Securities registered or to be registered pursuant
to Section 12(g) of the Act.
None
Securities for which there is a reporting obligation
pursuant to Section 15(d) of the Act.
None
The number of outstanding
shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report:
1,177,693,383 Ordinary Shares, £0.01 par value per share
Indicate by check mark if the registrant is
a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
If this report is an annual or transition report,
indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934.
Note – Checking the box above will not
relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 from their
obligations under those Sections.
Indicate by check mark
whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Indicate by check mark
whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required
to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files).
Indicate by check mark
whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated
filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
Indicate by check mark
which basis of accounting the registrant has used to prepare the financial statements included in this filing:
If “Other”
has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has
elected to follow.
If this is an annual report, indicate by check
mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Unless the context otherwise requires, all
references to “Akari,” “we,” “us,” “our,” the “Company” and similar
designations refer to Akari Therapeutics PLC and its subsidiaries.
Market data and certain industry data and
forecasts used throughout this Annual Report on Form 20-F were obtained from sources we believe to be reliable, including market
research databases, publicly available information, reports of governmental agencies, and industry publications and surveys. We
have relied on certain data from third-party sources, including internal surveys, industry forecasts, and market research, which
we believe to be reliable based on our management's knowledge of the industry. While we are not aware of any misstatements regarding
the industry data presented in this Annual Report, our estimates involve risks and uncertainties and are subject to change based
on various factors, including those discussed under the heading "Risk Factors" and elsewhere in this prospectus.
All trademarks, service marks, trade names
and registered marks used in this report are trademarks, trade names or registered marks of their respective owners.
Statements made in this Annual Report on
Form 20-F concerning the contents of any agreement, contract or other document are summaries of such agreements, contracts or documents
and are not complete description of all of their terms. If we filed any of these agreements, contracts or documents as exhibits
to this Report or to any previous filing with the Securities and Exchange Commission, or SEC, you may read the document itself
for a complete understanding of its terms.
This Annual Report on Form 20-F contains
forward-looking statements. All statements other than statements of historical facts contained in this Annual Report on Form 20-F,
including statements regarding our strategy, future operations, future financial position, future revenue, projected costs, prospects,
plans, objectives of management and expected market growth are forward-looking statements. These statements involve known and unknown
risks, uncertainties and other important factors that may cause our actual results, performance or achievements to be materially
different from any future results, performance or achievements expressed or implied by the forward-looking statements.
Words such as “may,” “anticipate,”
“estimate,” “expects,” “projects,” “intends,” “plans,” “believes”
and words and terms of similar substance used in connection with any discussion of future operating or financial performance, identify
forward-looking statements. Forward-looking statements represent management’s present judgment regarding future events and
are subject to a number of risks and uncertainties that could cause actual results to differ materially from those described in
the forward-looking statements. These risks include, but are not limited to, risks and uncertainties regarding our pre-clinical
and clinical studies, the results of such trials, as well as risks and uncertainties relating to litigation, government regulation
and third-party reimbursement, economic conditions, markets, products, competition, intellectual property, services and prices,
key employees, future capital needs, dependence on third parties and other factors. Please also see the discussion of risks and
uncertainties under “Risk Factors” contained in this Annual Report on Form 20-F.
In light of these assumptions, risks and
uncertainties, the results and events discussed in the forward-looking statements contained in this Annual Report on Form 20-F
might not occur. We are not under any obligation, and we expressly disclaim any obligation, to update or alter any forward-looking
statements, whether as a result of new information, future events or otherwise. All subsequent forward-looking statements attributable
to us or to any person acting on our behalf are expressly qualified in their entirety by the cautionary statements contained or
referred to in this section.
We have obtained the statistical data, market
data and other industry data and forecasts used throughout this Annual Report on Form 20-F from publicly available information.
We have not sought the consent of the sources to refer to the publicly available reports in this Annual Report on Form 20-F.
You should read this Annual Report on Form 20-F
and the documents that we have filed as exhibits to the Annual Report on Form 20-F with the understanding that our actual
future results may be materially different from what we expect. We do not assume any obligation to update any forward-looking statements
whether as a result of new information, future events or otherwise, except as required by applicable law.
PART I
|
ITEM 1.
|
IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
|
Not applicable.
|
ITEM 2.
|
OFFER STATISTICS AND EXPECTED TIMETABLE
|
Not applicable.
|
A.
|
Selected Financial Data
|
The following selected
financial data should be read in conjunction with “Item 5 Operating and Financial Review and Prospects” and the Financial
Statements and Notes thereto included elsewhere in this Annual Report.
We have derived
the balance sheet data as of December 31, 2016 and 2015 and the combined and consolidated statement of operations data for the
years ended December 31, 2016, 2015 and 2014 from our audited financial statements included elsewhere in this Annual Report. We
have derived the balance sheet data as of December 31, 2014 from our audited financial statements not included in this Annual Report.
Selected financial data as of, and for the years ended, December 31, 2013 and 2012 have been omitted from this Annual Report because
it cannot be made available without unreasonable effort and expense. Our financial statements have been prepared in accordance
with US GAAP.
Certain factors
that affect the comparability of the information set forth in the following table are described in Item 5 “Operating and
Financial Review and Prospects” and the Combined and Consolidated Financial Statements and related notes thereto included
elsewhere in this Annual Report.
BALANCE SHEET DATA
|
|
As of December 31,
|
|
(In United States Dollars)
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
$
|
45,633,781
|
|
|
$
|
69,658,487
|
|
|
$
|
3,335,249
|
|
Total assets
|
|
|
45,873,678
|
|
|
|
69,893,562
|
|
|
|
3,394,666
|
|
Total current liabilities
|
|
|
11,714,768
|
|
|
|
21,124,968
|
|
|
|
1,171,368
|
|
Total liabilities
|
|
|
11,771,128
|
|
|
|
21,174,037
|
|
|
|
1,171,368
|
|
Capital stock
|
|
|
18,340,894
|
|
|
|
18,340,894
|
|
|
|
11,210,804
|
|
Shareholders’ equity
|
|
|
34,102,550
|
|
|
|
48,719,525
|
|
|
|
2,223,298
|
|
STATEMENT OF OPERATIONS DATA
(In United States Dollars,
|
|
As of December 31,
|
|
except for per share data)
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
$
|
17,306,001
|
|
|
$
|
5,799,076
|
|
|
$
|
1,616,204
|
|
General and administrative
|
|
|
9,940,557
|
|
|
|
5,502,214
|
|
|
|
303,095
|
|
Excess Consideration
|
|
|
-
|
|
|
|
19,293,280
|
|
|
|
-
|
|
Total operating expenses
|
|
|
27,246,558
|
|
|
|
30,584,570
|
|
|
|
1,919,299
|
|
Other expense (income)
|
|
|
(9,105,561
|
)
|
|
|
14,732,962
|
|
|
|
28,254
|
|
Net loss
|
|
|
(18,140,997
|
)
|
|
|
(45,317,532
|
)
|
|
|
(1,947,553
|
)
|
Net basic and diluted loss per share
|
|
$
|
(0.02
|
)
|
|
$
|
(0.05
|
)
|
|
$
|
(0.02
|
)
|
Weighted average number of Ordinary Shares
|
|
|
1,177,693,383
|
|
|
|
852,088,530
|
|
|
|
85,515,588
|
|
OTHER FINANCIAL DATA
|
|
As of December 31,
|
|
(In United States Dollars)
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities
|
|
$
|
(24,624,535
|
)
|
|
$
|
(4,965,583
|
)
|
|
$
|
(1,476,824
|
)
|
Net cash provided (used) by financial activities
|
|
|
(10,066,632
|
)
|
|
|
1,391,798
|
|
|
|
-
|
|
Net cash provided by financial activities
|
|
|
-
|
|
|
|
69,044,419
|
|
|
|
4,235,376
|
|
|
B.
|
Capitalization and Indebtedness
|
Not applicable.
|
C.
|
Reasons for the Offer and Use of Proceeds
|
Not applicable.
Except for the historical information
contained herein or incorporated by reference, this Annual Report on Form 20-F and the information incorporated by reference contains
forward-looking statements that involve risks and uncertainties. These statements include projections about our accounting and
finances, plans and objectives for the future, future operating and economic performance and other statements regarding future
performance. These statements are not guarantees of future performance or events. Our actual results could differ materially from
those discussed in this Annual Report on Form 20-F. Factors that could cause or contribute to these differences include, but are
not limited to, those discussed in the following section, as well as those discussed in Item 5 entitled “Operating and
Financial Review and Prospects” and elsewhere throughout this Annual Report on Form 20-F and in any documents incorporated
in this Annual Report on Form 20-F by reference.
You should consider carefully the following
risk factors, together with all of the other information included or incorporated in this Annual Report on Form 20-F. If any of
the following risks, either alone or taken together, or other risks not presently known to us or that we currently believe to not
be significant, develop into actual events, then our business, financial condition, results of operations or prospects could be
materially adversely affected. If that happens, the market price of our American Depositary Shares, or ADSs, could decline, and
shareholders may lose all or part of their investment.
Risks Relating to Our Financial Position
and Our Business
We have a history of operating losses and cannot give
assurance of future revenues or operating profits; investors may lose their entire investment.
We do not expect to generate revenue or
profitability that is necessary to finance our operations in the short term. We incurred net losses of $18,140,997 and $45,317,532
for the years ended December 31, 2016 and 2015, respectively. In addition, our accumulated deficit as of December 31, 2016 and
2015 was $74,937,610 and $56,796,613, respectively. Losses have principally resulted from costs incurred for manufacturing, our
clinical trials, research and development programs and general and administrative expenses. We have funded our operations primarily
through the private placement of equity securities. As of December 31, 2016, we had cash, cash equivalents and short-term investments
of $44,120,775.
To date, we have not commercialized any
products or generated any revenues from the sale of products, and absent the realization of sufficient revenues from product sales,
we may never attain profitability in the future. We expect to incur significant losses for the foreseeable future as we continue
to conduct research and development, clinical testing, regulatory compliance activities and, if Coversin™ or other future
product candidates receive regulatory approval, sales and marketing activities.
Our failure to become and remain profitable
would depress the market price of the ADSs and could impair our ability to raise capital, expand our business, diversify our product
offerings or continue our operations. If we continue to suffer losses as we have in the past, investors may not receive any return
on their investment and may lose their entire investment.
We will require additional capital to fund our operations,
and if we are unable to obtain such capital, we will be unable to successfully develop and commercialize any product candidates.
As of December 31, 2016, we had existing
cash, cash equivalents and short-term investments of $44,120,775. We will require additional capital in order to develop and commercialize
our current product candidates or any product candidates that we acquire, if any. There can be no assurance that additional funds
will be available when we need them on terms that are acceptable to us, or at all. If adequate funds are not available on a timely
basis, we may be required to terminate or delay development for one or more of our product candidates.
The amount and timing of any expenditure
needed will depend on numerous factors, some of which are outside our control, including:
|
·
|
the type, number, scope, progress, expansion costs, results of and
timing of our ongoing or future clinical trials or the need for additional clinical trials of Coversin for paroxysmal nocturnal
hemoglobinuria, or PNH or any other indications or product candidates which we are pursuing or may choose to pursue in the future;
|
|
·
|
the costs of obtaining, maintaining and enforcing its patents and
other intellectual property rights;
|
|
·
|
the costs and timing of obtaining or maintaining manufacturing for
Coversin for PNH or any other indications or product candidates, including commercial manufacturing if any product candidate is
approved;
|
|
·
|
the costs and timing of establishing sales marketing, and reimbursement
capabilities and enhanced internal controls over financial reporting;
|
|
·
|
the terms and timing of establishing and maintaining collaborations,
license agreements and other partnerships;
|
|
·
|
costs associated with any new product candidates that we may develop,
in-license or acquire;
|
|
·
|
the effect of competing technological and market developments; and
|
|
·
|
the costs associated with being a public company.
|
We have not sold any products, and we do
not expect to sell or derive revenue from any product sales for the foreseeable future. We may seek additional funding through
future debt and equity financing, as well as potential additional collaborations or strategic partnerships with other companies
or through non-dilutive financings. Additional funding may not be available to us on acceptable terms or at all. General market
conditions may make it very difficult for us to seek financing from the capital markets. We may be required to relinquish rights
to our technologies or product candidates, or grant licenses on terms that are not favorable to us, in order to raise additional
funds through alliance, joint venture or licensing arrangements. In addition, the terms of any financing may adversely affect the
holdings or the rights of our shareholders and the issuance of additional shares by us, or the possibility of such issuance, may
cause the market price of our shares to decline.
If we are unable to obtain funding on a
timely basis, we will be unable to complete ongoing and planned clinical trials for Coversin and we may be required to significantly
curtail some or all of our activities. We also could be required to seek funds through arrangements with collaborative partners
or otherwise that may require us to relinquish rights to our product candidates or some of our technologies or otherwise agree
to terms unfavorable to us.
Future sales and issuances of the ADSs or rights to purchase
ADSs and any equity financing that we pursue, could result in significant dilution of the percentage ownership of our shareholders
and could cause our ADS price to fall.
To the extent we raise additional capital
by issuing equity securities, our shareholders may experience substantial dilution. In any financing transaction, we may
sell ordinary shares or ADSs, convertible securities or other equity securities. If we sell ordinary shares or ADSs, convertible
securities or other equity securities, our shareholders investment in our ordinary shares or ADSs will be diluted. These sales
may also result in material dilution to our existing shareholders, and new investors could gain rights superior to our existing
shareholders.
Risks
Related to the Clinical Development and Regulatory Approval of Our Product Candidates
Our business depends on the success of Coversin, which
is still under development. If we are unable to obtain regulatory approval for or successfully commercialize Coversin, our business
will be materially harmed.
Coversin has been the sole focus of our
product development. Successful continued development and ultimate regulatory approval of Coversin for at least one autoimmune
disease including PNH, atypical hemolytic-uremic syndrome, or aHUS, Guillain-Barre syndrome, or GBS and others, is critical to
the future success of our business. We have invested, and will continue to invest, a significant portion of our time and financial
resources in the development of Coversin. We will need to raise sufficient funds for, and successfully enroll and complete, our
ongoing clinical development program for Coversin in PNH and for our planned clinical development program for Coversin in aHUS
and other indications. The future regulatory and commercial success of this product candidate is subject to a number of risks,
including the following:
|
·
|
we may not have sufficient financial and other resources to complete
the necessary clinical trials for Coversin;
|
|
·
|
we may not be able to obtain adequate evidence of efficacy and safety
for Coversin;
|
|
·
|
we do not know the degree to which Coversin will be accepted as a
therapy, even if approved;
|
|
·
|
in our clinical programs, we may experience difficulty in enrollment,
variability in patients, adjustments to clinical trial procedures and the need for additional clinical trial sites, which could
delay our clinical trial progress;
|
|
·
|
our reliance on a sole manufacturer to supply the drug product formulation
of Coversin that is being used in our clinical trials;
|
|
·
|
the results of our clinical trials may not meet the level of statistical
or clinical significance required by the FDA, EMA or comparable foreign regulatory bodies for marketing approval;
|
|
·
|
patients in our clinical trials may die or suffer other adverse effects
for reasons that may or may not be related to Coversin, which could delay or prevent further clinical development;
|
|
·
|
the standards implemented by clinical or regulatory agencies may change
at any time;
|
|
·
|
the FDA, EMA or foreign clinical or regulatory agencies may require
efficacy endpoints for a Phase II clinical trial for the treatment of PNH, aHUS, GBS and in conditions such as antibody mediated
transplant rejection that differ from the endpoints of our planned current or future trials, which may require us to conduct additional
clinical trials;
|
|
·
|
the mechanism of action of Coversin is complex and we do not know
the degree to which it will translate into a medical benefit in certain indications;
|
|
·
|
if approved for PNH, aHUS, or GBS, and other indications, Coversin
will likely compete with the off-label use of currently marketed products and other therapies in development;
|
|
·
|
our intellectual property rights may not be patentable, valid or enforceable;
and
|
|
·
|
we may not be able to obtain, maintain or enforce our patents and
other intellectual property rights.
|
Of the large number of drugs in development
in the pharmaceutical industry, only a small percentage results in the submission of a new drug application, or NDA, to the FDA,
or a marketing authorisation application, or MAA, to the EMA and even fewer are approved for commercialization. Furthermore, even
if we do receive regulatory approval to market Coversin, any such approval may be subject to limitations on the indicated uses
or patient populations for which we may market the product. Accordingly, even if we are able to obtain the requisite financing
to continue to fund our development programs, we cannot assure you that Coversin will be successfully developed or commercialized.
If we or any of our future development partners are unable to develop, or obtain regulatory approval for, or, if approved, successfully
commercialize Coversin, we may not be able to generate sufficient revenue to continue our business.
If we encounter difficulties enrolling patients in our
clinical trials, our clinical development activities could be delayed or otherwise adversely affected.
We may not be able to initiate or continue
clinical trials required by the FDA, EMA or other foreign regulatory agencies for Coversin if we are unable to locate and enroll
a sufficient number of eligible patients to participate in these clinical trials. We will be required to identify and enroll a
sufficient number of patients with PNH, aHUS, GBS, and other rare and orphan autoimmune and inflammatory diseases for each of our
ongoing and planned clinical trials of Coversin in these indications. Each of these is a rare disease or indication with relatively
small patient populations, which could result in slow enrollment of clinical trial participants.
Patient enrollment is affected by other
factors, including:
|
·
|
severity of the disease under investigation;
|
|
·
|
design of the clinical trial protocol;
|
|
·
|
size and nature of the patient population;
|
|
·
|
eligibility criteria for the trial in question;
|
|
·
|
perceived risks and benefits of the product candidate under trial;
|
|
·
|
proximity and availability of clinical trial sites for prospective
patients;
|
|
·
|
availability of competing therapies and clinical trials;
|
|
·
|
clinicians’ and patients’ perceptions as to the potential
advantages of the drug being studied in relation to other available therapies, including any new drugs that may be approved for
the indications we are investigating;
|
|
·
|
efforts to facilitate timely enrollment in clinical trials;
|
|
·
|
patient referral practices of physicians; and
|
|
·
|
our ability to monitor patients adequately during and after treatment.
|
Further, there are only a limited number
of specialist physicians that treat patients with these diseases. We also may encounter difficulties in identifying and enrolling
such patients with a stage of disease appropriate for our ongoing or future clinical trials. In addition, the process of finding
and diagnosing patients may prove costly. Our inability to enroll a sufficient number of patients for any of our clinical trials
would result in significant delays or may require us to abandon one or more clinical trials.
If clinical trials or regulatory approval processes for
Coversin are prolonged, delayed or suspended, we may be unable to commercialize Coversin on a timely basis.
We cannot predict whether we will encounter
problems with any of our completed, ongoing or planned clinical trials that will cause us or any regulatory authority to delay
or suspend those clinical trials or delay the completion of our ongoing and planned clinical trials and negatively impact our ability
to obtain regulatory approval for, and to market and sell, a particular product candidate:
|
·
|
conditions imposed on us by the FDA, EMA or another foreign regulatory
authority regarding the scope or design of our clinical trials;
|
|
·
|
insufficient supply of our product candidates or other materials necessary
to conduct and complete our clinical trials;
|
|
·
|
slow enrollment and retention rate of subjects in our clinical trials;
and
|
|
·
|
serious and unexpected drug-related side effects related to the product
candidate being tested.
|
Commercialization may be delayed by the
imposition of additional conditions on our clinical trials by the FDA, EMA or any other applicable foreign regulatory authority
or the requirement of additional supportive studies by the FDA, EMA or such foreign regulatory authority.
We do not know whether our clinical trials
will begin as planned, will need to be restructured, or will be completed on schedule, if at all. Delays in our clinical trials
will result in increased development costs for our product candidates, and our financial resources may be insufficient to fund
any incremental costs. In addition, if our clinical trials are delayed, our competitors may be able to bring products to market
before we do and the commercial viability of our product candidates could be limited.
The efficacy of Coversin may not be known until advanced
stages of testing, after we have incurred significant product development costs which may not be recoverable.
Coversin may fail to show the desired efficacy
at any phase in the clinical development program. Good efficacy in animal models of the target indication are no guarantee of success
in human clinical trials. Often there is no adequate animal model of a human disease, such as PNH. As a result, the first definitive
proof of efficacy may not occur until clinical trials in humans. Until Coversin has completed proof of principal clinical trials
in target indications, for example, PNH, aHUS and GBS, there can be no assurance that it will have its expected efficacy in these
conditions. If Coversin does not demonstrate adequate efficacy, its development may be delayed or terminated, which could have
a material adverse effect on our financial condition and results of operation.
The route of administration or dose for Coversin may be
inadequate.
Unsatisfactory drug availability due to
problems relating to the route of administration or the target tissue availability of the drug is another potential cause of lack
of efficacy of Coversin if and when it is commercialized. Complement component C5, the target of Coversin is predominantly found
in blood. For PNH, aHUS and GBS, Coversin will be administered subcutaneously. The completed single dose Phase I study shows that
Coversin is able to enter the systemic circulation by absorption from subcutaneous sites in healthy volunteers. However, if daily
subcutaneous administration proves to be unfeasible, then we may need to research additional doses or routes of administration,
which could delay commercialization of Coversin and result in significant additional costs to us.
Long-term animal toxicity studies of Coversin could result
in adverse results.
While we have conducted toxicity studies
in certain animals without any evidence of toxicity, we are currently undertaking long-term animal toxicity studies of Coversin.
Such tests may show that Coversin is toxic in certain animals, is not as effective as we expected, or other adverse results. If
animal toxicity tests do not yield favorable results, we may be required to abandon our development of Coversin, which could have
a material adverse effect on our financial condition and results of operation.
Chronic dosing of patients with Coversin could lead to
an immune response that causes adverse reactions or impairs the activity of the drug.
There is a risk that chronic dosing of patients
with Coversin may lead to an immune response that causes adverse reactions or impairs the activity of the drug. Patients may develop
an allergic reaction to the drug and/or develop antibodies directed at the drug. Impaired drug activity could be caused by neutralization
of the drug’s inhibitory activity or by an increased rate of clearance of the drug from circulation.
One potential toxic side effect of Coversin
that has occurred in patients receiving Soliris® (eculizumab), a humanized antibody against complement component C5, may include
the inhibition of the terminal complement system, which can result in an increased incidence of meningitis. As a result, we expect
that patients receiving Coversin would also receive meningitis immunization and prophylactic antibiotics as indicated.
Coversin has a secondary binding site
that sequesters leukotriene B4, or LTB4. LTB4 synthesis from eicosanoid fatty acids can be induced by a variety of triggers
including complement. LTB4 is a pro-inflammatory mediator which attracts and activates white blood cells at the area of
inflammation. LTB4 inhibition may lead to positive anti-inflammatory benefits, but another potential cause of undesired side
effects is that the reduction of these neutrophil attractant properties may include increased risk of infection, among
others.
Any immune response that causes adverse
reactions or impairs the activity of the drug could cause a delay in or termination of our development of Coversin, which would
have a material adverse effect on our financial condition and results of operation.
If Coversin is not convenient for patients to use, then
potential sales may decrease materially.
Coversin may be required to be kept refrigerated
prior to use and will likely require self-injection. If the drug product is not stable at temperatures of between four and eight
degrees Celsius, then the drug product may need to be defrosted before use, which patients could view as inconvenient, causing
sales to decrease. In addition, if Coversin shows a lack of long-term stability at low storage temperatures, this may negatively
impact our ability to manage the commercial supply chain, which could result in us having to refund customers or replace products
that are unstable, which could materially increase our costs and have an adverse effect on our financial condition and results
of operation.
Because Coversin has not yet received regulatory approval,
it is difficult to predict the time and cost of development and our ability to successfully complete clinical development and obtain
the necessary regulatory approvals for commercialization.
Coversin has not yet received regulatory
approval for the treatment of PNH, or other potential indications, and unexpected problems may arise that could cause us to delay,
suspend or terminate our development efforts. Although Coversin has in a single clinical patient to date in our Phase II eculizumab
resistance trial shown beneficial effects, a larger scale Phase II trial is ongoing in PNH and the efficacy or non-efficacy of
Coversin will ultimately be determined by the applicable regulatory agencies. The long-term safety consequences of inhibition of
C5 with Coversin is not known. Regulatory approval of product candidates such as Coversin can be more expensive and take longer
than approval for candidates for the treatment of more well understood diseases with previously approved products.
We have obtained orphan drug status for Coversin in PNH
and GBS, both in the United States and the EU, but we may be unable to maintain the benefits associated with orphan drug status,
including market exclusivity.
In the United States, orphan drug designation
entitles a party to financial incentives such as opportunities for grant funding towards clinical trial costs, tax advantages,
and user-fee waivers. After the FDA grants orphan drug designation, the generic identity of the drug and its potential orphan use
are disclosed publicly by the FDA. Although we have received orphan drug designation for Coversin in PNH and GBS and intend to
seek orphan product designation for Coversin in further indications, we may never receive such additional designations.
If a product that has orphan drug designation
subsequently receives the first FDA approval for a particular active ingredient for the disease for which it has such designation,
the product is entitled to orphan product exclusivity, which means that the FDA may not approve any other applications, including
a BLA, to market the same biologic for the same indication for seven years, except in limited circumstances such as a showing of
clinical superiority to the product with orphan product exclusivity or if the FDA finds that the holder of the orphan drug exclusivity
has not shown that it can assure the availability of sufficient quantities of the orphan drug to meet the needs of patients with
the disease or condition for which the drug was designated. Even if we were to obtain orphan drug designation for Coversin for
a particular indication, we may not be the first to obtain marketing approval for any particular orphan indication due to the uncertainties
associated with developing pharmaceutical products. If we do obtain exclusive marketing rights in the United States, they may be
limited if we seek approval for an indication broader than the orphan designated indication and may be lost if the FDA later determines
that the request for designation was materially defective or if the manufacturer is unable to assure sufficient quantities of the
product to meet the needs of the relevant patients. Further, exclusivity may not effectively protect the product from competition
because different drugs with different active moieties can be approved for the same condition. Even after an orphan drug is approved,
the FDA can subsequently approve a drug with the same active moiety for the same condition if the FDA concludes that the later
drug is safer, more effective, or makes a major contribution to patient care. Furthermore, the FDA can waive orphan exclusivity
if we are unable to manufacture sufficient supply of our product.
In the EU, where a marketing authorization
in respect of an orphan medicinal product is granted, the Agency and the Member States shall not, for a period of 10 years, accept
another application for a marketing authorization, or grant a marketing authorization or accept an application to extend an existing
marketing authorization, for the same therapeutic indication, in respect of a similar medicinal product. A marketing authorization
may be granted, for the same therapeutic indication, to a similar medicinal product if: (i) the holder of the marketing authorization
for the original orphan medicinal product has given his consent to the second applicant, or; (ii) the holder of the marketing authorization
for the original orphan medicinal product is unable to supply sufficient quantities of the medicinal product, or; (iii) the second
applicant can establish in the application that the second medicinal product, although, similar to the orphan medicinal product
already authorized, is safer, more effective or otherwise clinically superior.
The receipt of orphan drug designation status
does not change the regulatory requirements or process for obtaining marketing approval and designation does not mean that marketing
approval will be received.
We may seek a breakthrough therapy designation from the
FDA for Coversin. Such designation or a similar designation from other national or international regulatory agencies, may not lead
to a faster development or regulatory review or approval process, and it does not increase the likelihood that Coversin or any
other product candidates will receive marketing approval.
We may seek a breakthrough therapy designation
for Coversin. A breakthrough therapy is defined as a product that is intended, alone or in combination with one or more other drugs,
to treat a serious or life-threatening disease or condition, and preliminary clinical evidence indicates that the product may demonstrate
substantial improvement over existing therapies on one or more clinically significant endpoints. Designation as a breakthrough
therapy is within the discretion of the FDA. Receipt of a breakthrough therapy designation for Coversin may not result in a faster
development process, review or approval compared to products considered for approval under conventional FDA procedures and does
not assure ultimate approval by the FDA. In addition, even if Coversin qualifies as a breakthrough therapy, the FDA may later decide
that it no longer meets the conditions for qualification.
Even if we obtain FDA approval of Coversin, we or our
partners may never obtain approval or commercialize our products outside of the United States and, conversely, even if we obtain
regulatory approval of Coversin in the EU, we or our partners may never obtain approval or commercialize our products outside the
EU.
In order to market any products in a country,
we must establish and comply with numerous and varying regulatory requirements of other countries regarding clinical trial design,
safety and efficacy. Clinical trials conducted in one country may not be accepted by regulatory authorities in other countries,
and regulatory approval in one country does not mean that regulatory approval will be obtained in any other country. Approval procedures
vary among countries and can involve additional product testing and validation and additional administrative review periods. Seeking
regulatory approvals in other countries could result in significant delays, difficulties and costs for us and may require additional
preclinical studies or clinical trials which would be costly and time consuming and could delay or prevent introduction of Coversin
in those countries. We rely on contract research organizations for experience in obtaining regulatory approval in international
markets. If we or our partners fail to comply with regulatory requirements or to obtain and maintain required approvals, our target
market will be reduced and our ability to realize the full market potential of Coversin will be harmed.
If we or our partners market products in a manner that
violates fraud and abuse and other healthcare laws, or if we or they violate government price reporting laws, we or our partners
may be subject to administrative civil and/or criminal penalties.
In addition to FDA restrictions on marketing
of pharmaceutical products, several other types of state and federal healthcare laws, including those commonly referred to as “fraud
and abuse” laws have been applied in recent years to restrict certain marketing practices in the pharmaceutical industry.
These laws include, among others, false claims and anti-kickback statutes. At such time, if ever, as we or any of our partners
market any of our future approved products, it is possible that some of the business activities of us and/or our partners could
be subject to challenge under one or more of these laws.
Federal false claims, false statements and
civil monetary penalties laws prohibit any person from knowingly presenting, or causing to be presented, a false claim for payment
to the federal government or to get a false claim paid. The federal healthcare program anti-kickback statute prohibits, among other
things, knowingly and willfully offering, paying, soliciting or receiving remuneration to induce, or in return for, purchasing,
leasing, ordering or arranging for the purchase, lease or order of any healthcare item or service reimbursable under Medicare,
Medicaid or other federally financed healthcare programs. This statute has been interpreted to apply to arrangements between pharmaceutical
manufacturers on the one hand and prescribers, purchasers and formulary managers on the other. Although there are several statutory
exceptions and regulatory safe harbors protecting certain common activities from prosecution, they are drawn narrowly, and practices
that involve remuneration intended to induce prescribing, purchasing or recommending may be subject to scrutiny if they do not
qualify for an exception or safe harbor.
In addition, we and/or our partners may
be subject to data privacy and security regulation, including the Health Insurance Portability and Accountability Act of 1996,
or HIPAA, as amended by the Health Information Technology for Economic and Clinical Health Act, or HITECH, and their respective
implementing regulations, which impose specified requirements relating to the privacy, security and transmission of individually
identifiable health information.
Most states also have statutes or regulations
similar to these federal laws, which may apply to items such as pharmaceutical products and services reimbursed by private insurers.
We and/or our partners may be subject to administrative, civil and criminal sanctions for violations of any of these federal and
state laws.
Our employees, principal investigators, consultants, commercial
partners or vendors may engage in misconduct or other improper activities, including non-compliance with regulatory standards.
We are also exposed to the risk of employees,
independent contractors, principal investigators, consultants, commercial partners or vendors engaging in fraud or other misconduct.
Misconduct by employees, independent contractors, principal investigators, consultants, commercial partners and vendors could include
intentional failures to comply with EU regulations, to provide accurate information to the EMA or EU Member States authorities
or to comply with manufacturing or quality standards we have or will have established. In particular, sales, marketing and business
arrangements in the healthcare industry are subject to extensive laws and regulations intended to prevent fraud, misconduct, kickbacks,
self-dealing and other abusive practices such as promotion of products by medical practitioners. Of general application are the
European Anti-Fraud Office Regulation 883/2013, and the UK Bribery Act 2010. Under the latter, a commercial organisation can be
guilty of the offence if the bribery is carried out by an employee, agent, subsidiary, or another third-party, and the location
of the third-party is irrelevant to the prosecution. The advertising of medicinal products in the EU is regulated by Title VIII
of European Directive 2001/83/EC. The corresponding UK implementing legislation is Part 14 of the Human Medicines Regulations 2012
(S.I. 2012/1916 as amended). Such laws and regulations may restrict or prohibit a wide range of pricing, discounting, marketing
and promotion, sales commission, customer incentive programmes and other business arrangements. Misconduct could also involve the
improper use of information obtained in the course of clinical studies, which could result in regulatory sanctions and serious
and irreparable harm to our reputation. This could also apply with respect to data privacy. In the EU, the collection and use of
Personal Data is governed by EU Directive 95/46/EEC. In the UK this was implemented by the Data Protection Act 1998. However, the
current legislation is in the process of being replaced by the General Data Protection Regulation (EU) 2016/679, or GDPR, on the
protection of natural persons with regard to the processing of personal data and on the free movement of such data. The GDPR entered
into force on May 24, 2016 and repealed Directive 95/46/EC. The GDPR will apply directly in all member states (including the UK)
from May 25, 2018. It is not always possible to identify and deter misconduct by employees or other parties. The precautions we
take to detect and prevent this activity may not protect us from legal or regulatory action resulting from a failure to comply
with applicable laws or regulations. Misconduct by our employees, principal investigators, consultants, commercial partners or
vendors could result in significant financial penalties, criminal sanctions and thus have a material adverse effect on our business,
including through the imposition of significant fines or other sanctions, and our reputation.
Risks Related to our Intellectual Property
Our success depends on our ability to protect our intellectual
property and our proprietary technologies.
Our commercial success depends in part on
our ability to obtain and maintain patent protection and trade secret protection for our product candidates, proprietary technologies,
and their uses as well as our ability to operate without infringing upon the proprietary rights of others. We can provide no assurance
that our patent applications or those of our licensors will result in additional patents being issued or that issued patents will
afford sufficient protection against competitors with similar technologies, nor can there be any assurance that the patents issued
will not be infringed, designed around or invalidated by third parties. Even issued patents may later be found unenforceable or
may be modified or revoked in proceedings instituted by third parties before various patent offices or in courts. The degree of
future protection for our proprietary rights is uncertain. Only limited protection may be available and may not adequately protect
our rights or permit us to gain or keep any competitive advantage. Composition-of-matter patents on the biological or chemical
active pharmaceutical ingredients are generally considered to offer the strongest protection of intellectual property and provide
the broadest scope of patent protection for pharmaceutical products, as such patents provide protection without regard to any method
of use or any method of manufacturing. While we have issued composition-of-matter patents in the United States and other countries
for Coversin, we cannot be certain that the claims in our issued composition-of-matter patents will not be found invalid or unenforceable
if challenged. We cannot be certain that the claims in our patent applications covering composition-of-matter or formulations of
our product candidates will be considered patentable by the United States Patent and Trademark Office, or USPTO, and courts in
the United States or by the patent offices and courts in foreign countries, nor can we be certain that the claims in our issued
composition-of-matter patents will not be found invalid or unenforceable if challenged. Even if our patent applications covering
formulations of our product candidates issue as patents, the formulation patents protect a specific formulation of a product and
may not be enforced against competitors making and marketing a product that has the same active pharmaceutical ingredient in a
different formulation. Method-of-use patents protect the use of a product for the specified method or for treatment of a particular
indication. This type of patents may not be enforced against competitors making and marketing a product that has the same active
pharmaceutical ingredient but is used for a method not included in the patent. Moreover, even if competitors do not actively promote
their product for our targeted indications, physicians may prescribe these products “off-label.” Although off-label
prescriptions may infringe or contribute to the infringement of method-of-use patents, the practice is common and such infringement
is difficult to prevent or prosecute.
Our issued patents for Coversin and its uses are expected to
expire between 2024 and 2031 (excluding any patent term adjustment or potential patent term extension). Our pending patent applications
cover formulations, combination products and use of Coversin to treat various indications and, if issued, are expected to expire
at various times that range from 2024 to 2037 (excluding any potential patent term adjustment or extension).
The patent application process is subject
to numerous risks and uncertainties, and there can be no assurance that we or any of our future development partners will be successful
in protecting our product candidates by obtaining and defending patents. These risks and uncertainties include the following:
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the USPTO and various foreign governmental patent agencies require
compliance with a number of procedural, documentary, fee payment and other provisions during the patent process. There are situations
in which noncompliance can result in abandonment or lapse of a patent or patent application, resulting in partial or complete loss
of patent rights in the relevant jurisdiction. In such an event, competitors might be able to enter the market earlier than would
otherwise have been the case;
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patent applications may not result in any patents being issued;
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patents that may be issued or in-licensed may be challenged, invalidated,
modified, revoked, circumvented, found to be unenforceable or otherwise may not provide any competitive advantage;
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our competitors, many of whom have substantially greater resources
and many of whom have made significant investments in competing technologies, may seek or may have already obtained patents that
will limit, interfere with or eliminate our ability to make, use, and sell our potential product candidates;
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there may be significant pressure on the U.S. government and international
governmental bodies to limit the scope of patent protection both inside and outside the United States for disease treatments that
prove successful, as a matter of public policy regarding worldwide health concerns; and
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countries other than the United States may have patent laws less favorable
to patentees than those upheld by U.S. courts, allowing foreign competitors a better opportunity to create, develop and market
competing product candidates.
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In addition, we rely on the protection of
our trade secrets and proprietary know-how. Although we have taken steps to protect our trade secrets and unpatented know-how,
including entering into confidentiality agreements with third parties, and confidential information and inventions agreements with
employees, consultants and advisors, we cannot provide any assurances that all such agreements have been duly executed, and third
parties may still obtain this information or may come upon this or similar information independently. Additionally, if the steps
taken to maintain our trade secrets are deemed inadequate, we may have insufficient recourse against third parties for misappropriating
its trade secrets. If any of these events occurs or if we otherwise lose protection for our trade secrets or proprietary know-how,
our business may be harmed.
Others may claim an ownership interest in our intellectual
property which could expose it to litigation and have a significant adverse effect on its prospects.
A third party may claim an ownership interest
in one or more of our patents or other intellectual property. A third party could bring legal actions against us and seek monetary
damages and/or enjoin clinical testing, manufacturing and marketing of the affected product or products. While we believe we own
the right, title and interest in the patents for which we have applied and our other intellectual property and are presently unaware
of any claims or assertions by third-parties with respect to our patents or other intellectual property, we cannot guarantee that
a third-party will not assert a claim or an interest in any of such patents or intellectual property. If we become involved in
any litigation, it could consume a substantial portion of our resources, and cause a significant diversion of effort by our technical
and management personnel. If any of these actions are successful, in addition to any potential liability for damages, we could
be required to obtain a license to continue to manufacture or market the affected product, in which case we may be required to
pay substantial royalties or grant cross-licenses to our patents. We cannot, however, assure you that any such license will be
available on acceptable terms, if at all. Ultimately, we could be prevented from commercializing a product, or be forced to cease
some aspect of our business operations as a result of claims of patent infringement or violation of other IP rights, Further, the
outcome of IP litigation is subject to uncertainties that cannot be adequately quantified in advance, including the demeanor and
credibility of witnesses and the identity of the adverse party. This is especially true in IP cases that may turn on the testimony
of experts as to technical facts upon which experts may reasonably disagree.
Risks Related to our Business Operations
We currently have no marketing, sales or distribution
infrastructure with respect to Coversin. If we are unable to develop our sales, marketing and distribution capability on our own
or through collaborations with marketing partners, we will not be successful in commercializing our product candidates.
We currently have no marketing, sales or
distribution capabilities and have limited sales or marketing experience within our organization. If our product candidate Coversin
is approved, we intend either to establish a sales and marketing organization with technical expertise and supporting distribution
capabilities to commercialize Coversin, or to outsource this function to a third party. Either of these options would be expensive
and time consuming. Some or all of these costs may be incurred in advance of any approval of Coversin. In addition, we may not
be able to hire a sales force in the United States or other target market that is sufficient in size or has adequate expertise
in the medical markets that we intend to target. Any failure or delay in the development of our or third parties’ internal
sales, marketing and distribution capabilities would adversely impact the commercialization of Coversin and other future product
candidates.
With respect to our existing and future
product candidates, we may choose to collaborate with third parties that have direct sales forces and established distribution
systems, either to augment or to serve as an alternative to our own sales force and distribution systems. Our product revenue may
be lower than if it directly marketed or sold any approved products. In addition, any revenue we receive will depend in whole or
in part upon the efforts of these third parties, which may not be successful and are generally not within our control. If we are
unable to enter into these arrangements on acceptable terms or at all, we may not be able to successfully commercialize any approved
products. If we are not successful in commercializing any approved products, our future product revenue will suffer and we may
incur significant additional losses.
We only have a limited number of employees to manage and
operate our business.
As of December 31, 2016, we had fifteen
full-time employees and a further two full-time equivalent consultants. Our focus on the development of Coversin requires us to
optimize cash utilization and to manage and operate our business in a highly efficient manner. We cannot assure you that we will
be able to hire and/or retain adequate staffing levels to develop Coversin or run our operations and/or to accomplish all of the
objectives that we otherwise would seek to accomplish.
