial Officer, Treasurer and Secretary of ICAD, Inc. She received her Bachelor of Science in Accounting from Southern New Hampshire University and her MBA from Rivier College. Based upon her extensive financial experience including experience in fund raising, mergers, public companies and life sciences, the Board believes Ms. Deptula-Hicks has the appropriate set of skills to serve as a member of our Board.