Indicate 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.
Indicate by check mark if the registrant
is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒
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. Yes ☐ No ☒
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. Yes ☒ No ☐
Indicate by check mark whether the registrant
has submitted electronically every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation
S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes
☒ No ☐
Indicate by check mark whether the registrant
is a large accelerated filer, an accelerated filer, a non-accelerated filer, or an emerging growth company. See definition of “large
accelerated filer,” accelerated filer,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
If an emerging growth company that prepares
its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended
transition period for complying with any new or revised financial accounting standards+ provided pursuant to Section
13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant
has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial
reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared
or issued its audit report. ☐
Indicate by check mark which basis of accounting the registrant
has used to prepare the financial statements included in this filing:
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). Yes ☐ No ☒
Unless the context otherwise requires, in this annual
report on Form 20-F references to:
Discrepancies in any
table between the amounts identified as total amounts and the sum of the amounts listed therein are due to rounding.
This annual report
on Form 20-F includes our audited consolidated balance sheets (successor basis) as of December 31, 2019 and 2018, the related
consolidated statements (successor basis) of operations and comprehensive loss, equity and cash flows for the years ended December
31, 2019 and 2018, and the period March 1, 2017 through December 31, 2017, the statements (predecessor basis) of operations, changes
in net assets, and cash flows for the period January 1, 2017 through February 28, 2017, and the related notes to consolidated
financial statements.
Our operations and
equity are funded in U.S. dollars and we currently incur the majority of our expenses in U.S. dollars or in H.K. dollars. H.K.
dollar is currently pegged to the U.S. dollar; however, we cannot guarantee that such peg will continue to be in place in the future.
Our exposure to foreign exchange risk primarily relates to the limited cash denominated in currencies other than the functional
currencies of each entity and limited revenue contracts dominated in H.K. dollars in certain PRC operating entities. We do not
believe that we currently have any significant direct foreign exchange risk and have not hedged exposures denominated in foreign
currencies or any other derivative financial instruments.
Part I
Item 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
Not Applicable.
Item 2. OFFER STATISTICS AND EXPECTED TIMETABLE
Not Applicable.
Item 3. KEY INFORMATION
A. Selected Financial Data
The following
summary consolidated balance sheets (successor basis) as of December 31, 2019 and 2018, consolidated statements of operations
and comprehensive loss (successor basis) for the years ended December 31, 2019 and 2018, and the period March 1, 2017 through
December 31, 2017, as well as the statement of operations (predecessor basis) for the period January 1, 2017 through February
28, 2017, have been derived from our audited consolidated financial statements included elsewhere in this annual report. The
following summary consolidated balance sheet (successor basis) as of December 31, 2017 have been derived from our audited
consolidated financial statements which are not included in this annual report.
You should not view
our historical results as an indicator of our future performance.
The following table presents our summary consolidated statements
of operations and comprehensive loss (successor basis) for the years ended December 31, 2019 and 2018, and the period March 1,
2017 through December 31, 2017.
Selected Consolidated Statements of Operations
and Comprehensive Loss (Successor Basis)
(In U.S. Dollars, except number of shares)
|
|
Year Ended
December 31,
2019
|
|
|
Year Ended
December 31,
2018
|
|
|
March 1,
2017
through
December 31,
2017
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
Healthcare service income
|
|
$
|
535,166
|
|
|
$
|
383,450
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of healthcare service
|
|
|
(794,545
|
)
|
|
|
(318,011
|
)
|
|
|
-
|
|
Research and development expenses
|
|
|
(6,939,051
|
)
|
|
|
(3,101,432
|
)
|
|
|
(2,560,323
|
)
|
General and administrative fees
|
|
|
(7,373,425
|
)
|
|
|
(4,919,626
|
)
|
|
|
(1,480,093
|
)
|
Legal and professional fees
|
|
|
(3,405,705
|
)
|
|
|
(1,811,770
|
)
|
|
|
(1,395,490
|
)
|
Other operating expenses
|
|
|
(220,891
|
)
|
|
|
(560,709
|
)
|
|
|
(257,177
|
)
|
Total expenses
|
|
|
(18,733,617
|
)
|
|
|
(10,711,548
|
)
|
|
|
(5,693,083
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other (loss) income
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) gain on investments in marketable securities, net
|
|
|
(81,839
|
)
|
|
|
501,522
|
|
|
|
3,912,500
|
|
Gain on non-marketable investments
|
|
|
1,147,190
|
|
|
|
-
|
|
|
|
-
|
|
Gain (loss) on investments in derivatives, net
|
|
|
87,599
|
|
|
|
(974,444
|
)
|
|
|
(827,501
|
)
|
Gain on use of digital currencies
|
|
|
46,717
|
|
|
|
-
|
|
|
|
-
|
|
Gain on extinguishment of convertible debts
|
|
|
1,198,490
|
|
|
|
-
|
|
|
|
-
|
|
Changes in fair value of warrant liabilities
|
|
|
(866,300
|
)
|
|
|
124,726
|
|
|
|
-
|
|
Interest (expense) income, net
|
|
|
(3,699,672
|
)
|
|
|
(4,458,191
|
)
|
|
|
44,269
|
|
Rental income
|
|
|
16,868
|
|
|
|
-
|
|
|
|
-
|
|
Dividend income
|
|
|
-
|
|
|
|
-
|
|
|
|
2,308
|
|
Sundry income
|
|
|
232,460
|
|
|
|
-
|
|
|
|
-
|
|
Total other (loss) income, net
|
|
|
(1,918,487
|
)
|
|
|
(4,806,387
|
)
|
|
|
3,131,576
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(20,116,938
|
)
|
|
|
(15,134,485
|
)
|
|
|
(2,561,507
|
)
|
Less: net loss attributable to non-controlling interests
|
|
|
(1,430,176
|
)
|
|
|
(302,762
|
)
|
|
|
(14,045
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to Aptorum Group Limited
|
|
$
|
(18,686,762
|
)
|
|
$
|
(14,831,723
|
)
|
|
$
|
(2,547,462
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share – basic and diluted*
|
|
$
|
(0.64
|
)
|
|
$
|
(0.53
|
)
|
|
$
|
(0.09
|
)
|
Weighted-average shares outstanding – basic and diluted
|
|
|
29,008,445
|
|
|
|
27,909,788
|
|
|
|
26,963,435
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(20,116,938
|
)
|
|
$
|
(15,134,485
|
)
|
|
$
|
(2,561,507
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized loss on investments in available-for-sale securities
|
|
|
-
|
|
|
|
(1,122,251
|
)
|
|
|
(367,782
|
)
|
Exchange differences on translation of foreign operations
|
|
|
(10,897
|
)
|
|
|
5,345
|
|
|
|
-
|
|
Other Comprehensive loss
|
|
|
(10,897
|
)
|
|
|
(1,116,906
|
)
|
|
|
(367,782
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
|
(20,127,835
|
)
|
|
|
(16,251,391
|
)
|
|
|
(2,929,289
|
)
|
Less: comprehensive loss attributable to non-controlling interests
|
|
|
(1,430,176
|
)
|
|
|
(302,762
|
)
|
|
|
(14,045
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss attributable to the shareholders of Aptorum Group Limited
|
|
|
(18,697,659
|
)
|
|
|
(15,948,629
|
)
|
|
|
(2,915,244
|
)
|
|
*
|
The
shares and per share data are presented at a weighted average basis to reflect the nominal share issuance.
|
The following table
presents our summary statements of operations (predecessor basis) for the period January 1, 2017 through February 28, 2017.
Selected Statement of
Operations (Predecessor Basis)
(In U.S. Dollars)
|
|
January 1,
2017
through
February 28,
2017
|
|
Investment income:
|
|
|
|
Interest income
|
|
$
|
3,011
|
|
Total investment income
|
|
|
3,011
|
|
Expenses
|
|
|
|
|
General and administrative fees
|
|
|
17,516
|
|
Management fees
|
|
|
108,958
|
|
Legal and professional fees
|
|
|
98,646
|
|
Other operating expenses
|
|
|
1,907
|
|
Total expenses
|
|
|
227,027
|
|
Net investment loss
|
|
$
|
(224,016
|
)
|
|
|
|
|
|
Realized and unrealized losses
|
|
|
|
|
Net realized losses on investments in unaffiliated issuers
|
|
$
|
(15,327
|
)
|
Net change in unrealized depreciation on investments
|
|
|
(386,741
|
)
|
Net realized and unrealized losses
|
|
|
(402,068
|
)
|
|
|
|
|
|
Net decrease in net assets resulting from operations
|
|
$
|
(626,084
|
)
|
The following table presents our summary consolidated balance
sheets (successor basis) as of December 31, 2019, 2018 and 2017.
|
|
As of
December 31,
2019
|
|
|
As of
December 31,
2018
|
|
|
As of
December 31,
2017
|
|
|
|
|
|
|
|
|
|
|
|
Cash and restricted cash
|
|
$
|
5,293,173
|
|
|
$
|
26,107,238
|
|
|
$
|
16,725,807
|
|
Total current assets
|
|
|
8,032,881
|
|
|
|
28,722,941
|
|
|
|
20,283,399
|
|
Total assets
|
|
|
23,954,218
|
|
|
|
45,074,640
|
|
|
|
31,559,982
|
|
Total current liabilities
|
|
|
2,674,675
|
|
|
|
12,184,865
|
|
|
|
1,330,734
|
|
Total liabilities
|
|
|
9,102,466
|
|
|
|
12,328,738
|
|
|
|
1,330,734
|
|
Total equity attributable to the shareholders of Aptorum Group Limited
|
|
|
16,361,208
|
|
|
|
33,114,435
|
|
|
|
30,243,293
|
|
Non-controlling interests
|
|
|
(1,509,456
|
)
|
|
|
(368,533
|
)
|
|
|
(14,045
|
)
|
Total equity
|
|
|
14,851,752
|
|
|
|
32,745,902
|
|
|
|
30,229,248
|
|
Total liabilities and equity
|
|
$
|
23,954,218
|
|
|
$
|
45,074,640
|
|
|
$
|
31,559,982
|
|
Exchange Rate Information
Our operations and
equity are funded in U.S. dollars and we currently incur the majority of our expenses in U.S. dollars or in H.K. dollars. H.K.
dollar is currently pegged to the U.S. dollar; however, we cannot guarantee that such peg will continue to be in place in the future.