We depend heavily on our executive officers, directors,
and principal consultants and the loss of their services would materially harm our business.
Our success depends, and will likely continue
to depend, upon our ability to hire, retain the services of our current executive officers, directors, principal consultants and
others. In addition, we have established relationships with universities and research institutions which have historically provided,
and continue to provide, us with access to research laboratories, clinical trials, facilities and patients. The loss of the services
of any of these individuals or institutions could have a material adverse effect on our business.
Our industry is highly competitive, and our product candidates
may become obsolete.
We are engaged in a rapidly evolving field.
Competition from other pharmaceutical companies, biotechnology companies and research and academic institutions is intense and
likely to increase. Many of those companies and institutions have substantially greater financial, technical and human resources
than us. Those companies and institutions also have substantially greater experience in developing products, conducting clinical
trials, obtaining regulatory approval and in manufacturing and marketing pharmaceutical products. Our competitors may succeed in
obtaining regulatory approval for their products more rapidly than we do. Competitors have developed or are in the process of developing
technologies that are, or in the future may be, the basis for competitive products, such as Alexion Pharmaceuticals’ Soliris
®
(eculizumab). Our competitors may succeed in developing products that are more effective and/or cost competitive than those we
are developing, or that would render our product candidates less competitive or even obsolete. In addition, one or more of our
competitors may achieve product commercialization or patent protection earlier than us, which could materially adversely affect
our business.
If the FDA or other applicable regulatory authorities
approve generic products that compete with any of our or any of our partners’ product candidates, the sales of our product
candidates would be adversely affected.
Once an NDA or marketing authorization application
outside the United States is approved, the product covered thereby becomes a “listed drug” that can, in turn, be cited
by potential competitors in support of approval of an abbreviated new drug application in the United States. Agency regulations
and other applicable regulations and policies provide incentives to manufacturers to create modified, non-infringing versions of
a drug to facilitate the approval of an abbreviated new drug application or other application for generic substitutes in the United
States and in nearly every pharmaceutical market around the world. These generic equivalents, which must meet the same quality
standards as branded pharmaceuticals, would be significantly less costly than us to bring to market, and companies that produce
generic equivalents are generally able to offer their products at lower prices. Thus, after the introduction of a generic competitor,
a significant percentage of the sales of any branded product is typically lost to the generic product. Accordingly, competition
from generic equivalents to our or any of our partners’ future products, if any, could materially adversely impact our future
revenue, profitability and financial condition.
If physicians and patients do not accept our future products
or if the market for indications for which any product candidate is approved is smaller than expected, we may be unable to generate
significant revenue, if any.
Even if any of our product candidates obtain
regulatory approval, they may not gain market acceptance among physicians, patients, and third-party payers. Physicians may decide
not to recommend its treatments for a variety of reasons including:
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timing of market introduction of competitive products;
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demonstration of clinical safety and efficacy compared to other products;
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limited or no coverage by third-party payers;
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convenience and ease of administration;
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prevalence and severity of adverse side effects;
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restrictions in the label of the drug;
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other potential advantages of alternative treatment methods; and
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ineffective marketing and distribution support of our products.
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If any of our product candidates are approved,
but fail to achieve market acceptance or such market is smaller than anticipated, we may not be able to generate significant revenue
and our business would suffer.
The uncertainty associated with pharmaceutical reimbursement
and related matters may adversely affect our business.
Market acceptance and sales of any one or
more of our product candidates will depend on reimbursement policies and may be affected by future healthcare reform measures in
the United States and in foreign jurisdictions. Government authorities and third-party payers, such as private health insurers
and health maintenance organizations, decide which drugs they will cover and establish payment levels. We cannot be certain that
reimbursement will be available for any of our product candidates. Also, we cannot be certain that reimbursement policies will
not reduce the demand for, or the price paid for, our products. The insurance coverage and reimbursement status of newly-approved
products for orphan diseases is particularly uncertain, and failure to obtain or maintain adequate coverage and reimbursement for
Coversin or any other product candidates could limit our ability to generate revenue.
The United States and several foreign jurisdictions
are considering, or have already enacted, a number of legislative and regulatory proposals to change the healthcare system in ways
that could affect our ability to sell our products profitably. There is significant interest in promoting changes in healthcare
systems with the stated goals of containing healthcare costs, improving quality and/or expanding access to healthcare. In the United
States, the pharmaceutical industry has been a particular focus of these efforts and has been significantly affected by major legislative
initiatives. We expect to experience pricing pressures in connection with the sale of any products that we develop due to the trend
toward managed healthcare, increasing influence of health maintenance organizations and additional legislative proposals.
In March 2010, the Patient Protection and
Affordable Care Act, as amended by the Health Care and Education Affordability Reconciliation Act, or collectively, ACA, became
law in the United States. More recently, President Trump and other U.S. lawmakers have made statements about potentially repealing
and/or replacing the ACA, although specific legislation for such a repeal or replacement is still in its early stages. While we
are unable to predict what changes may ultimately be enacted, to the extent that future changes affect how our products are paid
for and reimbursed by government and private payers our business could be adversely impacted.
If any product liability lawsuits are successfully brought
against us or any of our collaborative partners, we may incur substantial liabilities and may be required to limit commercialization
of our product candidates.
We face an inherent risk of product liability
lawsuits related to the testing of our product candidates in seriously ill patients and will face an even greater risk if product
candidates are approved by regulatory authorities and introduced commercially. Product liability claims may be brought against
us or our partners by participants enrolled in our clinical trials, patients, health care providers or others using, administering
or selling any of our future approved products. If we cannot successfully defend ourselves against any such claims, we may incur
substantial liabilities, which may result in:
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decreased demand for any of our future approved products;
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injury to our reputation;
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withdrawal of clinical trial participants;
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termination of clinical trial sites or entire trial programs;
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significant litigation costs;
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substantial monetary awards to or costly settlements with patients
or other claimants;
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product recalls or a change in the indications for which they may
be used;
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diversion of management and scientific resources from our business
operations; and
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the inability to commercialize our product candidates.
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If any of our product candidates are approved
for commercial sale, we will be highly dependent upon consumer perceptions of us and the safety and quality of our products. We
could be adversely affected if we are subject to negative publicity associated with illness or other adverse effects resulting
from patients’ use or misuse of our products or any similar products distributed by other companies.
Although we currently carry clinical trial
insurance, the amount of such insurance coverage may not be adequate. In addition, we will need to obtain more comprehensive
insurance and increase our insurance coverage when we begin the commercialization of our product candidates. Insurance coverage
is becoming increasingly expensive. As a result, we may be unable to maintain or obtain sufficient insurance at a reasonable cost
to protect us against losses that could have a material adverse effect on our business.
We enter into various contracts in the normal course of
our business in which we indemnify the other party to the contract. In the event we have to perform under these indemnification
provisions, it could have a material adverse effect on our business, financial condition and results of operations.
In the normal course of business, we periodically
enter into academic, commercial, service, collaboration, licensing, consulting and other agreements that contain indemnification
provisions. With respect to our academic and other research agreements, we typically indemnify the institution and related parties
from losses arising from claims relating to the products, processes or services made, used, sold or performed pursuant to the agreements
for which we have secured licenses, and from claims arising from our or our sublicensees’ exercise of rights under the agreement.
With respect to our commercial agreements, we indemnify our vendors from any third-party product liability claims that could result
from the production, use or consumption of the product, as well as for alleged infringements of any patent or other intellectual
property right by a third party.
Should our obligation under an indemnification
provision exceed applicable insurance coverage or if we were denied insurance coverage, our business, financial condition and results
of operations could be adversely affected. Similarly, if we are relying on a collaborator to indemnify us and the collaborator
is denied insurance coverage or the indemnification obligation exceeds the applicable insurance coverage and does not have other
assets available to indemnify us, our business, financial condition and results of operations could be adversely affected.
Our business and operations would suffer in the event
of computer system failures.
Despite the implementation of security measures,
our internal computer systems, and those of our partners and other third parties on which we rely, are vulnerable to damage from
computer viruses, unauthorized access, natural disasters, fire, terrorism, war and telecommunication and electrical failures. In
addition, our systems safeguard important confidential personal data regarding our subjects. If a disruption event were to occur
and cause interruptions in our operations, it could result in a material disruption of our drug development programs. For example,
the loss of clinical trial data from completed, ongoing or planned clinical trials could result in delays in our regulatory approval
efforts and significantly increase our costs to recover or reproduce the data. To the extent that any disruption or security breach
results in a loss of or damage to our data or applications, or inappropriate disclosure of confidential or proprietary information,
we could incur liability and the further development of Coversin and other product candidates could be delayed.
If we fail to develop and commercialize other product
candidates, we may be unable to grow our business.
Although the development and commercialization
of Coversin is our primary focus, as part of our longer-term growth strategy, we plan to evaluate the development and commercialization
of other therapies related to immune-mediated, inflammatory, orphan and other diseases. We will evaluate internal opportunities
from our current product candidates, and also may choose to in-license or acquire other product candidates as well as commercial
products to treat patients suffering from immune-mediated or orphan or other disorders with high unmet medical needs and limited
treatment options. These other product candidates will require additional, time-consuming development efforts prior to commercial
sale, including preclinical studies, clinical trials and approval by the FDA, EMA and/or applicable foreign regulatory authorities.
All product candidates are prone to the risks of failure that are inherent in pharmaceutical product development, including the
possibility that the product candidate will not be shown to be sufficiently safe and effective for approval by regulatory authorities.
In addition, we cannot assure you that any such products that are approved will be manufactured or produced economically, successfully
commercialized or widely accepted in the marketplace or be more effective than other commercially available alternatives.
Risks Related to Our Reliance on Third
Parties
If the third parties on which we rely for our clinical
trials and results do not perform our clinical trial activities in accordance with good clinical practices and related regulatory
requirements, we may be unable to obtain regulatory approval for or commercialize our product candidates.
We use and heavily rely on third-party service
providers to conduct and/or oversee the clinical trials of our product candidates and expect to continue to do so for the foreseeable
future. Nonetheless, we are responsible for confirming that each of our clinical trials is conducted in accordance with the FDAs
and/or EMA’s requirements and its general investigational plan and protocol.
The FDA and EMA require us and our third-party
service providers to comply with regulations and standards, commonly referred to as good clinical practices, for conducting, recording
and reporting the results of clinical trials to assure that data and reported results are credible and accurate and that the trial
participants are adequately protected. Our reliance on third parties that we do not control does not relieve us of these responsibilities
and requirements. Third parties may not complete activities on schedule or conduct our clinical trials in accordance with regulatory
requirements or the respective trial plans and protocols. In addition, third parties may not be able to repeat their past successes
in clinical trials. The third parties’ failure to carry out their obligations could delay or prevent the development, approval
and commercialization of our product candidates or result in enforcement action against us.
Use of third parties to manufacture our product candidates
may increase the risk that we will not have sufficient quantities of our product candidates, products, or necessary quantities
at an acceptable cost.
We do not own or operate manufacturing facilities
for the production of clinical or commercial quantities of our product candidates, and we lack the resources and the capabilities
to do so. As a result, we currently rely on third parties for supply of the active pharmaceutical ingredients, or API, in our product
candidates. Our strategy is to outsource all manufacturing of our product candidates and products to third parties.
We currently engage a third-party manufacturer
to provide clinical material of the API, lyophilization, release testing and fill and finish services for the final drug product
formulation of Coversin that is being used in our clinical trials. Although we believe that there are several potential alternative
manufacturers who could manufacture Coversin, we may incur added costs and delays in identifying and qualifying any such replacement.
In addition, we have not yet concluded a commercial supply contract with any commercial manufacturer. There is no assurance that
we will be able to timely secure needed supply arrangements on satisfactory terms, or at all. Our failure to secure these arrangements
as needed could have a material adverse effect on our ability to complete the development of our product candidates or, to commercialize
them. We may be unable to conclude agreements for commercial supply with third-party manufacturers, or may be unable to do so on
acceptable terms. There may be difficulties in scaling up to commercial quantities and formulation of Coversin and the costs of
manufacturing could be prohibitive.
Even if we are able to establish and maintain
arrangements with third-party manufacturers, reliance on third-party manufacturers entails additional risks, including:
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reliance on third-parties for manufacturing process development, regulatory
compliance and quality assurance;
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limitations on supply availability resulting from capacity and scheduling
constraints of third-parties;
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the possible breach of manufacturing agreements by third-parties because
of factors beyond our control; and
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the possible termination or non-renewal of the manufacturing agreements
by the third-party, at a time that is costly or inconvenient to us.
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If we do not maintain our key manufacturing
relationships, we may fail to find replacement manufacturers or develop our own manufacturing capabilities, which could delay or
impair our ability to obtain regulatory approval for our products. If we do find replacement manufacturers, we may not be able
to enter into agreements with them on terms and conditions favorable to us and there could be a substantial delay before new facilities
could be qualified and registered with the FDA and other foreign regulatory authorities.
The FDA, EMA and other foreign regulatory
authorities require manufacturers to register manufacturing facilities. The FDA and corresponding foreign regulators also inspect
these facilities to confirm compliance with current good manufacturing practices, or cGMPs. Contract manufacturers may face manufacturing
or quality control problems causing drug substance production and shipment delays or a situation where the contractor may not be
able to maintain compliance with the applicable cGMP requirements. Any failure to comply with cGMP requirements or other FDA, EMA
and comparable foreign regulatory requirements could adversely affect our clinical research activities and our ability to develop
our product candidates and market our products following approval.
If our third-party manufacturer of Coversin is unable
to increase the scale of its production of Coversin, and/or increase the product yield of its manufacturing, then our costs to
manufacture the product may increase and commercialization may be delayed.
In order to produce sufficient quantities
of Coversin to meet the demand for clinical trials and subsequent commercialization, our third party manufacturer of Coversin will
be required to increase its production and optimize its manufacturing processes while maintaining the quality of the product. The
transition to larger scale production could prove difficult. In addition, if our third party manufacturer is not able to optimize
its manufacturing process to increase the product yield for Coversin, or if it is unable to produce increased amounts of Coversin
while maintaining the quality of the product, then we may not be able to meet the demands of clinical trials or market demands,
which could decrease our ability to generate profits and have a material adverse impact on our business and results of operation.
Risks Related to our Ordinary Shares
and ADSs
Ownership of our ADSs and/or Ordinary Shares involves
a high degree of risk.
Investing in and owning our ADSs and Ordinary
Shares involve a high degree of risk. Shareholders should read carefully the risk factors provided within this section, as well
as our public documents filed with the SEC, including the financial statements therein.
If we are deemed or become a passive foreign investment
company, or PFIC, for U.S. federal income tax purposes in 2017 or in any prior or subsequent years, there may be negative
tax consequences for U.S. taxpayers that are holders of our ADSs.
We will be treated
as a passive foreign investment company, or PFIC, for U.S. federal income tax purposes in any taxable year in which either
(i) at least 75% of our gross income is “passive income” or (ii) on average at least 50% of our assets by value produce
passive income or are held for the production of passive income. Passive income for this purpose generally includes, among other
things, certain dividends, interest, royalties, rents and gains from commodities and securities transactions and from the sale
or exchange of property that gives rise to passive income. Passive income also includes amounts derived by reason of the temporary
investment of funds, including those raised in a public offering. In determining whether a non-U.S. corporation is a PFIC,
a proportionate share of the income and assets of each corporation in which it owns, directly or indirectly, at least a 25% interest
(by value) is taken into account.
We believe
we are not a PFIC for 2016 but may be deemed a PFIC for 2017 and future taxable years. If we are
deemed a PFIC for any taxable year, and a U.S. Holder does not make an election to treat us as a “qualified
electing fund,” or QEF, or make a “mark-to-market” election, then “excess distributions” to a
U.S. shareholder, and any gain realized on the sale or other disposition of our ADSs will be subject to special rules. Under
these rules: (i) the excess distribution or gain would be allocated ratably over the U.S. Holder’s holding period for
ADSs; (ii) the amount allocated to the current taxable year and any period prior to the first day of the first taxable year
in which we were a PFIC would be taxed as ordinary income; and (iii) the amount allocated to each of the other
taxable years would be subject to tax at the highest rate of tax in effect for the applicable class of taxpayer for that
year, and an interest charge for the deemed deferral benefit would be imposed with respect to the resulting tax attributable
to each such other taxable year. In addition, if the U.S. Internal Revenue Service determines that we are
a PFIC for a year with respect to which we have determined that we were not a PFIC, it may be too late for a
U.S. shareholder to make a timely QEF or mark-to-market election. U.S. Holders who hold our ADSs during a period when we are
a PFIC will be subject to the foregoing rules, even if we cease to be a PFIC in subsequent years, subject
to exceptions for U.S. shareholders who made a timely QEF or mark-to-market election. A U.S. shareholder can make a QEF
election by completing the relevant portions of and filing IRS Form 8621 in accordance with the instructions thereto. A QEF
election generally may not be revoked without the consent of the IRS. Upon request of any shareholder or pursuant to an
agreement with any shareholder, we will annually furnish U.S. shareholders with information needed in order to complete IRS
Form 8621 (which form would be required to be filed with the IRS on an annual basis by the U.S. shareholder) and to make and
maintain a valid QEF election for any year in which we or any of our subsidiaries are a PFIC.
A limited public market exists for our securities and
we cannot assure you that our securities will continue to be listed on the NASDAQ Capital Market or any other securities exchange
or that an active trading market will ever develop for any of our securities.
Our ADSs were approved for listing and began
trading on the NASDAQ Capital Market under the symbol “CLTX” on January 31, 2014 and commenced trading under the symbol
“AKTX” commencing on September 21, 2015. An active trading market for our shares has not developed and, even if it
does, it may not be sustained. In addition, we cannot assure you that we will be successful in meeting the continuing listing
standards of the NASDAQ Capital Market and cannot assure you that our ADSs will be listed on a national securities exchange. If
an active market for our common stock does not develop or is not sustained, it may be difficult for investors to sell their shares
without depressing the market price for the shares or at all. Further, an inactive market may also impair our ability to raise
capital and may impair our ability to enter into strategic partnerships or acquire companies or products by using our ADSs or Ordinary
Shares as consideration.
The market price of our ADSs may be volatile and may fluctuate
in a way that is disproportionate to our operating performance.
Even if an active trading market develops
for our ADSs, our stock price may experience substantial volatility as a result of a number of factors. The market prices for securities
of biotechnology companies in general have been highly volatile and may continue to be so in the future. The following factors,
in addition to other risk factors described in this section, may have a significant impact on the market price of our ADSs:
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sales or potential sales of substantial amounts of our Ordinary Shares
or ADSs;
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delay or failure in initiating, enrolling, or completing pre-clinical
or clinical trials or unsatisfactory results of these trials or events reported in any of our current or future clinical trials;
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announcements about us or about our competitors, including clinical
trial results, regulatory approvals or new product introductions;
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developments concerning our licensors or product manufacturers;
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litigation and other developments relating to our patents or other
proprietary rights or those of our competitors;
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conditions in the pharmaceutical or biotechnology industries;
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governmental regulation and legislation;
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variations in our anticipated or actual operating results;
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change in securities analysts’ estimates of our performance,
or our failure to meet analysts’ expectations;
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whether, to what extent and under what conditions the FDA or EMA will
permit us to continue developing our product candidates, if at all, and if development is continued, any reports of safety issues
or other adverse events observed in any potential future studies of these product candidates;
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our ability to enter into new collaborative arrangements with respect
to our product candidates;
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the terms and timing of any future collaborative, licensing or other
arrangements that we may establish;
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our ability to raise additional capital to carry through with our
clinical development plans and current and future operations and the terms of any related financing arrangements;
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the timing of achievement of, or failure to achieve, our and any potential
future collaborators’ clinical, regulatory and other milestones, such as the commencement of clinical development, the completion
of a clinical trial or the receipt of regulatory approval;
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announcement of FDA or EMA approval or non-approval of our product
candidates or delays in or adverse events during the FDA or EMA review process;
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actions taken by regulatory agencies with respect to our product candidates
or products, our clinical trials or our sales and marketing activities, including regulatory actions requiring or leading to restrictions,
limitations and/or warnings in the label of an approved product candidate;
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uncontemplated problems in the supply of the raw materials used to
produce our product candidates;
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the commercial success of any product approved by the FDA, EMA or
any other foreign counterpart;
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introductions or announcements of technological innovations or new
products by us, our potential future collaborators, or our competitors, and the timing of these introductions or announcements;
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market conditions for equity investments in general, or the biotechnology
or pharmaceutical industries in particular;
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we may have limited or very low trading volume that may increase the
volatility of the market price of our ADSs;
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regulatory developments in the United States and foreign countries;
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changes in the structure or reimbursement policies of health care
payment systems;
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any intellectual property infringement lawsuit involving us;
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actual or anticipated fluctuations in our results of operations;
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changes in financial estimates or recommendations by securities analysts;
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hedging activity that may develop regarding our ADSs;
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regional or worldwide recession;
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sales of large blocks of our Ordinary Shares or ADSs;
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sales of our Ordinary Shares or ADSs by our executive officers, directors
and significant shareholders;
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managerial costs and expenses;
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changes in accounting principles; and
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the loss of any of our key scientific or management personnel.
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The stock markets in general, and the markets
for biotechnology stocks in particular, have experienced significant volatility that has often been unrelated to the operating
performance of particular companies. The financial markets continue to face significant uncertainty, resulting in a decline in
investor confidence and concerns about the proper functioning of the securities markets, which decline in general investor confidence
has resulted in depressed stock prices for many companies notwithstanding the lack of a fundamental change in their underlying
business models or prospects. These broad market fluctuations may adversely affect the trading price of our ADSs.
In the past, class action litigation has
often been instituted against companies whose securities have experienced periods of volatility in market price. Any such litigation
brought against us could result in substantial costs, which would hurt our financial condition and results of operations and divert
management’s attention and resources, which could result in delays of our clinical trials or commercialization efforts.
Insiders have control over us which could delay or prevent
a change in corporate control or result in the entrenchment of management and/or the board of directors.
As of December 31, 2016, our directors
and executive officers, together with their affiliates and related persons, beneficially own, in the aggregate, approximately
62.1% of our outstanding Ordinary Shares. RPC, which is controlled by our chairman Dr. Ray Prudo, beneficially owns
approximately 61.3% of our outstanding Ordinary Shares. Accordingly, these shareholders, if acting together, or Dr. Prudo,
individually, may have the ability to impact the outcome of matters submitted to our shareholders for approval, including the
election and removal of directors and any merger, consolidation, or sale of all or substantially all of our assets. In
addition, these persons may have the ability to influence the management and affairs of our company. Accordingly, this
concentration of ownership may harm the market price of our ADSs by:
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delaying, deferring, or preventing a change in control;
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entrenching our management and/or the board of directors;
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impeding a merger, consolidation, takeover, or other business combination
involving us; or
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discouraging a potential acquirer from making a tender offer or otherwise
attempting to obtain control of us.
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Future sales and issuances of our Ordinary Shares or ADSs
or rights to purchase Ordinary Shares or ADSs pursuant to our equity incentive plans could result in additional dilution of the
percentage ownership of our shareholders and could cause our share price to fall.
We expect that
significant additional capital will be needed in the future to continue our planned operations. To the extent we raise additional
capital by issuing equity securities, our shareholders may experience substantial dilution. We may sell Ordinary Shares (which
may be represented by ADSs), convertible securities or other equity securities in one or more transactions at prices and in a manner
we determine from time to time. If we sell Ordinary Shares, convertible securities or other equity securities in more than one
transaction, investors may be materially diluted by subsequent sales. Such sales may also result in material dilution to our existing
shareholders, and new investors could gain rights superior to our existing shareholders.
Sales of a substantial number of our ADSs by our existing
shareholders in the public market could cause our stock price to fall.
Sales of a substantial
number of our ADSs in the public market or the perception that these sales might occur, could significantly reduce the market price
of our ADSs and impair our ability to raise adequate capital through the sale of additional equity securities.
The vote by the United Kingdom to leave the European Union
could adversely affect our business, financial condition, results of operations and prospects.
On March 29, 2017, the Prime Minister of
the United Kingdom submitted formal notice to the European Union in order to trigger Article 50 of the Treaty on European Union.
This is the formal mechanism which begins the two-year process of negotiating the UK’s exit from the EU, and to determine
the future terms of the UK’s relationship with the EU, including the terms of trade between the UK and the EU, and potentially
other countries. The effects of the UK exiting the EU (commonly referred to as Brexit) will depend on any agreements the UK makes
to retain access to EU markets. In addition, Brexit could lead to legal uncertainty and potentially divergent national laws and
regulations as the UK determines which EU laws to replace or replicate. Brexit could adversely affect economic or market conditions
in the UK, Europe or globally and could contribute to instability in global financial markets, in particular until there is more
certainty as to the outcome of the aforementioned decisions and negotiations. Exports from the United Kingdom may incur increased
duties and tariffs following Brexit, or Brexit could result in the regulatory compliance and patent costs associated with our business
compliance costs increasing significantly so as to adversely affect our financial condition, results of operations and prospects.
Our regulatory compliance costs may increase as a result of Brexit. Following an exit by the UK from the EU, we may be required
to register any current EU-wide patents separately with the UK Intellectual Property Office, which could require significant additional
expense. Further, our regulatory compliance costs may increase as a result of Brexit, as on an exit from the EU, the UK may cease
compliance with the EU and the EMA’s legislative regime for medicines, their research, development and commercialisation.
Any changes to such regulatory regimes could require us to comply with separate regimes in the UK and the EU, or to develop new
policies and procedures or reorganise our operations, any of which could increase our compliance costs.Brexit has also led to a
decrease in the value of pounds sterling against the U.S. dollar, as well as general volatility in currency exchange markets. The
challenges faced by the UK following Brexit could result in an overall decline in trade and economic growth and/or an increase
in economic volatility and therefore may affect the attractiveness of the UK as a leading centre for business and commerce. Any
of the aforementioned possible effects of Brexit, and others that the we cannot anticipate, may materially adversely affect our
business, financial condition, results of operations and prospects.
Provisions in our articles of association and under English
law could make an acquisition of our company more difficult and may prevent attempts by our shareholders to replace or remove our
organization management.
Provisions in our articles of association
may delay or prevent an acquisition or a change in management. These provisions include a staggered board and prohibition on actions
by written consent of our shareholders. Although we believe these provisions collectively will provide for an opportunity to receive
higher bids by requiring potential acquirors to negotiate with our board of directors, they would apply even if the offer may be
considered beneficial by some shareholders. In addition, these provisions may frustrate or prevent any attempts by our shareholders
to replace or remove then current management by making it more difficult for shareholders to replace members of the board of directors,
which is responsible for appointing the members of management.
We do not anticipate paying cash dividends, and accordingly,
shareholders must rely on the appreciation in our ADSs for any return on their investment.
We currently anticipate that we will retain
future earnings for the development, operation and expansion of our business and do not anticipate declaring or paying any cash
dividends for the foreseeable future. Therefore, the success of an investment in our ADSs will depend upon any future appreciation
in their value. There is no guarantee that our ADSs will appreciate in value or even maintain the price at which our shareholders
have purchased their shares.
We were and are required to evaluate our internal control
over financial reporting under Section 404 of the Sarbanes-Oxley Act of 2002, and any adverse results from such evaluation could
result in a loss of investor confidence in our financial reports and have an adverse effect on the price of our ADSs.
Pursuant to Section 404 of the Sarbanes-Oxley
Act of 2002, we are required to furnish an annual report by our management on our internal control over financial reporting. Such
reports contain, among other matters, an assessment of the effectiveness of our internal control over financial reporting as of
the end of our fiscal year, including a statement as to whether or not our internal control over financial reporting is effective.
These assessments must include disclosure of any material weaknesses in our internal control over financial reporting identified
by management. If we are unable to assert that our internal control over financial reporting is effective, we could lose investor
confidence in the accuracy and completeness of our financial reports, which could have an adverse effect on the price of our stock
ADSs.
Our independent registered public accounting
firm is not required to formally attest to the effectiveness of our internal control over financial reporting until the later of
the year following our first annual report required to be filed with the SEC, or the date we are no longer an “emerging growth
company.” At such time, our independent registered public accounting firm may issue a report that is adverse in the event
it is not satisfied with the level at which our controls are documented, designed or operating. Our remediation efforts may not
enable us to avoid a material weakness in the future. We will remain an “emerging growth company” for up to five years,
although if the market value of our ADSs that is held by non-affiliates exceeds $700 million as of any June 30 before that time,
we would cease to be an “emerging growth company” as of the following December 31. Furthermore, as a result of the
extended time period afforded us as an “emerging growth company,” the effectiveness of our internal control over financial
reporting may not be as transparent to our investors as they may otherwise expect of a public reporting company, which could further
impact investor confidence in the accuracy and completeness of our financial reports.
We incur significant costs and demands upon management
as a result of complying with the laws and regulations affecting public companies, which could harm our operating results.
As a public company, we incur significant
legal, accounting and other expenses, including costs associated with public company reporting requirements. We also incur costs
associated with current corporate governance requirements, including requirements under Section 404 and other provisions of SOX,
as well as rules implemented by the SEC and The NASDAQ Stock Market. The expenses incurred by public companies for reporting and
corporate governance purposes have increased dramatically in recent years.
We are an “emerging growth company” and a
“foreign private issuer” and as a result of this and other reduced disclosure requirements applicable to emerging growth
companies and foreign private issuers, our ADSs may be less attractive to investors.
We are an “emerging growth company,”
as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act, and we intend to take advantage of certain exemptions
from various reporting requirements that are applicable to other public companies that are not “emerging growth companies”
including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley
Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions
from the requirements of holding a nonbinding advisory vote on executive compensation and shareholder approval of any golden parachute
payments not previously approved. In addition, Section 107 of the JOBS Act also provides that an “emerging growth company”
can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new
or revised accounting standards. In other words, an “emerging growth company” can delay the adoption of certain accounting
standards until those standards would otherwise apply to private companies. We chose to “opt out” of the extended transition
period related to the exemption from new or revised accounting standards, and as a result, we will comply with new or revised accounting
standards on the relevant dates on which adoption of such standards is required for non-emerging growth companies. This election
is irrevocable. We cannot predict if investors will find our Ordinary Shares or ADSs less attractive because of our reduced disclosure
requirements. If some investors find our Ordinary Shares or ADSs less attractive as a result, there may be a less active trading
market for our ADSs and our stock price may be more volatile. We may take advantage of these reporting exemptions until we are
no longer an “emerging growth company.” We will remain an “emerging growth company” for up to five years
after the first sale of our common equity securities pursuant to an effective registration statement under the Securities Act,
although if the market value of our ADSs that is held by non-affiliates exceeds $700 million as of any June 30 before that time,
we would cease to be an “emerging growth company” as of the following December 31.
Furthermore, on
July 1, 2016 we became a foreign private issuer having previously lost this status at the end of 2014. As a foreign private issuer,
we are not subject to the same requirements that are imposed upon U.S. domestic issuers by the SEC. Under the Securities Exchange
Act of 1934, or the Exchange Act, we are subject to reporting obligations that, in certain respects, are less detailed and less
frequent than those of U.S. domestic reporting companies. For example, we will not be required to issue proxy statements that comply
with the requirements applicable to U.S. domestic reporting companies. We will also have four months after the end of each fiscal
year to file our annual reports with the SEC and will not be required to file current reports as frequently or promptly as U.S.
domestic reporting companies. Furthermore, our officers, directors, and principal shareholders will be exempt from the requirements
to report transactions in our equity securities and from the short-swing profit liability provisions contained in Section 16
of the Exchange Act. These exemptions and leniencies, along with other corporate governance exemptions resulting from our ability
to rely on home country rules, will reduce the frequency and scope of information and protections to which you may otherwise have
been eligible in relation to a U.S. domestic reporting companies. If we were to lose our foreign private issuer status, the regulatory
and compliance costs to us under U.S. securities laws as a U.S. domestic issuer will be significantly more than costs we incur
as a foreign private issuer.
U.S. investors may not be able to enforce their civil
liabilities against our company or certain of our directors, controlling persons and officers.
It may be difficult for U.S. investors to
bring and/or effectively enforce suits against our company outside of the United States. We are a public limited company incorporated
in England and Wales under the Companies Act 2006, as amended. A majority our directors are not residents of the United States,
and all or substantial portions of their assets are located outside of the United States. As a result, it may be difficult for
U.S. holders of our Ordinary Shares or ADSs to effect service of process on these persons within the United States or to make effective
recovery in the United States by enforcing any judgments rendered against them. In addition, if a judgment is obtained in the U.S.
courts based on civil liability provisions of the U.S. federal securities laws against us or our directors or officers, it may,
depending on the jurisdiction, be difficult to enforce the judgment in the non-U.S. courts against us and any of our non-U.S. resident
executive officers or directors. Accordingly, U.S. shareholders may be forced to bring legal proceedings against us and our respective
directors and officers under English law and in the English courts in order to enforce any claims that they may have against us
or our directors and officers. The enforceability of a U.S. judgment in the United Kingdom will depend on the particular facts
of the case as well as the laws and treaties in effect at the time. The United States and the United Kingdom do not currently have
a treaty providing for reciprocal recognition and enforcement of judgments (other than arbitration awards) in civil and commercial
matters. Nevertheless, it may be difficult for U.S. shareholders to bring an original action in the English courts to enforce liabilities
based on the U.S. federal securities laws against us and any of our non-U.S. resident executive officers or directors.
The rights of our shareholders
may differ from the rights typically offered to shareholders of a U.S. corporation.
We are incorporated
under English law. The rights of holders of Ordinary Shares and, therefore, certain of the rights of holders of ADSs, are governed
by English law, including the provisions of the Companies Act 2006, and by our Articles of Association. These rights differ in
certain respects from the rights of shareholders in typical U.S. corporations.
Holders of ADSs must act through the depositary to exercise
their rights as shareholders of our company.
Holders of our ADSs do not have the same
rights of our shareholders and may only exercise the voting rights with respect to the underlying Ordinary Shares in accordance
with the provisions of the deposit agreement for the ADSs. Under our articles of association, the minimum notice period required
to convene an Annual General Meeting is no less than 21 clear days’ notice and 14 clear days’ notice for a general
meeting (unless, in the case of an annual general meeting all members entitled to attend and vote at the meeting, or in the case
of a general meeting, a majority of the members entitled to attend and vote who hold not less than 95% of the voting shares (excluding
treasury shares), agree to shorter notice). When a general meeting is convened, holders of our ADSs may not receive sufficient
notice of a shareholders’ meeting to permit them to withdraw their Ordinary Shares to allow them to cast their vote with
respect to any specific matter. In addition, the depositary and its agents may not be able to send voting instructions to holders
of our ADSs or carry out their voting instructions in a timely manner. We will make all reasonable efforts to cause the depositary
to extend voting rights to holders of our ADSs in a timely manner, but we cannot assure them that they will receive the voting
materials in time to ensure that they can instruct the depositary to vote their ADSs. Furthermore, the depositary and its agents
will not be responsible for any failure to carry out any instructions to vote, for the manner in which any vote is cast or for
the effect of any such vote. As a result, holders of our ADSs may not be able to exercise their right to vote and they may lack
recourse if their ADSs are not voted as they requested. In addition, in the capacity as an ADS holder, they will not be able to
call a shareholders’ meeting.
The depositary for our ADSs will give us a discretionary
proxy to vote our Ordinary Shares underlying ADSs if a holder of our ADSs does not vote at shareholders’ meetings, except
in limited circumstances, which could adversely affect their interests.
Under the deposit agreement for the ADSs,
the depositary will give us a discretionary proxy to vote our Ordinary Shares underlying ADSs at shareholders’ meetings if
a holder of our ADSs does not vote, unless:
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we have failed to timely provide the depositary with our notice of
meeting and related voting materials;
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we have instructed the depositary that we do not wish a discretionary
proxy to be given;
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we have informed the depositary that there is substantial opposition
as to a matter to be voted on at the meeting; or
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a matter to be voted on at the meeting would have a material adverse
impact on shareholders.
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The effect of this discretionary proxy is
that a holder of our ADSs cannot prevent our Ordinary Shares underlying such ADSs from being voted, absent the situations described
above, and it may make it more difficult for shareholders to influence the management of our company. Holders of our Ordinary Shares
are not subject to this discretionary proxy.
Holders of our ADSs may be subject to limitations on transfers
of ADSs.
ADSs are transferable on the books of the
depositary. However, the depositary may close its transfer books at any time or from time to time when it deems expedient in connection
with the performance of its duties. In addition, the depositary may refuse to deliver, transfer or register transfers of ADSs generally
when our books or the books of the depositary are closed, or at any time if we or the depositary deems it advisable to do so because
of any requirement of law or of any government or governmental body, or under any provision of the deposit agreement, or for any
other reason.
The rights of holders of our ADSs to participate in any
future rights offerings may be limited, which may cause dilution to their holdings and they may not receive cash dividends if it
is impractical to make them available to them.
We may from time to time distribute rights
to our shareholders, including rights to acquire our securities. However, we cannot make rights available to holders of our ADSs
in the United States unless we register the rights and the securities to which the rights relate under the Securities Act or an
exemption from the registration requirements is available. Also, under the deposit agreement, the depositary will not make rights
available to holders of our ADSs unless either both the rights and any related securities are registered under the Securities Act,
or the distribution of them to ADS holders is exempted from registration under the Securities Act. We are under no obligation to
file a registration statement with respect to any such rights or securities or to endeavor to cause such a registration statement
to be declared effective. Moreover, we may not be able to establish an exemption from registration under the Securities Act. Accordingly,
holders of our ADSs may be unable to participate in our rights offerings and may experience dilution in their holdings.
In addition, the depositary has agreed to
pay to holders of our ADSs the cash dividends or other distributions it or the custodian receives on our Ordinary Shares or other
deposited securities after deducting its fees and expenses. Holders of our ADSs will receive these distributions in proportion
to the number of Ordinary Shares their ADSs represent. However, the depositary may, at its discretion, decide that it is inequitable
or impractical to make a distribution available to any holders of ADSs. For example, the depositary may determine that it is not
practicable to distribute certain property through the mail, or that the value of certain distributions may be less than the cost
of mailing them. In these cases, the depositary may decide not to distribute such property and holders of our ADSs will not receive
any such distribution.
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ITEM 4.
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INFORMATION ON THE COMPANY
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A.
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History and Development of the Company
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Our Corporate History
Our legal and commercial name is Akari Therapeutics,
PLC. We were originally established as a private limited company under the laws of England and Wales on October 7, 2004 under the
name Freshname No. 333 Limited. On January 19, 2005, we changed our name to Morria Biopharmaceuticals Limited and on February 3,
2005, we completed a reverse merger with Morria Biopharmaceuticals Inc., or Morria, a Delaware corporation, in which Morria became
our wholly-owned subsidiary and we re-registered as a non-traded public limited company under the laws of England and Wales. Morria
was dedicated to the discovery and development of novel, first-in-class, non-steroidal, synthetic anti-inflammatory drugs. On March
22, 2011, we incorporated an Israeli subsidiary, Morria Biopharma Ltd. On June 25, 2013, we changed our name to Celsus Therapeutics
PLC and on October 13, 2013 Morria was renamed Celsus Therapeutics Inc. As of the date of this report, Celsus Therapeutics Inc.
and Morria Biopharma Ltd. do not conduct any operations.
On September 18, 2015, we completed an acquisition
of all of the capital stock of Volution Immuno Pharmaceuticals SA, or Volution, a private Swiss company, from Pharma Limited, or
RPC, Volution’s sole shareholder, in exchange for our Ordinary Shares, in accordance with the terms of a Share Exchange Agreement,
dated as of July 10, 2015. In connection with the acquisition, our name was changed to Akari Therapeutics, PLC and the combined
company focused on the development and commercialization of life-transforming treatments for a range of rare and orphan autoimmune
and inflammatory diseases caused by dysregulation of complement C5, including PNH, aHUS and GBS.
Our ADSs have been listed on the NASDAQ
Capital Market under the symbol “AKTX” since September 21, 2015 and under the symbol “CLTX” from January
31, 2014 until September 18, 2015. Prior to that, our ADSs were quoted on the OTCQB under the symbol “CLSXD” from January
3, 2014 to January 30, 2014 and were quoted on the OTCQB under the symbol “CLSXY” from September 16, 2013 until January
2, 2014 and under the symbol “MRRBY” from February 19, 2013 to September 15, 2013. Effective January 3, 2014, our ratio
of ADSs to Ordinary Shares changed from one ADS per each two Ordinary Shares to one ADS per each ten Ordinary Shares and, effective
as of September 17, 2015, our ratio of ADSs to Ordinary Shares changed from one ADS per each ten Ordinary Shares to one ADS per
each one hundred Ordinary Shares. Currently, each ADS represents by one hundred Ordinary Shares.
Our principal office is located at 75/76
Wimpole Street, London W1G 9RT, United Kingdom, and our telephone number is 44 20 8004 0270.
Our website
address is www.akaritx.com. The information contained on, or that can be accessed from, our
website
does not form part of this Annual Report.
Capital Expenditures
Our capital expenditures for the years ended
December 31, 2016 and 2015 were $54,750 and $10,560, respectively. Our current capital expenditures primarily consist of computer
equipment.
We are a clinical-stage
biopharmaceutical company focused on developing inhibitors of acute and chronic inflammation, specifically the complement
system, the eicosanoid system and the bioamine system for the treatment of rare and orphan diseases. Each of these systems
has scientifically well-supported causative roles in the diseases being targeted by Akari. Akari believes that blocking early
mediators of inflammation will prevent initiation and continual amplification of the processes that cause certain
diseases.
All Akari molecules are derived from ticks
which have undergone 300 million years of natural selection to produce inhibitors that bind tightly to key highly-conserved inflammatory
mediators, are generally well tolerated in humans, and remain fully functional when a host is repeatedly exposed to the molecule.
Our lead product candidate, Coversin™,
which is a second-generation complement inhibitor, acts on complement component-C5, preventing release of C5a and formation of
C5b–9 (also known as the membrane attack complex, or MAC), and independently also inhibits LTB4 activity, both elements that
are co-located as part of the immune/inflammatory response. Coversin is a recombinant small protein (16,740 Da) derived from a
protein originally discovered in the saliva of the Ornithodoros moubata tick, where it modulates the host immune system to allow
the parasite to feed without alerting the host to its presence or provoking an immune response.
Our initial clinical targets for Coversin
are paroxysmal nocturnal haemoglobinuria, or PNH, atypical Hemolytic Uremic Syndrome, or aHUS, and Guillain Barré syndrome,
or GBS. Akari is also targeting patients with polymorphisms of the C5 molecule which interfere with correct binding of Soliris®
(eculizumab), a first-generation C5 inhibitor currently approved for PNH and aHUS treatment, making these patients resistant to
treatment with that drug. In addition to disease targets where complement dysregulation is the key driver, Akari is also targeting
a range of inflammatory diseases where the inhibition of both C5 and LTB4 are implicated.
Other compounds in our pipeline include
engineered versions of Coversin that potentially decrease the frequency of administration, improve potency, or allow for specific
tissue targeting, as well as new proteins targeting LBT4 alone, as well as bioamine inhibitors (for example, anti-histamines).
In general, these inhibitors act as ligand binding compounds, which may provide additional benefit versus other modes of inhibition.
For example, off target effects are less likely with ligand capture. One example of this benefit is seen with LTB4 inhibition through
ligand capture. LTB4 acts to amplify the inflammatory signal by bringing and activating white blood cells to the area of inflammation.
Compounds that have targeted the production of leukotrienes will inhibit both the production of pro-inflammatory as well as anti-inflammatory
leukotrienes—often diminishing the potential benefit of the drug on the inflammatory system. Coversin has demonstrated that,
by capturing LTB4, it is limited to disrupting the white blood cell activation and attraction aspects, without interfering with
the anti-inflammatory benefits of other leukotrienes.
To date, we have demonstrated: (i)
full complement inhibition and marked lactate dehydrogenase reduction in a PNH patient with eculizumab resistance and who has
now been self-administering Coversin daily for over one year pursuant to an approved clinical protocol in the Netherlands;
(ii) 100% inhibition of complement C5 activity by Coversin with once daily subcutaneous injections during our Phase Ib
clinical trial in healthy volunteers; (iii) that Coversin inhibits PNH red blood cell lysis in vitro; and (iv) that
complement inhibition is complete whether measured by Elisa CH50 U Eq/ml assay or sheep red blood cell lytic CH50 assay, as
demonstrated in both our Phase Ib healthy volunteer study and our 28-day safety study in non-human primates.
In the fourth quarter of 2016, we commenced
enrollment for a 90 day open-label Phase II, single arm trial in patients with PNH in 5 centers in the European Union. To date,
five patients have been enrolled. This trial is designed to test the safety and efficacy of Coversin in patients with PNH who have
not received any other complement blocking therapies. Patients who complete the trial will have the option to continue self–administration
with Coversin in an open-label long term safety study. We expect to provide interim results from the Phase II trial in April, 2017.
Assuming results from this trial confirm the safety and efficacy of Coversin in PNH, we expect to begin our Phase III program before
the end of 2017.
Coversin has received orphan drug status
from the FDA and EMA for PNH and GBS. Orphan drug designation provides the sponsor certain benefits and incentives, including
a period of marketing exclusivity if regulatory approval of the drug is ultimately received for the designated indication. The
receipt of orphan drug designation status does not change the regulatory requirements or process for obtaining marketing approval
and designation does not mean that marketing approval will be received. We intend to apply in the future for further orphan drug
designation in indications we deem appropriate.
On March 29, 2017, we received notice
from the FDA of fast track designation for the investigation of Coversin for treatment of PNH in patients who have
polymorphisms conferring eculizumab resistance. The fast track program was created by the FDA to facilitate the development
and expedite the review of new drugs which show promise in treating a serious or life-threatening disease and address an
unmet medical need. Drugs that receive this designation benefit from more frequent communications and meetings with FDA to
review the drug's development plan including the design of the proposed clinical trials, use of biomarkers and the extent of
data needed for approval. Drugs with fast track designation may also qualify for priority review to expedite the FDA review
process, if relevant criteria are met.
Coversin is much smaller than typical antibodies
currently used in therapeutic treatment. Coversin can be self-administered by subcutaneous injection, much like an insulin injection,
which we believe will provide considerable benefits in terms of patient convenience. We believe that the subcutaneous formulation
of Coversin may accelerate recruitment for our clinical trials, and, as an alternative to intravenous infusion, may accelerate
patient uptake if Coversin is approved by regulatory authorities for commercial sale. Patient surveys contracted by us suggest
that a majority of patients would prefer to self-inject daily than undergo intravenous infusions.
Clinical Development Program — Past and Future
Coversin entered clinical development in
2013 when a Phase Ia clinical trial was initiated under a Clinical Trials Authorisation (CTA) issued by the Medicines and Healthcare
products Regulatory Agency (MHRA), an executive agency of the Department of Health in the United Kingdom. The primary objective
of this single ascending dose, first-in-man study was to explore the safety profile of Coversin in 24 subjects. The drug was well
tolerated, and no serious or dose-related adverse events were reported. The secondary objective of this Phase Ia clinical trial
was to examine the effect of Coversin on complement activity at the highest, therapeutic dose. This showed that the peak onset
of action was about nine hours after injection, and that the effect of a single dose persisted for more than 96 hours. The effects
were consistent between all subjects and showed 100% inhibition of the complement system within 12 hours.
A Phase Ib repeat dose study was initiated
in the first quarter of 2016. In this double-blind, randomized Phase Ib trial, each cohort of six normal healthy volunteers was
given either a loading dose of subcutaneous placebo twice a day for two days followed by five days of a single daily placebo dose
(n=2) or a loading dose of 30 mg of subcutaneous Coversin twice a day for two days followed by five days of a single daily subcutaneous
maintenance dose (n=4) of either 15 mg, 22.5 mg or 30 mg.
Data from the 22.5 mg once daily maintenance
cohort and 30 mg once daily maintenance cohort demonstrated that subcutaneous Coversin achieved complete complement inhibition
(Elisa CH50 < 8 Eq/ml, lower limit of quantification) within the first day, and demonstrated complete complement inhibition
at the end of dosing on day seven whether measured using the ELISA or lytic CH50 assays.
The data from the 15 mg once daily maintenance
cohort demonstrated that subcutaneous Coversin achieved complete complement inhibition (Elisa CH50 < 8 Eq/ml, lower limit of
quantification) within the first day but by day three was unable to maintain complete complement inhibition at the 24-hour trough
measurement. A final cohort of 4 healthy volunteers was given 22.5 mg of Coversin as a maintenance dose for 21 days. Complete complement
inhibition was demonstrated at the end of the 21 day period of once daily dosing and there we no neutralizing antibodies detected.
One volunteer receiving the Coversin in the 30 mg 7 day cohort stopped dosing on day three due to a non-serious adverse event possibly
related to antibiotics administered for meningitis prophylaxis. The trial was conducted at Hammersmith Medicines Research Ltd,
in London.
In February 2016, we initiated an open-label
Phase II single arm trial for PNH patients with eculizumab resistance due to C5 polymorphisms, pursuant to a clinical trial protocol
approved by the European Union national regulatory authority. Patients are to be treated with Coversin by daily subcutaneous injection
for 6 months in order to determine the safety and efficacy of the drug in these circumstances. If satisfactory control of the PNH
is achieved, patients will have the option of remaining on Coversin and being entered into the long term follow-up study. The primary
objective of the eculizumab-resistance program is to provide patients who have clinically demonstrated resistance to eculizumab
with early access to Coversin as a potentially lifesaving alternative. Patients are entered into an open label protocol where safety
and efficacy parameters are evaluated on an ongoing basis including measures of complement activity such as CH50 and biomarkers
of hemolysis activity such as LDH. Initial results from a patient with PNH who is resistant to eculizimab due to a C5 polymorphism
have demonstrated complete complement inhibition (Elisa CH50 < 8 Eq/ml, lower limit of quantification) and marked LDH reduction
to below 1.5 ULN (upper limit of normal), which have continued through more than 12 months of therapy to date. This patient has
been self-administering Coversin™. We expect to present topline results from these patients as they become available.
In December, 2016, we announced that the
U.S. Food and Drug Administration (FDA) has allowed our Investigational New Drug Application (IND) for the clinical development
of Coversin in patients with PNH. The FDA's allowance of the IND permits us to expand its clinical program for the development
of Coversin in PNH to the United States. We plan to open the ongoing Phase II trial of Coversin in eculizumab resistant PNH in
the United States in the second quarter of 2017.
In the fourth quarter of 2016, we commenced
a 90 day open-label Phase II single arm trial in patients with PNH in 5 centers in the European Union. This trial is designed to
test the safety and efficacy of Coversin in patients with PNH who have not received any other complement blocking therapies. The
primary endpoint is measuring the change of LDH from baseline at 28 days and secondary endpoints include hemoglobin, CH50, quality
of life and safety. Five patients have been recruited to the trial and we expect to present interim data in April, 2017. Patients
who complete the trial will have the option to continue self–administration with Coversin in an open-label long term safety
study. Assuming results from this trial confirm the safety and efficacy of Coversin in PNH, we plan to begin our Phase III program
before the end of 2017.
Coversin™, at 17 kDa, is much smaller
than typical antibodies currently used in therapeutic treatment. Coversin can be self-administered by subcutaneous injection, much
like an insulin injection, which we believe will provide considerable benefits in terms of patient convenience. Patient surveys
contracted by us suggest that a significant proportion of patients would prefer to self-inject daily than undergo intravenous infusions.
Coversin’s small physical size allows it to be potentially used in a variety of formulations, some of which may enable therapeutic
use via topical or inhaled routes of administration.
Immunogenicity
We successfully completed a chronic (28
day) dosing experiment in mice to investigate whether daily subcutaneous administration of the expected therapeutic dose of Coversin
induces an antibody response, and whether the antibodies neutralise complement inhibition by Coversin. The data from this chronic
dosing experiment showed Coversin was well tolerated with no injection site allergic reactions or behavioral changes. Coversin
can induce formation of low titre anti-drug IgG antibodies in mice after four weeks of daily inoculation, which is not uncommon,
but these antibodies were not neutralising and had no effect on Coversin’s ability to inhibit complement.
We believe these data support the development
of Coversin for chronic use in humans. During the Phase Ib and Phase II clinical trials and chronic toxicology studies, we plan
to concurrently investigate whether any antibodies arise to Coversin, and if they do, whether these antibodies affect the drug’s
activity or clearance rates and consequently drug tolerance and efficacy of the drug. No neuitralizing antibodies have been detected
to date, including in the healthy volunteers in the Phase Ia and Ib trials and the ongoing PNH patient treated for over one year
in the eculizumab resistance trial.
PAS-Coversin
Using PASylation®, a proprietary process
of XL-protein GmbH, XL-protein has modified Coversin by adding a 600 amino acid proline/alanine/ serine (PAS) N-terminal fusion
tag to generate PAS-Coversin (68kDa). The unstructured and uncharged PAS polypeptide increases the apparent molecular size to approximately
720kDa, slowing kidney clearance and extending the half-life.
Data from mouse and rat studies of PAS-Coversin
demonstrated that the expected terminal half-life in humans should be approximately 4 days. Based on these data, Pk modeling supports
that a once weekly dosing regimen is feasible. We are currently moving to GMP manufacturing and maximizing yield. We expect first
in man trials to begin in the first half of 2018.
Target Indications
Paroxysmal nocturnal haemoglobinuria
(PNH)
PNH is an ultra-rare, life-threatening and
debilitating disease of the blood with an estimated 8,000 – 10,000 patients globally. Due to an acquired genetic
deficiency, uncontrolled complement activation in PNH patients allows their own complement system to attack and destroy blood cells,
leading to life-threatening complications.
Patients with PNH suffer from chronic complement
activation and destruction of some of their blood cells, known as hemolysis, caused by the C5 cleavage product C5b-9 (the membrane
attack complex). This hemolysis is associated with further clinical symptoms and negative outcomes, including kidney disease, thrombosis
(blood clots), liver dysfunction, fatigue, impaired quality of life, recurring pain, shortness of breath, pulmonary hypertension,
intermittent episodes of dark-colored urine (hemoglobinuria), and anemia. When the destruction of red blood cells is sufficiently
large, recurrent blood transfusions may be necessary.
Soliris®, (eculizumab) is the only FDA
approved drug for the treatment of PNH. Before the introduction of eculizumab, PNH patients, many of whom were in young adulthood,
faced a life of repeated blood transfusions, thromboembolic complications and typical life expectancies of only 8 – 10
years from diagnosis. There are no animal models of the autoimmune hematological condition PNH. The advent of eculizumab, the first
effective complement C5 inhibitor, transformed this bleak outlook, and most of these patients now enjoy a more normal life expectancy.
Eculizumab resistance
Coversin and eculizumab both prevent the
splitting of complement C5 into its active components, but they each accomplish this effect by binding to specific and different
sites on the molecule. It has recently been discovered that a small but identifiable subgroup of eculizumab-treated patients have
a C5 polymorphism affecting the eculizumab binding site which prevents correct binding and makes these patients resistant to treatment — but
does not appear to affect binding by Coversin in those patients tested to date. While this polymorphism has been identified in
3.5% of the Japanese population, the prevalence of this and other potential mutations that may interfere with eculizumab binding
activity in non-Japanese patients remains unknown.
A currently available blood test enables
some of these eculizumab-resistant patients to be identified, we are in discussions with regulatory authorities to allow treatment
of patients with Coversin under compassionate or named-patient protocols, as there are no alternate treatments currently available.
We have identified several non-Japanese patients to date and have demonstrated that Coversin fully inhibits complement activity
in the blood of these patients by blocking C5. As noted above, we have also been treating a patient with PNH and eculizumab resistance
due to a C5 polymorphism for over 12 months.
Guillain Barré syndrome
Guillain Barré syndrome is an acute
immune-mediated polyneuropathy where the immune system is triggered into attacking the myelin sheath surrounding nerves, leading
to progressive, fairly symmetric muscle weakness accompanied by absent or depressed deep tendon reflexes. Patients usually present
a few days to a week after onset of symptoms. The weakness can vary from mild difficulty with walking to nearly complete paralysis
of all extremities, facial, respiratory, and bulbar muscles.
Guillain-Barré syndrome occurs worldwide,
with an overall incidence of one to two per 100,000 per year. According to the U.S. Department of Health and Human Services, Agency
for Healthcare Research and Quality, there are approximately 6,000 patients admitted to US hospitals with a primary diagnosis of
GBS every year. While all age groups are affected, the incidence increases by approximately 20% with every ten-year increase in
age beyond the first decade of life. Patients are treated with supportive care, plasma exchange or Intravenous Immunoglobulin (IVIG).
The proportion of patients with GBS who
walk independently at six months and one year after diagnosis is approximately 80% and 84%, respectively. At one year, full recovery
of motor strength occurs in about 60% of patients, while severe motor problems persist in about 14%. Approximately 5 to 10% of
patients with GBS have a prolonged course with several months of ventilator dependency and very delayed and incomplete recovery.
Within one year of diagnosis, approximately 4 to 5% of patients with GBS die despite intensive care. Of patients who become ventilator
dependent, about 20% will die.
Causes of death include acute respiratory
distress syndrome, sepsis, pulmonary emboli, and unexplained cardiac arrest. In an in vitro model of GBS, Coversin was
shown to prevent the development of the characteristic pathological markers of disease activity, and in vivo protected
mice from developing respiratory paralysis, the most serious consequence of GBS in humans.
Coversin has been successfully tested in
animal models of Guillain Barré syndrome (GBS). In GBS, complement-mediated damage is provoked by the deposition of auto-antibodies,
against the neuromuscular junction in the myelin sheath. This in turn triggers systemic complement activation and local tissue
destruction, with often devastating neurological consequences.
Atypical Hemolytic Uremic
Syndrome (aHUS)
Complement-mediated ‘atypical’
hemolytic uremic syndrome (aHUS) is a chronic and life-threatening ultra-rare genetic disease with an estimated prevalence of seven
per one million individuals in which uncontrolled complement activation causes blood clots in small blood vessels throughout the
body, or thrombotic microangiopathy (TMA), leading to kidney failure, stroke, heart attack and death.
The prognosis for patients with aHUS is
generally poor. Approximately 70% of patients with the most common mutation experience chronic renal insufficiency, chronic dialysis,
or death by one year after the first clinical symptoms. aHUS commonly recurs in patients who undergo renal transplantation for
the kidney injury and kidney failure suffered due to the uncontrolled complement activity. Approximately 50% of patients with aHUS
have been identified to have genetic mutations in at least one of the complement control proteins or neutralizing autoantibodies
to complement regulatory factors, which can lead to uncontrolled complement activation. Eculizumab received accelerated FDA approval
in 2011 based on data from both prospective and retrospective trials in a cumulative total of 67 adult and pediatric patients.
Eculizumab remains the first and only therapy
approved for the treatment of pediatric and adult patients with aHUS. Alexion, the maker of eculizumab, has noted that the opportunity
for eculizumab in aHUS is at least as large as PNH, with more patients in the United States receiving eculizumab for aHUS than
PNH at a similar timeframe from launch since its approval in aHUS. Given that eculizumab and Coversin have the same mechanism
of action, it is anticipated that Coversin will be effective in treating aHUS patients.
We plan to commence a single arm open-label
Phase II trial in the second half of 2017.
Sjogren’s-related
dry eye syndrome
Sjögren’s syndrome is a chronic
multisystem inflammatory autoimmune disorder characterized by a combination of dry eyes and dry mouth. According to medical literature,
it is estimated that the annual incidence of Sjogren’s may range between four to as high as 43 per 100,000 people, with approximately
5% of these patients having severe dry eye. Severe dry eye is a painful and debilitating symptom that can lead to blindness. There
is evidence that Coversin has activity against eye surface inflammation. Delivery by the topical ocular route, made possible by
Coversin’s small molecular size, has considerable advantages both in reducing the total quantity of drug needed and, because
the very small topical dose, virtually abolishes the effects of systemic complement inhibition, in reducing the risk of meningitis
infection or need for prophylaxis of potential Neisseria infections.
Sjögren’s syndrome, a complement
driven autoimmune disease affects multiple organs including the eye where it is responsible for a very severe form of dry eye which
can be sight threatening. It is estimated that dry eye disease generally affects approximately 8% of the population, mainly women,
and in 11% of these it is a co-morbidity of Sjögren’s syndrome. Thus approximately 2.5 million people in the United
States suffer from ocular Sjögren’s syndrome. The only approved drug for dry eye (but not Sjögren’s syndrome),
cyclosporine, is of limited efficacy against ocular Sjögren’s syndrome.
We believe Coversin’s special physical
characteristics make it an attractive candidate drug for the treatment of ocular Sjögren’s syndrome which is not accessible
by this route to antibodies like eculizumab or gene therapies which require systemic complement inhibition. Relative to systemic
diseases such as PNH and aHUS, ocular drug development is potentially rapid and new drugs typically gain marketing approval much
sooner than their systemic counterparts. Coversin has already successfully completed a 60 day topical eye toxicology study and
is pursuing pre-clinical studies to support potential clinical development.
Market Opportunity in Complement
Mediated Diseases
The NIH estimates that approximately 23.5
million Americans may suffer from an autoimmune disorder, although this number may underestimate actual prevalence as it includes
only 24 diseases for which good epidemiology studies were available. Researchers have identified 80 – 100 different
autoimmune diseases and suspect at least 40 additional diseases of having an autoimmune basis. These diseases are chronic and can
be life-threatening. Autoimmune disease is one of the top 10 leading causes of death in female children and women in all age groups
up to 64 years of age. The NIH estimates annual direct health care costs for autoimmune diseases to be in the range of $100 billion.
As noted earlier, the complement system works with the immune system to disable and clear out foreign invaders and unwanted cells,
and as such, plays an important role in the pathology of many autoimmune diseases. The term “Complement Mediated Diseases”
applies to diseases and conditions where a patient’s immune system attacks and destroys healthy body tissue by mistake, causing
damage through its complement component and through mediators induced by complement activation. These diseases and conditions are
often very rare, and include such diseases as PNH, aHUS, GBS, Myasthenia Gravis, transplant mediated organ rejection, glomerulopathies
(kidney diseases), as well as numerous other disorders. While not all complement mediated diseases will respond to a direct C5
inhibitor, like Coversin, there is a large market opportunity as demonstrated by eculizumab with $2.8 billion in sales in 2016.
Competition in Complement
Mediated Diseases
The development and commercialization of
new drugs is highly competitive. We will face competition with respect to all product candidates that we may develop or commercialize
in the future from pharmaceutical and biotechnology companies worldwide. The key factors affecting the success of any approved
product will be its efficacy, safety profile, drug interactions, method of administration, pricing, reimbursement and level of
promotional activity relative to those of competing drugs.
Our potential competitors may have substantially
greater financial, technical, and personnel resources than we do. In addition, many of these competitors have significantly greater
commercial infrastructures. Our ability to compete successfully will depend largely on our ability to leverage our collective experience
in drug discovery, development and commercialization to:
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discover and develop drugs that are differentiated from other products in the market, including eculizumab;
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obtain patent and/or proprietary protection for our product candidates and technologies;
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obtain required regulatory approvals;
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obtain a commercial partner;
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commercialize our product candidates, if approved; and
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attract and retain high-quality research, development and commercial personnel.
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Coversin
™. If approved,
we would expect Coversin to compete in the market for PNH and aHUS treatment with Soliris®, (eculizumab) which was developed
by Alexion Pharmaceuticals. Eculizumab is the first and only therapy approved for PNH, is marketed by Alexion and had sales of
approximately $2.8 billion in 2016. Clinicians, nurses and patient groups contacted by us believe that theability to self-administer
Coversin as a fixed-dose daily subcutaneous injection will be an attractive alternative therapy.
There has been a broad research effort in
complement based therapy to date, with eculizumab being the first and only therapy approved that directly inhibits C5. We believe
that Coversin is amongst the most advanced in clinical development of next generation C5 inhibitors. However, we are aware of certain
other companies and academic institutions that are continuing their efforts to discover and develop alternate complement and/or
C5 inhibitors, including Alexion, Alnylam, Swedish Orphan Biovitrum and RA Pharmaceuticals.
We are aware of certain other companies
that are focused on developing therapies targeting other aspects of the complement system, including Appelis, Amyndus, Achillion,
Omeros, Chemocentryx and True North Therapeutics.
Sales and Marketing
Because we are focused on discovery and
development of drugs, we currently have no sales, marketing or distribution capabilities in order to commercialize Coversin or
any approved product candidates. If our lead product candidate Coversin is approved, we intend either to establish a sales and
marketing organization with technical expertise and supporting distribution capabilities to commercialize Coversin™, or to
outsource this function to a third party. We will adopt a similar strategy for the other compounds in our pipeline.
Manufacturing
We currently rely on a third-party contract
manufacturer (CMO), which complies with FDA’s current good manufacturing practice requirements, for all of our clinical supplies,
including active pharmaceutical ingredients, or APIs, drug substances and finished drug products for our preclinical research and
clinical trials, including the Phase I/II trials for Coversin. Analytical methods that define activity, identity, purity, sterility,
endotoxin, and host cell related impurities have been established and qualified for release testing of drug substance. We have
successfully completed a commercial scale process batch in 2016. We are manufacturing multiple lots of Coversin in 2017
We do not own or operate, and currently
have no plans to establish, any manufacturing facilities. We currently rely, and expect to continue to rely, on third-party contract
manufacturers, or CMOs, for the manufacture of Coversin and any other product candidates that we may develop for larger scale preclinical
and clinical testing, as well as for commercial quantities of any product candidates that are approved.
We currently expect initial commercial supplies
of Coversin to be supplied as a dry powder together with syringes prefilled with sterile water for injection. This will enable
the drug to be stored for long periods at room temperature and simplify distribution and storage by hospitals and pharmacies. Further
evaluation activities are ongoing regarding potential future alternate drug delivery and device options and/or improvements, including
auto-injecting pens.
We plan to expand our relationship with
the current CMO for commercial supplies of Coversin if and when it nears potential approval, and plan to examine alternate CMOs
for secondary commercial supplies of Coversin™. and other pipeline molecules.
Intellectual Property
We will be able to protect our technology
and products from unauthorized use by third parties only to the extent it is covered by valid and enforceable patents or is effectively
maintained as trade secrets. Patents and other proprietary rights are thus an essential element of our business.
Our success will depend in part on our
ability to obtain and maintain proprietary protection for our product candidates, technology, and know-how, to operate without
infringing on the proprietary rights of others, and to prevent others from infringing its proprietary rights. Our policy is to
seek to protect its proprietary position by, among other methods, filing U.S. and foreign patent applications related to its proprietary
technology, inventions, and improvements that are important to the development of its business. We also rely on trade secrets,
know-how, continuing technological innovation, and in-licensing opportunities to develop and maintain our proprietary position.
We
own or have exclusive rights to five United States patents, 74 national patents in Europe derived from five patents granted by
the European Patent Office and 18 foreign issued patents in other jurisdictions, and six United States and 22 foreign or international
pending patent applications, relating to the complement C5 inhibitor protein Coversin and its use in the treatment of key disease
indications. Our current patent portfolio has granted patents in the jurisdictions of United States, Canada, major European countries,
Japan, China, Australia and New Zealand and pending applications in the jurisdictions of United States, Canada, Europe, Japan,
China, Brazil, Israel, India, Republic of Korea, Mexico, Russia, Australia and New Zealand.
Issued United States patents which
cover our product candidate Coversin and its uses will expire between 2024 and 2031, excluding any patent term extensions that
might be available following the grant of marketing authorizations. Issued patents outside of the United States directed to our
product candidate Coversin and its uses will also expire between 2024 and 2031. We have pending patent applications for our product
candidate Coversin that, if issued, would expire in the United States and in countries outside of the United States between 2024
and 2037, excluding any patent term adjustment that might be available following the grant of the patent and any patent term extensions
that might be available following the grant of marketing authorizations. These pending patent applications relate to the following
specific compositions and methods including complement inhibitor molecule; methods for treating myasthenia gravis; methods for
treating peripheral nerve disorders; methods for treating respiratory disorders; methods for treating viral infections of the respiratory
tract; and methods of treating complement-mediated diseases in patients with C5 polymorphisms.
Government Regulation
Government Regulation and Product Approval
Government authorities in the U.S., at the
federal, state and local level, and other countries extensively regulate, among other things, the research, development, testing,
manufacture, quality control, approval, labeling, packaging, storage, record-keeping, promotion, advertising, distribution, marketing
and export and import of products such as those that we are developing. A new drug must be approved by the FDA, generally through
the new drug application, or NDA, process and a new biologic must be approved by the FDA through the biologics license application,
or BLA, process before it may be legally marketed in the U.S. The animal and other non-clinical data and the results of human clinical
trials performed under an Investigational New Drug application, or IND, and under similar foreign applications will become part
of the NDA or BLA.
U.S. Drug Development Process
In the U.S., the FDA regulates drugs under
the Federal Food, Drug, and Cosmetic Act, or FDCA, and in the case of biologics, also under the Public Health Service Act, or PHSA,
and implementing regulations. The process of obtaining regulatory approvals and the subsequent compliance with applicable federal,
state, local, and foreign statutes and regulations require the expenditure of substantial time and financial resources. Failure
to comply with the applicable U.S. requirements at any time during the product development process, approval process or after approval,
may subject an applicant to administrative or judicial sanctions. These sanctions could include the FDA’s refusal to approve
pending applications, withdrawal of an approval, a clinical hold, warning letters, requesting product recalls, product seizures,
total or partial suspension of production or distribution, injunctions, fines, refusals of government contracts, restitution, disgorgement,
or civil or criminal penalties. Any agency or judicial enforcement action could have a material adverse effect on us. The process
required by the FDA before a drug or biologic may be marketed in the U.S. generally involves the following:
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completion of preclinical laboratory tests, animal studies and formulation
studies according to Good Laboratory Practices or other applicable regulations;
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submission to the FDA of an IND which must become effective before
human clinical trials may begin;
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performance of adequate and well-controlled human clinical trials
according to Good Clinical Practices to establish the safety and efficacy of the proposed drug for its intended use;
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submission to the FDA of an NDA or BLA;
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satisfactory completion of an FDA inspection of the manufacturing
facility or facilities at which the drug is produced to assess compliance with current good manufacturing practice, or cGMP, to
assure that the facilities, methods and controls are adequate to preserve the drug’s identity, strength, quality and purity;
and
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FDA review and approval of the NDA or BLA.
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Once a pharmaceutical candidate is identified
for development, it enters the preclinical testing stage. Preclinical tests include laboratory evaluations of product chemistry,
toxicity and formulation, as well as animal studies. An IND sponsor must submit the results of the preclinical tests, together
with manufacturing information and analytical data, to the FDA as part of the IND. The sponsor will also include a protocol detailing,
among other things, the objectives of the first phase of the clinical trials, the parameters to be used in monitoring safety, and
the effectiveness criteria to be evaluated, if the first phase lends itself to an efficacy evaluation. Some preclinical testing
may continue even after the IND is submitted. The IND automatically becomes effective 30 days after receipt by the FDA, unless
the FDA, within the 30-day time period, places the clinical trial on a clinical hold. In such a case, the IND sponsor and the FDA
must resolve any outstanding concerns before the clinical trial can begin. Clinical holds also may be imposed by the FDA at any
time before or during studies due to safety concerns or non-compliance.
All clinical trials must be conducted under
the supervision of one or more qualified investigators in accordance with good clinical practice regulations. They must be conducted
under protocols detailing the objectives of the trial, dosing procedures, subject selection and exclusion criteria and the safety
and effectiveness criteria to be evaluated. Each protocol must be submitted to the FDA as part of the IND, and progress reports
detailing the results of the clinical trials must be submitted at least annually. In addition, timely safety reports must be submitted
to the FDA and the investigators for serious and unexpected adverse events. An institutional review board, or IRB, responsible
for the research conducted at each institution participating in the clinical trial must review and approve each protocol before
a clinical trial commences at that institution and must also approve the information regarding the trial and the consent form that
must be provided to each trial subject or his or her legal representative, monitor the study until completed and otherwise comply
with IRB regulations.
Human clinical trials are typically conducted
in three sequential phases that may overlap or be combined:
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Phase I:
The product candidate is initially
introduced into healthy human subjects and tested for safety, dosage tolerance, absorption, metabolism, distribution and excretion.
In the case of some products for severe or life-threatening diseases, such as cancer, especially when the product may be too inherently
toxic to ethically administer to healthy volunteers, the initial human testing may be conducted in patients.
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Phase II
: This phase involves studies in
a limited patient population to identify possible adverse effects and safety risks, to preliminarily evaluate the efficacy of the
product for specific targeted diseases and to determine dosage tolerance and optimal dosage.
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Phase III
: Clinical trials are undertaken
to further evaluate dosage, clinical efficacy and safety in an expanded patient population at geographically dispersed clinical
study sites. These studies are intended to establish the overall risk-benefit ratio of the product candidate and provide, if appropriate,
an adequate basis for product labeling.
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The FDA or the sponsor may suspend a clinical
trial at any time on various grounds, including a finding that the research subjects or patients are being exposed to an unacceptable
health risk. Similarly, an IRB can suspend or terminate approval of a clinical trial at its institution if the clinical trial is
not being conducted in accordance with the IRB’s requirements or if the drug has been associated with unexpected serious
harm to patients. Phase I, Phase II, and Phase III testing may not be completed successfully within any specified period, if at
all.
During the development of a new drug, sponsors
are given opportunities to meet with the FDA at certain points. These points may be prior to submission of an IND, at the end of
Phase II, and before an NDA or BLA is submitted. Meetings at other times may be requested. These meetings can provide an opportunity
for the sponsor to share information about the data gathered to date, for the FDA to provide advice, and for the sponsor and FDA
to reach agreement on the next phase of development. Sponsors typically use the end of Phase II meeting to discuss their Phase
II clinical results and present their plans for the pivotal Phase III clinical trial that they believe will support approval of
the new drug.
Concurrent with clinical trials, companies
usually complete additional animal studies and must also develop additional information about the chemistry and physical characteristics
of the drug and finalize a process for manufacturing the product in commercial quantities in accordance with cGMP requirements.
The manufacturing process must be capable of consistently producing quality batches of the product candidate and, among other things,
the manufacturer must develop methods for testing the identity, strength, quality and purity of the final drug. Additionally, appropriate
packaging must be selected and tested and stability studies must be conducted to demonstrate that the product candidate does not
undergo unacceptable deterioration over its shelf life.
U.S. Review and Approval Processes
The results of product development, preclinical
studies and clinical trials, along with descriptions of the manufacturing process, analytical tests conducted on the chemistry
of the drug, proposed labeling, and other relevant information are submitted to the FDA as part of an NDA or BLA requesting approval
to market the product. The submission of an NDA or BLA is subject to the payment of user fees; a waiver of such fees may be obtained
under certain limited circumstances. The FDA initially reviews all NDAs and BLAs submitted to ensure that they are sufficiently
complete for substantive review before it accepts them for filing. The FDA may request additional information rather than accept
a NDA or BLA for filing. In this event, the NDA or BLA must be resubmitted with the additional information. The resubmitted application
also is subject to review before the FDA accepts it for filing. Once the submission is accepted for filing, the FDA begins an in-depth
substantive review. FDA may refer the NDA or BLA to an advisory committee for review, evaluation and recommendation as to whether
the application should be approved and under what conditions. The FDA is not bound by the recommendation of an advisory committee,
but it generally follows such recommendations. The approval process is lengthy and often difficult, and the FDA may refuse to approve
an NDA or BLA if the applicable regulatory criteria are not satisfied or may require additional clinical or other data and information.
Even if such data and information are submitted, the FDA may ultimately decide that the NDA or BLA does not satisfy the criteria
for approval. Data obtained from clinical trials are not always conclusive and the FDA may interpret data differently than we interpret
the same data. The FDA reviews an NDA to determine, among other things, whether a product is safe and effective for its intended
use and whether its manufacturing is cGMP-compliant to assure and preserve the product’s identity, strength, quality and
purity. The FDA reviews a BLA to determine, among other things whether the product is safe, pure and potent and the facility in
which it is manufactured, processed, packed or held meets standards designed to assure the product’s continued safety, purity
and potency. Before approving an NDA or BLA, the FDA will inspect the facility or facilities where the product is manufactured.
The FDA may issue a complete response letter, which may require additional clinical or other data or impose other conditions that
must be met in order to secure final approval of the NDA or BLA, or an approval letter following satisfactory completion of all
aspects of the review process.
NDAs or BLAs may receive either standard
or priority review. Under current FDA review goals, standard review of an NDA for a new molecular entity (NME) or original BLA
will be 10 months from the date that the NDA or BLA is filed. A drug representing a significant improvement in treatment, prevention
or diagnosis of disease may receive a priority review of six months. In addition, products studied for their safety and effectiveness
in treating serious or life-threatening illnesses and that provide meaningful therapeutic benefit over existing treatments may
receive accelerated approval and may be approved on the basis of adequate and well-controlled clinical trials establishing that
the drug product has an effect on a surrogate endpoint that is reasonably likely to predict clinical benefit or on the basis of
an effect on a clinical endpoint that can be measured earlier than irreversible morbidity or mortality, or IMM, that is reasonably
likely to predict an effect on IMM or other clinical benefit. As a condition of approval, the FDA may require that a sponsor of
a drug receiving accelerated approval perform additional studies after approval, potentially including additional adequate and
well-controlled clinical trials. Priority review and accelerated approval do not change the standards for approval, but may expedite
the approval process.
If a product receives regulatory approval,
the approval may be significantly limited to specific diseases and dosages or the indications for use may otherwise be limited,
which could restrict the commercial value of the product. In addition, the FDA may require a sponsor to conduct Phase IV testing
which involves clinical trials designed to further assess a drug’s safety and effectiveness after NDA or BLA approval, and
may require testing and surveillance programs to monitor the safety of approved products which have been commercialized.
The Food and Drug Administration Safety
and Innovation Act, or FDASIA, which was enacted in 2012, made permanent the Pediatric Research Equity Act, or PREA, which requires
a sponsor to conduct pediatric studies for most drugs and biologics with a new active ingredient, new indication, new dosage form,
new dosing regimen or new route of administration. Under PREA, original NDAs, BLAs and supplements thereto, must contain a pediatric
assessment unless the sponsor has received a deferral or waiver. The required assessment must assess the safety and effectiveness
of the product for the claimed indications in all relevant pediatric subpopulations and support dosing and administration for each
pediatric subpopulation for which the product is safe and effective. The sponsor or FDA may request a deferral of pediatric studies
for some or all of the pediatric subpopulations. A deferral may be granted for several reasons, including a finding that the drug
or biologic is ready for approval for use in adults before pediatric studies are complete or that additional safety or effectiveness
data needs to be collected before pediatric studies can begin. After April 2013, the FDA must send a non-compliance letter to any
sponsor that fails to submit a required pediatric assessment within specified deadlines or fails to submit a timely request for
approval of a pediatric formulation, if required.
Patent Term Restoration and Marketing
Exclusivity
Depending upon the timing, duration and
specifics of FDA approval of our drugs, some of our U.S. patents may be eligible for limited patent term extension under the Drug
Price Competition and Patent Term Restoration Act of 1984, referred to as the Hatch-Waxman Amendments. The Hatch-Waxman Amendments
permit a patent restoration term of up to five years as partial compensation for effective patent term lost due to time spent during
product development and the FDA regulatory review process. However, patent term restoration cannot extend the remaining term of
a patent beyond a total of 14 years from the product’s approval date. The patent term restoration period is generally one-half
the time between the effective date of an IND, and the submission date of an NDA or BLA, plus the time between the submission date
of an NDA or BLA and the approval of that application, except that the period is reduced by any time during which the applicant
failed to exercise due diligence. Only one patent applicable to an approved drug may be extended, and the extension must be applied
for prior to expiration of the patent. The United States Patent and Trademark Office, in consultation with the FDA, reviews and
approves the application for any patent term extension or restoration.
Pediatric exclusivity is another type of
marketing exclusivity available in the U.S. The FDASIA made permanent the Best Pharmaceuticals for Children Act, or BPCA, which
provides, under certain circumstances, for an additional six months of marketing exclusivity if a sponsor conducts clinical trials
in children in response to a written request from the FDA, or a Written Request. If the Written Request does not include studies
in neonates, the FDA is required to include its rationale for not requesting those studies. The FDA may request studies on approved
or unapproved indications in separate Written Requests. The issuance of a Written Request does not require the sponsor to undertake
the described studies.
Biologics Price Competition and Innovation
Act of 2009
On March 23, 2010, President Obama signed
into law the Patient Protection and Affordable Care Act which included the Biologics Price Competition and Innovation Act of 2009,
or BPCIA. The BPCIA amended the PHSA to create an abbreviated approval pathway for two types of “generic” biologics — biosimilars
and interchangeable biologic products, and provides for a twelve-year exclusivity period for the first approved biological product,
or reference product, against which a biosimilar or interchangeable application is evaluated; however if pediatric studies are
performed and accepted by the FDA, the twelve-year exclusivity period will be extended for an additional six months A biosimilar
product is defined as one that is highly similar to a reference product notwithstanding minor differences in clinically inactive
components and for which there are no clinically meaningful differences between the biological product and the reference product
in terms of the safety, purity and potency of the product. An interchangeable product is a biosimilar product that may be substituted
for the reference product without the intervention of the health care provider who prescribed the reference product.
The biosimilar applicant must demonstrate
that the product is biosimilar based on data from (1) analytical studies showing that the biosimilar product is highly similar
to the reference product; (2) animal studies (including toxicity); and (3) one or more clinical studies to demonstrate safety,
purity and potency in one or more appropriate conditions of use for which the reference product is approved. In addition, the applicant
must show that the biosimilar and reference products have the same mechanism of action for the conditions of use on the label,
route of administration, dosage and strength, and the production facility must meet standards designed to assure product safety,
purity and potency.
An application for a biosimilar product
may not be submitted until four years after the date on which the reference product was first approved. The first approved interchangeable
biologic product will be granted an exclusivity period of up to one year after it is first commercially marketed, but the exclusivity
period may be shortened under certain circumstances.