If we are exposed to
foreign currency exchange risk as our results of operations, cash flows maybe subject to fluctuations in foreign currency exchange
rates. For example, if a significant portion of our clinical trial activities may be conducted outside of the United States, and
associated costs may be incurred in the local currency of the country in which the trial is being conducted, which costs could
be subject to fluctuations in currency exchange rates. We currently do not engage in hedging transactions to protect against uncertainty
in future exchange rates between particular foreign currencies and the U.S. dollar. A decline in the value of the U.S. dollar against
currencies in countries in which we conduct clinical trials could have a negative impact on our research and development costs.
Foreign currency fluctuations are unpredictable and may adversely affect our financial condition, results of operations and cash
flows.
The following table
sets forth information concerning exchange rates between the H.K. dollar and the United States dollar for the periods indicated.
|
|
Period
Ended
December 31,
(1)
|
|
|
Average
(2)
|
|
2016
|
|
|
7.7534
|
|
|
|
7.7618
|
|
2017
|
|
|
7.8128
|
|
|
|
7.7950
|
|
2018
|
|
|
7.8305
|
|
|
|
7.8376
|
|
2019
|
|
|
7.7894
|
|
|
|
7.8335
|
|
2020 (through April 24, 2020)
|
|
|
7.7506
|
|
|
|
7.7653
|
|
January, 2019
|
|
|
7.8463
|
|
|
|
7.8411
|
|
February, 2019
|
|
|
7.8496
|
|
|
|
7.8477
|
|
March, 2019
|
|
|
7.8498
|
|
|
|
7.8492
|
|
April, 2019
|
|
|
7.8451
|
|
|
|
7.8445
|
|
May, 2019
|
|
|
7.8387
|
|
|
|
7.8478
|
|
June, 2019
|
|
|
7.8103
|
|
|
|
7.8260
|
|
July, 2019
|
|
|
7.8275
|
|
|
|
7.8133
|
|
August, 2019
|
|
|
7.8403
|
|
|
|
7.8420
|
|
September, 2019
|
|
|
7.8401
|
|
|
|
7.8350
|
|
October, 2019
|
|
|
7.8376
|
|
|
|
7.8421
|
|
November, 2019
|
|
|
7.8267
|
|
|
|
7.8279
|
|
December, 2019
|
|
|
7.7894
|
|
|
|
7.8045
|
|
January, 2020
|
|
|
7.7665
|
|
|
|
7.7725
|
|
February, 2020
|
|
|
7.7927
|
|
|
|
7.7757
|
|
March, 2020
|
|
|
7.7513
|
|
|
|
7.7651
|
|
April, 2020
|
|
|
7.7506
|
|
|
|
7.7514
|
|
|
(1)
|
The exchange rates reflect the noon buying rate in effect in
New York City for cable transfers of H.K. dollar.
|
|
(2)
|
Annual
averages are calculated from month-end rates. Monthly averages are calculated using the average of the daily rates during the
relevant period.
|
B. Capitalization
and Indebtedness
Not applicable.
C. Reasons for the Offer and Use of Proceeds
Not applicable.
D. Risk Factors
Risks Related to the Preclinical and
Clinical Development of Our Drug Candidates
We currently do not generate revenue
from product sales and may never become profitable; unless we can raise more capital through additional financings, of which there
can be no guarantee, our principal source of revenue will be from AML Clinic, which may not be substantial.
Our ability to generate revenue and become
profitable depends upon our ability to successfully complete the development of, and obtain the necessary regulatory approvals
for, the drug candidates in our Lead Projects and any future drug candidates we may develop, as we do not currently have any drugs
that are available for commercial sale. We expect to continue to incur losses before commercialization of our drug candidates and
any future drug candidates. None of our drug candidates has been approved for marketing in the U.S., Europe, the PRC or any other
jurisdictions and may never receive such approval. Our ability to generate revenue and achieve profitability is dependent on our
ability to complete the development of our drug candidates and any future drug candidates we develop in our portfolio, obtain necessary
regulatory approvals, and have our drugs products under development manufactured and successfully marketed, of which there can
be no guarantee. Although AML Clinic commenced operations in June 2018 and we expect to receive some revenue from such operations,
even at full capacity, AML Clinic may not bring enough revenue to support our operation and R&D. Thus, we may not be able to
generate a profit until our drug candidates become profitable.
Even if we receive regulatory approval
and marketing authorization for one or more of our drug candidates or one or more of any future drug candidates for commercial
sale, a potential product may not generate revenue at all unless we are successful in:
|
●
|
developing a sustainable and scalable manufacturing process for our drug candidates and any approved products, including establishing and maintaining commercially viable supply relationships with third parties;
|
|
|
|
|
●
|
launching and commercializing drug candidates following regulatory approvals and marketing authorizations, either directly or with a collaborator or distributor;
|
|
|
|
|
●
|
obtaining market acceptance of our drug candidates as viable treatment options;
|
|
●
|
addressing any competing technological and market developments;
|
|
|
|
|
●
|
negotiating and maintaining favorable terms in any collaboration, licensing or other arrangement into which we may enter to commercialize drug candidates for which we have obtained required approvals and marketing authorizations; and
|
|
|
|
|
●
|
maintaining, protecting and expanding our portfolio of IP rights, including patents, trade secrets and know-how.
|
In addition, our ability to achieve and
maintain profitability depends on timing and the amount of expenses we will incur. Our expenses could increase materially if we
are required by the FDA, NMPA, EMA or other comparable regulatory authorities to perform studies in addition to those that we currently
have anticipated. Even if our drug candidates are approved for commercial sale, we anticipate incurring significant costs associated
with the commercial launch of these products.
Our ability to become and remain profitable
depends on our ability to generate revenue. Even if we are able to generate revenues from AML Clinic or the sale or sublicense
of any products we may develop or license, we may not become profitable on a sustainable basis or at all. Our failure to become
and remain profitable would decrease the value of our Company and adversely affect the market price of our Class A Ordinary Shares,
which could impair our ability to raise capital, expand our business or continue our operations.
AML Clinic’s operations may
be our principal source of revenue for the foreseeable future and most likely, without additional financing, such revenue will
not be sufficient for us to carry out all of our plans.
As stated above, we have not generated
any revenue and do not foresee generating any revenue from our drug candidates in the near future. Effective as of March 2018,
we leased the property in Central, Hong Kong that is the home to AML Clinic, which commenced operations in June 2018.
Until our therapeutic candidates produce
revenue, our principal source of revenue shall be from AML Clinic, but we cannot guarantee that it will provide the expected revenue,
and even if expected revenue is realized, it will not be sufficient by itself to fund our other operations. We believe that available
cash, together with the efforts from management plans and actions described elsewhere in this report, should enable the Company
to meet presently anticipated cash needs for at least the next 12 months after the date that the financial statements are issued
and the Company has prepared the consolidated financial statements on a going concern basis. However, the Company continues to
have ongoing obligations and it expects that it will require additional capital in order to execute its longer-term development
plan. If the Company encounters unforeseen circumstances that place constraints on its capital resources, management will be required
to take various measures to conserve liquidity, which could include, but not necessarily be limited to, deferring some of its research
and seeking to dispose of marketable securities. Management cannot provide any assurance that the Company will raise additional
capital if needed.
We depend substantially on the success
of the drug candidates being researched as our current Lead Projects, which are in the preclinical stage of development. The preclinical
development, IND-enabling, and clinical trials of our drug candidates may not be successful. If we are unable to license or sublicense,
sell or otherwise commercialize our drug candidates, or experience significant delays in doing so, our business will be materially
harmed.
Our business and the ability to generate
revenue related to product sales, if ever achieved, will depend on the successful development, regulatory approval and licensing
or sublicensing or other commercialization of our drug candidates or any other drug candidates we may develop. We have invested
a significant amount of financial resources in the development of our drug candidates and we expect to invest in other drug candidates.
The success of our drug candidates and any other potential drug candidates will depend on many factors, including but not limited
to:
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successful enrollment in, and completion of, studies in animals and clinical trials;
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other parties’ ability in conducting our clinical trials safely, efficiently and according to the agreed protocol;
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receipt of regulatory approvals from the FDA, NMPA, EMA and other comparable regulatory authorities for our drug candidates;
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our ability to establish commercial manufacturing capabilities by making arrangements with third-party manufacturers;
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reliance on other parties to conduct our clinical trials swiftly and effectively;
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launch of commercial sales of our drug candidates, if and when approved;
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obtaining and maintaining patents, trade secrets and other IP protection and regulatory exclusivity, as well as protecting our rights in our own IP;
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ensuring that we do not infringe, misappropriate or otherwise violate patents, trade secrets or other IP rights of other parties;
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obtaining acceptance of our drug candidates by doctors and patients;
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obtaining reimbursement from third-party payors for our drug candidates, if and when approved;
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our ability to compete with other drug candidates and drugs; and
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maintenance of an acceptable safety profile for our drug candidates following regulatory approval, if and when received.