From time to time, FDA has issued a number
of final and draft guidances in order to implement various aspects of the law, including the testing, review and approval requirements
for new drugs and biological products. These guidance documents provide FDA’s current thinking and recommendations on approaches
to the development, testing, review and approval of proposed new drugs and biological products, including demonstrating that a
proposed biological product is biosimilar to a reference product. The FDA is expected to continue issuing guidance documents in
the future. Nevertheless, the absence of final guidance documents does not prevent a sponsor for seeking approval of new drug products,
including licensure of biosimilar biological products under the BPCIA.
Orphan Drug Designation
Under the Orphan Drug Act, the FDA may grant
orphan drug designation to a drug intended to treat a rare disease or condition, which is generally a disease or condition that
affects fewer than 200,000 individuals in the U.S., or more than 200,000 individuals in the U.S. and for which there is no reasonable
expectation that the cost of developing and making available in the U.S. a drug for this type of disease or condition will be recovered
from sales in the U.S. for that drug. Orphan drug designation must be requested before submitting an NDA or BLA. After the FDA
grants orphan drug designation, the identity of the therapeutic agent and its potential orphan use are disclosed publicly by the
FDA. Orphan drug designation does not itself convey any advantage in or shorten the duration of the regulatory review and approval
process. If a product that has orphan drug designation subsequently receives the first FDA approval for the disease for which it
has such designation, the product is entitled to orphan product exclusivity, which means that the FDA may not approve any other
applications to market the same drug for the same indication, except in very limited circumstances, for seven years. Orphan drug
exclusivity, however, also could block the approval of one of our products for seven years if a competitor obtains approval of
the same drug, for the same designated orphan indication or if our product candidate is determined to be contained within the competitor’s
product for the same indication or disease.
The FDA also administers a clinical research
grants program, whereby researchers may compete for funding to conduct clinical trials to support the approval of drugs, biologics,
medical devices, and medical foods for rare diseases and conditions. A product does not have to be designated as an orphan drug
to be eligible for the grant program. An application for an orphan grant should propose one discrete clinical study to facilitate
FDA approval of the product for a rare disease or condition. The study may address an unapproved new product or an unapproved new
use for a product already on the market.
Most of Coversin’s target disease
indications are rare diseases, and therefore we plan to pursue orphan drug designation where possible. Eculizumab has been
granted orphan status for some of the same disease indications that we propose to treat with Coversin and in 2016 Coversin was
granted orphan drug designation for PNH and GBS by the FDA and EMA. However, Coversin is not considered structurally similar to
eculizumab, and so we believe these preceding orphan designations should not pose a barrier to approval or market entry for Coversin.
There is also a possibility for us to obtain additional orphan designation(s) for Coversin for indications beyond those already
covered by designations granted to eculizumab, based on the substantial medical benefits that Coversin may offer in terms of its
efficacy in certain clinical populations and dosage forms.
Fast Track Designation and Accelerated
Approval
The FDA is required to facilitate the
development, and expedite the review, of drugs that it finds are intended for the treatment of a serious or life-threatening
disease or condition for which there is no effective treatment and which demonstrate the potential to address unmet medical
needs for the condition. On March 29, 2017, we received notice from the FDA of fast track designation for the investigation
of Coversin for treatment of PNH in patients who have polymorphisms conferring eculizumab resistance. Under the fast track
program, the sponsor of a new product candidate may request that the FDA designate the product candidate for a specific
indication as a fast track drug concurrent with, or after, the filing of the IND for the product candidate. The FDA must
determine if the product candidate qualifies for fast track designation within 60 days of receipt of the sponsor’s
request.
Under the fast track program, the FDA may
designate a drug for fast-track status if it is intended to treat a serious or life-threatening illness and nonclinical or clinical
data demonstrate the potential to address an unmet medical need. Similarly, the agency may designate a drug for accelerated approval
if it treats a serious condition and generally provides meaningful therapeutic benefit to patients over existing treatments based
upon a surrogate endpoint that is reasonably likely to predict clinical benefit, or on a clinical endpoint that can be measured
earlier than irreversible morbidity or mortality, that is reasonably likely to predict an effect on irreversible morbidity or mortality
or other clinical benefit, taking into account the severity, rarity, or prevalence of the condition and the availability or lack
of alternative treatments.
In clinical trials, a surrogate endpoint
is a measurement of laboratory or clinical signs of a disease or condition that substitutes for a direct measurement of how a patient
feels, functions, or survives. Surrogate endpoints can often be measured more easily or more rapidly than other clinical endpoints.
A product candidate approved on this basis is generally subject to rigorous post-marketing compliance requirements, including the
completion of Phase 4 or post-approval clinical trials to confirm the effect on the clinical endpoint. Failure to conduct required
post-approval studies, or confirm a clinical benefit during post-marketing studies, will allow the FDA to withdraw the drug from
the market on an expedited basis. All promotional materials for product candidates approved under accelerated regulations are subject
to prior review by the FDA.
In addition to other benefits such as the
ability to use surrogate endpoints and engage in more frequent interactions with the FDA, the FDA may initiate review of sections
of a fast track drug’s NDA or BLA before the application is complete. This rolling review is available if the applicant provides,
and the FDA approves, a schedule for the submission of the remaining information and the applicant pays applicable user fees. However,
the FDA’s time period goal for reviewing an application does not begin until the last section of the application is submitted.
Additionally, the fast track designation may be withdrawn by the FDA if the FDA believes that the designation is no longer supported
by data emerging in the clinical trial process.
In FDASIA, Congress encouraged the FDA to
utilize innovative and flexible approaches to the assessment of products under accelerated approval. The law required the FDA to
issue related draft guidance within a year after the law’s enactment and also promulgate confirming regulatory changes. In
May 2014, the FDA published a Guidance for Industry entitled, “Expedited Programs for Serious Conditions-Drugs and Biologics”
which provides guidance on FDA programs that are intended to facilitate and expedite development and review of new drugs as well
as threshold criteria generally applicable to concluding that a drug is a candidate for these expedited development and review
programs. In addition to the Fast Track, accelerated approval and priority review programs discussed above, the FDA also provided
guidance on a new program for Breakthrough Therapy designation. A request for Breakthrough Therapy designation should be submitted
concurrently with, or as an amendment to an IND. The FDA has already granted this designation to over 30 new drugs and has approved
several.
Post-Approval Requirements
Once an approval is granted, the FDA may
withdraw the approval if compliance with regulatory standards is not maintained or if problems are identified after the product
reaches the market. Later discovery of previously unknown problems with a product may result in restrictions on the product or
even complete withdrawal of the product from the market. After approval, some types of changes to the approved product, such as
adding new indications, manufacturing changes and additional labeling claims, are subject to further FDA review and approval. Drug
manufacturers and other entities involved in the manufacture and distribution of approved drugs are required to register their
establishments with the FDA and certain state agencies, and are subject to periodic unannounced inspections by the FDA and certain
state agencies for compliance with cGMP and other laws and regulations. We rely, and expect to continue to rely, on third parties
for the production of clinical and commercial quantities of our products. Future inspections by the FDA and other regulatory agencies
may identify compliance issues at the facilities of our contract manufacturers that may disrupt production or distribution, or
require substantial resources to correct.
Any drug products manufactured or distributed
by us pursuant to FDA approvals are subject to continuing regulation by the FDA, including, among other things, record-keeping
requirements, reporting of adverse experiences with the drug, providing the FDA with updated safety and efficacy information, drug
sampling and distribution requirements, complying with certain electronic records and signature requirements, and complying with
FDA promotion and advertising requirements. The FDA strictly regulates labeling, advertising, promotion and other types of information
that may be disseminated about products that are placed on the market. Drugs may be promoted only for the approved indications
and in accordance with the provisions of the approved label.
From time to time, legislation is drafted,
introduced and passed in Congress that could significantly change the statutory provisions governing the development, approval,
manufacturing and marketing of products regulated by the FDA. It is impossible to predict whether further legislative changes will
be enacted, or FDA regulations, guidance or interpretations changed or what the impact of such changes, if any, may be.
Regulation and Marketing Authorization in the European
Union
The process governing approval of medicinal
products in the European Union follows essentially the same lines as in the United States and, likewise, generally involves satisfactorily
completing each of the following:
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preclinical laboratory tests, animal studies and formulation studies all performed in accordance with the applicable E.U. Good
Laboratory Practice regulations;
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submission to the relevant national authorities of a clinical trial application, or CTA, which must be approved before human
clinical trials may begin;
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performance of adequate and well-controlled clinical trials to establish the safety and efficacy of the product for each proposed
indication;
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submission to the relevant competent authorities of a marketing authorization application, or MAA, which includes the data
supporting safety and efficacy as well as detailed information on the manufacture and composition of the product in clinical development
and proposed labelling;
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satisfactory completion of an inspection by the relevant national authorities of the manufacturing facility or facilities,
including those of third parties, at which the product is produced to assess compliance with strictly enforced current cGMP;
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potential audits of the non-clinical and clinical trial sites that generated the data in support of the MAA; and
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review and approval by the relevant competent authority of the MAA before any commercial marketing, sale or shipment of the
product.
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Preclinical Studies
Preclinical tests include laboratory evaluations
of product chemistry, formulation and stability, as well as studies to evaluate toxicity in animal studies, in order to assess
the potential safety and efficacy of the product. The conduct of the preclinical tests and formulation of the compounds for testing
must comply with the relevant E.U. regulations and requirements. The results of the preclinical tests, together with relevant manufacturing
information and analytical data, are submitted as part of the CTA.
Clinical Trial Approval
Requirements for the conduct of clinical
trials in the European Union including Good Clinical Practice, or GCP, are implemented in the Clinical Trials Directive 2001/20/EC
and the GCP Directive 2005/28/EC. Pursuant to Directive 2001/20/EC and Directive 2005/28/EC, as amended, a system for the approval
of clinical trials in the European Union has been implemented through national legislation of the member states. Under this system,
approval must be obtained from the competent national authority of an E.U. member state in which a study is planned to be conducted,
or in multiple member states if the clinical trial is to be conducted in a number of member states. To this end, a CTA is submitted,
which must be supported by an investigational medicinal product dossier, or IMPD, and further supporting information prescribed
by Directive 2001/20/EC and Directive 2005/28/EC and other applicable guidance documents. Furthermore, a clinical trial may only
be started after a competent ethics committee has issued a favorable opinion on the clinical trial application in that country.
In April 2014, a new Clinical Trials Regulation,
(EU) No 536/2014 was adopted which will replace the current Clinical Trials Directive 2001/20/EC. To ensure that the rules for
clinical trials are identical throughout the European Union, the new E.U. clinical trials legislation was passed as a “regulation”
that is directly applicable in all E.U. member states. All clinical trials performed in the European Union are required to be conducted
in accordance with the Clinical Trials Directive 2001/20/EC until the new Clinical Trials Regulation (EU) No 536/2014 becomes applicable,
which is scheduled to be in 2018.
The new Regulation (EU) No 536/2014 aims
to harmonize, simplify and streamline the approval of clinical trials in the European Union. The main characteristics of the Regulation
include:
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A streamlined application procedure via a single entry point, the E.U. portal.
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A single set of documents to be prepared and submitted for the application as well as simplified reporting procedures that
will spare sponsors from submitting broadly identical information separately to various bodies and different member states.
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A harmonized procedure for the assessment of applications for clinical trials, which is divided in two parts. Part I is assessed
jointly by all member states concerned. Part II is assessed separately by each member state concerned.
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Strictly defined deadlines for the assessment of clinical trial application.
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The involvement of the ethics committees in the assessment procedure in accordance with the national law of the member state
concerned but within the overall timelines defined by the Regulation (EU) No 536/2014.
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Marketing Authorization
Authorization to market a product in the
member states of the European Union proceeds under one of four procedures: a centralized authorization procedure, a mutual recognition
procedure, a decentralized procedure or a national procedure.
Centralized Authorization Procedure
The centralized procedure enables applicants to obtain a marketing
authorization that is valid in all E.U. member states based on a single application. Certain medicinal products, including products
developed by means of biotechnological processes, must undergo the centralized authorization procedure for marketing authorization,
which, if granted by the European Commission, is automatically valid in all 28 E.U. member states. The EMA and the European Commission
administer this centralized authorization procedure pursuant to Regulation (EC) No 726/2004.
Pursuant to Regulation (EC) No 726/2004, this procedure is mandatory
for:
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medicinal products developed by means of one of the following biotechnological processes:
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recombinant DNA technology;
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controlled expression of genes coding for biologically active proteins in prokaryotes and eukaryotes including transformed
mammalian cells; and
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hybridoma and monoclonal antibody methods;
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•
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advanced therapy medicinal products as defined in Article 2 of Regulation (EC) No. 1394/2007 on advanced therapy medicinal
products;
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•
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medicinal products for human use containing a new active substance that, on the date of effectiveness of this regulation, was
not authorized in the European Union, and for which the therapeutic indication is the treatment of any of the following diseases:
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acquired immune deficiency syndrome;
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neurodegenerative disorder;
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auto-immune diseases and other immune dysfunctions; and
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•
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medicinal products that are designated as orphan medicinal products pursuant to Regulation (EC) No 141/2000.
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The centralized authorization procedure
is optional for other medicinal products if they contain a new active substance or if the applicant shows that the medicinal product
concerned constitutes a significant therapeutic, scientific or technical innovation or that the granting of authorization is in
the interest of patients in the European Union.
Administrative Procedure
Under the centralized authorization procedure,
the EMA’s Committee for Human Medicinal Products, or CHMP, serves as the scientific committee that renders opinions about
the safety, efficacy and quality of medicinal products for human use on behalf of the EMA. The CHMP is composed of experts nominated
by each member state’s national authority for medicinal products, with expert appointed to act as Rapporteur for the co-ordination
of the evaluation with the possible assistance of a further member of the Committee acting as a Co-Rapporteur. After approval,
the Rapporteur(s) continue to monitor the product throughout its life cycle. The CHMP has 210 days to adopt an opinion as
to whether a marketing authorization should be granted. The process usually takes longer in case additional information is requested,
which triggers clock-stops in the procedural timelines. The process is complex and involves extensive consultation with the regulatory
authorities of member states and a number of experts. When an application is submitted for a marketing authorization in respect
of a drug that is of major interest from the point of view of public health and in particular from the viewpoint of therapeutic
innovation, the applicant may pursuant to Article 14(9) Regulation (EC) No 726/2004 request an accelerated assessment procedure.
If the CHMP accepts such request, the time-limit of 210 days will be reduced to 150 days but it is possible that the CHMP can revert
to the standard time-limit for the centralized procedure if it considers that it is no longer appropriate to conduct an accelerated
assessment. Once the procedure is completed, a European Public Assessment Report, or EPAR, is produced. If the opinion is negative,
information is given as to the grounds on which this conclusion was reached. After the adoption of the CHMP opinion, a decision
on the MAA must be adopted by the European Commission, after consulting the E.U. member states, which in total can take more than
60 days.
Conditional Approval
In specific circumstances, E.U. legislation
(Article 14(7) Regulation (EC) No 726/2004 and Regulation (EC) No 507/2006 on Conditional Marketing Authorisations for Medicinal
Products for Human Use) enables applicants to obtain a conditional marketing authorization prior to obtaining the comprehensive
clinical data required for an application for a full marketing authorization. Such conditional approvals may be granted for product
candidates (including medicines designated as orphan medicinal products) if (1) the risk-benefit balance of the product candidate
is positive, (2) it is likely that the applicant will be in a position to provide the required comprehensive clinical trial
data, (3) the product fulfills unmet medical needs and (4) the benefit to public health of the immediate availability
on the market of the medicinal product concerned outweighs the risk inherent in the fact that additional data are still required.
A conditional marketing authorization may contain specific obligations to be fulfilled by the marketing authorization holder, including
obligations with respect to the completion of ongoing or new studies, and with respect to the collection of pharmacovigilance data.
Conditional marketing authorizations are valid for one year, and may be renewed annually, if the risk-benefit balance remains positive,
and after an assessment of the need for additional or modified conditions and/or specific obligations. The timelines for the centralized
procedure described above also apply with respect to the review by the CHMP of applications for a conditional marketing authorization.
Marketing Authorization under Exceptional Circumstances
Under Article 14(8) Regulation (EC) No 726/2004,
products for which the applicant can demonstrate that comprehensive data (in line with the requirements laid down in Annex I of
Directive 2001/83/EC, as amended) cannot be provided (due to specific reasons foreseen in the legislation) might be eligible for
marketing authorization under exceptional circumstances. This type of authorization is reviewed annually to reassess the risk-benefit
balance. The fulfillment of any specific procedures/obligations imposed as part of the marketing authorization under exceptional
circumstances is aimed at the provision of information on the safe and effective use of the product and will normally not lead
to the completion of a full dossier/approval.
Market Authorizations Granted by Authorities of E.U. Member
States
In general, if the centralized procedure
is not followed, there are three alternative procedures as prescribed in Directive 2001/83/EC:
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The decentralized procedure allows applicants to file identical applications to several E.U. member states and receive simultaneous
national approvals based on the recognition by E.U. member states of an assessment by a reference member state.
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The national procedure is only available for products intended to be authorized in a single E.U. member state.
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A mutual recognition procedure similar to the decentralized procedure is available when a marketing authorization has already
been obtained in at least one E.U. member state.
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A marketing authorization may be granted
only to an applicant established in the European Union.
Pediatric Studies
Prior to obtaining a marketing authorization
in the European Union, applicants have to demonstrate compliance with all measures included in an EMA-approved Paediatric Investigation
Plan, or PIP, covering all subsets of the paediatric population, unless the EMA has granted a product-specific waiver, a class
waiver, or a deferral for one or more of the measures included in the PIP. The respective requirements for all marketing authorization
procedures are set forth in Regulation (EC) No 1901/2006, which is referred to as the Pediatric Regulation. This requirement also
applies when a company wants to add a new indication, pharmaceutical form or route of administration for a medicine that is already
authorized. The Pediatric Committee of the EMA, or PDCO, may grant deferrals for some medicines, allowing a company to delay development
of the medicine in children until there is enough information to demonstrate its effectiveness and safety in adults. The PDCO may
also grant waivers when development of a medicine in children is not needed or is not appropriate, such as for diseases that only
affect the elderly population.
Before a marketing authorization application
can be filed, or an existing marketing authorization can be amended, the EMA determines that companies actually comply with the
agreed studies and measures listed in each relevant PIP.
Periods of Authorization and Renewals
A marketing authorization is valid for five
years in principle and the marketing authorization may be renewed after five years on the basis of a re-evaluation of the risk-benefit
balance by the competent authority of the authorizing member state. To this end, the marketing authorization holder must provide
the EMA or the competent authority with a consolidated version of the file in respect of quality, safety and efficacy, including
all variations introduced since the marketing authorization was granted, at least six months before the marketing authorization
ceases to be valid. Once renewed, the marketing authorization is valid for an unlimited period, unless the European Commission
or the competent authority decides, on justified grounds relating to pharmacovigilance, to proceed with one additional five-year
renewal. Any authorization which is not followed by the actual placing of the drug on the E.U. market (in case of centralized procedure)
or on the market of the authorizing member state within three years after authorization ceases to be valid (the so-called sunset
clause).
Orphan Drug Designation and Exclusivity
The European Commission, following an evaluation
by the EMA’s Committee for Orphan Medicinal Products designated Coversin
TM
, as an orphan medicinal product for
PNH and GBS. Pursuant to Regulation (EC) No 141/2000 and Regulation (EC) No. 847/2000, the European Commission can grant such
orphan medicinal product designation to products for which the sponsor can establish that it is intended for the diagnosis, prevention
or treatment of a life-threatening or chronically debilitating condition affecting not more than five in 10,000 people in the European
Union, or a life threatening, seriously debilitating or serious and chronic condition in the European Union and that without incentives
it is unlikely that sales of the drug in the European Union would generate a sufficient return to justify the necessary investment.
In addition, the sponsor must establish that there is no other satisfactory method approved in the European Union of diagnosing,
preventing or treating the condition, or if such a method exists, the proposed orphan drug will be of significant benefit to patients.
Orphan drug designation is not a marketing
authorization. It is a designation that provides a number of benefits, including fee reductions, regulatory assistance, and the
possibility to apply for a centralized E.U. marketing authorization, as well as ten years of market exclusivity following a marketing
authorization. During this market exclusivity period, neither the EMA, the European Commission nor the member states can accept
an application or grant a marketing authorization for a “similar medicinal product.” A “similar medicinal product”
is defined as a medicinal product containing a similar active substance or substances as those contained in an authorized orphan
medicinal product and that is intended for the same therapeutic indication. The market exclusivity period for the authorized therapeutic
indication may be reduced to six years if, at the end of the fifth year, it is established that the orphan designation criteria
are no longer met, including where it is shown that the product is sufficiently profitable not to justify maintenance of market
exclusivity. In addition, a competing similar medicinal product may in limited circumstances be authorized prior to the expiration
of the market exclusivity period, including if it is shown to be safer, more effective or otherwise clinically superior to the
already approved orphan drug. Furthermore, a product can lose orphan designation, and the related benefits, prior to us obtaining
a marketing authorization if it is demonstrated that the orphan designation criteria are no longer met.
Regulatory Data Protection
E.U. legislation also provides for a system
of regulatory data and market exclusivity. According to Article 14(11) of Regulation (EC) No 726/2004, as amended, and Article
10(1) of Directive 2001/83/EC, as amended, upon receiving marketing authorization, new chemical entities approved on the basis
of complete independent data package benefit from eight years of data exclusivity and an additional two years of market exclusivity.
Data exclusivity prevents regulatory authorities in the European Union from referencing the innovator’s data to assess a
generic (abbreviated) application. During the additional two-year period of market exclusivity, a generic marketing authorization
can be submitted, and the innovator’s data may be referenced, but no generic medicinal product can be marketed until the
expiration of the market exclusivity. The overall ten-year period will be extended to a maximum of 11 years if, during the first
eight years of those ten years, the marketing authorization holder, or MAH, obtains an authorization for one or more new therapeutic
indications which, during the scientific evaluation prior to their authorization, are held to bring a significant clinical benefit
in comparison with existing therapies. Even if a compound is considered to be a new chemical entity and the innovator is able to
gain the period of data exclusivity, another company nevertheless could also market another version of the drug if such company
obtained marketing authorization based on an MAA with a complete independent data package of pharmaceutical test, preclinical tests
and clinical trials. However, products designated as orphan medicinal products enjoy, upon receiving marketing authorization, a
period of ten years of orphan market exclusivity—see also
Orphan Drug Designation and Exclusivity
. Depending
upon the timing and duration of the E.U. marketing authorization process, products may be eligible for up to five years’
supplementary protection certificates, or SPCs, pursuant to Regulation (EC) No 469/2009. Such SPCs extend the rights under the
basic patent for the drug.
Regulatory Requirements After a Marketing Authorization has
been Obtained
If we obtain authorization for a medicinal
product in the European Union, we will be required to comply with a range of requirements applicable to the manufacturing, marketing,
promotion and sale of medicinal products:
Pharmacovigilance and other requirements
We will, for example, have to comply with
the E.U.’s stringent pharmacovigilance or safety reporting rules, pursuant to which post-authorization studies and additional
monitoring obligations can be imposed. Other requirements relate, for example, to the manufacturing of products and APIs in accordance
with good manufacturing practice standards. E.U. regulators may conduct inspections to verify our compliance with applicable requirements,
and we will have to continue to expend time, money and effort to remain compliant. Non-compliance with E.U. requirements regarding
safety monitoring or pharmacovigilance, and with requirements related to the development of products for the pediatric population,
can also result in significant financial penalties in the European Union. Similarly, failure to comply with the E.U.’s requirements
regarding the protection of individual personal data can also lead to significant penalties and sanctions. Individual E.U. member
states may also impose various sanctions and penalties in case we do not comply with locally applicable requirements.
Manufacturing
The manufacturing of authorized drugs, for
which a separate manufacturer’s license is mandatory, must be conducted in strict compliance with the EMA’s Good Manufacturing
Practices, or GMP, requirements and comparable requirements of other regulatory bodies in the European Union, which mandate the
methods, facilities and controls used in manufacturing, processing and packing of drugs to assure their safety and identity. The
EMA enforces its current GMP requirements through mandatory registration of facilities and inspections of those facilities. The
EMA may have a coordinating role for these inspections while the responsibility for carrying them out rests with the member states
competent authority under whose responsibility the manufacturer falls. Failure to comply with these requirements could interrupt
supply and result in delays, unanticipated costs and lost revenues, and could subject the applicant to potential legal or regulatory
action, including but not limited to warning letters, suspension of manufacturing, seizure of product, injunctive action or possible
civil and criminal penalties.
Marketing and Promotion
The marketing and promotion of authorized
drugs, including industry-sponsored continuing medical education and advertising directed toward the prescribers of drugs and/or
the general public, are strictly regulated in the European Union under Directive 2001/83/EC. The applicable regulations aim to
ensure that information provided by holders of marketing authorizations regarding their products is truthful, balanced and accurately
reflects the safety and efficacy claims authorized by the EMA or by the competent authority of the authorizing member state. Failure
to comply with these requirements can result in adverse publicity, warning letters, corrective advertising and potential civil
and criminal penalties.
Patent Term Extension
In order to compensate the patentee for
delays in obtaining a marketing authorization for a patented product, a supplementary certificate, or SPC, may be granted extending
the exclusivity period for that specific product by up to five years. Applications for SPCs must be made to the relevant patent
office in each E.U. member state and the granted certificates are valid only in the member state of grant. An application has to
be made by the patent owner within six months of the first marketing authorization being granted in the European Union (assuming
the patent in question has not expired, lapsed or been revoked) or within six months of the grant of the patent (if the marketing
authorization is granted first). In the context of SPCs, the term “product” means the active ingredient or combination
of active ingredients for a medicinal product and the term “patent” means a patent protecting such a product or a new
manufacturing process or application for it. The duration of an SPC is calculated as the difference between the patent’s
filing date and the date of the first marketing authorization, minus five years, subject to a maximum term of five years.
A six month pediatric extension of an SPC may be obtained where
the patentee has carried out an agreed pediatric investigation plan, the authorized product information includes information on
the results of the studies and the product is authorized in all member states of the European Union.
Foreign Regulation
In addition to regulations in the United
States and European Union, we will be subject to a variety of foreign regulations governing clinical trials and commercial sales
and distribution of our products. Whether or not we obtain FDA or EMA approval for a product, we must obtain approval by the comparable
regulatory authorities of foreign countries before we may commence clinical trials or market products in those countries or areas.
The approval process and requirements governing the conduct of clinical trials, product licensing, pricing and reimbursement vary
greatly from place to place, and the time may be longer or shorter than that required for FDA or EMA approval.
Reimbursement
Sales of pharmaceutical products depend
in significant part on the availability of third-party reimbursement. Third-party payors include government healthcare programs,
managed care providers, private health insurers and other organizations. These third-party payors are increasingly challenging
the price and examining the cost-effectiveness of medical products and services. In addition, significant uncertainty exists as
to the reimbursement status of newly approved healthcare products. We may need to conduct expensive pharmacoeconomic studies in
order to demonstrate the cost-effectiveness of our products. Our product candidates may not be considered cost-effective. It is
time consuming and expensive to seek reimbursement from third-party payors. Reimbursement may not be available or sufficient to
allow us to sell our products on a competitive and profitable basis.
In addition, in some foreign countries,
the proposed pricing for a drug must be approved before it may be lawfully marketed. The requirements governing drug pricing vary
widely from country to country. For example, the European Union provides options for its member states to restrict the range of
medicinal products for which their national health insurance systems provide reimbursement and to control the prices of medicinal
products for human use. A member state may approve a specific price for the medicinal product or it may instead adopt a system
of direct or indirect controls on the profitability of the company placing the medicinal product on the market. There can be no
assurance that any country that has price controls or reimbursement limitations for pharmaceutical products will allow favorable
reimbursement and pricing arrangements for any of our products. Historically, products launched in the European Union do not follow
price structures of the United States and generally tend to be significantly lower.
Legal Proceedings
We are not involved in any material legal
proceedings.
Employees
As of December 31, 2016, we had fifteen
full-time employees and two full-time equivalent consultants.
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C.
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Organizational Structure
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Our corporate structure consists of Akari
Therapeutics PLC and three subsidiaries, one of which is an indirect subsidiary. The following is a list of our subsidiaries:
Name of Subsidiary
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Jurisdiction
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Activity
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% Holding
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Volution Immuno Pharmaceuticals SA
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Switzerland
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Research & Development
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100
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%
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Celsus Therapeutics Inc.
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Delaware, USA
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Inactive
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100
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%
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Morria Biopharma Ltd
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Israel
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Inactive
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100
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%
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D.
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Property, Plant and Equipment
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We do not currently own any property. We
currently lease 4,900 square feet of office space in New York, New York, for approximately $25,000 per month. The lease for this
property expires in August 2019. We also lease 1,260 square feet of office space in London, England, for approximately $11,000
per month. The lease for this property expires in March 2019.
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Item 4A.
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UNRESOLVED STAFF COMMENTS
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None.
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Item 5.
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OPERATING AND FINANCIAL REVIEW AND PROSPECTS
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The following discussion and analysis
of our financial condition and results of operations should be read in conjunction with our combined and consolidated financial
statements and related notes appearing elsewhere in this Annual Report on Form 20-F. In addition to historical information,
this discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual
results may differ materially from those anticipated in the forward-looking statements as a result of certain factors. We discuss
factors that we believe could cause or contribute to these differences below and elsewhere in this report including those set forth
under Item 3D ”Risk Factors” in this Annual Report on Form 20-F.
Overview
We are a clinical-stage biopharmaceutical
company focused on developing inhibitors of acute and chronic inflammation, specifically the complement system, the eicosanoid
system and the bioamine system for the treatment of rare and orphan diseases. Each of these systems has scientifically well-supported
causative roles in the diseases we are targeting. We believe that blocking early mediators of inflammation will prevent initiation
and continual amplification of the processes that cause certain diseases.
All of our molecules are derived from ticks
which have undergone 300 million years of natural selection to produce inhibitors that bind tightly to key highly-conserved inflammatory
mediators, are generally well tolerated in humans, and remain fully functional when a host is repeatedly exposed to the molecule.
Our lead product candidate, Coversin™,
which is a second-generation complement inhibitor, acts on complement component-C5, preventing release of C5a and formation of
C5b–9 (also known as the membrane attack complex, or MAC), and independently also inhibits LTB4 activity, both elements that
are co-located as part of the immune/inflammatory response. Coversin is a recombinant small protein (16,740 Da) derived from a
protein originally discovered in the saliva of the Ornithodoros moubata tick, where it modulates the host immune system to allow
the parasite to feed without alerting the host to its presence or provoking an immune response.
C5 inhibition is a new form of treatment
that was pioneered by Alexion Pharmaceuticals (Nasdaq: ALXN) following approval by the U.S. Food and Drug Administration, or FDA,
approval in 2007 of their drug Soliris® (eculizumab) to treat PNH. Soliris® is currently the only drug approved to treat
two complement-related orphan indications, paroxysmal nocturnal haemoglobinuria, or PNH, and atypical Hemolytic Uremic Syndrome,
or aHUS, and had annual sales of $2.8 billion in 2016. Eculizumab is a humanized monoclonal antibody, administered by twice monthly
intravenous infusion (IV).
Our initial clinical targets for Coversin
are PNH, aHUS, and Guillain Barré syndrome, or GBS. We are also targeting patients with polymorphisms of the C5 molecule
which interfere with correct binding of eculizumab, making these patients resistant to treatment with that drug. In addition to
disease targets where complement dysregulation is the key driver, we are also targeting a range of inflammatory diseases where
the inhibition of both C5 and LTB4 are implicated.
Other compounds in our pipeline include
engineered versions of Coversin that potentially decrease the frequency of administration, improve potency, or allow for specific
tissue targeting, as well as new proteins targeting LBT4 alone, as well as bioamine inhibitors (for example, anti-histamines).
In general, these inhibitors act as ligand binding compounds, which may provide additional benefit versus other modes of inhibition.
For example, off target effects are less likely with ligand capture. One example of this benefit is seen with LTB4 inhibition through
ligand capture. LTB4 acts to amplify the inflammatory signal by bringing and activating white blood cells to the area of inflammation.
Compounds that have targeted the production of leukotrienes will inhibit both the production of pro-inflammatory as well as anti-inflammatory
leukotrienes—often diminishing the potential benefit of the drug on the inflammatory system. Coversin has demonstrated that,
by capturing LTB4, it is limited to disrupting the white blood cell activation and attraction aspects, without interfering with
the anti-inflammatory benefits of other leukotrienes.
To date, we have demonstrated: (i)
full complement inhibition and marked lactate dehydrogenase reduction in a PNH patient with eculizumab resistance and who has
now been self-administering Coversin daily for over one year pursuant to an approved clinical protocol in the Netherlands;
(ii) 100% inhibition of complement C5 activity by Coversin with once daily subcutaneous injections during our Phase Ib
clinical trial in healthy volunteers; (iii) that Coversin inhibits PNH red blood cell lysis in vitro; and (iv) that
complement inhibition is complete whether measured by Elisa CH50 U Eq/ml assay or sheep red blood cell lytic CH50 assay, as
demonstrated in both our Phase Ib healthy volunteer study and our 28-day safety study in non-human primates.
In the fourth quarter of 2016, we commenced
enrollment for a 90 day open-label Phase II, single arm trial in patients with PNH in 5 centers in the European Union. To date,
five patients have been enrolled. This trial is designed to test the safety and efficacy of Coversin in patients with PNH who have
not received any other complement blocking therapies. Patients who complete the trial will have the option to continue self–administration
with Coversin in an open-label long term safety study. We expect to provide interim results from the Phase II trial in April, 2017.
Assuming results from this trial confirm the safety and efficacy of Coversin in PNH, we expect to begin our Phase III program before
the end of 2017.
Coversin has received orphan drug status
from the FDA and EMA for PNH and GBS. Orphan drug designation provides the sponsor certain benefits and incentives, including
a period of marketing exclusivity if regulatory approval of the drug is ultimately received for the designated indication. The
receipt of orphan drug designation status does not change the regulatory requirements or process for obtaining marketing approval
and designation does not mean that marketing approval will be received. We intend to apply in the future for further orphan drug
designation in indications we deem appropriate.
On March 29, 2017, we received notice from the FDA of fast track designation for
the investigation of Coversin for treatment of PNH in patients who have polymorphisms conferring eculizumab resistance. The fast
track program was created by the FDA to facilitate the development and expedite the review of new drugs which show promise in
treating a serious or life-threatening disease and address an unmet medical need. Drugs that receive this designation benefit
from more frequent communications and meetings with FDA to review the drug's development plan including the design of the proposed
clinical trials, use of biomarkers and the extent of data needed for approval. Drugs with fast track designation may qualify for
priority review to expedite the FDA review process, if relevant criteria are met.
Coversin is much smaller than typical antibodies
currently used in therapeutic treatment. Coversin can be self-administered by subcutaneous injection, much like an insulin injection,
which we believe will provide considerable benefits in terms of patient convenience. We believe that the subcutaneous formulation
of Coversin may accelerate recruitment for our clinical trials, and, as an alternative to intravenous infusion, may accelerate
patient uptake if Coversin is approved by regulatory authorities for commercial sale. Patient surveys contracted by us suggest
that a majority of patients would prefer to self-inject daily than undergo intravenous infusions.
On September 18, 2015, we completed our
acquisition, or the Acquisition, of all of the capital stock of Volution Immuno Pharmaceuticals SA, or Volution, from RPC Pharma
Limited, or RPC, Volution’s sole shareholder, in exchange for ordinary shares, par value £0.01, or Ordinary Shares=,
in accordance with the terms of the Share Exchange Agreement, dated as of July 10, 2015, by and among Celsus and RPC. In connection
with the Acquisition, the name of the combined company was changed to Akari Therapeutics, Plc. Our American Depositary Shares,
or ADSs, each representing 100 Ordinary Shares, began trading on The NASDAQ Capital Market under the symbol “AKTX”
on September 21, 2015.
For accounting purposes, the Acquisition
was treated as a “reverse acquisition” and Volution was considered the accounting acquirer. Accordingly, our combined
and consolidated financial statements reflect the historical financial statements of Volution as our historical financial statements,
except for the legal capital which reflects our legal capital (Ordinary Shares).
In connection with the consummation of the
Acquisition, Celsus issued an aggregate of 722,345,600 Ordinary Shares to RPC, which represented, prior to giving effect to the
Financing (as defined below), 92.85% of Celsus’s outstanding Ordinary Shares following the closing of the Acquisition (or
91.68% of Celsus Ordinary Shares on a fully diluted basis). This yielded a share exchange ratio of approximately 721:1 of Akari
Ordinary Shares to RPC shares. Our earnings (loss) per share have been retrospectively adjusted in the Combined and Consolidated
Statement of Comprehensive Loss to reflect this recapitalization.
In addition, on September 18, 2015, we completed
a private placement of an aggregate of 3,958,811 restricted ADSs representing 395,881,100 Ordinary Shares for gross proceeds of
$75 million, or the “Financing”, at a price of $18.945 per restricted ADS, which represented approximately 33.3% of
our outstanding Ordinary Shares after giving effect to the Acquisition and the Financing. We incurred $5.4 million of share issuance
costs for net proceeds of $69.6 million.
Critical Accounting Policies and Use of Estimates
The preparation of the combined and consolidated
financial statements in conformity with United States generally accepted accounting principles, or U.S. GAAP, requires management
to make estimates, judgments and assumptions. Our management believes that the estimates, judgments and assumptions used are reasonable
based upon information available at the time they are made. These estimates, judgments and assumptions can affect the reported
amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements,
and the reported amounts of expenses during the reporting period. Actual results could differ from those estimates.
JOBS Act
On April 5, 2012, the Jumpstart Our Business
Startups Act of 2012, or the JOBS Act, was enacted. Section 107 of the JOBS Act provides that an “emerging growth company”
can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new
or revised accounting standards. In other words, an “emerging growth company” can delay the adoption of certain accounting
standards until those standards would otherwise apply to private companies. We chose to “opt out” of the extended transition
period related to the exemption from new or revised accounting standards, and as a result, we will comply with new or revised accounting
standards on the relevant dates on which adoption of such standards is required for non-emerging growth companies. This election
is irrevocable. Additionally, we are continuing to evaluate the benefits of relying on other exemptions and reduced reporting requirements
provided by the JOBS Act.
Subject to certain conditions set forth
in the JOBS Act, as an “emerging growth company,” we intend to rely on certain of these exemptions, including without
limitation, (i) providing an auditor’s attestation report on our system of internal controls over financial reporting pursuant
to Section 404 and (ii) complying with any requirement that may be adopted by the PCAOB regarding mandatory audit firm rotation
or a supplement to the auditor’s report providing additional information about the audit and the financial statements (auditor
discussion and analysis). These exemptions will apply for a period of five years following the first sale of our common equity
securities pursuant to an effective registration statement under the Securities Act or until we are no longer an “emerging
growth company,” whichever is earlier.
Share-Based Compensation and Fair Value of Ordinary Shares
We account for awards of equity instruments
issued to employees and directors under the fair value method of accounting and recognize such amounts in our Combined and Consolidated
Statements of Comprehensive Loss. We measure compensation cost for all stock-based awards at fair value on the date of grant and
recognize compensation expense in our Combined and Consolidated Statements of Comprehensive Income (Loss) using the straight-line
method over the service period over which we expect the awards to vest.
We estimate the fair value of all time-vested
options as of the date of grant using the Black-Scholes option valuation model, which was developed for use in estimating the fair
value of traded options that have no vesting restrictions and are fully transferable. Option valuation models require the input
of highly subjective assumptions, including the expected share price volatility, which we calculate based on the historical volatility
of peer companies. We use a risk-free interest rate, based on U.S. Treasury instruments in effect at the time of the grant, for
the period comparable to the expected term of the option. Given our limited history with share option grants and exercises, we
use the “simplified” method in estimating the expected term, the period of time that options granted are expected to
be outstanding, for our grants.
We classify our stock-based payments as
either liability-classified awards or as equity-classified awards. We remeasure liability-classified awards to fair value at each
balance sheet date until the award is settled. We measure equity-classified awards at their grant date fair value and do not subsequently
remeasure them. We have classified our share-based payments which are settled in our Ordinary Shares as equity-classified awards
and our share-based payments that are settled in cash as liability-classified awards. Compensation costs related to equity-classified
awards generally are equal to the grant-date fair value of the award amortized over the vesting period of the award. The liability
for liability-classified awards generally is equal to the fair value of the award as of the balance sheet date multiplied by the
percentage vested at the time. We charge (or credit) the change in the liability amount from one balance sheet date to another
to changes in fair value of options and warrants liabilities.
Warrants and RPC Options
In connection with the issuance of certain
warrants, we applied ASC 470-20, “
Debt with Conversion and Other Options
” (“ASC 470-20”). In accordance
with ASC 470-20, we first allocated the proceeds received to the warrant, freestanding liability instrument that is measured at
fair value at each reporting date, with changes in the fair values being recognized in our Combined and Consolidate Statement of
Comprehensive Loss as changes in fair value of option/warrant liabilities. The fair value of the warrants granted was valued by
using the Binomial method of valuation. The anti-dilution rights of the warrants were calculated by using the Binomial method of
valuation put option using the same parameters as the warrants call option. The computation of expected volatility is based on
realized historical share price volatility of our Ordinary Shares. The expected term is based on the contractual term. The risk
free interest rate assumption is the implied yield currently available on U.S. Treasury yield zero-coupon issues with a remaining
term equal to the expected life of the options. The dividend yield assumption is based on our historical experience and expectation
of no future dividend payouts and may be subject to substantial change in the future. We have historically not paid cash dividends
and have no foreseeable plans to pay cash dividends in the future. At December 31, 2016, the fair value of the warrants was $34,838.
The change in fair value of the warrants for the year ended December 31, 2016, was a decrease of $650,303 and was recognized as
a change in fair value of option and warrant liabilities in the Combined and Consolidated Statement of Comprehensive Loss.
In connection with a short-term working
capital loan from shareholders of approximately $3 million, the shareholders were granted options in RPC, equivalent to 15% of
the current outstanding equity issued by RPC. The RPC options were accounted for in accordance with ASC 718, “
Compensation-Stock
Compensation
”. The fair value of the RPC options is estimated using the fair value of Akari Ordinary Shares times RPC’s
ownership in Akari Ordinary Shares times 15% and was initially valued at approximately $26 million. These options do not relate
to the share capital of Akari. The exact terms of these options have not been finalized. During the year ended December 31, 2015,
we recorded a non-cash liability to options for $26 million, allocated $3 million as a loan discount, $23 million as a non-cash
financing expense and recorded interest expense in the amount of $3 million in the statement of comprehensive loss as a credit
to the loan discount. At December 31, 2015, the fair value of the options was $15,711,017. At December 31, 2016, the fair value
of the options was $7,627,790. The change in fair value of the options in the year ended December 31, 2016, was a decrease of $8,083,047
and was recognized as a change in fair value of option and warrant liabilities in the Combined and Consolidated Statement of Comprehensive
Loss.
At December 31, 2016, the fair value of
the options and warrants was $7,662,808.
Functional Currency
The functional currency of Akari is U.S.
dollars as that is the primary economic environment in which the Company operates as well as the currency in which it has been
financed.
The reporting currency of the
Company is U.S. Dollars. The Company translated its non-U.S. operations’ assets and liabilities denominated in foreign currencies
into U.S. dollars at current rates of exchange as of the balance sheet date and income and expense items at the average exchange
rate for the reporting period. Translation adjustments resulting from exchange rate fluctuations are recorded as foreign currency
translation adjustments, a component of accumulated other comprehensive (loss) income. Gains or losses from foreign currency transactions
and the remeasurement of intercompany balances are included in foreign currency exchange gains/(losses).
Results of Operations
For the Years Ended December 31, 2016 and December 31,
2015
Research and development expenses
Research and development expenses for the
year ended December 31, 2016 were approximately $17,306,000 compared to approximately $5,800,000 for the year ended December 31,
2015. This 198% or $11,506,000 increase was due to higher expenses of approximately $8,175,000 for manufacturing, $1,859,000 for
clinical trial expenses, $914,000 for consulting expense, $576,000 for personnel expenses, $221,000 for regulatory expenses, $119,000
for toxicology studies and $119,000 for stock-based non-cash compensation expense offset by a research and development tax credit
of $578,000.
We expect our research and development expenses
to increase in the future as we conduct additional clinical trials to support the clinical development of Coversin, and advance
other product candidates into pre-clinical and clinical development.
General and administrative expenses
General and administrative expenses for
the year ended December 31, 2016 were approximately $9,941,000 compared to approximately $5,502,000 for the year ended December
31, 2015. This 81% or $4,439,000 increase was primarily due to higher expenses of approximately $2,851,000 for stock-based non-cash
compensation expense, $1,480,000 of personnel expenses, $564,000 of board expenses and $356,000 of rent expenses, offset by $750,000
of compensation expense in 2015.
We expect our general and administrative
expenses to increase due to increased legal, accounting and professional fees associated with being a publicly reporting company
in the United States and rental expense associated with offices in the United States and London to support the Company’s
operations and anticipated growth.
Excess consideration
Excess consideration of approximately $19,283,000
was calculated as the difference between the fair value of the consideration realized from the Acquisition and the values assigned
to the identifiable tangible and intangible assets acquired and liabilities assumed of Celsus. We have recorded this non-cash charge
in the Combined and Consolidated Statements of Comprehensive Loss in the year ended December 31, 2015 due to the fact that Goodwill
could not be justified and was considered fully impaired.
Other Income (expenses)
Other income for the year ended December
31, 2016 was approximately $9,106,000 compared to other expense of $14,733,000 for the year ended December 31, 2015. This change
was primarily attributed to approximately $22,974,000 of financing expense related to recording of the stock option liability,
$3,054,000 of interest expense in 2015 and $2,675,000 of higher income related to the change in the fair value of the stock option
and warrant liabilities in 2015 than in 2016.
For the years ended December 31, 2015 and December 31, 2014
Research and development expenses
Research and development expenses for the
year ended December 31, 2015 were approximately $5,799,000 compared to approximately $1,616,000 for the year ended December 31,
2014. This 258% or $4,183,000 increase was due to higher expenses of approximately $3,511,000 for manufacturing and clinical trial
related activities, $346,000 of salary expenses, $189,000 of patent expenses and $137,000 of other expenses.
We expect our research and development expenses
to increase in the future as we conduct additional clinical trials to support the clinical development of Coversin, and advance
other product candidates into pre-clinical and clinical development.
General and administrative expenses
General and administrative expenses for
the year ended December 31, 2015 were approximately $5,502,000 compared to approximately $303,000 for the year ended December 31,
2014. This 1,716% or $5,199,000 increase was primarily due to higher expenses of legal, consulting, professional and accounting
expenses of approximately $1,774,000, $1,044,000 of stock-based compensation expense, $809,000 of salary expenses, $750,000 of
compensation expenses for advisory services related to the Acquisition, $229,000 of insurance expenses, $132,000 of board expenses,
$118,000 of rent expenses, $112,000 of travel related expenses primarily related to the Acquisition and the Financing and $216,000
of other expenses.
We expect our general and administrative
expenses to increase due to increased legal, accounting and professional fees associated with being a publicly reporting company
in the United States and rental expense associated with offices in the United States and London to support the Company’s
operations and anticipated growth.
Excess Consideration
Excess consideration of approximately $19,283,000
was calculated as the difference between the fair value of the consideration realized from the Acquisition and the values assigned
to the identifiable tangible and intangible assets acquired and liabilities assumed of Celsus. We have recorded this non-cash charge
in the Combined and Consolidated Statements of Comprehensive Loss in the year ended December 31, 2015 due to the fact that Goodwill
could not be justified and was considered fully impaired.
Other income/expenses
Other expense for the year ended December
31, 2015 was approximately $14,733,000 compared to approximately $28,000 for the year ended December 31, 2014. This change was
primarily attributed to non-cash financing expense of approximately $23,000,000 and $3,000,000 of non-cash interest expense related
to options of RPC granted in connection with a working capital loan to Volution, higher foreign exchange losses of approximately
$91,000 and $44,000 of other expenses, offset by the revaluation of stock option and warrant liabilities of approximately $11,408,000.
|
B.
|
Liquidity and Capital Resources
|
At December 31, 2016, we had $44,120,775
in cash and cash equivalents and short-term investments. In addition, as of December 31, 2016, we had accumulated losses in the
total amount of $74,937,610. Since inception, we have funded our operations primarily through the sale of equity securities and
debt financing. In September 2015, we completed a private placement of an aggregate of 3,958,811 restricted ADSs representing 395,881,100
Ordinary Shares for gross proceeds of $75 million at a price of $18.945 per restricted ADS. In connection with the private placement,
we incurred $5.4 million of share issuance costs for net proceeds of $69.6 million.
We have not yet generated any revenues and
we expect to continue to incur net losses and negative cash flows for the foreseeable future. These net losses and negative cash
flows have had, and will continue to have, an adverse effect on our shareholders’ equity and working capital. We believe
our current cash and cash equivalents and short-term investments are sufficient to fund future operations for at least the next
twelve months. This forecast of cash resources is forward-looking information that involves risks and uncertainties, and
the actual amount of our expenses over the next twelve months could vary materially and adversely as a result of a number of factors,
including the risks and uncertainties set forth in Item 3D under the heading “Risk Factors” of our Annual Report on
Form 20-F for the year ended December 31, 2016.
We are constantly addressing our liquidity
and intend to seek additional fund raisings when necessary to implement our operating plan. Failure to do so may delay research
and development activities. We cannot be certain that such funding will be available on acceptable terms or available at all. To
the extent that we raise additional funds by issuing equity securities, our shareholders may experience significant dilution. There
can be no assurance that we will be successful in obtaining an adequate level of financing needed for our long-term research and
development activities. If we are unable to raise sufficient capital resources, we will not be able to continue the development
of all of our products or may be required to delay part of our development programs and significantly reduce our activities in
order to maintain our operations. We will require additional capital in order to complete the clinical development of and to commercialize
our product candidates and our pre-clinical product candidates.
Net cash used in operating activities was
$24,625,000 during the year ended December 31, 2016 compared to $4,966,000 during the year ended December 31, 2015. Net cash flow
used in operating activities was primarily attributed to our ongoing research activities to support Coversin, including manufacturing,
clinical trial and preclinical activities.
Net cash used in investing activities was
$10,067,000 during the year ended December 31, 2016. This is cash used to purchase office equipment and short-term investments
offset by maturities of short-term securities compared to $1,392,000 provided by investing activities during the year ended December
31, 2015 primarily related to cash acquired from acquisition.
Net cash provided by financing activities
was $69,044,000 during the year ended December 31, 2015. This is primarily from net proceeds from issuance of shares and shareholder
loans offset by the repayment of shareholder loans. In the year ended December 31, 2016, we had no financing activity.
|
C.
|
Research and Development, Patents and Licenses
|
Our research and development expenditures
were approximately $17,306,000, $5,799,000 and $1,616,000 for the years ended December 31, 2016, 2015 and 2014, respectively. Most
of such research and development expenditures were in the form of payments to third parties to carry out our manufacturing, pre-clinical
and clinical research activities.
We incurred the following research and development
expenses for the years ended December 31, 2016, 2015 and 2014:
|
|
Years ended
December 31,
|
|
|
|
(in $000’s)
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Direct Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Coversin
|
|
$
|
12,087
|
|
|
$
|
2,437
|
|
|
$
|
547
|
|
Clinical trials
|
|
|
1, 982
|
|
|
|
41
|
|
|
|
11
|
|
Other
|
|
|
2,161
|
|
|
|
1,087
|
|
|
|
329
|
|
Total direct expenses
|
|
|
16,230
|
|
|
|
3,565
|
|
|
|
887
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Indirect Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Staffing
|
|
|
1,062
|
|
|
|
621
|
|
|
|
232
|
|
Other indirect
|
|
|
14
|
|
|
|
1,613
|
|
|
|
497
|
|
Total indirect expenses
|
|
|
1,076
|
|
|
|
2,234
|
|
|
|
729
|
|
Total Research and Development
|
|
$
|
17,306
|
|
|
$
|
5,799
|
|
|
$
|
1,616
|
|
We are a development stage company and it
is not possible for us to predict with any degree of accuracy the outcome of our research, development or commercialization efforts.
As such, it is not possible for us to predict with any degree of accuracy any significant trends, uncertainties, demands, commitments
or events that are reasonably likely to have a material effect on our net sales or revenues, income from continuing operations,
profitability, liquidity or capital resources, or that would cause financial information to not necessarily be indicative of future
operating results or financial condition. However, to the extent possible, certain trends, uncertainties, demands, commitments
and events are identified in the preceding subsections of this Item 5.
|
E.
|
Off-balance Sheet Arrangements
|
We currently do not have any off-balance
sheet arrangements.
|
F.
|
Contractual Obligations
|
The following table summarizes our significant
contractual obligations as of December 31, 2016:
Contractual Obligations
|
|
Total
|
|
|
Less than
1 year
|
|
|
1 – 3
years
|
|
|
3-5
years
|
|
|
More than
5 years
|
|
Lease of office space (1)(2)
|
|
$
|
1,152,087
|
|
|
$
|
441,719
|
|
|
$
|
710,368
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Total
|
|
$
|
1,152,087
|
|
|
$
|
441,719
|
|
|
$
|
710,368
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
(1)
|
In March 2014, we entered into a lease agreement for offices in London which was amended January 1, 2016. The amended lease
term commenced on December 1, 2014 and expires in March 2019. We have minimum rental payments of approximately $11,000 plus VAT
for each month for our UK offices. The lease can be cancelled early by either party upon 3 months’ notice.
|
|
(2)
|
We also have a five-year lease for offices in the United States effective July 2014. Minimum rental payments range from approximately
$25,000 per month to approximately $29,000 per month. The lease expires in August 2019.
|
|
Item 6.
|
DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
|
|
A.
|
Directors and Senior Management
|
The following table presents the names of
the current members of our board of directors and executive officers.
Name
|
|
Age
|
|
Position
|
|
|
|
|
|
James Hill, M.D.
|
|
71
|
|
Class A Director
|
|
|
|
|
|
Stuart Ungar, M.D.
|
|
73
|
|
Class A Director
|
|
|
|
|
|
David Byrne
|
|
57
|
|
Class A Director
|
|
|
|
|
|
Donald Williams
|
|
58
|
|
Class A Director
|
|
|
|
|
|
Robert Ward
|
|
59
|
|
Class A Director
|
|
|
|
|
|
Gur Roshwalb, M.D.
|
|
48
|
|
Class B Director — Chief Executive Officer
|
|
|
|
|
|
Clive Richardson
|
|
52
|
|
Class B Director — Chief Operating Officer
|
|
|
|
|
|
Ray Prudo
|
|
72
|
|
Class C Director — Executive Chairman of the Board
|
|
|
|
|
|
Dov Elefant
|
|
49
|
|
Chief Financial Officer
|
|
|
|
|
|
Robert Shaw
|
|
63
|
|
General Counsel and Secretary
|
Biographical information of the
members of our board of directors and executive officers is set forth below.
James Hill, M.D.,
age
71, has served as a member of our board of directors since September 2015. Prior to joining our board of directors, Dr. Hill was
a non-executive director and Chairman of Genetix Group Plc from 2001 to 2009, an AIM listed company providing scientists with intelligent
solutions for cell imaging and analysis. Previously Dr. Hill was a director and Senior Vice President of Corporate Affairs with
SmithKline Beecham, from 1994 to 2001, with global responsibility for Investor Relations, Government Affairs, Communication and
was a member of the corporate management team which oversaw corporate strategy. Dr. Hill’s prior experience was in the field
of strategic product development working closely with research and development and the global markets. Dr. Hill qualified in medicine
at Guys Hospital and became a fellow to The Royal Colleges of Physicians in both London and Edinburgh and was earlier awarded a
Hunterian Professorship by The Royal College of Surgeons in England.
Stuart Ungar, M.D.,
age
73, has served as a member of our board of directors since September 2015. Dr. Ungar is currently a member of our board of directors.
After pursuing post-graduate studies in Internal Medicine and research in neuro-pharmacology at The Royal Post-Graduate Medical
School, UK, Dr. Ungar was in practice as an Internist at The Princess Grace Hospital, London. Following fifteen years of practice
he, jointly with Dr. Raymond Prudo, founded The Doctors Laboratory PLC (TDL), a general pathology laboratory, which provided analytical
services to clinicians and pharmaceutical organizations throughout the United Kingdom and abroad. During his tenure as Chairman
and Board Director, The Doctors Laboratory PLC grew from a start-up to become one of the largest pathology laboratories in the
United Kingdom. It was sold to Sonic Healthcare, a quoted Australian PLC in 2002. Dr. Ungar studied medicine and biochemistry in
the University of London at the Royal Free Hospital School of Medicine. As a post-graduate he was admitted to The Royal College
of Physicians of the United Kingdom. Dr. Ungar is a Life Fellow of The Royal Society of Medicine and a founder and former Vice-President
of The Independent Doctors Federation.
David Byrne
, age 57,
has served as a member of our board of directors since June 2016. Mr. Byrne is currently Group Chief Executive Officer of Sonic
Healthcare UK Group, the United Kingdom’s largest NGO clinical diagnostics organization, a position that he has held since
1997. Mr. Byrne is also the CEO of The Doctors Laboratory which is a subsidiary of Sonic. Mr. Byrne also currently serves as a
Main Board Director for CIS Healthcare Limited and served as a Main Board Finance Director for Clinisys Solutions Ltd from 2000
to 2007. He is a UK Chartered Certified Accountant with over 25 years’ experience in corporate finance and developing early
stage biotechnology and medical services companies.
Donald
Williams,
age 58, has served as a member of our board of directors since June 2016. Mr. Williams is a 35-year veteran
of the public accounting industry who retired in 2014. Mr. Williams spent 18 years as a partner at Ernst & Young and the last
seven years as a partner at Grant Thornton. Mr. Williams’ career focused on private and public companies in the technology
and life sciences sectors. During the last seven years at Grant Thornton, he served as the National Leader of Grant Thornton’s
Life Sciences Practice and the Managing Partner of the San Diego Office. He was the lead partner for both Ernst & Young and
Grant Thornton on multiple initial public offerings; secondary offerings; private and public debt financings; as well as numerous
mergers and acquisitions. Mr. Williams serves as a director of Alphatec Holdings, Inc., Impedimed Limited, Marina Biotech, Inc.
and Proove Biosciences, Inc. Mr. Williams served on the board of directors and is past President and Chairman of the San
Diego Venture Group and has served on the board of directors of various charitable organizations in the communities in which he
has lived. Mr. Williams is a graduate of Southern Illinois University with a B.S.
degree.
Robert E. Ward
, age 59, has
served as a member of our board of directors since October 2016. Mr. Ward has served as President and Chief Executive Officer and
a member of the Board of Directors of Radius Health, Inc. (NasdaqGM: RDUS) since December 2013. Prior to joining Radius, Mr. Ward
was Vice President for Strategy and External Alliances for the New Opportunities iMed of AstraZeneca, a biopharmaceutical company,
from 2011 to 2013. In addition, he served as Co-Chair of the Joint Development Committees in Astra Zeneca's drug development partnerships
with Alcon and Galderma. Prior to AstraZeneca, from 2010 to 2011, Mr. Ward was the Managing Director of Harriman Biopartners, LLC,
a biopharmaceutical company, and from 2006 to 2010 he was the Vice President of Corporate Development for NPS Pharmaceuticals,
a pharmaceutical company. Mr. Ward received a B.A. in Biology and a B.S. in Physiological Psychology, both from the University
of California, Santa Barbara; an M.S. in Management from the New Jersey Institute of Technology; and an M.A. in Immunology from
The Johns Hopkins University School of Medicine.
Gur Roshwalb, M.D.
, age 48, has
served as our Chief Executive Officer since March 2013 and joined our board of directors in June 2014. Prior to joining Akari,
from April 2008 to February 2012, Dr. Roshwalb was employed by Venrock, a leading venture capital firm, where he most recently
served as a Vice President investing in both private and public healthcare companies. At Venrock, Dr. Roshwalb was involved in
the valuation, diligence and deal structuring of numerous pharmaceutical and biotechnology companies. Prior to Venrock, Dr. Roshwalb
was a senior equity analyst at Piper Jaffray from June 2004 to March 2008 where he published research on specialty pharmaceutical
companies. Dr. Roshwalb was in private practice in New York and Board Certified in Internal Medicine before joining the investment
community. He received an MBA from the NYU Stern School of Business, and an MD from the Albert Einstein College of Medicine.
Clive Richardson
,
age
52, has served as our Chief Operating Officer and member of our board of directors since September 2015. Mr. Richardson is currently
Head of Operations for Volution, a position he has held since January 2014 as a consultant. Prior his current position, Mr. Richardson
served as consultant to Volution’s predecessor company, Varleigh Immuno Pharmaceuticals, since inception in 2007. Prior to
working for Volution and Varleigh, Mr. Richardson served as a member of the board of directors for a range of international healthcare
companies, including CIS Healthcare Ltd. and Clinisys Ltd. Mr. Richardson was formerly Head of Equities Research for Investec Bank,
and worked as a strategy consultant for L.E.K. Consulting. Mr. Richardson holds an M.A. in Zoology from Trinity College, Oxford
University.
Ray Prudo, M.D.
age 72,
has served as our Executive Chairman since September 2015. Dr. Prudo has been an active investor and developer of healthcare companies
for 25 years. Dr. Prudo is the Founder, Chairman, and Chief Executive Officer of Volution and its predecessor company, Varleigh
Immuno Pharmaceuticals, since inception in 2007. He is currently a board member of several UK healthcare companies. Dr. Prudo holds
an MBBS from the University of London, and an FRCP(C) from the Royal College of Physicians and Surgeons of Canada.
Dov Elefant
, age 49, has served
as our Chief Financial Officer since January 2012. From March 2011 until January 2012, he was Chief Financial Officer of Althera
Medical Ltd. and from March 2009 to February 2011 he performed consulting services to a number of companies. He was also the Corporate
Controller, from March 2007 to February 2009 for Lev Pharmaceuticals, which was acquired by ViroPharma in 2008, Controller and
Vice President of Finance and Administration at EpiCept Corporation from December 1999 to March 2007, Assistant Controller at Tetragenex
Pharmaceuticals from November 1998 to October 1999 and held other accounting and finance roles from March 1991 to October 1998.
Mr. Elefant holds a B.S. in accounting from Yeshiva University.
Robert
M. Shaw
,
age 63, has served as our General Counsel & Secretary since February
2016. Prior to joining Akari, he was General Counsel at Kenyon & Kenyon LLP, a law firm in New York, New York from 2010 to
2016. Prior to 2010, he held the following positions: Vice President, Acting General Counsel, and Secretary at KV Pharmaceutical
Company in St. Louis, Missouri (2008 to 2010), Senior Vice President, General Counsel and Secretary at Pliva, Inc. in East Hanover,
New Jersey (2004 to 2008); Executive Vice President, Chief Administrative Officer, General Counsel and Secretary at Savient Pharmaceuticals,
Inc. in East Brunswick, New Jersey (1998 to 2004). From 1979 to 1998, he held various positions at BASF Corporation, Hoechst Celanese
Corporation, and law firms in New York and Pennsylvania. Mr. Shaw holds a B.A. in Chemistry from Amherst College and a J.D. from
the School of Law at Washington University in St. Louis.
Summary Compensation Table
The following table shows the compensation
paid or accrued during the last two fiscal years ended December 31, 2016 and 2015 to (1) our Executive Chairman, (2) our Chief
Executive Officer, (3) our Chief Financial Officer, (4) our Chief Operating Officer, and (5) our General Counsel and Secretary.
Name and Principal
Position
|
|
Year
|
|
|
Salary
($)
|
|
|
Bonus
($)
|
|
|
Stock
Awards
($)
|
|
|
Option
Awards
($)
(1)
|
|
|
Non-Equity
Incentive Plan
Compensation
($)
|
|
|
Nonqualified
Deferred
Compensation
Earnings
($)
|
|
|
All Other
Compensation
($)
|
|
|
Total
($)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ray Prudo,
|
|
|
2016
|
|
|
|
200,000
|
|
|
|
150,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
350,000
|
|
Executive Chairman
(2)
|
|
|
2015
|
|
|
|
56,986
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
56,986
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gur Roshwalb, M.D.,
|
|
|
2016
|
|
|
|
375,000
|
|
|
|
187,500
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
18,750
|
(5)
|
|
|
581,250
|
|
Chief Executive Officer
|
|
|
2015
|
|
|
|
357,292
|
|
|
|
86,625
|
|
|
|
—
|
|
|
|
6,863,034
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
7,306,951
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dov Elefant,
|
|
|
2016
|
|
|
|
200,000
|
|
|
|
62,500
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
10,000
|
(5)
|
|
|
272,500
|
|
Chief Financial Officer
|
|
|
2015
|
|
|
|
200,000
|
|
|
|
37,500
|
|
|
|
—
|
|
|
|
857,879
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,095,379
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Clive Richardson,
|
|
|
2016
|
|
|
|
282,178
|
|
|
|
129,167
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
34,815
|
(6)
|
|
|
446,160
|
|
Chief
Operating Officer
(3)
|
|
|
2015
|
|
|
|
79,792
|
|
|
|
—
|
|
|
|
—
|
|
|
|
3,431,517
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
3,511,309
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Robert Shaw,
|
|
|
2016
|
|
|
|
218,750
|
|
|
|
—
|
|
|
|
—
|
|
|
|
178,061
|
|
|
|
—
|
|
|
|
—
|
|
|
|
10,925
|
(5)
|
|
|
407,736
|
|
General
Counsel and Secretary
(4)
|
|
|
2015
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
(1)
|
These amounts represent the aggregate grant date fair value for option awards for fiscal years 2016 and 2015, respectively,
computed in accordance with FASB ASC Topic 718. A discussion of the assumptions used in determining grant date fair value may be
found in our Financial Statements, included in our Annual Report on Form 20-F for the years ended December 31, 2016 and 2015.
|
|
(2)
|
Dr. Prudo was appointed as our Executive Chairman in connection with the Acquisition.
|
|
(3)
|
Mr. Richardson was appointed as our Chief Operating Officer in connection with the Acquisition.
|
|
(4)
|
Mr. Shaw was appointed as our General Counsel in February 2016 and Company Secretary in March 2016.
|
|
(5)
|
Consists of company contributions to a 401K plan.
|
|
(6)
|
Consists of company contributions to a pension plan of $33,225 and life insurance premiums of $1,590.
|
Narrative Disclosure to Summary Compensation Table
Ray Prudo
. On September 21, 2015,
in connection with the Acquisition, we entered into an agreement with our Executive Chairman and director, Ray Prudo. The agreement
was effective as of September 18, 2015. Under the agreement, Dr. Prudo will hold office as Chairman and Class C Director for a
three year term and thereafter will seek reappointment in accordance with our Articles of Association. Dr. Prudo’s appointment
is subject to early termination in accordance with the Articles of Association or if he ceases to be a director.
Dr. Prudo’s current annual salary
is $206,000. Upon termination of Dr. Prudo’s appointment, he shall be entitled to any accrued but unpaid base salary and
expense reimbursement. Under the agreement, Dr. Prudo is required to maintain the confidentiality of our confidential information.
In a separately entered into agreement with
Dr. Prudo on September 2015, Dr. Prudo is entitled to an additional cash payment each calendar year in the discretion of our board
of directors based on Dr. Prudo’s performance. Dr. Prudo’s annual cash bonus is currently set at 60% of base salary.
Gur Roshwalb, M.D.
On
September 21, 2015, in connection with the Acquisition, we entered into an executive employment agreement with our Chief Executive
Officer and director, Gur Roshwalb. The employment agreement was effective as of September 18, 2015, and has a term of one year
with automatic renewals for successive one-year periods unless terminated by either party upon three-months’ notice prior
to the expiration of the current term. We are entitled to terminate the employment agreement immediately upon notice in the case
of termination for cause or Dr. Roshwalb’s death or disability and upon 30 days’ prior written notice for any other
reason. Dr. Roshwalb is entitled to terminate the employment agreement with or without good reason upon 30 days’ prior written
notice. Dr. Roshwalb is required to resign as a director upon termination for any reason.
Dr. Roshwalb’s current annual base
salary is $450,000 which is subject to review on an annual basis. Dr. Roshwalb is also entitled to an annual cash bonus with a
target of 40% of base salary, provided that the actual amount of such bonus may be greater or less that the target amount. The
employment agreement also provides that Dr. Roshwalb is entitled to a stock option grant to purchase 32,543,700 Ordinary Shares
(equivalent to 325,437 ADSs). This option was granted under our 2014 Equity Incentive Compensation Plan, or the 2014 Plan, on September
21, 2015, has a ten-year term, is exercisable at a price equal to $0.3221 per share (or $32.21 per ADS) and vests ratably on a
semi-annual basis over four years, with a minimum 25% vesting, subject to acceleration in the case of change of control or non-renewal
of the employment agreement. The employment agreement further provides that Dr. Roshwalb shall receive no additional compensation
for his service on the board of directors.
Upon termination of Dr. Roshwalb’s
employment by us for cause or by Dr. Roshwalb without good reason or in the case of Dr. Roshwalb’s disability or death then
he shall be entitled to any accrued but unpaid base salary and expense reimbursement.
Upon termination of Dr. Roshwalb’s
employment without cause or by Dr. Roshwalb for good reason, in addition to any accrued but unpaid base salary and expense reimbursement,
he shall be entitled to receive an amount equal to 12 months of base salary in effect before the employment terminates, plus the
greater of the actual or target annual performance bonus to which Dr. Roshwalb may have been entitled to for the year in which
the employment terminates. Upon termination of Dr. Roshwalb’s employment upon non-renewal of the term, in addition to any
accrued but unpaid base salary and expense reimbursement, he shall be entitled to receive an amount equal to 12 months of base
salary in effect before the employment terminates. In each such instance of termination, Dr. Roshwalb shall also be entitled to
an amount equal to our share of the medical insurance premium that we pay for Dr. Roshwalb under our health care plan for 12 months
following the date of termination.
Upon termination of Dr. Roshwalb’s
employment by us without cause or by Dr. Roshwalb for good reason within one year of a change of control in addition to any accrued
but unpaid base salary and expense reimbursement, he shall be entitled to receive an amount equal to 18 months of base salary in
effect before the employment terminates, plus one and a half times the target annual performance bonus to which Dr. Roshwalb may
have been entitled to for the year in which the employment terminates; provided our valuation in a change of control transaction
is greater than our valuation at the time of the Acquisition. In such instance, Dr. Roshwalb shall also be entitled to an amount
equal to our share of the medical insurance premium that we pay for Dr. Roshwalb under our health care plan for 18 months following
the date of termination.
The employment agreement also contains restrictive
covenants for our benefit and Dr. Roshwalb is required to maintain the confidentiality of our confidential information.
Dov Elefant.
On September
21, 2015, in connection with the Acquisition, we entered into an executive employment agreement with our Chief Financial Officer,
Dov Elefant. The employment agreement was effective as of September 18, 2015, and has a term of one year with automatic renewals
for successive one-year periods unless terminated by either party upon three-months’ notice prior to the expiration of the
current term. We are entitled to terminate the employment agreement immediately upon notice in the case of termination for cause
or Mr. Elefant’s death or disability and upon 30 days’ prior written notice for any other reason. Mr. Elefant is entitled
to terminate the employment agreement with or without good reason upon 30 days’ prior written notice.
Mr. Elefant’s current annual base
salary is $240,000 which is subject to review on an annual basis. Mr. Elefant is also entitled to an annual cash bonus with a target
of 25% of base salary, provided that the actual amount of such bonus may be greater or less that the target amount. The employment
agreement also provides that Mr. Elefant is entitled to a stock option grant to purchase 4,067,963 Ordinary Shares (equivalent
to 40,679 ADSs). This option was granted under our 2014 Plan on September 21, 2015, has a ten-year term, is exercisable at a price
equal to $0.3221 per share (or $32.21 per ADS) and vests ratably on a semi-annual basis over four years, subject to acceleration
in the case of change of control or non-renewal of the employment agreement.
Upon termination of Mr. Elefant’s
employment by us for cause or by Mr. Elefant without good reason or in the case of Mr. Elefant’s disability or death then
he shall be entitled to any accrued but unpaid base salary and expense reimbursement.
Upon termination of Mr. Elefant’s
employment without cause or by Mr. Elefant for good reason, in addition to any accrued but unpaid base salary and expense reimbursement,
he shall be entitled to receive an amount equal to 12 months of base salary in effect before the employment terminates, plus the
greater of the actual or target annual performance bonus to which Mr. Elefant may have been entitled to for the year in which the
employment terminates. Upon termination of Mr. Elefant’s employment upon non-renewal of the term, in addition to any accrued
but unpaid base salary and expense reimbursement, he shall be entitled to receive an amount equal to 12 months of base salary in
effect before the employment terminates. In each such instance of termination, Mr. Elefant shall also be entitled to an amount
equal to our share of the medical insurance premium that we pay for Mr. Elefant under our health care plan for 12 months following
the date of termination.
Upon termination of Mr. Elefant’s
employment by us without cause or by Mr. Elefant for good reason within one year of a change of control in addition to any accrued
but unpaid base salary and expense reimbursement, he shall be entitled to receive an amount equal to 18 months of base salary in
effect before the employment terminates, plus one and a half times the target annual performance bonus to which Mr. Elefant may
have been entitled to for the year in which the employment terminates; provided our valuation in a change of control transaction
is greater than our valuation at the time of the Acquisition. In such instance, Mr. Elefant shall also be entitled to an amount
equal to our share of the medical insurance premium that we pay for Mr. Elefant under our health care plan for 18 months following
the date of termination.
The employment agreement also contains restrictive
covenants for our benefit and Mr. Elefant is required to maintain the confidentiality of our confidential information.
Clive Richardson.
On September
21, 2015, in connection with the Acquisition, we entered into an executive employment agreement with our Chief Operating Officer
and director, Clive Richardson. The employment agreement was effective as of September 16, 2015 and shall continue in effect until
terminated by either party upon at least six months’ prior written notice.
Mr. Richardson’s current annual base
salary of £252,000 which is subject to review on an annual basis. Mr. Richardson is also entitled to an annual cash bonus
with a target of 40% of base salary, provided that the actual amount of such bonus may be greater or less that the target amount.
The employment agreement also provides that Mr. Richardson is entitled to a stock option grant to purchase 16,271,850 Ordinary
Shares (equivalent to 162,718 ADSs). This option was granted under our 2014 Plan on September 21, 2015, has a ten-year term, is
exercisable at a price equal to $0.3221 per share (or $32.21 per ADS) and vests ratably on a semi-annual basis over four years,
with a minimum 25% vesting, subject to acceleration in the case of change of control or non-renewal of the employment agreement.
Upon termination of Mr. Richardson’s
employment by us for cause, then he shall be entitled to any accrued amounts due at the date of termination. In other instances
of termination of Mr. Richardson’s employment, he shall be entitled to receive an amount equal to 18 months of base salary
in effect before the employment terminates, plus one and a half times the target annual performance bonus to which Mr. Richardson
may have been entitled to for the year in which the employment terminates; provided our valuation in a change of control transaction
is greater than our valuation at the time of the Acquisition..
The employment agreement also contains restrictive
covenants for our benefit and Mr. Richardson is required to maintain the confidentiality of our confidential information.
Robert Shaw.
On March
23, 2016, we entered into an executive employment agreement with our General Counsel and Secretary, Robert Shaw which was subsequently
amended on February 15, 2017. The employment agreement has a term of one year with automatic renewals for successive one-year periods
unless terminated by either party upon three-months’ notice prior to the expiration of the current term. We are entitled
to terminate the employment agreement immediately upon notice in the case of termination for cause or Mr. Shaw’s death or
disability and upon 30 days’ prior written notice for any other reason. Mr. Shaw is entitled to terminate the employment
agreement with or without good reason upon 30 days’ prior written notice.
Mr. Shaw’s current annual base salary
is $256,250 which is subject to review on an annual basis. From February 15, 2017, Mr. Shaw is also entitled to an annual cash
bonus with a target of 30% of base salary, provided that the actual amount of such bonus may be greater or less that the target
amount. The employment agreement also provides that Mr. Shaw is entitled to a stock option grant to purchase 1,800,000 Ordinary
Shares (equivalent to 18,000 ADSs). This option was granted under our 2014 Plan on March 23, 2016, has a ten-year term, is exercisable
at a price equal to $.0141 per share (or $14.10 per ADS) and vests ratably on a semi-annual basis over four years, subject to acceleration
in the case of change of control or non-renewal of the employment agreement.
Upon termination of Mr. Shaw’s employment
by us for cause or by Mr. Shaw without good reason or in the case of Mr. Shaw’s disability or death then he shall be entitled
to any accrued but unpaid base salary and expense reimbursement.
Upon termination of Mr. Shaw’s employment
without cause, by Mr. Shaw for good reason or upon non-renewal of the term, in each case occurring after February 15, 2017, in
addition to any accrued but unpaid base salary and expense reimbursement, he shall be entitled to receive an amount equal to 75%
of (i) 12 months of base salary in effect before the employment terminates, plus (ii) the greater of the actual or target annual
performance bonus to which Mr. Shaw may have been entitled to for the year in which the employment terminates. In each such instance
of termination, Mr. Shaw shall also be entitled to an amount equal to our share of the medical insurance premium that we pay for
Mr. Shaw under our health care plan for 9 months following the date of termination.
Upon termination of Mr. Shaw’s employment
by us without cause or by Mr. Shaw for good reason, in each case occurring after February 15, 2017, within one year of a change
of control in addition to any accrued but unpaid base salary and expense reimbursement, he shall be entitled to receive an amount
equal to 18 months of base salary in effect before the employment terminates , plus one and a half times the target annual performance
bonus to which Mr. Shaw may have been entitled to for the year in which the employment terminates; provided our valuation in a
change of control transaction is greater than our valuation at the time of the Acquisition. In such instance, Mr. Shaw shall also
be entitled to an amount equal to our share of the medical insurance premium that we pay under our health care plan for 18 months
following the date of termination.
The employment agreement also contains restrictive
covenants for our benefit and Mr. Shaw is required to maintain the confidentiality of our confidential information.
Outstanding Equity Awards at Fiscal Year-End
The following table provides information
regarding all outstanding equity awards for (1) our Executive Chairman, (2) our Chief Executive Officer, (3) our Chief Financial
Officer, (4) our Chief Operating Officer, and (5) our General Counsel and Secretary, as of December 31, 2016:
|
|
Option Awards
|
|
Name
|
|
Number of
Securities
Underlying
Unexercised
Options
(#)
Exercisable
(1)
|
|
|
Number of
Securities
Underlying
Unexercised
Options
(#)
Unexercisable
(1)
|
|
|
Equity
Incentive
Plan Awards:
Number of
Securities
Underlying
Unexercised
Unearned
Options
(#)
|
|
|
Option
Exercise
Price
($)
|
|
|
Option
Expiration
Date
|
|
Ray Prudo
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Gur Roshwalb, M.D.
|
|
|
560,000
|
(2)
|
|
|
—
|
|
|
|
—
|
|
|
|
2.00
|
|
|
|
9/24/2023
|
|
|
|
|
100,000
|
(3)
|
|
|
—
|
|
|
|
—
|
|
|
|
2.00
|
|
|
|
9/24/2023
|
|
|
|
|
120,000
|
(4)
|
|
|
—
|
|
|
|
—
|
|
|
|
0.75
|
|
|
|
2/5/2024
|
|
|
|
|
10,169,906
|
(5)
|
|
|
22,373,794
|
|
|
|
—
|
|
|
|
0.3221
|
|
|
|
9/21/2025
|
|
Dov Elefant
|
|
|
40,000
|
(6)
|
|
|
—
|
|
|
|
—
|
|
|
|
1.56
|
|
|
|
1/11/2022
|
|
|
|
|
100,000
|
(3)
|
|
|
—
|
|
|
|
—
|
|
|
|
2.00
|
|
|
|
7/1/2023
|
|
|
|
|
40,000
|
(4)
|
|
|
—
|
|
|
|
—
|
|
|
|
0.75
|
|
|
|
2/5/2024
|
|
|
|
|
1,271,238
|
(5)
|
|
|
2,796,725
|
|
|
|
—
|
|
|
|
0.3221
|
|
|
|
9/21/2025
|
|
Clive Richardson
|
|
|
5,084,953
|
(5)
|
|
|
11,186,897
|
|
|
|
—
|
|
|
|
0.3221
|
|
|
|
9/21/2025
|
|
Robert Shaw
|
|
|
225,000
|
(7)
|
|
|
1,575,000
|
|
|
|
—
|
|
|
|
0.141
|
|
|
|
3/23/2026
|
|
|
(1)
|
Amounts represent options to purchase Ordinary Shares.
|
|
(2)
|
These options were granted on September 24, 2013, and were fully exercisable on September 18, 2015.
|
|
(3)
|
These options were granted on September 24, 2013, and were fully exercisable on July 1, 2014.
|
|
(4)
|
These options were granted on February 2, 2014, and were fully exercisable on May 31, 2014.
|
|
(5)
|
These options were granted on September 21, 2015, in connection with the Acquisition, and are exercisable over a four-year
period with one-sixteenth of the options granted vesting every three months beginning September 21, 2015, through 2019.
|
|
(6)
|
These options were granted on July 1, 2013, and were fully exercisable on July 1, 2014.
|
|
(7)
|
These options were granted on March 23, 2016 and are exercisable over a four-year period with one-eighth of the options granted
vesting every six months beginning March 23, 2016, through 2020.
|
Director Compensation
Our director compensation program is administered
by our board of directors with the assistance of the compensation committee. The compensation committee conducts an annual review
of director compensation and makes recommendations to the board with respect thereto.