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We may not achieve regulatory approval
and commercialization in a timely manner or at all. Significant delays in obtaining approval for and/or to successfully commercialize
our drug candidates would materially harm our business and we may not be able to generate sufficient revenues and cash flows to
continue our operations.
Preclinical
development is a long, expensive and uncertain process, and we may terminate one or more of our current preclinical development
programs.
Traditionally,
drug discovery and development is a time-consuming, costly and high-risk business. On average, the cost of launching a new drug
is estimated to approach US$2.6 billion and can take around 12 years to make it to the market (4 key benefits of drug repositioning.
(n.d.). Retrieved from http://www.totalbiopharma.com/2012/07/04/4-key-benefits-drug-repositioning/). Despite the huge expenditures,
only approximately 1 in 1,000 potential drugs is graduated to human clinical trials after pre-clinical testing in the United States,
(Norman, G. A. Drugs, Devices, and the FDA: Part 1. JACC: Basic to Translational Science, 1(3), 170-179, 2016) and nearly 86.2%
of drug candidates entering phase 1 trials fails to achieve drug approval. (Wong C. H., Siah K. W. & Lo A. W. (2019, April),
“Estimation of clinical trial success rates and related parameters,” retrieved from https://academic.oup.com/biostatistics/article/20/2/273/4817524).
Even after a drug is commercialized, there are just too many factors affecting the sales of pharmaceutical products, including
unmet need/burden of disease (68.2%), clinical efficacy (47.3%), comparator choice (36.4%), safety profile (36.4%), and price (35.5%)
(Sendyona, S., Odeyemi, I., & Maman, K. “Perceptions and factors affecting pharmaceutical market access: Results from
a literature review and survey of stakeholders in different settings” Journal of Market Access & Health Policy, 4(1),
31660, 2016). In the end, on average, only 20% of approved new drugs generate revenues that exceed the average R&D investment.
(Rosenblatt, M. (2014, December 19) “The Real Cost of “High-Priced” Drugs,” retrieved from https://hbr.org/2014/11/the-real-cost-of-high-priced-drugs).
We may determine that certain preclinical product candidates or programs do not have sufficient potential to warrant the allocation
of resources toward them. Accordingly, we may elect to terminate our programs for and, in certain cases, our licenses to, such
product candidates or programs. If we terminate a preclinical program in which we have invested significant resources, we will
have expended resources on a program that will not provide a full return on our investment and missed the opportunity to have allocated
those resources to potentially more productive uses.
Management has discretion to terminate the development
of any of our projects at any time.
In light of the costs, both in time and
expense, as well as the preclinical results and general business considerations, management may decide not to continue developing
a particular preclinical program without announcement. Management will always base its decision on what it believes to be the most
efficient use of the Company’s resources to provide the most value to its shareholders. As a result, investors may not always
be aware of the termination of a previously announced study or trial. The Company will continue to provide update on its active
preclinical projects in its SEC filings and/or press releases, as appropriate.
We may not
be successful in our efforts to identify or discover additional drug candidates. Due to our limited resources and access to capital,
we must continue to prioritize development of certain drug candidates; such decisions may prove to be wrong and may adversely affect
our business.
Although we intend to explore other therapeutic
opportunities in addition to the drug candidates that we are currently developing, we may fail to identify other drug candidates
for a number of reasons. For example, our research methodology may be unsuccessful in identifying potential drug candidates or
those we identify may be shown to have harmful side effects or other undesirable characteristics that make them unmarketable or
unlikely to receive regulatory approval.
Research programs to pursue the development
of our drug candidates for additional indications and to identify new drug candidates and disease targets require substantial technical,
financial and human resources whether or not we ultimately are successful. Our research programs may initially show promise in
identifying potential indications and/or drug candidates, yet fail to yield results for clinical development for a number of reasons,
including but not limited to:
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the research methodology used may not be successful in identifying potential indications and/or drug candidates;
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potential drug candidates may, after further study, be shown to have harmful adverse effects or other characteristics that indicate they are unlikely to be effective drugs; or
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it may take greater human and financial resources to identify additional therapeutic opportunities for our drug candidates or to develop suitable potential drug candidates through internal research programs than we will possess, thereby limiting our ability to diversify and expand our drug portfolio.
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Because we have limited financial and managerial
resources, we have chosen to focus at present on our two Lead Projects, which may ultimately prove to be unsuccessful. As a result
of this focus, we may forego or delay pursuit of opportunities with other drug candidates, or for other indications that later
prove to have greater commercial potential or a greater likelihood of success. Even if we determine to pursue alternative therapeutic
or diagnostic drug candidates, these other drug candidates or other potential programs may ultimately prove to be unsuccessful.
In short, our resource allocation decisions may cause us to fail to capitalize on viable commercial products or profitable market
opportunities.
Accordingly, there can be no assurance
that we will ever be able to develop suitable potential drug candidates through internal research programs. This could materially
adversely affect our future growth and prospects.
If we encounter difficulties enrolling
patients in our clinical trials, our clinical development activities could be delayed or otherwise adversely affected.
While we have not commenced any clinical
trials and do not expect to start our first clinical trials until at least 2020 or 2021, assuming we obtain approval to do so from
at least one regulatory authority, of which there can be no assurance, timely completion of clinical trials in accordance with
their protocols depends, among other things, on our ability to enroll a sufficient number of patients who meet the trial criteria
and remain in the trial until its conclusion. We may experience difficulties enrolling and retaining appropriate patients in our
clinical trials for a variety of reasons, including but not limited to:
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the size and nature of the patient population;
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patient eligibility criteria defined in the clinical protocol;
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the size of study population required for statistical analysis of the trial’s primary endpoints;
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the proximity of patients to trial sites;
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the design of the trial and changes to the design of the trial;
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our ability to recruit clinical trial investigators with the appropriate competencies and experience;
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competing clinical trials for similar therapies or other new therapeutics exist and will reduce the number and types of patients available to us;
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clinicians’ and patients’ perceptions as to the potential advantages and side effects of the drug candidate being studied in relation to other available therapies, including any new drugs or treatments that may be approved for the indications we are investigating;
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our ability to obtain and maintain patient consents;
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patients enrolled in clinical trials may not complete a clinical trial; and
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the availability of approved therapies that are similar to our drug candidates.
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Even if we are able to enroll a sufficient
number of patients in our clinical trials, delays in patient enrollment may result in increased costs or may affect the timing
or outcome of the planned clinical trials, which could prevent completion of these trials and adversely affect our ability to advance
the development of our drug candidates.
Clinical drug development involves
a lengthy and expensive process and could fail at any stage of the process. We have limited experience in conducting clinical trials
and results of earlier studies and trials may not be reproduced in future clinical trials.
For our drug candidates, clinical testing
is expensive and can take many years to complete, while failure can occur at any time during the clinical trial process. The results
of studies in animals and early clinical trials of our drug candidates may not predict the results of later-stage clinical trials.
Drug candidates in later stages of clinical trials may fail to show the desired safety and efficacy traits despite having progressed
through studies in animals and initial clinical trials. In some instances, there can be significant variability in safety and/or
efficacy results between different trials of the same drug candidate due to numerous factors, including changes in trial procedures
set forth in protocols, differences in the size and type of the patient populations (including genetic differences), patient adherence
to the dosing regimen and the patient dropout rate. Results in later trials may also differ from earlier trials due to a larger
number of clinical trial sites and additional countries and languages involved in such trials. In addition, the design of a clinical
trial can determine whether its results will support approval of a drug candidate, and flaws in the design of a clinical trial
may not become apparent until the clinical trial is well advanced and significant expense has been incurred.
A number of companies in the pharmaceutical
and biotechnology industries have suffered significant setbacks in advanced clinical trials due to lack of demonstrated efficacy
or adverse safety profiles, notwithstanding promising results in earlier trials. Clinical trials of potential products often reveal
that it is not practical or feasible to continue development efforts. Furthermore, if the trials we conduct fail to meet their
primary statistical and clinical endpoints, they will not support the approval from the FDA, NMPA, EMA or other comparable regulatory
authorities for our drug candidates. If this occurs, we would need to replace the failed study with new trials, which would require
significant additional expense, cause substantial delays in commercialization and materially adversely affect our business, financial
condition, cash flows and results of operations. (See “We are subject to risks related to the carrying out and outcome of
clinical trials of medical devices”)
If clinical trials of our drug candidates
fail to demonstrate safety and efficacy to the satisfaction of the FDA, NMPA, EMA or other comparable regulatory authorities, or
do not otherwise produce positive results, we may incur additional costs or experience delays in completing, or ultimately be unable
to complete, the development and commercialization of our drug candidates.
Before applying for and obtaining regulatory
approval for the sale of any of our drug candidates, we must conduct extensive clinical trials to demonstrate the safety and efficacy
of our drug candidates in humans. Clinical testing is expensive, difficult to design and implement, can take many years to complete
and may fail. A failure of one or more of our clinical trials can occur at any stage of testing and successful interim results
of a clinical trial do not necessarily predict successful final results.
We and our CROs are required to comply
with current Good Clinical Practices (“cGCP”) requirements, which are regulations and guidelines enforced by the FDA,
NMPA, EMA and other comparable regulatory authorities for all drugs in clinical development. Regulatory authorities enforce these
cGCP through periodic inspections of trial sponsors, principal investigators and trial sites. Compliance with cGCP can be costly
and if we or any of our CROs fail to comply with applicable cGCP, the clinical data generated in our clinical trials may be deemed
unreliable and the FDA, NMPA, EMA or comparable regulatory authorities may require us to perform additional clinical trials before
approving our marketing applications.
We may experience numerous unexpected events
during, or as a result of, clinical trials that could delay or prevent our ability to receive regulatory approval or commercialize
our drug candidates, including but not limited to:
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regulators, institutional review boards (“IRBs”) or ethics committees may not authorize us or our investigators to commence a clinical trial or conduct a clinical trial at a prospective trial site;
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clinical trials of our drug candidates may produce negative or inconclusive results, and we may decide, or regulators may require us, to conduct additional clinical trials or abandon drug development programs;
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the number of patients required for clinical trials of our drug candidates may be larger than we anticipate, enrollment may be insufficient or slower than we anticipate or patients may drop out at a higher rate than we anticipate;
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our contractors and investigators may fail to comply with regulatory requirements or meet their contractual obligations to us in a timely manner, or at all;
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we might have to suspend or terminate clinical trials of our drug candidates for various reasons, including a lack of clinical response or a determination that participants are being exposed to unacceptable health risks;
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regulators, IRBs or ethics committees may require that we or our investigators suspend or terminate clinical research for various reasons, including non-compliance with regulatory requirements;
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the cost of clinical trials of our drug candidates may be greater than we anticipate;
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the supply or quality of our drug candidates or other materials necessary to conduct clinical trials of our drug candidates may be insufficient or inadequate; and
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our drug candidates may cause adverse events, have undesirable side effects or other unexpected characteristics, causing us, our investigators, or regulators to suspend or terminate the trials.
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If we are required to conduct additional
clinical trials or other testing of our drug candidates beyond those that we currently contemplate, if we are unable to successfully
complete clinical trials of our drug candidates or other testing, if the results of these trials or tests are not positive or are
only modestly positive or if they raise safety concerns, we may:
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be delayed in obtaining regulatory approval for our drug candidates;
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not obtain regulatory approval at all;
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obtain approval for indications that are not as broad as intended;
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have a drug removed from the market after obtaining regulatory approval;
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be subject to additional post-marketing testing requirements;
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be subject to restrictions on how a drug is distributed or used; or
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be unable to obtain reimbursement for use of a drug.
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Delays in testing or approvals may result
in increases in our drug development costs. We do not know whether any clinical trials will begin as planned, will need to be restructured,
or will be completed on schedule, or at all. Clinical trials may produce negative or inconclusive results. Moreover, these trials
may be delayed or proceed less quickly than intended. Delays in completing our clinical trials will increase our costs, slow down
our drug candidate development and approval process, and jeopardize our ability to commence product sales and generate revenues
and we may not have sufficient funding to complete the testing and approval process. Any of these events may significantly harm
our business, financial condition and prospects, lead to the denial of regulatory approval of our drug candidates or allow our
competitors to bring drugs to market before we do, impairing our ability to commercialize our drugs if and when approved.
Significant clinical trial delays also
could shorten any periods during which we have the exclusive right to commercialize our drug candidates or allow our competitors
to bring products to market before we do, impair our ability to commercialize our drug candidates and may harm our business and
results of operations.
We may in the future conduct clinical
trials for our drug candidates in sites outside the U.S. and the FDA may not accept data from trials conducted in such locations.
We may in the future conduct certain of
our clinical trials outside the U.S. Although the FDA may accept data from clinical trials conducted outside the U.S. for our New
Drug Application (“NDA”), acceptance of this data is subject to certain conditions imposed by the FDA. There can be
no assurance the FDA will accept data from any of the clinical trials we conduct outside the U.S. If the FDA does not accept the
data from any of our clinical trials conducted outside the U.S., it would likely result in the need for additional clinical trials
in the U.S., which would be costly and time-consuming and could delay or prevent the commercialization of any of our drug candidates.
Risks Related to Obtaining Regulatory
Approval for Our Drug Candidates
The regulatory approval processes
of the FDA, NMPA, EMA and other comparable regulatory authorities are lengthy, time-consuming and inherently unpredictable, and
if we are ultimately unable to obtain regulatory approval for our current drug candidates or any future drug candidates we may
develop, our business will be substantially harmed.
We cannot commercialize drug candidates
without first obtaining regulatory approval to market each drug from the FDA, NMPA, EMA or comparable regulatory authorities. Before
obtaining regulatory approvals for the commercial sale of any drug candidate for a target indication, we must demonstrate in studies
in animals and well-controlled clinical trials, and, with respect to approval in the United States and other regulatory agencies,
to the satisfaction of the FDA, NMPA, EMA or comparable regulatory authorities, that the drug candidate is safe and effective for
use for that target indication and that the manufacturing facilities, processes and controls are adequate.
The time required to obtain approval from
the FDA, NMPA, EMA and other comparable regulatory authorities is unpredictable but typically takes many years following the commencement
of studies in animals and clinical trials and depends upon numerous factors, including the substantial discretion of the regulatory
authorities.
In addition, approval policies, regulations
or the type and amount of clinical data necessary to gain approval can differ among regulatory authorities and may change during
the course of the development of a drug candidate. We have not obtained regulatory approval for any drug candidate. It is possible
that neither our existing drug candidates nor any drug candidates we may discover or acquire for development in the future will
ever obtain regulatory approval. Even if we obtain regulatory approval in one jurisdiction, we may not obtain it in other jurisdictions.
Our drug candidates could fail to receive
regulatory approval from any of the FDA, NMPA, EMA or other comparable regulatory authorities for many reasons, including but not
limited to:
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disagreement with regulators regarding the design or implementation of our clinical trials;
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failure to demonstrate that a drug candidate is safe and effective or safe, pure and potent for its proposed indication;
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failure of clinical trial results to meet the level of statistical significance required for approval;
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failure to demonstrate that a drug candidate’s clinical and other benefits outweigh its safety risks;
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disagreement with regulators regarding our interpretation of data from studies in animals or clinical trials;
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insufficiency of data collected from clinical trials of our drug candidates to support the submission and filing of a New Drug Application (“NDA”), or other submission or to obtain marketing approval;
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the FDA, NMPA, EMA or a comparable regulatory authority’s finding of deficiencies related to the manufacturing processes or facilities of third-party manufacturers with whom we contract for clinical and commercial supplies; and
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changes in approval policies or regulations that render our preclinical studies and clinical data insufficient for approval.
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Any of the FDA, NMPA, EMA or other comparable
regulatory authorities may require more information, including additional preclinical studies or clinical data, to support approval,
which may delay or prevent approval and our commercialization plans, or we may decide to abandon the development program. If we
were to obtain approval, regulatory authorities may approve any of our drug candidates for fewer or more limited indications than
we request. Regulatory authorities also may grant approval contingent on the performance of costly post-marketing clinical trials,
or may approve a drug candidate with a label that is not desirable for the successful commercialization of that drug candidate.
In addition, if our drug candidate produces undesirable side effects or involves other safety issues, the FDA may require the establishment
of a Risk Evaluation Mitigation Strategy (“REMS”), or NMPA, EMA or other comparable regulatory authorities may require
the establishment of a similar strategy. Such a strategy may, for instance, restrict distribution of our drug candidates, require
patient or physician education, or impose other burdensome implementation requirements on us.
Regulatory approval may be substantially
delayed or may not be obtained for one or all of our drug candidates if regulatory authorities require additional time or studies
to assess the safety or efficacy of our drug candidates.
We currently do not have any drug candidates
that have gained approval for sale by the FDA, NMPA or EMA or other regulatory authorities in any other country, and we cannot
guarantee that we will ever have marketable drugs. Our business is substantially dependent on our ability to complete the development
of, obtain marketing approval for and successfully commercialize drug candidates in a timely manner. We cannot commercialize drug
candidates without first obtaining marketing approval from the FDA, NMPA, EMA and comparable regulatory authorities. In the U.S.,
we hope to file INDs for the drug candidates from our Lead Projects and, subject to the approval of IND, Phase 1 clinical trials
in humans. Even if we are permitted to commence such clinical trials, they may not be successful and regulators may not agree with
our conclusions regarding the data generated by our clinical trials.
We may be unable to complete development
of our drug candidates or initiate or complete development of any future drug candidates we may develop on our projected schedule.
While we believe that our existing cash will likely enable us to complete the preclinical development of at least one of our current
Lead Projects, even assuming we can complete such preclinical studies for any drug candidate by 2021, the full clinical development,
manufacturing and launch of that drug candidate, will take significant additional time and likely require funding beyond the existing
cash. In addition, if regulatory authorities require additional time or studies to assess the safety or efficacy of our drug candidates,
we may not have or be able to obtain adequate funding to complete the necessary steps for approval for our drug candidates or any
future drug candidates.