Based on the recommendation of our compensation
committee, our board of directors adopted an amended and restated non-employee director compensation policy on November 19, 2015
which was subsequently amended on June 29, 2016. On January 26, 2017, our board approved a 3% increase in cash compensation. As
a result, our non-employee directors will be compensated for service on our board of directors as follows in 2017:
|
·
|
an annual retainer for service on the board of directors of $37,080;
|
|
·
|
an annual retainer for service a member of the audit committee, compensation
committee, nominating and governance committee and the research and development committee of $5,150;
|
|
·
|
for the chairman of the compensation committee, and nominating and
governance committee, an annual retainer of $10,300;
|
|
·
|
for the chairperson of the audit committee, an annual retainer of
$15,450;
|
|
·
|
for service on the board, an annual grant of a stock option to purchase
1,300,000 Ordinary Shares (equivalent to 13,000 ADSs) or Annual Stock Option; the grant is made each year on the date of the Company’s
Annual General Meeting of shareholders, or AGM, on the date of the first meeting of the board held following the AGM, or on any
date following such AGM as may be recommended by the compensation committee and approved by the Board;
|
|
·
|
for each new non-employee director that is appointed to the board
of directors, an initial grant of a stock option to purchase 1,300,000 Ordinary Shares (equivalent to 13,000 ADSs), or Initial
Stock Option Grant; if the non-employee director was not previously appointed to the board and is first elected at the Company’s
AGM, the grant shall be made on the date of the Company’s AGM, on the date of the first meeting of the board held following
the AGM, or on any date following such AGM as may be recommended by the compensation committee and approved by the board; if the
non-employee director is appointed to the board in advance of the next AGM and will stand for election at that AGM, the grant shall
be made at the meeting of the board at which he or she is appointed and, if not made at such meeting, shall be made promptly following
such meeting by written unanimous consent of the board; and if the non-employee director is first appointed to the board in advance
of the next AGM and will not stand for election at that AGM, the number of shares in the grant and the vesting schedule shall be
determined by the compensation committee, taking into account the term of the appointment and the grant shall be made at the meeting
of the board at which he or she is appointed and, if not made at such meeting, shall be made promptly following such meeting by
written unanimous consent of the board;
|
|
·
|
unless otherwise specified by the board or the compensation committee
at the time of grant, each Annual Stock Option granted under this policy shall (i) vest in full on the date of the next AGM following
the date of grant, subject to the non-employee director’s continued service on the Board; (ii) have an exercise price equal
to the fair market value of the Company’s Ordinary Shares as determined in the 2014 Plan on the grant date; (iii) terminate
ten years after the grant date, (iv) become fully vested immediately prior to a change of control and (v) contain such other terms
and conditions as set forth in the form of option agreement approved by the board or the compensation committee prior to the grant
date; and
|
|
·
|
unless otherwise specified by the board or the compensation committee
at the time of grant, each Initial Stock Option Grant for newly appointed or elected directors granted under the non-employee director
compensation policy shall (i) vest ratably in three equal installments with the first installment vesting on the date of the first
AGM following the date of the grant, and with the second and third installments vesting, respectively, on the dates of the second
and third AGMs following the date of the grant, subject to the non-employee director’s continued service on the board; (ii)
have an exercise price equal to the fair market value of the Company’s Ordinary Shares as determined in the 2014 Plan on
the grant date; (iii) terminate ten years after the grant date, (iv) become fully vested immediately prior to a change of control
and (v) contain such other terms and conditions as set forth in the form of option agreement approved by the board or the compensation
committee prior to the grant date; and
|
|
·
|
each of these options shall be granted under our 2014 Plan, terminate
ten years after the grant date and become fully vested immediately prior to a change of control.
|
All directors are eligible to receive reimbursement
for reasonable out-of-pocket expenses incurred in connection with attendance at meetings of our board of directors, and our non-employee
directors are also eligible to receive reimbursement, upon approval of the board of directors or a committee thereof, for reasonable
out-of-pocket expenses incurred in connection with attendance at various conferences or meetings with our management.
The following table sets forth information
regarding the total compensation awarded to, earned by or paid to each of our non-employee directors during the year ended December
31, 2016 for their service on our board of directors. Dr. Prudo, our Executive Chairman, Dr. Roshwalb, our Chief Executive Officer,
and Clive Richardson, our Chief Operating Officer, did not receive any additional compensation for their service as a director
during 2016. The compensation that we pay to the foregoing persons is discussed in the “Summary Compensation Table”
above.
Name
|
|
Fees Earned
or
Paid in Cash
($)
|
|
|
Option
Awards
($)
(1)
|
|
|
Total
($)
|
|
|
|
|
|
|
|
|
|
|
|
James Hill, M.D.
(2)
|
|
|
58,249
|
|
|
|
126,226
|
|
|
|
184,475
|
|
Stuart Ungar
(3)
|
|
|
50,770
|
|
|
|
126,226
|
|
|
|
176,996
|
|
David Byrne
(4)
|
|
|
21,683
|
|
|
|
278,636
|
|
|
|
300,319
|
|
Donald Williams
(5)
|
|
|
25,500
|
|
|
|
248,898
|
|
|
|
274,398
|
|
Robert Ward
(6)
|
|
|
10,880
|
|
|
|
69,062
|
|
|
|
79,942
|
|
Mark S. Cohen
(7) (8)
|
|
|
60,749
|
|
|
|
195,287
|
|
|
|
256,036
|
|
Allan Shaw
(9)
|
|
|
25,290
|
|
|
|
-
|
|
|
|
25,290
|
|
|
(1)
|
These amounts represent the aggregate grant date fair value of options granted to each director during the year ended December
31, 2016 computed in accordance with ASC Topic 718. A discussion of the assumptions used in determining grant date fair value may
be found in our Audited Financial Statements, included in our Annual Report on Form 20-F for the fiscal year ended December 31,
2016.
|
|
(2)
|
As of December 31, 2016, options to purchase an aggregate of 2,600,000 Ordinary Shares (equivalent to 26,000 ADSs) were outstanding,
of which 587,518 Ordinary Shares (equivalent to 5,875 ADSs) were exercisable.
|
|
(3)
|
As of December 31, 2016, options to purchase an aggregate of 2,600,000 Ordinary Shares (equivalent to 26,000 ADSs) were outstanding,
of which 574,185 Ordinary Shares (equivalent to 5,741 ADSs) were exercisable.
|
|
(4)
|
Mr. Byrne was appointed as a Class A director on April 20, 2016. As of December 31, 2016, options to purchase an aggregate
of 2,600,000 Ordinary Shares (equivalent to 26,000 ADSs) were outstanding, none of which were exercisable.
|
|
(5)
|
Mr. Williams was appointed as a Class A director on June 29, 2016. As of December 31, 2016, options to purchase an aggregate
of 2,600,000 Ordinary Shares (equivalent to 26,000 ADSs) were outstanding, none of which were exercisable.
|
|
(6)
|
Mr. Ward was appointed as a Class A director on October 13, 2016. As of December 31, 2016, options to purchase an aggregate
of 1,300,000 Ordinary Shares (equivalent to 13,000 ADSs) were outstanding, none of which were exercisable.
|
|
(7)
|
Mr. Cohen resigned as a Class C director on October 13, 2016. As of December 31, 2016, options to purchase an aggregate of
4,401,500 Ordinary Shares (equivalent to 44,015 ADSs) were outstanding, of which 4,401,500 Ordinary Shares (equivalent to 44,015
ADSs) were exercisable. In connection with Mr. Cohen’s resignation, we and Mr. Cohen agreed that Mr. Cohen’s (i) outstanding
unvested stock options from November 25, 2015 and June 29, 2016 in the amounts of 1,028,722 and 1,300,000 ordinary shares, respectively,
shall be fully vested as of October 13, 2016, and (ii) vested options (including those whose vesting accelerated pursuant to the
preceding clause) shall continue to be exercisable for a period ending on the earlier of (1) 10 years following the respective
dates of grant of such options, or (2) three months following the Company’s 2018 AGM. In addition, we agreed to (i) grant
Mr. Cohen an additional option to purchase 1,300,000 fully vested ordinary shares (equivalent to 13,000 ADS) at an exercise price
of $0.080621 per share (or $8.0621 per ADS) and which can be exercised until three months following the 2018 AGM, and (ii) pay
Mr. Cohen, in quarterly installments, $45,750 for the balance of director fees that he would have earned through the 2017 AGM and
an additional $61,000 that he would have earned in director fees from the 2017 AGM to the 2018 AGM.
|
|
(8)
|
Does not include payments of an aggregate of $18,542 for intellectual property legal services and expenses for third parties
in 2016 made to Pearl Cohen Zedek Latzer Baratz LLP, of which Mr. Cohen is a senior partner.
|
|
(9)
|
Mr. Shaw’s term as a Class A director expired on June 29, 2016. As of December 31, 2016, all previously granted options
to Mr. Shaw expired without exercise.
|
Our Articles of Association, as amended,
provide that our business is to be managed by the board of directors (subject to any directions made by the members of the Company
by special shareholder resolution). Our board of directors is divided into three classes for purposes of election (Class A Directors,
who serve a one year term before being subject to re-election at the Company’s annual general meeting; Class B Directors,
who serve a two year term before being subject to re-election at the annual general meeting; and Class C Directors who serve a
three year term before being subject to re-election at the annual general meeting, provided also that in any two year period, a
majority of the board must stand for re-election). Our board of directors currently consists of eight members: James Hill, M.D.,
Stuart Ungar, M.D., David Byrne, Donald Williams and Robert Ward currently serve as Class A directors, with a term ending at the
2017 annual general meeting; Gur Roshwalb, M.D. and Clive Richardson currently serve as Class B directors, with a term ending at
the 2017 annual general meeting; and Ray Prudo, currently serves as a Class C director, with a term ending at the 2018 annual general
meeting. Ray Prudo serves as Executive Chairman of our board of directors.
Subject to certain exceptions, the rules
of Nasdaq permit a foreign private issuer to follow its home country practice in lieu of listing requirements of Nasdaq. The committees
of our board of directors consist of an audit committee, a compensation committee and a nominating and corporate governance committee.
Audit Committee
Our audit committee currently consists of
three members, appointed by the board of directors: Donald Williams, James Hill, M.D. and David Byrne, all of whom are independent
within the meaning of SEC corporate governance rules of independence for purposes of the audit committee. Mr. Williams is the chairman
of our audit committee. Our board of directors has determined that Mr. Williams is the audit committee financial expert.
Compensation Committee
Our compensation committee currently consists
of three members, appointed by the board of directors: James Hill, M.D., Stuart Ungar, M.D. and David Byrne, all of whom are independent
within the meaning of SEC corporate governance rules of independence for purposes of the compensation committee. Dr. Hill is the
chairman of our compensation committee.
Nominating and Corporate Governance Committee
Our nominating and corporate governance
committee currently consists of three members, appointed by our board of directors: Robert Ward, James Hill, M.D., and Stuart Ungar,
M.D., all of whom are independent within the meaning of SEC corporate governance rules of independence for purposes of the nominating
and corporate governance committee. Mr. Ward is the chairman of our nominating and corporate governance committee.
None of our non-employee directors
have any service contracts with Akari or any of our subsidiaries that provide for benefits upon termination of
employment.
As of December 31, 2016, we had fifteen
full-time employees and a further two full-time equivalent consultants. Six of our employees and one consultant were engaged in
research and development and nine employees and one consultant were engaged in management, administration and finance. Eleven are
located in England and six are located in the United States.
None of our employees are members
of labor unions.
Information with respect to share ownership
of members of our board of directors and executive officers is included in “Item 7. Major Shareholders and Related Party
Transactions”
Option Plans
2014 Plan
In order to retain qualified individuals,
the Board previously established the 2007 Stock Option Plan. We currently have issued options representing 736,500 Ordinary Shares
under the 2007 Stock Option Plan.
On June 19, 2014, our board of directors
approved the 2014 Equity Incentive Plan, or the 2014 Plan. The shareholders approved the 2014 Plan on June 19, 2014. The purpose
of the 2014 Plan is to enable us to continue to attract and retain professional personnel for the purposes of executing our clinical
development plan. The material terms of the 2014 are set forth below.
The option plan is administered by our board
of directors and grants are made pursuant thereto by the compensation committee. The aggregate number of Ordinary Shares that may
be issued upon exercise of options under the 2014 Plan shall be the sum of: (i) 141,142,420 Ordinary Shares and (ii) any Ordinary
Shares that are represented by awards granted under the Company’s 2007 Stock Option Plan that are forfeited, expire or are
cancelled without delivery of Ordinary Shares or which result in the forfeiture of Ordinary Shares back to the Company on or after
June 19, 2014, or the equivalent of such number of Ordinary Shares after the administrator, in its sole discretion, has interpreted
the effect of any stock split, stock dividend, combination, recapitalization or similar transaction in accordance with the 2014
Plan; provided, however, that no more than 736,500 Ordinary Shares shall be added to the 2014 Plan pursuant to subsection (ii).
Options may be granted at any time. As of March 30, 2017, options to purchase 78,635,698 of our Ordinary Shares were outstanding
under the 2014 Plan. Unless sooner terminated, the Plan shall expire on April 30, 2024.
The per share exercise price for the shares
to be issued pursuant to the exercise of an option shall be such price as determined by the board of directors and set forth in
the individual option agreement, subject to any guidelines as may be determined by the board of directors from time to time, provided,
however, that the exercise price shall be not less than the par value of the shares underlying the option, and subject to other
conditions set forth in the 2014 Plan.
Options are exercisable pursuant to the
terms under which they were awarded and subject to the terms and conditions of the 2014 Plan. In general, an option, or any part
thereof, may not be exercised unless the optionee is then a service provider of our company or any parent or subsidiary thereof
(as each such term is defined in the 2014 Plan). Any tax consequences arising from the grant or exercise of any option from the
payment for shares covered thereby, the sale or disposition of such shares and any other expenses are the responsibility of the
optionee unless otherwise required by applicable law.
On January 23, 2017, the compensation committee
approved a UK Sub-Plan of the 2014 Plan which offers UK residents the opportunity to acquire interests in us in a similar manner
to that offered to US employees. The UK Sub-Plan requires that only employees may receive grants, and that all options granted
under the UK Sub-Plan must be designated as “non-tax-advantaged Options” under UK law. Options granted under the
UK Sub-Plan are exercisable pursuant to the terms of their award and are subject to the terms of the 2014 Plan generally, except
where otherwise stated. The UK Sub-Plan differs from the 2014 Plan only in UK-specific provisions regarding a valid disposition
to survivors and compliance with local UK laws regarding securities, treatment as compensation, tax matters, data privacy, and
third party rights.
Grants to non-employee directors who are
based in the UK or who are UK resident taxpayers are made pursuant to the 2014 Plan in accordance with the UK Appendix to the Amended
and Restated Non-Employee Director Compensation Policy which was approved by the compensation committee on January 23, 2017.
The UK Appendix, as with the Sub-Plan for employees, differs from the Non-Employee Director Compensation Policy by providing specific
UK-specific provisions. All options granted to UK non-employee directors or resident taxpayers are, as with the Sub-Plan
for employees, designated as “non-tax-advantaged options” under UK law, exercisable pursuant to the terms of the award
and the 2014 Plan, and provide for UK specific provisions regarding survivorship, securities, compensation, tax, data privacy,
and third party rights laws.
In addition, on January 26, 2017, our board
of directors approved a CSOP Sub Plan as recommended to the board by the compensation committee. The CSOP Sub-Plan modifies
the 2014 Plan to qualify as a Schedule 4 CSOP Scheme as defined under the UK’s Income Tax (Earnings & Pensions) Act 2003,
or ITEPA. The purpose of the CSOP Sub-Plan is to allow options granted to UK resident employees and directors to qualify
as a Schedule 4 CSOP Scheme under governing law and to therefore qualify for certain tax advantages under ITEPA. CSOP options are
effectuated by the execution of a deed of grant by the Company evidencing shares, option exercise price, restrictions, and other
terms or conditions. Grants are limited under the CSOP Sub-Plan such that an employee cannot hold more than £30,000
in value, measured as of grant date. In the event of redundancy, retirement, a relevant transfer within the meaning of the
Protection of Employment regulations, or a cease of control (as defined in Section 719 ITEPA) under governing UK law, the recipient
may exercise any CSOP option that has become exercisable but has not yet been exercised for a period of six months. A Change
of Control under UK law will similarly permit option exercise.
2007 Stock Option Plan
On August 28, 2007, our board of directors
approved the 2007 Stock Option Plan, or the 2007 Stock Option Plan, as amended on April 26, 2012, June 20, 2012 and April 29, 2013.
The shareholders approved the 2007 Stock Option Plan on June 20, 2013. The purpose of the 2007 Stock Option Plan is to provide
an additional incentive to employees, officers, directors, consultants and other service providers of the Company and any parent
or subsidiary of the Company (each as defined in the 2007 Stock Option Plan) to further the growth, development and financial success
of the company by providing them with opportunities to purchase shares pursuant to the 2007 Stock Option Plan and to promote the
success of the business. The material terms of the 2007 Stock Option Plan are set forth below.
The option plan is administered by the board
of directors and grants are made pursuant thereto by the compensation committee. The aggregate number of Ordinary Shares that may
be issued upon exercise of options under the 2007 Stock Option Plan shall not exceed 5,865,000 Ordinary Shares. The board of directors
may, at any time during the term of the 2007 Stock Option Plan, increase the number of shares available for grant under the 2007
Stock Option Plan. Options may be granted at any time. As of March 30, 2017, options to purchase 736,500 of our Ordinary Shares
were outstanding under the 2007 Stock Option Plan. Unless sooner terminated, the Plan shall expire on the tenth anniversary of
its effective date, or August 28, 2017.
The per share exercise price for the shares
to be issued pursuant to the exercise of an option shall be such price as determined by the board of directors and set forth in
the individual option agreement, subject to any guidelines as may be determined by the board of directors from time to time, provided,
however, that the exercise price shall be not less than the par value of the shares underlying the option, and subject to other
conditions set forth in the 2007 Stock Option Plan.
Options are exercisable pursuant to the
terms under which they were awarded and subject to the terms and conditions of the 2007 Stock Option Plan. In general, an option,
or any part thereof, may not be exercised unless the optionee is then a service provider of our company or any parent or subsidiary
thereof (as each such term is defined in the 2007 Stock Option Plan). Any tax consequences arising from the grant or exercise of
any option from the payment for shares covered thereby, the sale or disposition of such shares and any other expenses are the responsibility
of the optionee unless otherwise required by applicable law.
Equity Award Grant Policy
Based on the recommendation of the compensation
committee, our board of directors adopted an Equity Award Grant Policy on January 26, 2017, which sets forth policies for us to
follow when we grant stock options, shares of restricted stock, restricted stock units or other equity based awards to employees
of the Company or its subsidiaries.
The grants are divided into annual grants,
made on the last business day in March, new hire grants, to our new hires, and performance grants to existing employees in recognition
of performance. The policy standardizes employee grants and delegates authority to the Executive Chairman and CEO to make grants
other than (a) grants of more than 1,000,000 Ordinary Shares or share-equivalents to one individual on one date; (b) new hire or
performance grants to a person who is reasonably expected to be an executive officer or director upon hire or promotion; (c) any
grant which would exceed 1,000,000 Ordinary Shares or share equivalents to any one individual in a calendar year; or (d) any grant
with an exercise price less than fair market value on the date. These non-delegated grants remain in the sole authority of
the compensation committee.
Pricing will be based on the closing market
price on the NASDAQ Capital Market for all such grants. All new hire grants must be made by a writing sent to the recipient
stating the terms and conditions and clarifying that the equity award is subject to approval, whether by the delegated authority
pursuant to the policy or by the compensation committee or the board itself.
|
Item 7.
|
MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
|
The following table sets forth certain information
with respect to the beneficial ownership of our Ordinary Shares as of March 30, 2017 (except where otherwise indicated) for:
|
·
|
each person, or group of affiliated persons, who are known by us to
beneficially own more than 5% of our outstanding Ordinary Shares;
|
|
·
|
each of member of our board of directors
|
|
·
|
each of our other executive officers; and
|
|
·
|
all of our directors and executive officers as a group.
|
The number of shares beneficially owned
by each entity, person, director or executive officer is determined under the rules of the SEC and the information is not necessarily
indicative of beneficial ownership for any other purpose. Under such rules, beneficial ownership includes any shares as to which
the individual has the sole or shared voting power or investment power and also any shares that the individual has the right to
acquire within 60 days of March 30, 2017, through the exercise of any option or other right. Unless otherwise indicated, each person
has sole investment and voting power, or shares such powers with his or her spouse, with respect to the shares set forth in the
following table.
Ordinary Shares that may be acquired by
an individual or group within 60 days of March 30, 2017, pursuant to the exercise of options or warrants, are deemed to be outstanding
for the purpose of computing the percentage ownership of such individual or group, but are not deemed to be outstanding for the
purpose of computing the percentage ownership of any other person shown in the table. The percentage of ownership is based on 1,177,693,383
shares of Ordinary Shares outstanding on March 30, 2017, adjusted as required by the rules promulgated by the SEC to determine
beneficial ownership. Akari does not know of any arrangements, including any pledge by any person of securities of Akari, the operation
of which may at a subsequent date result in a change of control of Akari. Unless otherwise noted, the address of each director
and executive officer of Akari is: c/o Akari Therapeutics, Plc, 24 West 40th Street, 8th Floor, New York, New York, 10018.
|
|
Number of
Ordinary Shares
Beneficially
Owned
(1)
|
|
|
Percentage of
Ordinary Shares
Beneficially
|
|
Directors and Executive Officers
|
|
|
|
|
|
|
|
|
Ray Prudo
|
|
|
722,345,600
|
(1)
|
|
|
61.3
|
%
|
Clive Richardson
|
|
|
6,101,944
|
(2)
|
|
|
|
*
|
James Hill, M.D.
|
|
|
587,518
|
(3)
|
|
|
|
*
|
Stuart Ungar, M.D.
|
|
|
574,185
|
(4)
|
|
|
|
*
|
Gur Roshwalb, M.D.
|
|
|
13,159,326
|
(5)
|
|
|
1.1
|
%
|
Dov Elefant
|
|
|
1,705,486
|
(6)
|
|
|
|
*
|
David Byrne
|
|
|
433,333
|
(7)
|
|
|
|
*
|
Donald Williams
|
|
|
—
|
|
|
|
|
*
|
Robert Ward
|
|
|
—
|
|
|
|
|
*
|
Robert M. Shaw
|
|
|
450,000
|
(8)
|
|
|
|
*
|
All directors and officers as a group (10 persons)
|
|
|
745,357,392
|
|
|
|
62.1
|
%
|
5% or More Shareholders
|
|
|
|
|
|
|
|
|
RPC Pharma Limited
(9)
|
|
|
722,345,600
|
|
|
|
61.3
|
%
|
Deerfield Management
Company, L.P.
|
|
|
115,070,000
|
(10)
|
|
|
9.8
|
%
|
|
*
|
Represents beneficial ownership of less than 1% of our
outstanding Ordinary Shares.
|
|
(1)
|
Represents the entire holdings of RPC Pharma Limited. Dr. Prudo has voting and dispositive control over the Ordinary Shares
held by RPC Pharma Limited and owns approximately 71% of RPC’s outstanding shares (including option grants), including 10.64%
of RPC’s outstanding shares held in trust for Dr. Ungar. Dr. Prudo disclaims beneficial ownership except to the extent of
his actual pecuniary interest in such shares.
|
|
(2)
|
Consists of options to purchase 6,101,944 Ordinary Shares (equivalent to 61,019 ADSs) at an exercise price of $0.3221 per share
(or $32.21 per ADS), which expire on September 21, 2025.
|
|
(3)
|
Consists of options to purchase 231,278 Ordinary Shares (equivalent to 2,312 ADSs) at an exercise price of $0.3221 per share
(or $32.21 per ADS), which expire on September 21, 2025 and 356,240 Ordinary Shares (equivalent to 3,562ADSs) at an exercise price
of $0.1917 per share (or $19.17 per ADS), which expire on November 25, 2025. Does not include shares held by RPC Pharma Limited
of which he has a pecuniary interest. Dr. Hill disclaims beneficial ownership of the shares held by RPC Pharma Limited.
|
|
(4)
|
Consists of options to purchase 211,278 Ordinary Shares (equivalent to 2,112 ADSs) at an exercise price of $0.3221 per share
(or $32.21 per ADS), which expire on September 21, 2025 and 362,907 Ordinary Shares (equivalent to 3,629 ADSs) at an exercise price
of $0.1917 per share (or $19.17 per ADS), which expire on November 25, 2025. Does not include shares held by RPC Pharma Limited
of which he has a pecuniary interest. Dr. Ungar disclaims beneficial ownership of the shares held by RPC Pharma Limited.
|
|
(5)
|
Includes options to purchase 12,203,888 Ordinary Shares (equivalent to 122,038 ADSs) at an exercise price of $0.3221 per share
(or $32.21 per ADS), which expire on September 21, 2025, 120,000 Ordinary Shares (equivalent to 1,200 ADSs) at an exercise price
of $0.75 per share (or $75.00 per ADS), which expire on February 5, 2024 and 660,000 Ordinary Shares (equivalent to 6,600 ADSs)
at an exercise price of $2.00 per share (or $200,00 per ADS), which expire on September 24, 2023.
|
|
(6)
|
Includes options to purchase 40,000 Ordinary Shares (equivalent to 400 ADSs) at an exercise price of $1.56 per share (or $156.00
per ADS), which expire on January 11, 2022, 100,000 Ordinary Shares (equivalent to 1,000 ADSs) at an exercise price of $2.00 per
share (or $200.00 per ADS), which expire on July 1, 2023, 40,000 Ordinary Shares (equivalent to 400 ADSs) at an exercise price
of $0.75 per share (or $75.00 per ADS), which expire on February 5, 2024 and 1,525,486 Ordinary Shares (equivalent to 15,254 ADSs)
at an exercise price of $0.3221 per share( or $32.21 per ADS), which expire on September 21, 2025.
|
|
(7)
|
Consists of options to purchase 433,333 Ordinary Shares (equivalent to 4,333 ADSs) at an exercise price of $0.18 per share
(or $18.00 per ADS), which expire on April 22, 2026. Does not include shares held by RPC Pharma Limited of which he has a pecuniary
interest. Mr. Byrne disclaims beneficial ownership of the shares held by RPC Pharma Limited.
|
|
(8)
|
Consists of options to purchase 450,000 Ordinary Shares (equivalent to 4,500 ADSs) at an exercise price of $0.141 per share
(or $14.10 per ADS), which expire on March 23, 2026.
|
|
(9)
|
The principal business office of RPC Pharma Limited is c/o Landmark Fiduciare (Suisse) SA, 6 Place des Eaux-Vives, P.O. Box
3461, Geneva, V8 1211, Switzerland.
|
|
(10)
|
Consists of (i) 57,535,000 Ordinary Shares (equivalent to 575,350 ADSs) directly held by Deerfield Private Design Fund III,
L.P. (the “Private Design Shares”) which are indirectly beneficially owned by Deerfield Mgmt. III, L.P., its general
partner, Deerfield Management Company, L.P., its investment advisor, and James E. Flynn, and (ii) 57,535,000 Ordinary Shares (equivalent
to 575,350 ADSs) directly held by Deerfield Special Situations Fund, L.P. which are indirectly beneficially owned by Deerfield
Mgmt., L.P., its general partner, Deerfield Management Company, L.P., its investment advisor, and James E. Flynn (the “Special
Situations Shares”). As the sole member of the respective general partners of Deerfield Mgmt. III, L.P. and Deerfield Management
Company, L.P., Mr. Flynn is the sole natural person possessing beneficial ownership over the Private Design Shares. As the sole
member of the respective general partners of Deerfield Mgmt., L.P. and Deerfield Management Company, L.P., Mr. Flynn is the sole
natural person possessing beneficial ownership over the Special Situations Shares. The business address for Deerfield Private Design
Fund III, L.P. and Deerfield Special Situations Fund, L.P. is 780 Third Avenue, 37
th
floor, New York, NY 10017.
|
Deutsche Bank
Trust Company Americas, or Deutsche Bank, is the holder of record for the company’s ADR program, pursuant to which each
ADS represents 100 Ordinary Shares. As of March 30, 2017, Deutsche Bank held 1,172,831,700 Ordinary Shares
representing 99.6% of the issued share capital held at that date. To our knowledge, as of March 30, 2017, we had
approximately 13 holders of record with addresses in the United States. As a result, the number of holders of record or
registered holders in the United States is not representative of the number of beneficial holders or of the residence of
beneficial holders.
To our knowledge, there has
been no significant change in the percentage ownership held by the principal shareholders listed above since September 18, 2015.
|
B.
|
Related Party Transactions
|
The following discloses, since January 1,
2016, certain related party transactions involving us. The descriptions provided below are summaries of the terms of such agreements,
do not purport to be complete and are qualified in their entirety by the complete agreements.
Employment and Consulting Agreements
We have or have had employment, consulting
or related agreements with each member of our senior management and employee-directors. See “Item 6. Directors, Senior Management
and Employees—Compensation”.
Office Lease
We lease our UK office space from The Doctors
Laboratory, or TDL, and have incurred expenses of approximately $142,000 and $10,000 plus VAT during the years ended December 31,
2016 and December 31, 2015, respectively. David Byrne, a non-employee director of ours is also the CEO of TDL.
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C.
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Interests of Experts and Counsel.
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Not applicable.
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Item 8.
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FINANCIAL INFORMATION
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A.
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Consolidated Statements and Other Financial Information
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See “Item 18. Financial Statements,”
which contains our financial statements prepared in accordance with United States GAAP.
We are not involved in any material legal
proceedings.
We currently anticipate that we will retain
future earnings for the development, operation and expansion of our business and do not anticipate declaring or paying any cash
dividends for the foreseeable future. Therefore, the success of an investment in our Ordinary Shares or ADSs will depend upon any
future appreciation in their value. There is no guarantee that our Ordinary Shares or ADSs will appreciate in value or even maintain
the price at which our shareholders have purchased their shares.
A discussion of the significant changes
in our business can be found under “Item 4. Information on the Company—A. History and Development of the Company.”
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Item 9.
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THE OFFER AND LISTING
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A.
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Offering and Listing Details
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Our ADSs have been listed on the NASDAQ
Capital Market under the symbol “AKTX” since September 21, 2015 and under the symbol “CLTX” from January
31, 2014 until September 18, 2015. Prior to that, our ADSs were quoted on the OTCQB under the symbol “CLSXD” from January
3, 2014 to January 30, 2014 and were quoted on the OTCQB under the symbol “CLSXY” from September 16, 2013 until January
2, 2014 and under the symbol “MRRBY” from February 19, 2013 to September 15, 2013. Effective January 3, 2014, our ratio
of ADSs to Ordinary Shares changed from one ADS per each two Ordinary Shares to one ADS per each ten Ordinary Shares and, effective
as of September 17, 2015, our ratio of ADSs is to Ordinary Shares changed from one ADS per each ten Ordinary Shares to one ADS
per each one hundred Ordinary Shares. Currently, each ADS represents by one hundred Ordinary Shares.
The following table sets forth the range
of high and low sale prices for our ADSs for the periods indicated, as reported by the NASDAQ Capital Market or the OTCQB, as applicable.
These prices do not include retail mark-ups, markdowns, or commissions but give effect to the change in the number of Ordinary
Shares represented by each ADS to one hundred Ordinary Shares per each ADS, implemented on September 17, 2015. Historical data
in the table has been restated to take into account this change.
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USD High
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USD Low
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Annual:
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2016
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$
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19.75
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$
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6.71
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2015
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$
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62.00
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$
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4.00
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2014
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$
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119.00
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$
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45.80
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2013 (from February 19, 2013)
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$
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25.00
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$
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7.10
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|
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Quarterly:
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First Quarter 2017 (through March 30, 2017)
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$
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8.80
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$
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6.22
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Fourth Quarter 2016
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$
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9.75
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|
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$
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6.71
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Third Quarter 2016
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$
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13.81
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|
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$
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7.93
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Second Quarter 2016
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$
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19.75
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|
|
$
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12.20
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First Quarter 2016
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$
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19.28
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$
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7.63
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Fourth Quarter 2015
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$
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24.00
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$
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13.50
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Third Quarter 2015
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$
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46.70
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$
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4.90
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Second Quarter 2015
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|
$
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8.66
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|
|
$
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4.00
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First Quarter 2015
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|
$
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62.00
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|
|
$
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7.21
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|
|
|
|
|
|
|
|
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Monthly:
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|
|
|
|
|
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March (through March 30, 2017)
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|
$
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8.25
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|
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$
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6.22
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February 2017
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|
$
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8.00
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|
|
$
|
6.40
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January 2017
|
|
$
|
8.80
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|
|
$
|
6.80
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December 2016
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|
$
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8.46
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|
|
$
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6.71
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November 2016
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|
$
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9.75
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|
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$
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7.08
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October 2016
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|
$
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9.45
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|
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$
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8.05
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September 2016
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$
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10.06
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$
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7.93
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On March 30, 2017, the last reported sales
price of our ordinary shares on the NASDAQ Capital Market was $7.00 per ADS.
Not applicable.
See “—Offer and Listing Details”
above.
Not applicable.
Not applicable.
Not applicable.
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Item 10.
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ADDITIONAL INFORMATION
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Not applicable.
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B.
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Memorandum and Articles of Association
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The information called for by this item
has been reported previously in our Registration Statement on Form F-1 (File No. 333-192783), filed with the SEC on December
12, 2013, as amended, under the heading "Description of Share Capital" and is incorporated by reference into this Annual
Report.
Set forth below are summaries of material
agreements to which we are a party, other than contracts entered into in the ordinary course of business, that have been in effect
since March 1, 2015. In addition to the agreements described below, we also enter into agreements with clinical research organizations,
or CROs, for the conduct of our clinical trials. The descriptions provided below do not purport to be complete and are qualified
in their entirety by the complete agreements, which are attached as exhibits to this Annual Report.
Share Exchange Agreement
Pursuant the terms of the Share
Exchange Agreement, dated as of July 10, 2015, or Exchange Agreement, by and between us and RPC Pharma
Limited, or RPC, on September 18, 2015, RPC exchanged all of the capital stock of Volution Immuno Pharmaceuticals SA or
Volution, for 722,345,600 of our Ordinary Shares.
Under the terms and subject to the satisfaction
of the conditions described in the Exchange Agreement, we acquired the entire issued share capital of Volution, with Volution becoming
our wholly-owned subsidiary on September 18, 2015. Following the Acquisition, the name of the combined company was changed from
Celsus Therapeutics, Plc to Akari Therapeutics, Plc.
Lock-Up Agreement
As a condition to the closing of the Acquisition,
RPC agreed to enter into a lock-up agreement, pursuant to which RPC agreed not to sell or transfer, or engage in swap or similar
transactions with respect to, our Ordinary Shares, including, as applicable, shares received in the Acquisition and issuable upon
exercise of certain warrants and options from the completion of the Acquisition until 180 days from the completion of the Acquisition.
Relationship Agreement
As a condition to the closing of the Acquisition,
we and RPC entered into a Relationship Agreement, which provided, subject to closing of the Acquisition, the right for RPC to appoint
the following number of directors to our board of directors in relation to the percentage of our Ordinary Shares held in aggregate
by RPC from time to time: (i) two class A directors if RPC holds 25% or more of our Ordinary Shares; (ii) one class A director
if RPC holds 10% or more but less than 25% of our Ordinary Shares; and (iii) no directors if RPC holds less than 10% of our Ordinary
Shares.
Additionally, where such right to appoint
a director falls away, RPC is obliged to procure the resignation of the relevant director as soon as practicably possible thereafter
at no cost to us. Unless otherwise agreed by our board of directors, the directors appointed by RPC shall be class A directors.
Volution’s Related Party Transactions
Pursuant to short term loan agreements entered
into with Ray Prudo, the Chairman of our board of directors, on October 15, 2014 and November 10, 2014, Volution borrowed an aggregate
of approximately $405,018 from Ray Prudo at an interest rate of $4.5% per annum. Volution repaid Ray Prudo the entire principal
amount outstanding, plus interest in the amount of approximately $4,052, on April 17, 2015.
On July 3, 2015, under the terms of a contribution
agreement among RPC and the shareholders of Volution, the Volution shareholders contributed all of their Volution shares to RPC,
which resulted in Volution becoming a wholly owned subsidiary of RPC.
Volution and certain shareholders of Volution,
including Ray Prudo who is the Chairman of our board of directors and a director of both Volution and RPC, entered into a working
capital advance agreement, pursuant to which such shareholders agreed to make available up to $4,000,000 in the aggregate, to Volution
for working capital purposes. All amounts advanced under the agreement accrued interest at a rate of 3% per annum and matured shortly
after completion of the Acquisition.
Employment and Consulting Agreements
See “Item 6. Directors, Senior Management
and Employees—Compensation—Employment and Consulting Agreements”.
There are currently no U.K. laws, decrees
or regulations that restrict the export or import of capital, including, but not limited to, foreign exchange controls, or that
affect the remittance of dividends or other payments to non-U.K. residents or to U.S. holders of our securities except as otherwise
set forth in “Taxation” below. There are no limitations under our Memorandum and Articles of Association
restricting voting or shareholding.
The following summary contains a description
of certain United Kingdom and United States federal income tax consequences of the acquisition, ownership and disposition of our
Ordinary Shares or ADSs to a U.S. holder of our Ordinary Shares or ADSs. The summary is based upon the tax laws of the United Kingdom
and the United States and the respective regulations thereunder as of the date hereof, which are subject to change.
For purposes of this description, a “U.S.
Holder” includes any beneficial owner of our Ordinary Shares or ADSs that is, for U.S. federal income tax purposes:
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•
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a citizen or individual resident of the United States;
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•
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a corporation (or other entity treated as a corporation for U.S. federal income tax purposes) created or organized in or under
the laws of the United States or organized under the laws of any state thereof, or the District of Columbia;
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•
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an estate, the income of which is subject to U.S. federal income taxation regardless of its source; or
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•
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a trust if (1) a court within the United States is able to exercise primary supervision over its administration and one or
more United States persons have the authority to control all of the substantial decisions of such trust; or (2) such trust has
a valid election in effect to be treated as a United States person for U.S. federal income tax purposes.
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A “Non-U.S. Holder” is any beneficial
owner of our Ordinary Shares or ADSs that is not a U.S. Holder.
This section does not purport to be a comprehensive
description of all of the tax considerations that may be relevant to any particular investor. This discussion assumes that you
are familiar with the tax rules applicable to investments in securities generally, and with any special rules to which you may
be subject. In particular, the discussion deals only with investors that will hold our Ordinary Shares or ADSs as capital assets,
and does not address the tax treatment of investors that are subject to special rules, such as banks, financial institutions, insurance
companies, dealers or traders in securities or currencies, persons that elect mark-to- market treatment, tax-exempt entities (including
401 pensions plans), real estate investment trusts, regulated investment companies, grantor trusts, individual retirement and other
tax-deferred accounts, persons that received our ordinary or ADS shares as compensation for the performance of services, persons
who own, directly, indirectly through non-U.S. entities or by attribution by application of the constructive ownership rules of
section 958(b) of the United States Internal Revenue Code of 1986, or Code, 10% or more of our voting shares or ADS, persons that
are residents of the U.K. for U.K. tax purposes or that conduct a business or have a permanent establishment in the U.K., persons
that hold our Ordinary Shares or ADSs as a position in a straddle, hedging, conversion, integration, constructive sale or other
risk reduction transaction, certain former citizens or long-term residents of the U.S., partnerships and their partners and persons
whose functional currency is not the U.S. dollar. This discussion is based on laws, treaties, judicial decisions, and regulatory
interpretations in effect on the date hereof, all of which are subject to change, as well as, in the United States, the Internal
Revenue Code of 1986, as amended, or the Code, administrative pronouncements, judicial decisions, and final, temporary and proposed
Treasury regulations, all as of the date hereof, any of which is subject to change, possibly with retroactive effect.
If a partnership holds Ordinary Shares or
ADSs, the tax treatment of a partner will generally depend upon the status of the partner and upon the activities of the partnership.
We will not seek a ruling from the U.S.
Internal Revenue Service, or IRS, with regard to the U.S. federal income tax treatment of an investment in our Ordinary Shares
or ADSs, and we cannot assure you that the IRS will agree with the conclusions set forth below.
You are urged to consult with your own
advisers regarding the tax consequences of the acquisition, ownership, and disposition of our Ordinary Shares or ADSs in the light
of your particular circumstances, including the effect of any state, local, or other national laws.
United Kingdom tax considerations
Taxation of dividends
Under current U.K. tax law, no tax is required
to be withheld in the United Kingdom at source from cash dividends paid to U.S. resident holders.
Taxation of Capital Gains
Subject to the comments in the following
paragraph, a holder of our Ordinary Shares or ADSs who, for U.K. tax purposes, is not resident nor in the U.K. will not be liable
for U.K. taxation on capital gains realized on the disposal of our Ordinary Shares or ADS unless at the time of the disposal:
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•
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the holder carries on a trade, or in the case of an individual, a profession or vocation in the United Kingdom through, in
the case of an individual, a branch or agency, or, in the case of a company, a permanent establishment, and
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•
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our Ordinary Shares or ADSs are or have been used, held, or acquired for the purpose of such trade, profession, vocation, branch,
agency or permanent establishment.