Preclinical studies in animals and clinical
trials in humans to demonstrate the safety and efficacy of our drug candidates are time-consuming, expensive and take several years
or more to complete. Delays in preclinical or clinical trials, regulatory approvals or rejections of applications for regulatory
approval in the U.S., Europe, the PRC or other markets may result from many factors, including but not limited to:
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our inability to obtain sufficient funds required to conduct or continue a trial, including lack of funding due to unforeseen costs or other business decisions;
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regulatory reports for additional analysts, reports, data, preclinical studies and clinical trials;
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failure to reach agreement with, or inability to comply with conditions imposed by the FDA, NMPA, EMA or other regulators regarding the scope or design of our clinical trials;
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regulatory questions regarding interpretations of data and results and the emergence of new information regarding our drug candidates or other products;
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delay or failure in obtaining authorization to commence a clinical trial or inability to comply with conditions imposed by a regulatory authority regarding the scope or design of a clinical trial;
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withdrawal of clinical trial sites from our clinical trials as a result of changing standards of care or the ineligibility of a site to participate in our clinical trials;
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unfavorable or inconclusive results of clinical trials and supportive non-clinical studies, including unfavorable results regarding effectiveness of drug candidates during clinical trials;
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difficulty in maintaining contact with patients during or after treatment, resulting in incomplete data;
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our inability to obtain approval from IRBs or ethics committees to conduct clinical trials at their respective sites;
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our inability to enroll and retain a sufficient number of patients who meet the inclusion and exclusion criteria in a clinical trial;
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our inability to conduct a clinical trial in accordance with regulatory requirements or our clinical protocols;
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clinical sites and investigators deviating from trial protocol, failing to conduct the trial in accordance with regulatory requirements, withdrawing from or dropping out of a trial, or becoming ineligible to participate in a trial;
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failure of our clinical trial managers to satisfy their contractual duties or meet expected deadlines;
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manufacturing issues, including problems with manufacturing or timely obtaining from third parties sufficient quantities of a drug candidate for use in a clinical trial;
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ambiguous or negative interim results, or results that are inconsistent with earlier results;
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feedback from the FDA, NMPA, EMA, an IRB, data safety monitoring boards, or comparable entities, or results from earlier stage or concurrent studies in animals and clinical trials, regarding our drug candidates, including which might require modification of a trial protocol;
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unacceptable risk-benefit profile or unforeseen safety issues or adverse side effects; and
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a decision by the FDA, NMPA, EMA, an IRB, comparable entities, or the Company, or recommendation by a data safety monitoring board or comparable regulatory entity, to suspend or terminate clinical trials at any time for safety issues or for any other reason.
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Changes in regulatory requirements and
guidance may also occur, and we may need to amend clinical trial protocols submitted to applicable regulatory authorities to reflect
these changes. Amendments may require us to resubmit clinical trial protocols to IRBs or ethics committees for re-examination,
which may increase the costs or time required to complete a clinical trial.
If we experience delays in the completion
of, or the termination of, a clinical trial, of any of our drug candidates, the commercial prospects of our drug candidates will
be harmed, and our ability to generate product sales revenues from any of those drug candidates will be delayed. In addition, any
delay in completing our clinical trials will increase our costs, slow down our drug candidate development and approval process,
and jeopardize our ability to commence product sales and generate revenues. Any of these occurrences may harm our business, financial
condition and prospects significantly. In addition, many of the factors that cause, or lead to, a delay in the commencement or
completion of clinical trials may also ultimately lead to the denial of regulatory approval of our drug candidates.
If we are required to conduct additional
clinical trials or other studies with respect to any of our drug candidates beyond those that we initially contemplated, if we
are unable to successfully complete our clinical trials or other studies or if the results of these studies are not positive or
are only modestly positive, we may be delayed in obtaining regulatory approval for that drug candidate, we may not be able to obtain
regulatory approval at all or we may obtain approval for indications that are not as broad as intended. Our product development
costs will also increase if we experience delays in testing or approvals, and we may not have sufficient funding to complete the
testing and approval process. Significant clinical trial delays could allow our competitors to bring their products to market before
we do and impair our ability to commercialize our drugs, if and when approved. If any of this occurs, our business will be materially
harmed.
Our drug candidates may cause undesirable
adverse events or have other properties that could delay or prevent their regulatory approval, limit the commercial profile of
an approved label, or result in significant negative consequences following any regulatory approval.
Undesirable adverse events caused by our
drug candidates or any future drug candidates we may develop could cause us or regulatory authorities to interrupt, delay or halt
clinical trials and could result in a more restrictive label or the delay or denial of regulatory approval by the FDA, NMPA, EMA
or other comparable regulatory authorities. Results of our potential clinical trials could reveal a high and unacceptable severity
or prevalence of adverse effects. In such event, our trials could be suspended or terminated and the FDA, NMPA, EMA or other comparable
regulatory authorities could order us to cease further development of, or deny approval of, our drug candidates for any or all
target indications. Drug-related adverse events could also affect patient recruitment or the ability of enrolled subjects to complete
the trial, could result in potential product liability claims and may harm our reputation, business, financial condition and business
prospects significantly.
Additionally, if any of our current or
future drug candidates receives regulatory approval, and we or others later identify undesirable side effects caused by such drugs,
a number of potentially significant negative consequences could result, including but not limited to:
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suspending the marketing of the drug;
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having regulatory authorities withdraw approvals of the drug;
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adding warnings on the label;
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developing a REMS for the drug or, if a REMS is already in place, incorporating additional requirements under the REMS, or to develop a similar strategy as required by a comparable regulatory authority;
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conducting post-market studies;
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being sued and held liable for harm caused to subjects or patients; and
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damage to our reputation.
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Any of these events could prevent us from
achieving or maintaining market acceptance of the particular drug candidate, if approved, and could significantly harm our business,
results of operations and prospects.
Even if we receive regulatory approval
for our drug candidates, we will be subject to ongoing regulatory obligations and continued regulatory review, which may result
in significant additional expense and we may be subject to penalties if we fail to comply with regulatory requirements or experience
unanticipated problems with our drug candidates.
If our drug candidates or any future drug
candidates we develop are approved, they will be subject to ongoing regulatory requirements for manufacturing, labeling, packaging,
storage, advertising, promotion, sampling, record-keeping, conduct of post-marketing studies, and submission of safety, efficacy,
and other post-market information, including both federal and state requirements in the United States and requirements of comparable
regulatory authorities outside of the United States.
Manufacturers and manufacturers’
facilities are required to comply with extensive requirements from the FDA, NMPA, EMA and comparable regulatory authorities, including,
in the United States, ensuring that quality control and manufacturing procedures conform to cGMP regulations. As such, our contract
manufacturers will be subject to continual review and inspections to assess compliance with cGMP and adherence to commitments made
in any NDA, other marketing application, and previous responses to inspection observations. Accordingly, we and others with whom
we work must continue to expend time, money and effort in all areas of regulatory compliance, including manufacturing, production
and quality control.
Any regulatory approvals that we receive
for our drug candidates may be subject to limitations on the approved indicated uses for which the drug may be marketed or to the
conditions of approval, or contain requirements for potentially costly post-marketing testing, including Phase 4 clinical trials
and surveillance to monitor the safety and efficacy of the drug candidate. The regulatory authorities may also require risk management
plans or programs as a condition of approval of our drug candidates (such as REMS of the FDA and risk-management plan of the EMA),
which could entail requirements for long-term patient follow-up, a medication guide, physician communication plans or additional
elements to ensure safe use, such as restricted distribution methods, patient registries and other risk minimization tools. In
addition, if the FDA, NMPA, EMA or a comparable regulatory authority approves our drug candidates, we will have to comply with
requirements including, for example, submissions of safety and other post-marketing information and reports, registration, as well
as continued compliance with cGCP and cGMP, for any clinical trials that we conduct post-approval.
The FDA may impose consent decrees or withdraw
approval if compliance with regulatory requirements and standards is not maintained or if problems occur after the drug reaches
the market. Later discovery of previously unknown problems with our drug candidates, including adverse events of unanticipated
severity or frequency, or with our third-party manufacturers or manufacturing processes, or failure to comply with regulatory requirements,
may result in revisions to the approved labeling to add new safety information; imposition of post-market studies or clinical studies
to assess new safety risks; or imposition of distribution restrictions or other restrictions under a REMS program. Other potential
consequences include, among other things:
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restrictions on the marketing or manufacturing of our drug candidates, withdrawal of the product from the market, or voluntary or mandatory product recalls;
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fines, untitled or warning letters, or holds on clinical trials;
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refusal by the FDA to approve pending applications or supplements to approved applications filed by us or suspension or revocation of license approvals;
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product seizure or detention, or refusal to permit the import or export of our drug candidates; and
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injunctions or the imposition of civil or criminal penalties.
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The FDA strictly regulates marketing, labeling,
advertising and promotion of products that are placed on the market. Companies may promote drugs only for the approved indications
and in accordance with the provisions of the approved label and may not promote drugs for any off-label use, such as uses that
are not described in the product’s labeling and that differ from those approved by the regulatory authorities. However, physicians
may prescribe drug products for off-label uses and such off-label uses are common across some medical specialties. Thus, they may,
unbeknownst to us, use our product for an “off label” indication for a specific treatment recipient. The FDA, NMPA,
EMA and other regulatory authorities actively enforce the laws and regulations prohibiting the promotion of off-label uses, and
if we are found to be out of compliance with the requirements and restrictions imposed on us under those laws and restrictions,
we may be subject to significant liability, including civil and administrative remedies as well as criminal sanctions, and the
off-label use of our products may increase the risk of product liability claims. In addition, management’s attention could
be diverted from our business operations and our reputation could be damaged.
The policies of the FDA, NMPA, EMA and
other regulatory authorities may change and we cannot predict the likelihood, nature or extent of government regulation that may
arise from future legislation or administrative action, either in the United States or abroad. If we are slow or unable to adapt
to changes in existing requirements or the adoption of new requirements or policies, or if we are not able to maintain regulatory
compliance, we may lose any regulatory approval that we may have obtained and we may not achieve or sustain profitability.
Risks Related to Commercialization
of Our Drug Candidates
Even if any of our drug candidates
receive regulatory approval, it may fail to achieve the degree of market acceptance by physicians, patients, third-party payors
and others in the medical community necessary for commercial success.
After we complete clinical trials and receive
regulatory approval for any of our drug candidates, which may not happen for some time, we recognize that such candidate(s) may
ultimately fail to gain sufficient market acceptance by physicians, patients, third-party payors and others in the medical community.
We may not be able to achieve or maintain market acceptance of our products over time if new products or technology are introduced
that are more favorably received than our products, are more cost effective or render our drug obsolete. We will face competition
with respect to our drug candidates from other pharmaceutical companies developing products in the same disease/therapeutic area
and specialty pharmaceutical and biotechnology companies worldwide. Many of the companies against which we may be competing have
significantly greater financial resources and expertise in research and development, manufacturing, animal testing, conducting
clinical trials, obtaining regulatory approvals and marketing approval for drugs than we do. Physicians, patients and third-party
payors may prefer other novel products to ours, which means that we may not generate significant sales revenues for that product
and that product may not become profitable. The degree of market acceptance of our drug candidates, if approved for commercial
sale, will depend on a number of factors, including but not limited to:
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clinical indications for which our drug candidates are approved;
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physicians, hospitals, and patients considering our drug candidates as a safe and effective treatment;
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the potential and perceived advantages of our drug candidates over alternative treatments;
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the prevalence and severity of any side effects;
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product labeling or product insert requirements of the FDA, NMPA, EMA or other comparable regulatory authorities;
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limitations or warnings contained in the labeling approved by the FDA, NMPA, EMA or other comparable regulatory authorities;
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the timing of market introduction of our drug candidates as well as competitive drugs;
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the cost of treatment in relation to alternative treatments and their relative benefits;
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the availability of adequate coverage, reimbursement and pricing by third-party payors and government authorities;
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lack of experience and financial and other limitations on our ability to create and sustain effective sales and marketing efforts or ineffectiveness of our sales and marketing partners; and
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changes in legislative and regulatory requirements that could prevent or delay regulatory approval of our drug candidates, restrict or regulate post-approval activities and affect our ability to profitably sell any drug candidates for which we obtain regulatory approval.
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Risks Related to Our IP
A significant portion of our IP portfolio
currently includes pending patent applications that have not yet been issued as granted patents and if the pending patent applications
covering our product candidates fail to be issued, our business will be adversely affected. If we or our licensors are unable to
obtain and maintain patent protection for our technology and drugs, our competitors could develop and commercialize technology
and drugs similar or identical to ours, and our ability to successfully commercialize our technology and drugs may be adversely
affected.
Our success depends largely on our ability
to obtain and maintain patent protection and other forms of IP rights for the composition
of matter, method of use and/or method of manufacture for each of our drug candidates. Failure to obtain, maintain protection,
enforce or extend adequate patent and other IP rights could materially adversely affect our ability to develop and market one or
more of our drug candidates. We also rely on trade secrets and know-how to develop and maintain our proprietary and IP position
for each of our drug candidates. Any failure to protect our trade secrets and know-how with respect to any specific drug and device
candidate could adversely affect the market potential of that potential product.
As of the date of this report, the Company
has, through its licenses, obtained rights to patents and patent applications covering some or all its drug and device candidates
that have been filed in major jurisdictions such as the United States, member states of the European Patent Organization (the “EPO”)
and the PRC (collectively, “Major Patent Jurisdictions”), as well as in other countries. We have also filed a number
of provisional applications to establish earlier filing dates for certain of our other ongoing researches, the specifics of which
are currently proprietary and confidential. To the extent we do not seek or obtain patent protection in a particular jurisdiction,
we may not have commercial incentive to seek marketing authorization in such jurisdiction. Nonetheless, other parties might enter
those markets with generic versions or copies of our products and received regulatory approval without having significantly invested
in their own research and development costs compared to the Company’s investment. For more information about our IP portfolio,
please refer to the Intellectual Property section below.
With respect to issued patents in certain
jurisdictions, for example in the U.S. and under the EPO, we may be entitled to obtain a patent term extension to extend the patent
expiration date provided we meet the applicable requirements for obtaining such patent term extensions. We have sought to support
our proprietary position by working with our licensors in filing patent applications in the names of the licensors in the United
States and through the PCT, related to the Lead Projects and certain other drug candidates. In the future, we intend to file patent
applications on supplemental or improvement IP derived from the licensed technologies, where those IP would be solely or jointly
owned by the Company pursuant to the terms of respective license agreements. Filing patents covering multiple technologies in multiple
countries is time-consuming and expensive, and we may not have the resources file and prosecute all necessary or desirable patent
applications in a timely manner. It is also possible that we will fail to identify patentable aspects of our research and development
output before it is too late to obtain patent protection.
We cannot be certain that patents will
be issued or granted with respect to patent applications that are currently pending, or that issued or granted patents will not
later be found to be invalid or unenforceable.
The patent position of biotechnology and
pharmaceutical companies is generally uncertain because it involves complex legal and factual considerations. The standards applied
by the EPO, the U.S. Patent and Trademark Office, or USPTO, and foreign patent offices in granting patents are not always applied
uniformly or predictably. For example, there is no uniform worldwide policy regarding patentable subject matter or the scope of
claims allowable in biotechnology and pharmaceutical patents. Consequently, patents may not issue from our pending patent applications
and even if they do issue, such patents may not issue in a form that effectively prevents others from commercializing competing
products. As such, we do not know the degree of future protection that we will have on our proprietary products and technology.
Additionally,
the issuance of a patent is not conclusive as to its inventorship, scope, validity or enforceability, and our patents may be challenged
in the courts or patent offices in the United States and abroad. Even if patents do successfully issue and even if such patents
cover our drug candidates, other parties may initiate, for patents filed before March 16, 2013 (i.e., the enactment of the America
Invents Act), interference or re-examination proceedings, for patents filed on or after March 16, 2013, post-grant review, inter
partes review, nullification or derivation proceedings, in court or before patent offices, or similar proceedings challenging
the validity, enforceability or scope of such patents, which may result in the patent claims being narrowed or invalidated. Successful
defense of its patents can constitute a material factor in a company’s expenses. According to an August 2017 article published
by Bloomberg News (https://www.bna.com/cost-patent-infringement-n73014463011/), depending on the value at stake, the American Intellectual
Property Law Association’s “2017 Report of the Economic Survey” reported the average cost of a patent litigation
in 2017 to be $1.7 million.
In
addition, the fact that the Company has exclusive rights to prevent others from using a patented invention does not necessarily mean
that the Company itself will have the unrestricted right to use that invention. Other parties may obtain ownership
or licenses to patents or other IP rights that cover the manufacture, use or sale of our current or future products (or elements
thereof). This may enable such other parties to enforce their patents or IP rights against
us, and may, as a result, affect the commercialization of our products or exploitation of our own technology. We
endeavor to identify early patents and patent applications which may block development of a product or technology and minimize
this risk by conducting prior art searches before and during the projects. However, relevant documents may be overlooked, yet-to-be
published or missed, which may in turn impact on the freedom to commercialize the relevant asset. In such cases, we
may not be in a position to develop or commercialize products or drug candidates unless we successfully pursue litigation to nullify
or invalidate the other IP rights concerned, or enter into a license agreement with the IP right holder, if available on commercially
reasonable terms.
If we are unable to obtain and maintain
the appropriate scope for our patents, our competitors could develop and commercialize technology and drugs similar or identical
to ours, and our ability to successfully commercialize our technology and drugs may be adversely affected.
We may not obtain sufficient claim scope
in those patents to prevent another party from competing successfully with our drug and device candidates. Even if our patent applications
issue as patents, they may not issue in a form that will provide us with any meaningful protection, prevent competitors from competing
with us or otherwise provide us with any competitive advantage. Our competitors may be able to circumvent our patents by developing
similar or alternative technology or drug and device candidates in a non-infringing manner. The issuance of a patent is not conclusive
as to its scope, validity or enforceability, and our patents may be challenged in the courts or patent offices in the United States
and abroad. Such challenges may result in patent claims being narrowed, invalidated or held unenforceable, which could limit our
ability to stop or prevent us from stopping others from using or commercializing similar or identical technology and drug and device
candidates, or limit the duration of the patent protection of our technology and drug and device candidates. Given the amount of
time required for the development, testing and regulatory review of new drug and device candidates, patents protecting such candidates
might expire before or shortly after such candidates are commercialized. As a result, our patent portfolio may not provide us with
sufficient rights to exclude others from commercializing drug and device candidates similar or identical to ours.
Further, the issuance,
scope, validity, enforceability and commercial value of our and our current or future licensors’ or collaboration partners’
patent rights are highly uncertain. Our and our licensors’ pending and future patent applications may not result in patents
being issued which protect our technology or products, in whole or in part, or which effectively prevent others from commercializing
competitive technologies and products.
We may not be able to protect and
enforce our IP rights throughout the world.