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A holder of our Ordinary Shares or ADSs
who (1) is an individual who has ceased to be resident or ordinarily resident for U.K. tax purposes in the United Kingdom, (2)
was resident or ordinarily resident for U.K. tax purposes in the United Kingdom for at least four out of the seven U.K. tax years
immediately preceding the year in which he or she ceased to be both resident and ordinarily resident in the United Kingdom, (3)
only remains non-resident and non-ordinarily resident in the United Kingdom for a period of five years or less and (4) disposes
of his or her Ordinary Shares or ADSs during that period may also be liable, upon returning to the United Kingdom, for U.K. tax
on capital gains, subject to any available exemption or relief, even though he or she was not resident or ordinarily resident in
the United Kingdom at the time of the disposal.
Inheritance Tax
Our Ordinary Shares or ADSs are assets
situated in the United Kingdom for the purposes of U.K. inheritance tax (the equivalent of U.S. estate and gift tax). Subject
to the discussion of the U.K.-U.S. estate tax treaty in the next paragraph, U.K. inheritance tax may apply (subject to any available
reliefs) if an individual who holds our Ordinary Shares or ADSs gifts them or dies even if he or she is neither domiciled in the
United Kingdom nor deemed to be domiciled there under U.K. law. For inheritance tax purposes, a transfer of our Ordinary Shares
or ADSs at less than full market value may be treated as a gift for these purposes. Special inheritance tax rules apply (1) to
gifts if the donor retains some benefit, (2) to close companies and (3) to trustees of settlements.
However, as a result of the U.K.-U.S. estate
tax treaty, our Ordinary Shares or ADSs held by an individual who is domiciled in the United States for the purposes of the U.K.-U.S.
estate tax treaty and who is not a U.K. national will not be subject to U.K. inheritance tax on that individual’s death or
on a gift of our Ordinary Shares or ADSs unless the Ordinary Shares or ADSs:
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•
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are part of the business property of a permanent establishment in the United Kingdom, or
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|
•
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pertain to a fixed base in the United Kingdom used for the performance of independent personal services.
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The U.K.-U.S. estate tax treaty provides
a credit mechanism if our Ordinary Shares or ADSs are subject to both U.K. inheritance tax and to U.S. estate and gift tax.
U.K. Stamp Duty and Stamp Duty Reserve
Tax (SDRT)
In general no stamp duty should be payable
on any transfer of ADSs provided that the ADSs and any separate instrument of transfer are executed and retained at all times outside
the United Kingdom. A transfer of shares in registered form would attract ad valorem stamp duty generally at the rate of 0.5% of
the purchase price of the shares. There is no charge to ad valorem stamp duty on gifts.
An agreement to transfer ADSs should not
give rise to SDRT. SDRT would generally be payable on an unconditional agreement to transfer shares in registered form at 0.5%
of the amount or value of the consideration for the transfer, but is repayable if, within six years of the date of the agreement,
an instrument transferring the shares is executed or, if the SDRT has not been paid, the liability to pay the tax (but not necessarily
interest and penalties) would be cancelled.
HMRC now accepts that stamp duty/SDRT is
not payable on issues of UK shares and securities to depositary receipt issuers and clearance services anywhere in the world. HMRC
still contends however that stamp duty/SDRT at 1.5% is payable on transfers (by sale or otherwise) of shares and securities to
depository receipt systems or clearance services that are not an integral part of an issue of share capital.
United States federal income
taxation considerations
Ownership of ADSs
For U.S. federal income tax purposes, a
holder of ADSs generally will be treated as the owner of the ordinary shares represented by such ADSs. Gain or loss will generally
not be recognized on account of exchanges of ordinary shares for ADSs, or of ADSs for ordinary shares. References to ordinary shares
in the discussion below are deemed to include ADSs, unless context otherwise requires.
U.S. Taxation of Distributions
The gross amount of any distributions made
by us to a U.S. Holder will generally be subject to U.S. federal income tax as dividend income to the extent paid or deemed paid
out of our current or accumulated earnings and profits, as determined under U.S. federal income tax principles. Such dividends
will not be eligible for the dividends received deduction generally allowed to U.S. corporations with respect to dividends received
from other U.S. corporations. To the extent that an amount received by a U.S. Holder exceeds its allocable share of our current
and accumulated earnings and profits, such excess would, subject to the discussion below, be treated first as a tax-free return
of capital which will reduce such U.S. Holder’s tax basis in his Ordinary Shares or ADSs and then, to the extent such distribution
exceeds such U.S. Holder’s tax basis, it will be treated as capital gain.
Subject to applicable holding period (which
generally requires our Ordinary Shares to be held for at least 61 days without protection from the risk of loss during the 121-day
period beginning 60 days before the ex-dividend date) and other limitations, the U.S. Dollar amount of dividends received on our
Ordinary Shares or ADSs by certain non-corporate U.S. Holders are currently subject to taxation at a maximum rate of 20% if the
dividends are “qualified dividends” and certain other requirements are met. Dividends paid on our Ordinary Shares or
ADSs will be treated as qualified dividends if: (i) we are eligible for the benefits of the Treaty or the Ordinary Shares or ADSs
are readily tradable on an established U.S. securities market and (ii) we were not, in the year prior to the year in which the
dividend was paid, and are not, in the year in which the dividend is paid, a passive foreign investment company, or PFIC. Our ADSs
are listed on the NASDAQ Capital Market, which is an established securities market in the United States, and we expect the ADSs
to be readily tradable on the NASDAQ Capital Market. However, there can be no assurance that the ADSs will be considered readily
tradable on an established securities market in the United States in later years. The Company, which is incorporated under the
laws of England and Wales, believes that it qualifies as a resident of the United Kingdom for the purposes of, and is eligible
for the benefits of, the Convention between the Government of the United States of America and the Government of the United Kingdom
of Great Britain and Northern Ireland for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to
Taxes on Income and Capital Gains, signed on July 24, 2001, or the U.S.-U.K. Tax Treaty, although there can be no assurance in
this regard. Further, the IRS has determined that the U.S.-U.K. Tax Treaty is satisfactory for purposes of the qualified dividend
rules and that it includes an exchange-of-information program. Based on the foregoing, we expect to be considered a qualified foreign
corporation under the Code. Accordingly, dividends paid by us to non-corporate U.S. holders with respect to shares that meet the
minimum holding period and other requirements are expected to be treated as “qualified dividend income.” However, dividends
paid by us will not qualify for the 20% maximum U.S. federal income tax rate if we are treated, for the tax year in which the dividends
are paid or the preceding tax year, as a “passive foreign investment company” for U.S. federal income tax purposes,
as discussed below. Although we currently believe that distributions on our Ordinary Shares or ADSs that are treated as dividends
for U.S. federal income tax purposes should constitute qualified dividends, no assurance can be given that this will be the case.
U.S. Holders should consult their tax advisors regarding the tax rate applicable to dividends received by them with respect to
our Ordinary Shares or ADSs, as well as the potential treatment of any loss on a disposition of our Ordinary Shares or ADSs as
long-term capital loss regardless of the U.S. Holders’ actual holding period for our Ordinary Shares or ADSs.
We have not maintained and do not plan to
maintain calculations of earnings and profits under U.S. federal income tax principles. Accordingly, it is unlikely that U.S. Holders
will be able to establish whether a distribution by us is in excess of our and accumulated earnings and profits (as computed under
U.S. federal income tax principles). Thus, it is expected that any distribution will be reported as a dividend, even if that distribution
would otherwise be treated as a non-taxable return of capital or as capital gain under the rules described above. The amount of
any distribution of property other than cash will be the fair market value of that property on the date of distribution. .
The U.S. Treasury Department has announced
its intention to issue rules regarding when and to what extent holders of ADSs will be permitted to rely on certifications from
issuers to establish that dividends paid on shares to which such ADSs relate are treated as qualified dividends. Because such procedures
have not yet been issued, it is not clear whether we will be able to comply with them.
For foreign tax credit computation purposes,
dividends will generally constitute foreign source income, and with certain exceptions, will constitute “passive category
income.”
U.S. Taxation upon Sale or Other Disposition
Subject to the discussion under “Passive
Foreign Investment Company Considerations” below, gain or loss realized by a U.S. Holder on the sale or other disposition
of our Ordinary Shares or ADSs will be subject to U.S. federal income taxation as capital gain or loss in an amount equal to the
difference between the U.S. Holder’s adjusted tax basis in our Ordinary Shares or ADSs and the amount realized on the disposition.
Such gain or loss generally will be treated as long-term capital gain or loss if our Ordinary Shares or ADSs have been held for
more than one year at the time of the sale or disposition. Any such gain or loss realized will generally be treated as U.S. source
gain or loss. In the case of a non-corporate U.S. Holder, long-term capital gains are currently eligible for federal income tax
at preferential rates . The deductibility of capital losses is subject to significant limitations.
For a cash basis taxpayer, units of foreign
currency paid or received are translated into U.S. dollars at the spot rate on the settlement date of the purchase or sale. In
that case, no foreign currency exchange gain or loss will result from currency fluctuations between the trade date and the settlement
date of such a purchase or sale. An accrual basis taxpayer, however, may elect the same treatment required of cash basis taxpayers
with respect to purchases and sales of the ADSs that are traded on an established securities market, provided the election is applied
consistently from year to year. Such election may not be changed without the consent of the IRS. For an accrual basis taxpayer
who does not make such election, units of foreign currency paid or received are translated into U.S. dollars at the spot rate on
the trade date of the purchase or sale. Such an accrual basis taxpayer may recognize exchange gain or loss based on currency fluctuations
between the trade date and settlement date. Any foreign currency gain or loss a U.S. holder realizes will be U.S. source ordinary
income or loss.
The maximum individual rate for long-term
capital gain is currently 20%.
Medicare Tax
Individuals, estates and trusts are subject
to a Medicare tax of 3.8% on “net investment income,” which includes dividends, interest, and capital gain from the
sale of investment securities, adjusted for certain deductions properly allocated to such investment income. The Medicare tax will
apply to the lesser of such net investment income or the excess of the taxpayer’s adjusted gross income (with certain modifications)
over a specified amount. The specified amount is $250,000 for married individuals filing jointly, $125,000 for married individuals
filing separately, and $200,000 for single individuals. U.S. Holders should consult with their own tax advisers regarding the application
of the net investment income tax to them as a result of their investment in our ADSs or Ordinary Shares.
Passive foreign investment
company rules
Based on the nature of our present business
operations, assets and income, we believe that for the year 2016, we are not a PFIC. However, no assurance can be given that changes
will not occur in our business operations, assets and income that might cause us to be treated as a PFIC at some future time.
We would be a PFIC for U.S. federal income
tax purposes in any taxable year if 75% or more of our gross income would be passive income, or on average at least 50% of the
gross value of our assets is held for the production of, or produces, passive income. In making the above determination, we are
treated as earning our proportionate share of any income and owning our proportionate share of any asset of any company in which
we are considered to own, directly or indirectly, 25% or more of the shares by value. If we were considered a PFIC at any time
when a U.S. Holder held our Ordinary Shares or ADSs, we generally should continue to be treated as a PFIC with respect to that
U.S. Holder, and the U.S. Holder generally will be subject to special rules with respect to (a) any gain realized on the disposition
of our Ordinary Shares or ADSs and (b) any “excess distribution” by us to the U.S. Holder in respect of our Ordinary
Shares or ADSs. Generally, a distribution during a taxable year to a U.S. Holder with respect to Ordinary Shares would be treated
as an “excess distribution” to the extent that the distribution plus all other distributions received (or deemed to
be received) by the U.S. Holder during the taxable year with respect to such Ordinary Shares, is greater than 125% of the average
annual distributions received by the U.S. Holder with respect to such Ordinary Shares during the three preceding years (or during
such shorter period as the U.S. Holder may have held the Ordinary Shares or ADSs). Under the PFIC rules: (i) the gain or excess
distribution would be allocated ratably over the U.S. Holder’s holding period for our Ordinary Shares or ADSs, (ii) the amount
allocated to the taxable year in which the gain or excess distribution was realized or to any year before we became a PFIC would
be taxable as ordinary income and (iii) the amount allocated to each other taxable year would be subject to tax at the highest
tax rate in effect in that year and an interest charge generally applicable to underpayments of tax would be imposed in respect
of the tax attributable to each such year. Because a U.S. Holder that is a direct (and in certain cases indirect) shareholder of
a PFIC is deemed to own its proportionate share of interests in any lower-tier PFICs, U.S. Holders should be subject to the foregoing
rules with respect to any of our subsidiaries characterized as PFICs, if we are deemed a PFIC.
In the event we were treated as a PFIC,
the tax consequences under the default PFIC regime described above could be avoided by either a “mark-to-market” or
“qualified electing fund” election. If our Ordinary Shares or ADSs are considered “marketable stock,” a
U.S. Holder may elect to “mark-to-market” its ADSs. A U.S. holder making a mark-to-market election (if the eligibility
requirements for such an election were satisfied) generally would not be subject to the PFIC rules discussed above, except with
respect to any portion of the holder’s holding period that preceded the effective date of the election. Instead, such U.S.
Holder would generally include in income any excess of the fair market value of the Ordinary Shares or ADSs at the close of each
tax year over its adjusted basis in the Ordinary Shares or ADSs. If the fair market value of the Ordinary Shares of ADSs had depreciated
below the U.S. Holders adjusted basis at the close of the tax year, the U.S. Holder may generally deduct the excess of the adjusted
basis of the Ordinary Shares or ADSs over its fair market value at that time. However, such deductions generally would be limited
to the net mark-to-market gains, if any, that the U.S. Holder included in income with respect to such Ordinary Shares or ADSs in
prior years. Income recognized and deductions allowed under the mark-to-market provisions, as well as any gain or loss on the disposition
of Ordinary Shares or ADSs with respect to which the mark-to-market election is made, is treated as ordinary income or loss (except
that loss is treated as capital loss to the extent the loss exceeds the net mark-to-market gains, if any, that a U.S. Holder included
in income with respect to such Ordinary Share or ADSs in prior years). Gain or loss from the disposition of Ordinary Shares or
ADSs (as to which a “mark-to-market” election was made) in a year in which we are no longer a PFIC, will be capital
gain or loss. Our Ordinary Shares or ADSs should be considered “marketable stock” if they traded at least 15 days during
each calendar quarter of the relevant calendar year in more than de minimis quantities. Any such mark to market election would
not be available for a lower-tier PFIC. Alternatively, a U.S. Holder making a valid and timely “qualified electing fund”
or “QEF” election generally would not be subject to the default PFIC regime discussed above. Instead, for each PFIC
year to which such an election applied, the electing U.S. Holder would be subject to U.S. federal income tax on the electing U.S.
Holder’s pro rata share of our net capital gain and ordinary earnings, regardless of whether such amounts were actually distributed
to the electing U.S. Holder. Any gain on sale or other disposition of a U.S. Holder’s Ordinary Shares or would be treated
as capital, and the interest penalty will not be imposed. However, because we do not intend to prepare or provide the information
that would permit the making of a valid QEF election, that election will not be available to U.S. holders.
U.S. Holders are urged to consult
their tax advisors about the PFIC rules, including the advisability, procedure and timing of making a mark-to-market election
and the U.S. Holder’s eligibility to file such an election (including whether our Ordinary Shares or ADSs are treated
as “marketable stock” for such purpose). A U.S. Holder will be required to file Internal Revenue Service Form
8621 if such U.S. Holder owns our Ordinary Shares or ADSs in any year in which we are classified as a PFIC.
Information reporting and
backup withholding
A U.S. Holder may be subject to information
reporting to the IRS and possible backup withholding with respect to dividends paid on, or proceeds of the sale or other disposition
of our Ordinary Shares or ADSs unless such U.S. Holder is a corporation or qualifies within certain other categories of exempt
recipients or provides a taxpayer identification number and certifies as to no loss of exemption from backup withholding and otherwise
complies with applicable requirements of the backup withholding rules. Amounts withheld under these rules may be credited against
the U.S. Holder’s U.S. federal income tax liability and a U.S. Holder may obtain a refund of any excess amounts withheld
under the backup withholding rules by filing the appropriate IRS forms and furnishing any required information. A U.S. Holder who
does not provide a correct taxpayer identification number may be subject to penalties imposed by the IRS.
A non-U.S. Holder generally will not be
subject to information reporting or backup withholding with respect to dividends on our Ordinary Shares or ADSs, unless payment
is made through a paying agent (or office) in the United States or through certain U.S.-related financial intermediaries. However,
a Non-U.S. Holder generally may be subject to information reporting and backup withholding with respect to the payment within the
United States of dividends on our Ordinary Shares or ADSs, unless such non-U.S. Holder provides a taxpayer identification number,
certifies under penalties of perjury as to its foreign status, or otherwise establishes an exemption.
U.S. individuals (and, under proposed regulations,
certain entities) that hold certain specified foreign financial assets, including stock in a foreign corporation, with values in
excess of certain thresholds are required to file with their U.S. federal income tax return Form 8938, on which information about
the assets, including their value, is provided. Taxpayers who fail to file the form when required are subject to penalties. An
exemption from reporting applies to foreign assets held through certain financial institutions. Investors are encouraged to consult
with their own tax advisors regarding the possible application of this disclosure requirement to their investment in our Ordinary
Shares or ADSs.
Transfer of ADSs
No U.K. stamp duty will be payable on a
written instrument transferring an ADS or on a written agreement to transfer an ADS provided that the instrument of transfer or
the agreement to transfer is executed and remains at all times outside the United Kingdom. Where these conditions are not met,
the transfer of, or agreement to transfer, an ADS could, depending on the circumstances, attract a charge to U.K. stamp duty at
the rate of 0.5% of the value of the consideration given in connection with the transfer.
No SDRT will be payable in respect of an
agreement to transfer an ADS.
|
F.
|
Dividends and Paying Agents
|
Not applicable.
Not applicable.
We are currently subject to the information
and periodic reporting requirements of the Exchange Act, and file periodic reports and other information with the SEC through its
electronic data gathering, analysis and retrieval (EDGAR) system. Our securities filings, including this Annual Report and the
exhibits thereto, are available for inspection and copying at the public reference facilities of the SEC located at 100 F Street,
N.E., Washington, D.C. 20549. You may also obtain copies of the documents at prescribed rates by writing to the Public Reference
Section of the SEC at 100 F Street, N.E., Washington, DC 20549. Please call the SEC at 1-800-SEC-0330 for further information on
the public reference room. The SEC also maintains a website at http://www.sec.gov from which certain filings may be accessed.
As a foreign private issuer, we are exempt
from the rules under the Exchange Act related to the furnishing and content of proxy statements, and our officers, directors and
principal shareholders are exempt from the reporting and short-swing profit recovery provisions contained in Section 16 of the
Exchange Act. In addition, we are not required under the Exchange Act to file annual, quarterly and current reports and financial
statements with the SEC as frequently or as promptly as United States companies whose securities are registered under the Exchange
Act.
|
I.
|
Subsidiary Information
|
Not applicable.
|
Item 11.
|
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT RISK
|
You should read the following information
in conjunction with Item 5, “Operating and Financial Review and Prospects;” Item 3, “Risk Factors;” and
our combined and consolidated financial statements, including the related notes thereto, including Note 2, both of which are included
elsewhere in this document. The following discussion about our financial risk management activities includes “forward-looking
statements” that involve risks and uncertainties. Actual results could differ materially from those projected
in these forward-looking statements.
Risk Management Framework
We are exposed to a variety of risks, including
changes in foreign currency exchange risk and interest rates.
Currency Exchange Rate Sensitivity
The results of our operations are subject
to currency transactional risk. Operating results and financial position are reported in local currencies and then translated into
United States dollars at the applicable exchange rate for preparation of our combined and consolidated financial statements. The
fluctuation of the U.S. dollar in relation to the British Pound, Euro and Swiss Franc will therefore have an impact upon profitability
of our operations and may also affect the value of our assets and the amount of shareholders’ equity.
Our functional currency is the United States
dollar and our activities are predominantly executed using both the U.S. dollar, Euro and British Pound. We have done a limited
number of financings, and we are not subject to significant operational exposures due to fluctuations in these currencies. We have
not entered into any agreements, or purchased any instruments, to hedge any possible currency risks at this time.
Interest Rate Sensitivity
We currently have no short-term or long-term
debt requiring interest payments. This does not require us to consider entering into any agreements or purchasing any instruments
to hedge against possible interest rate risks at this time. Our interest-earning investments are short-term. Thus, any reductions
in future income or carrying values due to future interest rate declines are believed to be immaterial.
|
Item 12.
|
DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
|
Not applicable.
Not applicable.
Not applicable.
|
D.
|
American Depositary Shares
|
Deutsche Bank Trust Company Americas, as
depositary, will register and deliver the ADSs. Each ADS will represent ownership of one hundred (100) Ordinary Shares deposited
with State Street Bank & Trust Company, having its principal office at 525 Ferry Road, Crewe Toll, Edinburgh, EH5 2AW Scotland,
as custodian for the depositary. Each ADS will also represent ownership of any other securities, cash or other property which may
be held by the depositary. The depositary’s corporate trust office at which the ADSs will be administered is located at 60
Wall Street, New York, NY 10005, USA. The principal executive office of the depositary is located at 60 Wall Street, New York,
NY 10005, USA.
Fees and Charges
As a holder ADSs, you will be required to
pay the following service fees to the depositary bank:
Service:
|
|
Fee:
|
Issuance of ADSs, including issuances resulting from a distribution of shares or rights or other property
|
|
Up to $0.05 per ADS issued
|
Cancellation of ADSs, including in the case of termination of the deposit agreement
|
|
Up to $0.05 per ADS cancelled
|
Distribution of cash dividends or other cash distributions
|
|
Up to $0.05 per ADS held
|
Distribution of ADSs pursuant to share dividends, free share distributions or exercise of rights
|
|
Up to $0.05 per ADS held
|
Distribution of securities other than ADSs or rights to purchase ADSs additional ADSs
|
|
A fee equivalent to the fee that would be payable if securities distributed to you had been Ordinary Shares and the Ordinary Shares had been deposited for issuance of ADSs
|
Depositary services
|
|
Up to $0.05 per ADS held on the applicable record date(s) established by the depositary bank
|
Transfer of ADRs
|
|
$1.50 per certificate presented for transfer
|
As an ADS holder, you will also be responsible
to pay certain fees and expenses incurred by the depositary bank and certain taxes and governmental charges such as:
|
•
|
Fees for the transfer and registration of Ordinary Shares charged by the registrar and transfer agent for the Ordinary Shares
in the United Kingdom (i.e., upon deposit and withdrawal of Ordinary Shares).
|
|
•
|
Expenses incurred for converting foreign currency into U.S. dollars.
|
|
•
|
Expenses for cable, telex and fax transmissions and for delivery of securities.
|
|
•
|
Taxes and duties upon the transfer of securities, including any applicable stamp duties, any stock transfer charges or withholding
taxes (i.e., when Ordinary Shares are deposited or withdrawn from deposit).
|
|
•
|
Fees and expenses incurred in connection with the delivery or servicing of Ordinary Shares on deposit.
|
|
•
|
Fees and expenses incurred in connection with complying with exchange control regulations and any other regulatory requirements
that are not currently applicable but may arise or become applicable to Ordinary Shares, deposited securities, ADSs and ADRs.
|
|
•
|
Any applicable fees and penalties thereon.
|
The depositary fees payable upon the issuance
and cancellation of ADSs are typically paid to the depositary bank by the brokers (on behalf of their clients) receiving the newly
issued ADSs from the depositary bank and by the brokers (on behalf of their clients) delivering the ADSs to the depositary bank
for cancellation. The brokers in turn charge these fees to their clients. Depositary fees payable in connection with distributions
of cash or securities to ADS holders and the depositary services fee are charged by the depositary bank to the holders of record
of ADSs as of the applicable ADS record date.
The depositary fees payable for cash distributions
are generally deducted from the cash being distributed or by selling a portion of distributable property to pay the fees. In the
case of distributions other than cash (i.e., share dividends, rights, etc.), the depositary bank charges the applicable fee to
the ADS record date holders concurrent with the distribution. In the case of ADSs registered in the name of the investor (whether
certificated or uncertificated in direct registration), the depositary bank sends invoices to the applicable record date ADS holders.
In the case of ADSs held in brokerage and custodian accounts (via DTC), the depositary bank generally collects its fees through
the systems provided by DTC (whose nominee is the registered holder of the ADSs held in DTC) from the brokers and custodians holding
ADSs in their DTC accounts. The brokers and custodians who hold their clients’ ADSs in DTC accounts in turn charge their
clients’ accounts the amount of the fees paid to the depositary banks.
In the event of refusal to pay the depositary
fees, the depositary bank may, under the terms of the deposit agreement, refuse the requested service until payment is received
or may set off the amount of the depositary fees from any distribution to be made to the ADS holder.
The depositary has agreed to reimburse us
for a portion of certain expenses we incur that are related to establishment and maintenance of the American Depository Receipt,
or ADR, program, including investor relations expenses. There are limits on the amount of expenses for which the depositary will
reimburse us, but the amount of reimbursement available to us is not related to the amounts of fees the depositary collects from
investors. Further, the depositary has agreed to reimburse us certain fees payable to the depositary by holders of ADSs. Neither
the depositary nor we can determine the exact amount to be made available to us because (i) the number of ADSs that will be issued
and outstanding, (ii) the level of service fees to be charged to holders of ADSs and (iii) our reimbursable expenses related to
the program are not known at this time.
Payment of Taxes
You will be responsible for any taxes or
other governmental charges payable on your ADSs or on the deposited securities represented by any of your ADSs. The depositary
may refuse to register any transfer of your ADSs or allow you to withdraw the deposited securities represented by your ADSs until
such taxes or other charges are paid. It may apply payments owed to you or sell deposited securities represented by your ADSs to
pay any taxes owed and you will remain liable for any deficiency. If the depositary sells deposited securities, it will, if appropriate,
reduce the number of ADSs to reflect the sale and pay to you any net proceeds, or send to you any property, remaining after it
has paid the taxes. You agree to indemnify us, the depositary, the custodian and each of our and their respective agents, directors,
employees and affiliates for, and hold each of them harmless from, any claims with respect to taxes (including applicable interest
and penalties thereon) arising from any tax benefit obtained for you.
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL
STATEMENTS
December 31, 2016 and 2015
(in U.S. Dollars)
NOTE 1 - Nature of Business
|
Akari Therapeutics, Plc, (the “Company”
or “Akari”), formerly Celsus Therapeutics Plc (“Celsus”), is incorporated in the United Kingdom. The Company
is a clinical-stage biopharmaceutical company focused on developing inhibitors of acute and chronic inflammation, specifically
the complement system, the eicosanoid system and the bioamine system for the treatment of rare and orphan diseases.
On September 18, 2015, Celsus Therapeutics
Plc completed its acquisition of all of the capital stock of Volution Immuno Pharmaceuticals SA (“Volution”), from
RPC Pharma Limited (“RPC”), Volution’s sole shareholder, in exchange for ordinary shares, par value £0.01,
(“Ordinary Shares”), of Celsus (the “Acquisition”), in accordance with the terms of the Share Exchange
Agreement, dated as of July 10, 2015 (the “Agreement”), by and among Celsus and RPC. In connection with the Acquisition,
the name of the combined company was changed to Akari Therapeutics, Plc. The Company’s American Depositary Shares (“ADSs”),
each representing 100 Ordinary Shares, began trading on The NASDAQ Capital Market under the symbol “AKTX” on September
21, 2015.
In connection with the consummation of
the Acquisition, Celsus issued an aggregate of 722,345,600 Ordinary Shares to RPC, which represented, prior to giving effect to
the Financing (as defined below), 92.85% of Celsus’s outstanding Ordinary Shares following the closing of the Acquisition
(or 91.68% of Celsus Ordinary Shares on a fully diluted basis). This yielded a share exchange ratio of approximately 721:1
of Akari Ordinary Shares to RPC Ordinary Shares. The Company’s earnings (loss) per share have been retrospectively adjusted
in the Combined and Consolidated Statements of Comprehensive Loss to reflect this recapitalization. Since the Volution securityholders
owned a majority of the capitalization of the Company immediately following the closing of the Acquisition, Volution is considered
to be the acquiring company for accounting purposes, and the transaction has been accounted for as a reverse acquisition under
the acquisition method of accounting for business combinations in accordance with generally accepted accounting principles (“U.S.
GAAP”). Accordingly, the assets and liabilities of Celsus have been recorded as of the Acquisition closing date at fair value
and the condensed consolidated financial statements reflect the historical financial statements of Volution as the Company’s
historical financial statements.
The Company, as defined in the accompanying
notes to the Combined and Consolidated Financial Statements, refers to Volution prior to the Acquisition and Akari subsequent to
the completion of the Acquisition.
In addition, on September 18, 2015, the
Company completed a private placement of an aggregate of 3,958,811 restricted ADSs representing 395,881,100 Ordinary Shares for
gross proceeds of $75 million at a price of $18.945 per restricted ADS (the “Financing”), which represented approximately
33.3% of the outstanding Ordinary Shares of the Company after giving effect to the Acquisition and the Financing. In connection
with the private placement, the Company incurred $5.4 million of share issuance costs for net proceeds of $69.6 million.
Volution was originally incorporated in
Switzerland as a private limited company and commenced business on October 9, 2013. On October 23, 2013, Varleigh Immuno Pharmaceuticals
Ltd (“Varleigh”), a UK limited company, transferred certain patent rights to Volution in exchange for a payment of
approximately $107,000 (GBP 65,000), which was the carrying value of the patents in accordance with local accounting standards.
Effective September 12, 2014, Varleigh ceased its operations and was dissolved. The transaction resulted in the transfer of the
business of Varleigh to Volution. On the date of transfer, the controlling/majority shareholders of Volution were also the controlling/majority
shareholders of Varleigh. Upon dissolution, there were no reported assets, liabilities, or accumulated comprehensive income remaining
in Varleigh, as such no gain or loss on dissolution was recognized.
On July 3, 2015, the shareholders of Volution
exchanged their shares for RPC shares with no changes in individual share ownerships. This qualified as a reorganization.
AKARI THERAPEUTICS,
Plc
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL
STATEMENTS
December 31, 2016 and 2015
(in U.S. Dollars)
NOTE 1 - Nature of Business (cont.)
|
The Company is subject to a number of risks
similar to those of clinical stage companies, including dependence on key individuals, uncertainty of product development and generation
of revenues, dependence on outside sources of capital, risks associated with clinical trials of products, dependence on third-party
collaborators for research operations, need for regulatory approval of products, risks associated with protection of intellectual
property, and competition with larger, better-capitalized companies. Successful completion of the Company’s development program
and, ultimately, the attainment of profitable operations is dependent upon future events, including obtaining adequate financing
to fulfill its development activities and achieving a level of revenues adequate to support the Company’s cost structure.
There are no assurances that the Company will be able to obtain additional financing on favorable terms, or at all or successfully
market its products.
NOTE 2 - Summary of Significant Accounting Policies
|
Principles of Consolidation –
The Combined and Consolidated Financial Statements include the accounts of the Company, Volution and Volution Immuno Pharmaceuticals
Ltd (a private limited company incorporated in England and Wales), its wholly-owned subsidiary, which was incorporated in London
on August 22, 2014. On September 6, 2016, Volution Immuno Pharmaceuticals Ltd was dissolved.
All intercompany transactions
have been eliminated.
Foreign Currency –
The functional
currency of the Company is U.S. dollars as that is the primary economic environment in which the Company operates as well as the
currency in which it has been financed.
The reporting currency of the
Company is U.S. Dollars. The Company translated its non-U.S. operations’ assets and liabilities denominated in foreign currencies
into U.S. dollars at current rates of exchange as of the balance sheet date and income and expense items at the average exchange
rate for the reporting period. Translation adjustments resulting from exchange rate fluctuations are recorded as foreign currency
translation adjustments, a component of accumulated other comprehensive (loss) income. Gains or losses from foreign currency transactions
are included in foreign currency exchange gains (losses).
Use of Estimates –
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and judgments that may
affect the reported amounts of assets, liabilities, equity, revenue, expenses and related disclosure of contingent assets and liabilities.
Management’s estimates and judgments include assumptions used in the evaluation of impairment and useful lives of intangible
assets (patents), accrued liabilities, deferred income taxes, liabilities related to stock options and warrants, stock-based compensation
and various other assumptions that are believed to be reasonable under the circumstances. Actual results may differ from those
estimates under different assumptions or conditions.
Fair Value Measurements
– The carrying amounts of financial instruments, including cash and cash equivalents, short-term investments, restricted
cash, receivable from related party and accounts payable approximate fair value due to their short-term maturities.
The Company’s liabilities
related to options and warrants relate to equity and debt financing rounds and options related to RPC, and are recognized on the
balance sheet at their fair value, with changes in the fair value accounted for in the Statements of Comprehensive Loss and included
in changes in fair value of option/warrant liabilities.
AKARI THERAPEUTICS,
Plc
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL
STATEMENTS
December 31, 2016 and 2015
(in U.S. Dollars)
NOTE 2 - Summary of Significant Accounting Policies (cont.)
|
Cash and Cash Equivalents
–
The Company considers all highly-liquid investments with original maturities of 90 days or less at the time of acquisition to be
cash equivalents. The Company had no cash equivalents as of December 31, 2016 and December 31, 2015.
Short-term investments –
Short-term investments consist of certificates of deposit that are expected to be converted into cash within one year.
Restricted cash -
Restricted
cash is collateral for a letter of credit related to the Company’s office lease.
Prepaid Expenses and Other
Current Assets –
Prepaid expenses and other current assets consist principally of VAT receivables and prepaid expenses.
Property and equipment, net –
Property and equipment are stated at cost, net of accumulated depreciation. Depreciation is calculated using the straight-line
method over the estimated useful lives of the assets at the following annual rates:
|
|
Years
|
|
|
|
|
|
Computers, peripheral, and scientific equipment
|
|
|
3
|
|
Office furniture and equipment
|
|
|
3
|
|
Depreciation expense for the
years ended December 31, 2016, 2015 and 2014 was $36,898, $7,040 and $3,051, respectively.
Long-Lived Assets
–
The Company reviews all long-lived assets for impairment whenever events or circumstances indicate the carrying amount of such
assets may not be recoverable. Recoverability of assets to be held or used is measured by comparison of the carrying value of the
asset to the future undiscounted net cash flows expected to be generated by the asset. If such asset is considered to be impaired,
the impairment recognized is measured by the amount by which the carrying value of the asset exceeds the discounted future cash
flows expected to be generated by the asset.
Patent Acquisition Costs
– Patent acquisition costs and related capitalized legal fees are amortized on a straight-line basis over the shorter of
the legal or economic life. The estimated useful life is 22 years. The Company expenses costs associated with maintaining and defending
patents subsequent to their issuance in the period incurred.
Accrued Expenses
– As part
of the process of preparing the Combined and Consolidated Financial Statements, it requires the estimate of accrued expenses. This
process involves identifying services that third parties have performed on the Company’s behalf and estimating the level
of service performed and the associated cost incurred on these services as of each balance sheet date in the Company’s Combined
and Consolidated Financial Statements. Examples of estimated accrued expenses include contract service fees in conjunction with
pre-clinical and clinical trials and professional service fees. In connection with these service fees, the Company estimates are
most affected by its understanding of the status and timing of services provided relative to the actual services incurred by the
service providers. In the event that the Company does not identify certain costs that have been incurred or it under or over-estimates
the level of services or costs of such services, our reported expenses for a reporting period could be understated or overstated.
The date on which certain services commence, the level of services performed on or before a given date, and the cost of services
are often subject to our judgment. The Company makes these judgments based upon the facts and circumstances known to us in accordance
with U.S. GAAP.
AKARI THERAPEUTICS,
Plc
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL
STATEMENTS
December 31, 2016 and 2015
(in U.S. Dollars)
NOTE 2 - Summary of Significant Accounting Policies (cont.)
|
Research and Development
Expenses –
Costs associated with research and development are expensed as incurred. Research and development expenses
include, among other costs, personnel expenses, costs incurred by outside laboratories, manufacturers’ and other accredited
facilities in connection with clinical trials and preclinical studies. Research and development expense for the years ended December
31, 2016, 2015 and 2014 was $17,306,001, $5,799,076 and $1,616,204, respectively. The Company accounts for research and development
tax credits at the time its realization becomes probable. In September 2016, the Company realized research and development tax
credits of $577,671 that was recorded as a credit to research and development costs in the Combined and Consolidated Statements
of Comprehensive Loss.
Stock-Based Compensation Expense –
Stock-based compensation expense is recorded using the fair-value based method for all awards granted. Compensation costs for stock
options and awards is recorded in earnings (loss) over the requisite service period based on the fair value of those options and
awards. For employees, fair value is estimated at the grant date and for non-employees fair value is re-measured at each reporting
date as required by ASC 718, “Compensation-Stock Compensation,” and ASC 505-50, “Equity-Based Payments to Non-Employees.”
Fair values of awards granted under the share option plans are estimated using a Black-Scholes option pricing model. The determination
of fair value for stock-based awards on the date of grant using an option pricing model requires management to make certain assumptions
regarding a number of complex and subjective variables. The Company classifies its stock-based payments as either liability-classified
awards or as equity-classified awards. The Company remeasures liability-classified awards to fair value at each balance sheet date
until the award is settled. The liability for liability-classified awards generally is equal to the fair value of the award as
of the balance sheet date multiplied by the percentage vested at the time. The Company charges (or credits) the change in the liability
amount from one balance sheet date to another to changes in fair value of option/warrant liabilities.
Concentration of Credit Risk
–
Financial instruments that subject the Company to credit risk consist of cash and cash equivalents. The Company maintains
cash and cash equivalents with well-capitalized financial institutions. At times, those amounts may exceed insured limits. The
Company has no significant concentrations of credit risk.
Income Taxes
–
The Company accounts for income taxes in accordance with the accounting rules that require an asset and liability approach to accounting
for income taxes based upon the future expected values of the related assets and liabilities. Deferred income tax assets and liabilities
are determined based on the differences between the financial reporting and tax bases of assets and liabilities and for tax loss
and credit carry forwards, and are measured using the expected tax rates estimated to be in effect when such basis differences
reverse. Valuation allowances are established, if necessary, to reduce the deferred tax asset to the amount that will, more likely
than not, be realized.
Uncertain Tax Positions –
The Company follows the provisions of ASC 740 “
Accounting for Uncertainty in Income Taxes
”, which prescribes
recognition thresholds that must be met before a tax position is recognized in the financial statements and provides guidance on
de-recognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. Under ASC 740
“
Accounting for Uncertainty in Income Taxes
,” an entity may only recognize or continue to recognize tax positions
that meet a “more-likely-than-not” threshold. Interest and penalties related to uncertain tax positions are recognized
as income tax expense. As of December 31, 2016 and December 31, 2015, the Company had no uncertain tax positions.
AKARI THERAPEUTICS,
Plc
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL
STATEMENTS
December 31, 2016 and 2015
(in U.S. Dollars)
NOTE 2 - Summary of Significant Accounting Policies (cont.)
|
Earnings (Loss) Per Share
–
Basic earnings (loss) per common share is computed by dividing net income (loss) available to common shareholders by the weighted-average
number of Ordinary Shares outstanding during the period. Diluted earnings (loss) per common share is computed by dividing net income
(loss) available to common shareholders by the sum of (1) the weighted-average number of Ordinary Shares outstanding during the
period, (2) the dilutive effect of the assumed exercise of options and warrants using the treasury stock method and (3) the dilutive
effect of other potentially dilutive securities.
Comprehensive Income (Loss)
–
Comprehensive income (loss) is defined as the change in equity of a business enterprise during a period from transactions
and other events and circumstances from non-owner sources. The Company’s other comprehensive income (loss) is comprised of
foreign currency translation adjustments.
The following table provides
details with respect to changes in accumulated other comprehensive income (loss) (AOCI), which is comprised of foreign currency
translation adjustments, as presented in the balance sheets at December 31, 2016 and 2015:
Balance January 1, 2014
|
|
$
|
(33,357
|
)
|
|
|
|
|
|
Net current period other comprehensive income
|
|
|
79,438
|
|
|
|
|
|
|
Balance December 31, 2014
|
|
|
46,081
|
|
|
|
|
|
|
Net current period other comprehensive income
|
|
|
110,399
|
|
|
|
|
|
|
Balance December 31, 2015
|
|
|
156,480
|
|
|
|
|
|
|
Net current period other comprehensive loss
|
|
|
(436,577
|
)
|
|
|
|
|
|
Balance December 31, 2016
|
|
$
|
(280,097
|
)
|
Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards
Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, “Revenue from Contracts with
Customers” (“ASU 2014-09”), which supersedes nearly all existing revenue recognition guidance under GAAP. The
core principle of ASU 2014-09 is to recognize revenues when promised goods or services are transferred to customers in an amount
that reflects the consideration to which an entity expects to be entitled for those goods or services. ASU 2014-09 defines a five
step process to achieve this core principle and, in doing so, more judgment and estimates may be required within the revenue recognition
process than are required under existing GAAP. On July 9, 2015, the FASB voted to defer the effective date by one year to December
15, 2017 for interim and annual reporting periods beginning after that date. Early adoption of ASU 2014-09 is permitted but
not before the original effective date (annual periods beginning after December 15, 2016). When effective, ASU 2014-09 prescribes
either of the following transition methods: (i) a full retrospective approach reflecting the application of the standard in each
prior reporting period with the option to elect certain practical expedients; or (ii) a retrospective approach with the cumulative
effect of initially adopting ASU 2014-09 recognized at the date of adoption (which includes additional footnote disclosures). The
Company does not believe the adoption of this standard will have a material impact on our financial position, results of operations
or related financial statement disclosures.