Our commercial success will depend, in
part, on our ability to maintain IP protection for our drug candidates in which we seek to develop and commercialize. While we
rely primarily upon a combination of patents, trademarks, trade secrets and other contractual obligations to protect the IP related
to our brands, products and other proprietary technologies, these legal means may afford only limited protection.
Filing and prosecuting patents on drug
candidates and defending the validity of the same (if challenged) in all countries throughout the world could be prohibitively
expensive for us, and our IP rights in countries outside the Major Patent Jurisdictions can be less extensive than those in the
Major Patent Jurisdictions. In addition, the laws of some countries in the rest of the world such as India do not protect IP rights
to the same extent as laws in the Major Patent Jurisdictions. Consequently, we may not be able to prevent other parties from practicing
our inventions in the rest of the world. Competitors may use our technology in jurisdictions where we have not or not yet obtained
patent protection to develop their own drugs and further, may export otherwise infringing drugs to non-U.S. jurisdictions where
we have patent protection.
Our, our licensors’
or collaboration partners’ patent applications cannot be enforced against other parties practicing the technology claimed
in such applications unless and until a patent issues from such applications, and then only to the extent the issued claims cover
the technology. In addition, patents and other IP rights also will not protect our technology, drug candidates if another party,
including our competitors, design around our protected technology, drug candidates without infringing, misappropriating or otherwise
violating our patents or other IP rights.
Moreover, currently
and as our R&D continues to progress, some of our patents and patent applications are or may be co-owned with another party.
Some of our licenses already provide that future-developed technologies (and any resulting patents) will be co-owned with the licensors
and other patents for technologies we may acquire or develop with other parties may also be jointly owned. If we are unable to
obtain an exclusive license to any such co-owners’ interest in such patents or patent applications, such co-owners may be
able to license their rights to other persons, including our competitors, and our competitors could market competing products and
technology, and we will be unable to transfer or grant exclusive rights to potential purchasers or development partners of such
co-owned technologies. In addition, we may need the cooperation of any such co-owners of our patents in order to enforce such patents
against other parties, and such cooperation may not be provided to us. Any of the foregoing could limit the revenue we might generate
from our patents or patent applications and thus have a material adverse effect on our competitive position, business, financial
conditions, results of operations, and prospects.
Because patent
applications are confidential for a period of time after filing, and some remain so until issued, we cannot be certain that we
or our licensors or collaborators were or will be the first to file any patent application related to a drug or device candidate.
Furthermore, in the United States, if patent applications of other parties have an effective filing date before March 16,
2013, an interference proceeding can be initiated by such other party to determine who was the first to invent any of the subject
matter covered by the patent claims of our applications. If patent applications of other parties have an effective filing date
on or after March 16, 2013, in the United States a derivation proceeding can be initiated by such other parties to determine
whether our invention was derived from theirs.
Even where we
have a valid and enforceable patent, we may not be able to exclude others from practicing our invention where the other party can
show that they used the invention in commerce before our filing date or the other party benefits from a compulsory license. In
addition, we may be subject to other challenges regarding our exclusive ownership of our IP. If another party were successful in
challenging our exclusive ownership of any of our IP, we may lose our right to use such IP, such other party may be able to license
such IP to other parties, including our competitors, and our competitors could market competing products and technology. Any of
the foregoing could have a material adverse effect on our competitive position, business, financial conditions, results of operations,
and prospects.
Many companies have encountered significant
problems in protecting and defending IP rights in jurisdictions outside Major Patent Jurisdictions. The legal systems of some countries
do not favor the enforcement of patents, trade secrets and other IP, which could make it difficult in those jurisdictions for us
to stop the infringement or misappropriation of our patents or other IP rights, or the marketing of competing drugs in violation
of our proprietary rights generally.
To date, we have not sought to enforce
any issued patents in any jurisdictions. Proceedings to enforce our patent and other IP rights in any jurisdictions could result
in substantial costs and divert our efforts and attention from other aspects of our business.
Furthermore, such proceedings could put
our patents at risk of being invalidated, held unenforceable, or interpreted narrowly, could put our patent applications at risk
of not issuing, and could provoke other parties to assert claims of infringement or misappropriation against us. We may not prevail
in any lawsuits that we initiate in jurisdictions where opposition proceedings are available and the damages or other remedies
awarded, if any, may not be commercially meaningful. The requirements for patentability may differ in certain countries, particularly
developing countries. Certain countries in Europe, the PRC, and developing countries including India, have compulsory licensing
laws under which a patent owner may be compelled to grant licenses to other parties. In those countries, we and our licensors may
have limited remedies if patents are infringed or if we or our licensors are compelled to grant a license to another party, which
could materially diminish the value of those patents. This could limit our potential revenue opportunities. Accordingly, our efforts
to enforce our IP rights around the world may be inadequate to obtain a significant commercial advantage from the IP that we develop.
We may become involved in lawsuits
to protect or enforce our IP, which could be expensive, time-consuming and unsuccessful. Our patent rights relating to our drug
and device candidates could be found invalid or unenforceable if challenged in court or before the USPTO or comparable non-U.S.
authority.
Competitors may infringe our patent rights
or misappropriate or otherwise violate our IP rights. To counter infringement or unauthorized use, litigation may be necessary
in the future to enforce or defend our IP rights, to protect our trade secrets or determine the validity and scope of our own IP
rights or the proprietary rights of others. This can be expensive and time-consuming. Any claim that we assert against perceived
infringers could also provoke these parties to assert counterclaims against us alleging that we infringe their IP rights. Many
of our current and potential competitors have the ability to dedicate substantially greater resources to enforce and/or defend
their IP rights than we can. Accordingly, despite our efforts, we may not be able to prevent other parties from infringing upon
or misappropriating our IP. Litigation could result in substantial costs and diversion of management resources, which could harm
our business and financial results. In addition, in an infringement proceeding, a court may decide that patent rights or other
IP rights owned by us are invalid or unenforceable, or may refuse to stop the other party from using the technology at issue on
the grounds that our patent rights or other IP rights do not cover the technology in question. An adverse result in any litigation
proceeding could put our patent, as well as any patents that may issue in the future from our pending patent applications, at risk
of being invalidated, held unenforceable or interpreted narrowly. Furthermore, because of the substantial amount of discovery required
in connection with IP litigation, there is risk that some of our confidential information could be compromised by disclosure during
this type of litigation.
If we initiate legal proceedings against
another party to enforce our patent, or any patents that may be issued in the future from our patent applications, that relates
to one of our drug and device candidates, the defendant could counterclaim that such patent rights are invalid or unenforceable.
In patent litigation in the United States, defendant counterclaims alleging invalidity or unenforceability are commonplace, and
there are numerous grounds upon which another party can assert invalidity or unenforceability of a patent. Parties may also raise
similar claims before administrative bodies in the United States or abroad, even outside the context of litigation. Such mechanisms
include ex parte re-examination, inter partes review, post-grant review, derivation and equivalent proceedings
in non-U.S. jurisdictions, such as opposition proceedings. Such proceedings could result in revocation or amendment to our patents
in such a way that they no longer cover and protect our drug and device candidates. With respect to the validity of our patents,
for example, there may be invalidating prior art of which we, our patent counsel, and the patent examiner were unaware during prosecution.
If a defendant were to prevail on a legal assertion of invalidity and/or unenforceability, we would lose at least part, and perhaps
all, of the patent protection on our drug and device candidates. Such a loss of patent protection could have a material adverse
impact on our business.
We may not be able to prevent misappropriation
of our trade secrets or confidential information, particularly in countries where the laws may not protect those rights as fully
as in the United States. Furthermore, because of the substantial amount of discovery required in connection with IP litigation,
there is a risk that some of our confidential information could be compromised by disclosure during this type of litigation.
We may be subject to claims challenging
the inventorship of our patents and other IP.
Although we are not currently experiencing
any claims challenging the inventorship of our patents or ownership of our IP, we may in the future be subject to claims that former
employees, collaborators or other parties have an interest in our patents or other IP as inventors or co-inventors. For example,
we may have inventorship disputes arise from conflicting obligations of consultants or others who are involved in developing our
drug and device candidates and who have not clearly contracted to transfer or assign any rights they may have to the Company. In
addition, for our licensed patents, although a majority of our licensors have procured assignment forms and records from inventors
to affirm their ownership in the licensed IP, another party or former employee or collaborator
of our licensors not named in the patents may challenge the inventorship of claim an ownership interest in one or more of our or
our licensors’ patents. Litigation may be necessary to defend against these and other claims challenging inventorship.
If we fail in defending any such claims, in addition to paying monetary damages, we may lose rights such as exclusive ownership
of, or right to use, our patent rights or other IP. Such an outcome could have a material adverse effect on our business. Even
if we are successful in defending against such claims, litigation could result in substantial costs and be a distraction to management
and other employees.
If we are sued for infringing IP
rights of other parties, such litigation could be costly and time-consuming and could prevent or delay us from developing or commercializing
our drug candidates, the outcome of which would be uncertain and could have a material adverse effect on the success of our business.
Our commercial success depends in part
on our avoiding infringement of the patents and other IP rights of other parties. There is a substantial amount of litigation involving
patent and other IP rights in the biotechnology and pharmaceutical industries. Numerous issued patents, provisional patents and
pending patent applications, which are owned by other parties, exist in the fields in which we are developing drug candidates.
As the biotechnology and pharmaceutical industries expand and more patents are issued, the risk increases that our drug candidates
may give rise to claims of infringement of the patent rights of others.