AKARI THERAPEUTICS,
Plc
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL
STATEMENTS
December 31, 2016 and 2015
(in U.S. Dollars)
NOTE 2 - Summary of Significant Accounting Policies (cont.)
|
In February 2016, the FASB issued ASU No.
2016-02,
Leases
(ASU 2016-02”). ASU 2016-02 establishes a right-of-use (ROU) model that requires a lessee to record
a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified
as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. The new
standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years.
A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into
after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients
available. The Company is currently evaluating the impact of its pending adoption of the new standard on the Combine and Consolidated
Financial Statements.
In March 2016, the FASB issued ASU No.
2016-09,
Improvements to Employee Share-Based Payment Accounting
(“ASU No. 2016-09”). ASU 2016-09 simplifies
various aspects related to how share-based payments are accounted for and presented in the Combined and Consolidated Financial
Statements. The amendments include income tax consequences, the accounting for forfeitures, classification of awards as either
equity or liabilities and classification on the statement of cash flows. The guidance is effective for annual periods beginning
after December 15, 2016, and interim periods within those annual periods. The Company does not believe the adoption of this standard
will have a material impact on its financial position, results of operations or related financial statement disclosures.
In August 2016, the FASB issued ASU 2016-15,
Classification
of Certain Cash Receipts and Cash Payments
, which addresses eight specific cash flow issues with the objective of reducing
the existing diversity in practice, including presentation of cash flows relating to contingent consideration payments, proceeds
from the settlement of insurance claims, and debt prepayment or debt extinguishment costs, among other matters. This guidance is
effective for fiscal years beginning after December 15, 2018, and interim periods within fiscal years beginning after December
15, 2019. Early adoption is permitted, including adoption in an interim period. If adopted in an interim period, any adjustments
should be reflected as of the beginning of the fiscal year that includes that interim period. Adoption of this guidance is required
to be applied using a retrospective transition method to each period presented, unless impracticable to do so. The Company does
not believe the adoption of this standard will have a material impact on our financial position, results of operations or related
financial statement disclosures.
In October 2016,
the FASB issued ASU 2016-16,
Intra-Entity Transfers of Assets Other Than Inventory
. This guidance removes the
prohibition in ASC 740 against the immediate recognition of the current and deferred income tax effects of intra-entity transfers
of assets other than inventory. This guidance is intended to reduce the complexity of U.S. GAAP and diversity in practice
related to the tax consequences of certain types of intra-entity asset transfers, particularly those involving intellectual property.
This guidance is effective for annual reporting periods beginning after December 15, 2018, and interim periods within fiscal
years beginning after December 15, 2019. Early adoption is permitted. The Company is currently evaluating the impact of this guidance
on its consolidated financial statements
In November 2016, the FASB issued ASU, 2016-18,
Restricted
Cash
, which requires that restricted cash be included with cash and cash equivalents when reconciling the beginning and ending
total amounts shown on the statement of cash flows. This guidance is effective for fiscal years beginning after December 15, 2018,
and interim periods within fiscal years beginning after December 15, 2019 and should be applied using a retrospective transition
method to each period presented. Early adoption is permitted, including adoption in an interim period. If an entity early adopts
the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that
interim period. The Company has not yet determined the timing of adoption. The Company currently presents changes in restricted
cash within investing activities and so the adoption of this guidance will result in changes in net
AKARI THERAPEUTICS,
Plc
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL
STATEMENTS
December 31, 2016 and 2015
(in U.S. Dollars)
NOTE 2 - Summary of Significant Accounting Policies (cont.)
|
cash flows from investing activities and
to certain beginning and ending cash and cash equivalent totals shown on Combined and Consolidated Statement of Cash Flows. The
Company does not believe the adoption of this standard will have a material impact on its financial position, results of operations
or related financial statement disclosures.
NOTE 3 – Reverse Acquisition
|
The Company completed the Acquisition
as discussed in Note 1. Based on the terms of the Acquisition and since the Volution securityholders owned approximately 91.68%
of the fully-diluted capitalization of the Company immediately following the closing of the Acquisition, Volution is considered
to be the acquiring company for accounting purposes, and the transaction has been accounted for as a reverse acquisition under
the acquisition method of accounting for business combinations in accordance with U.S. GAAP. Accordingly, the assets and liabilities
of Celsus have been recorded as of the Acquisition closing date at fair value.
The acquisition consideration
for accounting purposes consisted of Ordinary Shares and the fair value of vested options and warrants issued by Celsus that were
outstanding at the date of the Acquisition immediately prior to closing. Assets and liabilities of Celsus were measured at fair
value and added to the assets and liabilities of Volution. The consolidated financial statements reflect the historical financial
statements of Volution as our historical financial statements, except for the legal capital which reflects our legal capital (Ordinary
Shares).
In connection with the consummation
of the Acquisition, the Company issued an aggregate of 722,345,600 Ordinary Shares to RPC, Volution’s sole shareholder, in
exchange for the outstanding shares of common stock of Volution.
Purchase Consideration
The purchase price for Celsus
on September 18, 2015, the closing date of the Acquisition, was as follows:
Fair value of Celsus Ordinary Shares outstanding
|
|
$
|
20,034,625
|
|
|
(a)
|
Fair value of Celsus share options
|
|
|
277,461
|
|
|
(2,516,690 options)
|
Fair value of Celsus warrants
|
|
|
27,054
|
|
|
(1,782,246 warrants)
|
Total purchase price
|
|
$
|
20,339,140
|
|
|
|
|
(a)
|
computed by multiplying 55,636,283 Ordinary Shares of Celsus at Acquisition by the closing stock price on September 18, 2015, of $0.3601.
|
Allocation of Purchase Consideration
Under the acquisition method of accounting,
the total purchase price was allocated to tangible and identifiable intangible assets acquired and liabilities assumed of Celsus
on the basis of their estimated fair values as of the transaction closing date on September 18, 2015. The excess of the total purchase
price over the fair value of assets acquired and liabilities assumed was allocated to excess consideration.
AKARI THERAPEUTICS,
Plc
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL
STATEMENTS
December 31, 2016 and 2015
(in U.S. Dollars)
NOTE 3 – Reverse Acquisition (cont.)
|
The following table summarizes the allocation of
the purchase consideration to the assets acquired and liabilities assumed based on their fair values at September
18, 2015:
Cash and cash equivalents
|
|
$
|
1,410,577
|
|
Restricted cash
|
|
|
142,079
|
|
Prepaid expenses and other assets acquired
|
|
|
1,672,028
|
|
Excess consideration
|
|
|
19,283,280
|
|
Liabilities related to options and warrants
|
|
|
(1,800,154
|
)
|
Other assumed liabilities
|
|
|
(368,670
|
)
|
|
|
$
|
20,339,140
|
|
The Company believes that the historical
values of Celsus’s current assets and current liabilities approximate fair value based on the short-term nature of such items.
Excess consideration is calculated as the
difference between the fair value of the consideration realized and the values assigned to the identifiable tangible and intangible
assets acquired and liabilities assumed. The Company recorded this non-cash charge in the Combined and Consolidated Statements
of Comprehensive Loss for the year ended December 31, 2015 due to the fact that goodwill could not be justified and was considered
fully impaired.
NOTE 4 – Patent Acquisition Costs
|
Patent acquisition costs, net, are the
asset costs of purchased patents and are amortized over the useful life of the patent determined to be 22 years, as of December
31, 2016 and December 31, 2015 consisted of the following:
|
|
December 31,
2016
|
|
|
December 31,
2015
|
|
|
|
|
|
|
|
|
Patent acquisition and related costs
|
|
$
|
92,434
|
|
|
$
|
95,050
|
|
Less: Accumulated amortization
|
|
|
(53,069
|
)
|
|
|
(42,567
|
)
|
|
|
$
|
39,365
|
|
|
$
|
52,483
|
|
Amortization of patent acquisition costs
for the years ended December 31, 2016, 2015 and 2014 was $3,046, $3,122 and $1,891, respectively.
Approximate amortization expense of patent
acquisition costs for the next five years is as follows:
Year Ended
|
|
Amount
|
|
2017
|
|
$
|
2,944
|
|
2018
|
|
|
2,944
|
|
2019
|
|
|
2,944
|
|
2020
|
|
|
2,944
|
|
2021
|
|
|
2,944
|
|
Thereafter
|
|
|
24,645
|
|
|
|
$
|
39,365
|
|
AKARI THERAPEUTICS,
Plc
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL
STATEMENTS
December 31, 2016 and 2015
(in U.S. Dollars)
NOTE 5 – Loans Payable – Shareholders
|
At a Volution shareholder meeting held
on June 22, 2015, Volution raised short-term working capital in the form of loans from shareholders of approximately $3 million.
The loans carry with them, options in RPC, equivalent to 15% of the current outstanding equity issued by RPC which have been accounted
for in accordance with ASC 718 since RPC is a private company that is a majority shareholder of the Company. The fair value of
the RPC options is estimated using the fair value of Akari shares times RPC's ownership in Akari shares times 15 percent and was
approximately $26 million. The exact terms of these options have not been finalized. These options do not relate to the share capital
of Akari. The Company recorded a liability to options and warrants in the consolidated balance sheet for $26 million reflected
in current liabilities in the December 31, 2015 Combined and Consolidated balance sheet, allocated $3 million as a loan discount
and recorded interest expense over the estimated term of the loan amounting to $3 million in the Combined and Consolidated Statement
of Comprehensive Loss as a credit to the loan discount (see note 6). The remaining $23 million was recorded as a non-cash financing
expense in the Combined and Consolidated Statement of Comprehensive Loss.
Interest expense included in the Combined
and Consolidated Statements of comprehensive loss related to loans for the years ended December 31, 2016, 2015 and 2014 was $0,
$3,053,948 and $5,436, respectively. The shareholder loans from 2014 were repaid in April 2015 and the 2015 loans were repaid in
October 2015.
NOTE 6 – Fair Value Measurements
|
Fair value of financial instruments:
The estimated fair value of financial instruments
has been determined by the Company using available market information and valuation methodologies. Considerable judgment is required
in estimating fair values. Accordingly, the estimates may not be indicative of the amounts the Company could realize in a current
market exchange.
The carrying amounts of cash and cash equivalents,
short-term investments, receivable from related party, restricted cash and accounts payable approximate their fair value due to
the short-term maturity of such instruments.
Fair value is an exit price, representing
the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants.
As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would
use in pricing an asset or a liability. As a basis for considering such assumptions, ASC 820, “Fair Value Measurements and
Disclosures” establishes a three-tier value hierarchy, which prioritizes the inputs used in the valuation methodologies in
measuring fair value:
Level 1 - quoted
prices in active markets for identical assets or liabilities;
Level 2 - inputs
other than Level 1 that are observable, either directly or indirectly, such as quoted prices in active markets for similar
assets or liabilities, quoted prices for identical or similar assets or liabilities in markets that are not active, or other inputs
that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities;
or
Level 3 - unobservable
inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
AKARI THERAPEUTICS,
Plc
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL
STATEMENTS
December 31, 2016 and 2015
(in U.S. Dollars)
NOTE 6 – Fair Value Measurements (cont.)
|
The fair value hierarchy also requires
an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.
|
|
December 31, 2016
|
|
|
December 31, 2015
|
|
|
|
|
|
|
Carrying
Amount
$
|
|
|
Fair
Value
$
|
|
|
Carrying
Amount
$
|
|
|
Fair
Value
$
|
|
|
Fair
Value
Levels
|
|
Liability related to RPC options
|
|
|
7,627,970
|
|
|
|
7,627,970
|
|
|
|
15,711,017
|
|
|
|
15,711,017
|
|
|
|
3
|
|
Liability related to warrants
|
|
|
34,838
|
|
|
|
34,838
|
|
|
|
685,141
|
|
|
|
685,141
|
|
|
|
3
|
|
In accordance with ASC No. 820, the Company
measures its liabilities related to options and warrants on a recurring basis at fair value. The liabilities related to options
and warrants are classified within Level 3 value hierarchy because the liabilities are based on present value calculations and
external valuation models whose inputs include market interest rates, estimated operational capitalization rates, volatilities
and illiquidity. Unobservable inputs used in these models are significant.
Upon completion of the Acquisition, the
Company assumed certain warrants that were issued in connection with several private placements by Celsus and certain investors
where it sold Ordinary Shares and warrants. Some of the issued warrants contain non-standard anti-dilution terms and accordingly
are recorded as liabilities.
|
|
December 31, 2016
|
|
|
December 31, 2015
|
|
|
|
|
|
|
|
|
|
Carrying
Amount
$
|
|
|
Fair
Value
$
|
|
|
Carrying
Amount
$
|
|
|
Fair
Value
$
|
|
|
Fair
Value
Levels
|
|
|
Reference
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
|
34,098,812
|
|
|
|
34,098,812
|
|
|
|
68,919,995
|
|
|
|
68,919,995
|
|
|
|
1
|
|
|
|
Note 2
|
|
Short-term investment
|
|
|
10,021,963
|
|
|
|
10,021,963
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1
|
|
|
|
Note 2
|
|
Restricted cash
|
|
|
142,168
|
|
|
|
142,168
|
|
|
|
142,079
|
|
|
|
142,079
|
|
|
|
1
|
|
|
|
Note 2
|
|
Accounts payable
|
|
|
2,214,313
|
|
|
|
2,214,313
|
|
|
|
4,320,588
|
|
|
|
4,320,588
|
|
|
|
1
|
|
|
|
-
|
|
Liability related to options and warrants
|
|
|
7,662,808
|
|
|
|
7,662,808
|
|
|
|
16,396,158
|
|
|
|
16,396,158
|
|
|
|
3
|
|
|
|
Note 6
|
|
On September 18, 2015, the Acquisition
date, warrants to purchase 5,617,977 ordinary shares had full ratchet anti-dilution protection (which would be triggered by a share
or warrant issuance at less than $0.1958 price share or exercise price per share). The issuance of ordinary shares in connection
with the Financing (see Note 1) triggered the full ratchet anti-dilution protection resulting in an additional 188,303 ordinary
shares issuable upon exercise of such warrants for a total of 5,806,280 and reducing the exercise price to $0.18945. As of December
31, 2016, the fair value of the warrants was $34,838. The net change in fair value of $650,303 was recognized as change in fair
value of option and warrant liabilities in the Company’s Combined Consolidated Statement of Comprehensive Loss. The warrants
expire on April 4, 2017.
AKARI THERAPEUTICS,
Plc
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL
STATEMENTS
December 31, 2016 and 2015
(in U.S. Dollars)
NOTE 6 – Fair Value Measurements (cont.)
|
The Company accounts for the liability
warrants issued in accordance with ASC 815, “Derivatives and Hedging” as a freestanding liability instrument that is
measured at fair value at each reporting date, based on its fair value, with changes in the fair values being recognized in the
Company’s Combined and Consolidated Statements of Comprehensive Loss as a change in fair value of option/warrant liabilities.
The fair value of warrants granted was
measured using the Binomial method of valuation. Fair values were estimated using the following assumptions for the warrants:
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Expected dividend yield
|
|
|
0
|
%
|
|
|
0
|
%
|
Expected volatility
|
|
|
73.39
|
%
|
|
|
233.0
|
%
|
Risk-free interest
|
|
|
0.51
|
%
|
|
|
0.75
|
%
|
Expected life
|
|
|
0.26 years
|
|
|
|
1.26 years
|
|
In June 2015, the Company raised short-term
working capital in the form of loans from shareholders of approximately $3 million with the loans carrying with it, options in
RPC, equivalent to 15% of the current outstanding equity issued by RPC. RPC is a private company that is a majority shareholder
of the Company. The RPC options were accounted for in accordance with ASC 718, “Compensation – Stock Compensation”.
The fair value of the RPC options is estimated using the fair value of Akari Ordinary Shares times RPC’s ownership in Akari
Ordinary Shares times 15% and was initially valued at approximately $26 million. These options do not relate to the share capital
of Akari. The exact terms of these options have not been finalized. In September 2015, the Company recorded a liability to share
options for $26 million, allocated $3 million as a loan discount and recorded interest expense over the estimated term of the
loan amounting to $3 million recognized in the Combined and Consolidated Statements of Comprehensive Loss as a credit to the loan
discount. The remaining $23 million was recorded as a non-cash financing expense in the Combined and Consolidated Statements of
Comprehensive Loss during the quarter-ended September 30, 2015.
As of December 31, 2016, the fair value
of the RPC options was $7,627,970. The fair value of the RPC options for the year ended December 31, 2016 decreased by $8,083,047
and the change was recognized as change in fair value of option/warrant liabilities in the Combined and Consolidated Statements
of Comprehensive Loss. As of December 31, 2015, the fair value of the RPC options was $15,711,017. The Company accounts for the
RPC options as a liability in accordance with ASC 815-40-25, “
Accounting for Derivative Financial Instruments Indexed
to, and Potentially Settled in, a Company’s Own Stock
” and ASC 815-40-15, “
Determining Whether an Instrument
(or Embedded Feature) Is Indexed to an Entity’s Own Stock
.”
The Company’s financial assets and
liabilities measured at fair value on a recurring basis, consisted of the following instruments as of the following dates:
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
Fair value measurements
using input type
Level 3
|
|
|
|
|
|
|
|
|
Warrants
|
|
$
|
34,838
|
|
|
$
|
685,141
|
|
RPC options
|
|
|
7,627,970
|
|
|
|
15,711,017
|
|
Liabilities related to stock options and warrants
|
|
$
|
7,662,808
|
|
|
$
|
16,396,158
|
|
AKARI THERAPEUTICS,
Plc
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL
STATEMENTS
December 31, 2016 and 2015
(in U.S. Dollars)
NOTE 6 – Fair Value Measurements (cont.)
|
Fair value measurements using significant
unobservable inputs (Level 3):
|
|
Fair value of
liabilities related
to stock options
and warrants
|
|
Balance at December 31, 2014
|
|
$
|
-
|
|
|
|
|
|
|
Balance at September 18, 2015 (Acquisition)
|
|
|
1,800,154
|
|
|
|
|
|
|
Changes in values of liabilities related to options and warrants
|
|
|
(11,408,231
|
)
|
|
|
|
|
|
Value of liability related to options - transfer in
|
|
|
26,004,235
|
|
|
|
|
|
|
Balance at December 31, 2015
|
|
|
16,396,158
|
|
|
|
|
|
|
Changes in values of liabilities related to options and warrants
|
|
|
(8,733,350
|
)
|
|
|
|
|
|
Balance at December 31, 2016
|
|
$
|
7,662,808
|
|
NOTE 7 – Shareholders’ Equity
|
Share Capital
– The Company
has 5,000,000,000 Ordinary Shares of authorized capital and 1,177,693,383 Ordinary Shares outstanding at December 31, 2016 and
2015.
On September 18, 2015, in connection with
the Acquisition, 55,636,283 Ordinary Shares were issued to Celsus. All periods have been recast to reflect this reverse acquisition.
On September 18, 2015, the Company completed
a private placement of 395,881,100 Ordinary Shares for gross proceeds of $75 million at a price of $0.18945 per share.
On September 18, 2015, the Company issued
3,830,400 Ordinary Shares to MTS Health Partners (“MTS”), as partial compensation for financial advisory services to
the Company in connection with the Acquisition with a value of $750,000. The Company also paid MTS $500,000 in cash. These amounts
were recorded in general and administrative expenses on the Combined and Consolidated Statements of Comprehensive Loss for the
year ended December 31, 2015.
Share option plan
–
Upon completion of the Acquisition, the
Company assumed the former Celsus 2014 Equity Incentive Plan (the “Plan”). In accordance with the Plan, the number
of shares that may be issued upon exercise of options under the Plan, shall not exceed 141,142,420 Ordinary Shares. At December
31, 2016, 61,770,222 Ordinary Shares are available for future issuance under the Plan. The option plan is administered by the Company’s
board of directors and grants are made pursuant thereto by the compensation committee. The per share exercise price for the shares
to be issued pursuant to the exercise of an option shall be such price equal to the fair market value of the Company’s Ordinary
Shares on the grant date and set forth in the individual option agreement. Options expire ten years after the grant date and typically
vest over one to four years.
AKARI THERAPEUTICS,
Plc
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL
STATEMENTS
December 31, 2016 and 2015
(in U.S. Dollars)
NOTE 7 – Shareholders’ Equity (cont.)
|
The following is a summary of the Company’s
share option activity and related information for employees and directors for the year ended December 31, 2016:
|
|
Number
of shares
|
|
|
Weighted
average
exercise
price
|
|
|
Weighted
average
grant date
fair value
|
|
|
Weighted
average
remaining
contractual
term
(in years)
|
|
|
Aggregate
intrinsic
value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding as of January 1, 2016
|
|
|
61,362,198
|
|
|
$
|
0.34
|
|
|
|
|
|
|
|
9.7
|
|
$
|
-
|
Changes during the period:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
22,700,000
|
|
|
$
|
0.14
|
|
|
$
|
0.09
|
|
|
|
|
|
Forfeited
|
|
|
(4,690,000
|
)
|
|
$
|
0.21
|
|
|
$
|
0.12
|
|
|
|
|
|
Options outstanding at December 31, 2016
|
|
|
79,372,198
|
|
|
$
|
0.29
|
|
|
|
|
|
|
|
8.7
|
|
$
|
-
|
Exercisable options at December 31, 2016
|
|
|
25,486,486
|
|
|
$
|
0.34
|
|
|
|
|
|
|
|
8.7
|
|
$
|
-
|
The following is a summary of the Company’s
non-vested share options at December 31, 2016 and changes during the year ended December 31, 2016:
|
|
Number
of shares
|
|
|
Weighted
average
grant date
fair value
|
|
|
|
|
|
|
|
|
Non-vested options at December 31, 2015
|
|
|
58,480,181
|
|
|
$
|
0.21
|
|
Options granted
|
|
|
22,700,000
|
|
|
$
|
0.09
|
|
Options vested
|
|
|
(22,604,469
|
)
|
|
$
|
0.18
|
|
Non-vested options forfeited
|
|
|
(4,690,000
|
)
|
|
$
|
0.12
|
|
Non-vested at December 31, 2016
|
|
|
53,885,712
|
|
|
$
|
0.24
|
|
On March
23, 2016, the Company granted 11,000,000 options to its employees at an exercise price of $0.141 per share that vest semi-annually
over four years. On April 22, 2016, the Company granted 1,300,000 options to a director at an exercise price of $0.18 per share
that vest annually over three years. On June 29, 2016, the Company granted 7,800,000 options to its directors at an exercise price
of $0.145 per share, 6,500,000 which will vest in full on the date of the Company’s 2017 Annual General Meeting and 1,300,000
of which will vest over three years. On October 13, 2016, the Company granted 1,300,000 options to a director at an exercise price
of $0.080621 per share which will vest equally over three years on the date of the Company’s 2017-2019 Annual General Meetings,
with the first vesting on the date of the Company’s 2017 Annual General Meeting. On October 13, 2016, the Company granted
1,300,000 options to a resigning director at an exercise price of $
0.080621 per share which
vested immediately upon grant.
The Company accounts for awards of equity
instruments issued to employees and directors under the fair value method of accounting and recognize such amounts, upon vesting,
in general administrative and research and development expenses within its Combined and Consolidated Statements of Comprehensive
Loss. The Company measures compensation cost for all share-based awards at fair value on the date of grant and recognize compensation
expense in its Combined and Consolidated Statements of Comprehensive Loss using the straight-line method over the service period
over which it expects the awards to vest.
AKARI THERAPEUTICS,
Plc
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL
STATEMENTS
December 31, 2016 and 2015
(in U.S. Dollars)
NOTE 7 – Shareholders’ Equity (cont.)
|
The Company estimates the fair value of
all time-vested options as of the date of grant using the Black-Scholes option valuation model, which was developed for use in
estimating the fair value of traded options that have no vesting restrictions and are fully transferable. Option valuation models
require the input of highly subjective assumptions, including the expected share price volatility, which is calculated based on
the historical volatility of the Company’s Ordinary Shares. The Company uses a risk-free interest rate, based on the U.S.
Treasury instruments in effect at the time of the grant, for the period comparable to the expected term of the option. Given its
limited history with share option grants and exercises, the Company uses the “simplified” method in estimating the
expected term, the period of time that options granted are expected to be outstanding, for its grants.
The Company classifies its stock-based
payments as either liability-classified awards or as equity-classified awards. The Company remeasures liability-classified awards
to fair value at each balance sheet date until the award is settled. The Company measures equity-classified awards at their grant
date fair value and do not subsequently remeasure them. The Company has classified its stock-based payments which are settled in
common stock as equity-classified awards and share-based payments that are settled in cash as liability-classified awards. Compensation
costs related to equity-classified awards generally are equal to the grant-date fair value of the award amortized over the vesting
period of the award. The liability for liability-classified awards generally is equal to the fair value of the award as of the
balance sheet date multiplied by the percentage vested at the time. The Company charges (or credits) the change in the liability
amounts from one balance sheet date to another to compensation expense. Below are the assumptions used for the options granted
during the year:
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Expected dividend yield
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
-
|
|
Expected volatility
|
|
|
74.18%-80.71%
|
|
|
|
71.28%-81.79%
|
|
|
|
-
|
|
Risk-free interest
|
|
|
1.03%-1.52%
|
|
|
|
1.51%-2.27%
|
|
|
|
-
|
|
Expected life
|
|
|
5.5-6.25 years
|
|
|
|
5.5-10 years
|
|
|
|
-
|
|
The following is a summary of the Company’s
share options granted separated into ranges of exercise price:
Exercise
price
(range) ($)
|
|
Options
outstanding
at
December
31, 2016
|
|
|
Weighted
average
remaining
contractual
life (years)
|
|
|
Weighted
average
exercise
price ($)
|
|
|
Options
exercisable
at
December
31, 2016
|
|
|
Remaining
contractual
life (years
for
exercisable
options)
|
|
|
Weighted
average
exercise
price ($)
|
|
0.08-0.19
|
|
|
24,313,351
|
|
|
|
9.31
|
|
|
|
0.15
|
|
|
|
6,950,054
|
|
|
|
9.22
|
|
|
|
0.15
|
|
0.32
|
|
|
53,597,347
|
|
|
|
8.72
|
|
|
|
0.32
|
|
|
|
17,239,932
|
|
|
|
8.72
|
|
|
|
0.32
|
|
0.60-0.75
|
|
|
290,000
|
|
|
|
7.20
|
|
|
|
0.72
|
|
|
|
290,000
|
|
|
|
7.20
|
|
|
|
0.72
|
|
0.98-1.56
|
|
|
311,500
|
|
|
|
3.24
|
|
|
|
1.31
|
|
|
|
311,500
|
|
|
|
3.24
|
|
|
|
1.31
|
|
2.00
|
|
|
860,000
|
|
|
|
6.73
|
|
|
|
2.00
|
|
|
|
695,000
|
|
|
|
6.73
|
|
|
|
2.00
|
|
|
|
|
79,372,198
|
|
|
|
|
|
|
|
|
|
|
|
25,486,486
|
|
|
|
|
|
|
|
|
|
During the year ended December 31, 2016,
the Company recorded approximately $3,933,000 in stock-based compensation expenses for employees and directors. At December 31,
2016, there was approximately $8,957,000 of unrecognized compensation cost related to unvested share-based compensation arrangements
granted under the Company’s share option plans which the Company expects to recognize over 2.7 years.
AKARI THERAPEUTICS,
Plc
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL
STATEMENTS
December 31, 2016 and 2015
(in U.S. Dollars)
NOTE 7 – Shareholders’ Equity (cont.)
|
Warrants to service providers and investors –
The warrants outstanding at December 31, 2016,
classified as equity, were issued in connection with several private placements of the Company are as follows:
Grant date
|
|
Number of
warrants
|
|
|
Exercise
Price
|
|
|
Expiration date
|
2012 warrants
|
|
|
1,383,086
|
|
|
|
$ 1.72 - $2.25
|
|
|
January 16, 2017-November 30, 2017
|
2013 warrants
|
|
|
399,160
|
|
|
$
|
2.00
|
|
|
January 16, 2018-September 17, 2018
|
|
|
|
1,782,246
|
|
|
|
|
|
|
|
NOTE 8 – Related Party Transactions
|
Accounting Services –
An entity
related to a shareholder provided accounting and bookkeeping services of approximately $45,000, $131,000 and $25,000, respectively,
to the Company during the years ended December 31, 2016, 2015 and 2014, respectively.
Office Lease -
A non-employee director
of the Company is also the CEO of The Doctors Laboratory (“TDL”). The Company leases its UK office space from
TDL and has incurred expenses of approximately $142,000 and $10,000 plus VAT during the years ended December 31, 2016 and
2015, respectively (see Note 9).
Other –
At December 31,
2015, there was a receivable balance in the amount of $10,366 with RPC, a major shareholder. The Company paid certain registration
fees on RPC’s behalf and is treating this as short-term in nature with no interest. This amount is recorded under “Receivable
from related party” within current assets on the balance sheet. At December 31, 2016, the balance was $0.
NOTE 9 - Commitments and Contingencies
|
Lease commitment –
In March
2014, the Company entered into a lease agreement for offices in London which was amended January 1, 2016. The lease term commenced
on December 1, 2014 and expires in March 2019. The lease can be cancelled early by either party upon 3 months’ notice (See
Note 8).
The Company also has a five year
lease for offices in the United States effective July 2014. The lease expires in August 2019.
Future minimum lease payments
under the Company’s operating leases are as follows at December 31, 2016:
|
|
London
|
|
|
United States
|
|
2017
|
|
$
|
128,810
|
|
|
$
|
312,909
|
|
2018
|
|
|
128,810
|
|
|
|
330,291
|
|
2019
|
|
|
25,970
|
|
|
|
225,297
|
|
|
|
$
|
283,590
|
|
|
$
|
868,497
|
|
For the years ended December 31, 2016 and
December 31, 2015, the Company incurred rental expense in the amount of approximately $445,000 and $104,000, respectively.
AKARI THERAPEUTICS,
Plc
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL
STATEMENTS
December 31, 2016 and 2015
(in U.S. Dollars)
NOTE 10 – Earnings Per Share
|
Basic earnings (loss) per Ordinary Share
is computed by dividing net income (loss) available to ordinary shareholders by the weighted-average number of Ordinary Shares
outstanding during the period. Diluted earnings (loss) per common share is computed by dividing net income (loss) available to
ordinary shareholders by the sum of (1) the weighted-average number of Ordinary Shares outstanding during the period, (2) the dilutive
effect of the assumed exercise of share options using the treasury stock method, and (3) the dilutive effect of other potentially
dilutive securities.
|
|
Years Ended December 31,
|
|
Earnings per share
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Company posted
|
|
|
Net loss
|
|
|
|
Net loss
|
|
|
|
Net loss
|
|
Basic weighted average shares outstanding
|
|
|
1,177,693,383
|
|
|
|
852,088,530
|
|
|
|
85,515,588
|
|
Dilutive effect of Ordinary Share equivalents
|
|
|
None
|
|
|
|
None
|
|
|
|
None
|
|
Dilutive weighted average shares outstanding
|
|
|
1,177,693,383
|
|
|
|
852,088,530
|
|
|
|
85,515,588
|
|
For purposes of the diluted net
loss per share calculation, share options and warrants are considered to be potentially dilutive securities and are excluded from
the calculation of diluted net loss per share because their effect would be anti-dilutive. Therefore, basic and diluted net loss
per share was the same for the periods presented due to the Company’s net loss position.
The following table shows the
number of share equivalents that were excluded from the computation of diluted earnings (loss) per share for the respective periods
because the effect would have been anti-dilutive:
|
|
Year Ended
December 31, 2016
|
|
|
Year Ended
December 31, 2015
|
|
|
Year Ended
December 31, 2014
|
|
Total share options
|
|
|
79,372,198
|
|
|
|
61,362,198
|
|
|
|
-
|
|
Total warrants-equity classified
|
|
|
1,782,246
|
|
|
|
1,782,246
|
|
|
|
-
|
|
Total warrants-liability classified
|
|
|
5,806,280
|
|
|
|
5,806,280
|
|
|
|
-
|
|
Total share options and warrants
|
|
|
86,960,724
|
|
|
|
68,950,724
|
|
|
|
-
|
|
Tax rates:
The Company is incorporated in Great Britain.
The effective corporate tax rate applying to a company that is incorporated in Great Britain on December 31, 2016 is 20%, reduced
from 20.25% from December 31, 2015.
Tax
assessment:
The periods open to inquiry by the United
Kingdom (“UK”) tax authorities are 2015 and 2016. The Company has not been issued final tax assessments since its establishment
in Switzerland.
AKARI THERAPEUTICS,
Plc
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL
STATEMENTS
December 31, 2016 and 2015
(in U.S. Dollars)
Deferred taxes:
Deferred income taxes reflect the net tax
effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the
amounts used for income tax purposes. Management currently believes that since the Company has a history of losses, it is
more likely than not that the deferred tax assets relating to the loss carryforwards and other temporary differences will not be
realized in the foreseeable future. Therefore, the Company provided a full valuation allowance to reduce the deferred tax assets.
The main reconciling item between the statutory
tax rate of the Company and the effective tax rate is the recognition of valuation allowances in respect of deferred taxes relating
to accumulated net operating losses carried forward due to the uncertainty of the realization of such deferred taxes.
At December 31, 2016 and 2015, there were
no known uncertain tax positions. We have not identified any tax positions for which it is reasonably possible that a significant
change will occur during the next 12 months.
The components of loss before income taxes are as follows:
|
|
December 31, 2016
|
|
|
December 31, 2015
|
|
|
December 31, 2014
|
|
Domestic (UK)
|
|
$
|
(17,956,167
|
)
|
|
$
|
(39,599,123
|
)
|
|
$
|
(332,663
|
)
|
Foreign
|
|
|
(184,830
|
)
|
|
|
(5,718,409
|
)
|
|
|
(1,614,890
|
)
|
Loss before income tax
|
|
$
|
(18,140,997
|
)
|
|
$
|
(45,317,532
|
)
|
|
$
|
(1,947,553
|
)
|
Income taxes relating to the Company’s operations are
as follows:
|
|
|
December 31, 2016
|
|
|
|
December 31, 2015
|
|
|
|
December 31, 2014
|
|
Current income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic (UK)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Foreign
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Deferred income taxes
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Domestic
(UK)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Foreign
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Income tax expense/recovery
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes at the UK statutory rate compared to the Company’s
income tax expenses as reported are as follows:
|
|
December 31, 2016
|
|
|
December 31, 2015
(Revised)
|
|
|
December 31, 2014
|
|
Net loss before income tax
|
|
|
(18,140,997
|
)
|
|
|
(45,317,532
|
)
|
|
|
(1,947,553
|
)
|
Statutory rate
|
|
|
20.00
|
%
|
|
|
20.25
|
%
|
|
|
21.50
|
%
|
Expected income tax recovery
|
|
|
(3,628,199
|
)
|
|
|
(9,176,800
|
)
|
|
|
(418,724
|
)
|
Impact on income tax expense/recovery from
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in valuation allowance
|
|
|
1,336,161
|
|
|
|
7,447,002
|
|
|
|
572,139
|
|
Permanent differences – excess consideration
|
|
|
-
|
|
|
|
3,904,864
|
|
|
|
-
|
|
Permanent differences - liability related to options and warrants
|
|
|
(130,061
|
)
|
|
|
(225,748
|
)
|
|
|
-
|
|
Change of tax rate from prior year
|
|
|
80,986
|
|
|
|
15,596
|
|
|
|
-
|
|
Tax rate difference in foreign jurisdictions
|
|
|
2,341,113
|
|
|
|
(1,964,914
|
)
|
|
|
(153,415
|
)
|
Income tax expense
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
AKARI THERAPEUTICS,
Plc
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL
STATEMENTS
December 31, 2016 and 2015
(in U.S. Dollars)
The Company’s deferred tax assets and liabilities consist
of the following:
|
|
December 31, 2016
|
|
|
December 31, 2015 (Revised)
|
|
Deferred tax assets
|
|
|
|
|
|
|
|
|
Stock-based compensation
|
|
|
994,618
|
|
|
|
210,573
|
|
Stock option and warrant revaluation
|
|
|
1,525,594
|
|
|
|
3,181,481
|
|
Tax loss carry forward
|
|
|
13,370,548
|
|
|
|
11,162,545
|
|
Valuation allowance
|
|
|
(15,890,760
|
)
|
|
|
(14,554,599
|
)
|
Deferred tax assets/liabilities
|
|
|
-
|
|
|
|
-
|
|
Pursuant to ASC
740-10-25-3
Income Taxes
, an income tax provision has not been made for UK or additional foreign taxes since the Company
is not generating income nor are expected to in the foreseeable future. The Company expects that future earnings will be reinvested,
but could become subject to additional tax if they were remitted as dividends or were loaned to the Company, or if the Company
should sell or dispose of its stock in the foreign subsidiaries. It is not practical to determine the deferred tax liability, if
any, that might be payable on foreign earnings because if the Company were to repatriate these earnings, the Company believes there
would be various methods available to it, each with different UK tax consequences.
The following changes were made in this Note 11 to correct errors
in prior periods:
|
·
|
At December 31, 2015, the Company’s deferred income tax asset for stock option and warrant revaluation was increased
by $3.1 million, and the valuation allowance for deferred income taxes was increased accordingly.
|
|
·
|
the Company re-allocated the deferred tax assets among its various filing jurisdictions and the
foreign tax rate differential was reduced accordingly.
|
In 2016, as a
result of a transfer pricing adjustment, the Company has re-allocated the deferred tax assets among its various filing jurisdictions.
Due to the different statutory rates in effect in those jurisdictions, the total deferred tax asset has been reduced; however,
because the Company continues to have a full valuation allowance against all of its deferred tax assets, this adjustment did not
have an impact on its financial statements.
The Company’s
operating loss carry forward of all jurisdictions expire according to the following schedule:
|
|
Domestic
|
|
|
Foreign
|
|
2017
|
|
-
|
|
|
-
|
|
2018
|
|
-
|
|
|
-
|
|
2019
|
|
-
|
|
|
-
|
|
2020
|
|
-
|
|
|
-
|
|
2021
|
|
-
|
|
|
-
|
|
Beyond 2021
|
|
|
38,399,914
|
|
|
|
21,785,348
|
|
Total operating loss carry forwards
|
|
|
38,399,914
|
|
|
|
21,785,348
|
|
At December 31, 2016, the Company had
approximately $38.4 million of UK operating loss carryforwards to reduce future UK taxable income. These carryforwards to do not
expire. At December 31, 2016, the Company had approximately $21.8 million of foreign operating loss carryforwards in the US and
Switzerland. The carryforwards in Switzerland expire in seven years.
Research and development credits:
The Company carries out extensive research
and development activities, and may benefit from the UK research and development tax relief regime, whereby the Company can receive
an enhanced UK tax deduction on its research and development activities. Where the Company is loss making for the period it can
elect to surrender taxable losses for a refundable tax credit. The losses available to surrender are equal to the lower of the
sum of the research and development qualifying expenditure and enhanced tax deduction and the Company’s taxable losses for
the period with the tax credit for December 31, 2016 available at a rate of 14.5%. The credit therefore gives a cash flow advantage
to Company’s at a lower rate than would be available if the enhanced losses were carried forward and relieved against future
taxable profits.
Qualifying expenditures comprise of chemistry
and manufacturing consumables, employment costs for research staff, clinical trials management and other subcontracted research
expenditures.
AKARI THERAPEUTICS,
Plc
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL
STATEMENTS
December 31, 2016 and 2015
(in U.S. Dollars)
In August 2016, the Company
filed a credit claim for 2015 tax year. The credit claim was in the amount of approximately $578,000 for the year ended December
31, 2015 and was received in September 2016 and was recorded as a credit to research and development costs in the Combined and
Consolidated Statements of Comprehensive Loss. Due to the uncertainty of the approval of these tax credit claims and the potential
that an election for a tax credit in the form of cash is not made, the Company did not a record a related receivable at December
31, 2016.
NOTE 12 – Segment Information
|
The chief operating decision
maker (“CODM”) is the Company’s CEO. Neither the CODM nor the Company’s directors receive disaggregated
financial information about the locations in which research and development is occurring. Therefore, the Company considers that
it has only one reporting segment.
The following table presents
the Company’s tangible fixed assets by geographic region:
|
|
December 31,
2015
|
|
|
December 31,
2015
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
28,849
|
|
|
$
|
32,373
|
|
United Kingdom
|
|
|
29,515
|
|
|
|
8,140
|
|
Total
|
|
$
|
58,364
|
|
|
$
|
40,513
|
|
|
NOTE 13 – Subsequent Events
|
The
Company has evaluated events up to the filing date of these financial statements and determined that no subsequent event activity
required disclosure.