Other parties may assert that we are employing
their proprietary technology without authorization. There may be other patents of which we are currently unaware with claims to
materials, formulations, methods of manufacture or methods for treatment related to the use or manufacture of our drug candidates.
Because patent applications can take many years to issue, there may be currently pending patent applications or provisional patents
which may later result in issued patents that our drug candidates may infringe. In addition, other parties may obtain patents in
the future and claim that use of our technology infringes upon these patents. If any other patents were held by a court of competent
jurisdiction to cover the manufacturing process of any of our drug candidates, any molecules formed during the manufacturing process
or any final drug itself, the holders of any such patents may be able to prevent us from commercializing such drug candidate unless
we obtain a license under the applicable patents, or until such patents expire or they are finally determined to be held invalid
or unenforceable. Similarly, if any other patent were held by a court of competent jurisdiction to cover aspects of our formulations,
processes for manufacture or methods of use, including combination therapy or patient selection methods, the holders of any such
patent may be able to block our ability to develop and commercialize the applicable drug candidate unless we obtain a license,
limit our uses, or until such patent expires, or is finally determined to be held invalid or unenforceable. In either case, such
a license may not be available on commercially reasonable terms or at all.
Other parties who bring successful claims
against us for infringement of their IP rights may obtain injunctive or other equitable relief, which could prevent us from developing
and commercializing one or more of our drug candidates. Defense of these claims, regardless of their merits, would involve substantial
litigation expense and be a substantial diversion of employee resources from our business. In the event of a successful claim of
infringement or misappropriation against us, we may have to pay substantial damages, including treble damages and attorneys’
fees in the case of willful infringement, obtain one or more licenses from other parties, pay royalties or redesign our infringing
drug candidates, which may be impossible or require substantial time and monetary expenditure. In the event of an adverse result
in any such litigation, or even in the absence of litigation, we may need to obtain licenses from other parties to advance our
research or allow commercialization of our drug candidates. Any required license may not be available at all, or may not be available
on commercially reasonable terms. In the event that we are unable to obtain such a license, we would be unable to further develop
and commercialize one or more of our drug candidates, which could harm our business significantly. We may also elect to enter into
license agreements in order to settle patent infringement claims or resolve disputes prior to litigation, and any such license
agreements may require us to pay royalties and other fees that could significantly reduce our profitability for any product related
to that patent and thus harm our business.
Even if resolved in our favor, litigation
or other legal proceedings relating to IP claims may cause us to incur significant expenses, and could distract our technical personnel,
management personnel, or both from their normal responsibilities. In addition, there could be public announcements of the results
of hearings, motions or other interim proceedings or developments, and if securities analysts or investors perceive these results
to be negative, it could have a substantial adverse effect on the market price of our Class A Ordinary Shares. Such litigation
or proceedings could substantially increase our operating losses and reduce the resources available for development activities
or any future sales, marketing or distribution activities. We may not have sufficient financial or other resources to adequately
conduct such litigation or proceedings. Some of our competitors may be able to sustain the costs of such litigation or proceedings
more effectively than we can because of their greater financial resources. Uncertainties resulting from the initiation and continuation
of patent litigation or other proceedings could have a material adverse effect on our ability to compete in the marketplace.
There may
be patent applications pending of which we are not aware, but which cover similar products to the ones we are attempting to license
or develop, which may result in lost time and money, as well as litigation.
It is possible that we have failed to identify
relevant outstanding patents or applications. For example, U.S. applications filed before November 29, 2000 and certain U.S.
applications filed after that date that will not be filed outside the United States remain confidential until patents are issued.
Patent applications filed in the United States after November 29, 2000 and generally filed elsewhere are published approximately
18 months after the earliest filing for which priority is claimed, with such earliest filing date being commonly referred to as
the priority date. Therefore, patent applications covering our products could have been filed by others without our knowledge.
Additionally, pending patent applications which have been published can, subject to certain limitations, be later amended in a
manner that could cover our products or the use of our products. Holders of any such unanticipated patents or patent applications
may actively bring infringement claims against us, with the same potential litigation consequences as alluded to elsewhere in this
annual report. Any of these events could require us to divert substantial financial and management resources that we would otherwise
be able to devote to our business.
Obtaining and maintaining our patent
protection depends on compliance with various procedural, document submission, fee payment, and other requirements imposed by governmental
patent agencies, and our patent protection could be reduced or eliminated for non-compliance with these requirements.
Periodic maintenance fees on any issued
patent are due to be paid to the USPTO and other patent agencies in several stages over the lifetime of the patent. The USPTO and
various non-U.S. governmental patent agencies require compliance with a number of procedural, documentary, fee payment, and other
similar provisions during the patent application process. Although an inadvertent lapse can in many cases be cured by payment of
a late fee or by other means in accordance with the applicable rules, there are situations in which non-compliance can result in
abandonment or lapse of the patent or patent application, resulting in partial or complete loss of patent rights in the relevant
jurisdiction. Non-compliance events that could result in abandonment or lapse of a patent or patent application include failure
to respond to official actions within prescribed time limits, non-payment of fees, and failure to properly submit documents requesting
an extension of time. In any such event, our competitors might be able to enter the market, which would have a material adverse
effect on our business.
The terms of our patents may not
be sufficient to effectively protect our drug and device candidates and business.
In most countries in which we file, including
the United States, the term of an issued patent is generally 20 years from the earliest claimed filing date of a non-provisional
patent application in the applicable country. Although various extensions may be available, the life of a patent and the protection
it affords is limited. For example, depending upon the timing, duration and specifics of the FDA regulatory approval for our drug
candidates, one or more of our U.S. patents, if issued, might be eligible for limited patent term restoration 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 term extension of up to five years as compensation for patent term lost during drug development and the FDA regulatory
review process. Patent term extensions, however, cannot extend the remaining term of a patent beyond a total of 14 years from the
date of drug approval by the FDA, and only one patent can be extended for a particular drug. The application for patent term extension
is subject to approval by the USPTO, in conjunction with the FDA. We may not be granted an extension because of, for example, failing
to apply within applicable deadlines, failing to apply prior to expiration of relevant patents or otherwise failing to satisfy
applicable requirements. Moreover, the applicable time period or the scope of patent protection afforded could be less than we
request. If we are unable to obtain a patent term extension for a given patent or the term of any such extension is less than we
request, the period during which we will have the right to exclusively market our drug will be that of the originally issued patents
themselves.
Even if patents covering one of our drug
candidates are obtained, thereby giving us a period of exclusivity for manufacturing and marketing that drug, we will not be able
to assert such patent rights upon the expiration of the issued patents against potential competitors who may begin marketing generic
copies of our medications, and our business and results of operations may be adversely affected.
Changes in patent law in the United
States could diminish the value of patents in general, thereby impairing our ability to protect our drug and device candidates.
The United States has recently enacted
and is currently implementing wide-ranging patent reform legislation. Recent U.S. Supreme Court rulings have narrowed the scope
of patent protection available in certain circumstances and weakened the rights of patent owners in certain situations. In addition
to increasing uncertainty with regard to our ability to obtain patents in the future, this combination of events has created uncertainty
with respect to the value of patents once obtained, if any. Depending on decisions by the U.S. Congress, the federal courts and
the USPTO, the laws and regulations governing patents in the United States could change in unpredictable ways that would weaken
our ability to obtain new patents, or to enforce our existing patents and patents that we might obtain in the future. For example,
in a recent case, Assoc. for Molecular Pathology v. Myriad Genetics, Inc., the U.S. Supreme Court held that certain
claims to naturally-occurring substances are not patentable. Although we do not believe that any of the patents owned or licensed
by us will be found invalid based on this decision, future decisions by the courts, the U.S. Congress or the USPTO may impact the
value of our patent rights. There could be similar changes in the laws of foreign jurisdictions that may impact the value of our
patent rights or our other IP rights.
In addition, recent patent reform legislation
in the U.S., including the Leahy-Smith America Invents Act, or the America Invents Act, could increase those uncertainties and
costs. The America Invents Act was signed into law on September 16, 2011, and many of the substantive changes became effective
on March 16, 2013. The America Invents Act reforms U.S. patent law in part by changing the U.S. patent system from a “first
to invent” system to a “first inventor to file” system, expanding the definition of prior art, and developing
a post-grant review system, thus changing the U.S. patent law in a way that may weaken our ability to obtain patent protection
in the U.S. for those applications filed after March 16, 2013. Further, the America Invents Act created new procedures to
challenge the validity of issued patents in the U.S., including post-grant review and inter partes review
proceedings, which some other parties have been using to cause the cancellation of selected or all claims of issued patents of
competitors. For a patent with an effective filing date of March 16, 2013 or later, a petition for post-grant review can be
filed by another party in a nine-month window from issuance of the patent. A petition for inter partes review
can be filed immediately following the issuance of a patent if the patent has an effective filing date prior to March 16,
2013. A petition for inter partes review can be filed after the nine-month-period for filing a post-grant review
petition has expired for a patent with an effective filing date of March 16, 2013 or later. Post-grant review proceedings
can be brought on any ground of invalidity, whereas inter partes review proceedings can only raise an invalidity
challenge based on published prior art and patents. These adversarial actions at the USPTO review patent claims without the presumption
of validity afforded to U.S. patents in lawsuits in U.S. federal courts, and use a lower burden of proof than used in litigation
in U.S. federal courts. Therefore, it is generally considered easier for a competitor or other party to have a U.S. patent invalidated
in a USPTO post-grant review or inter partes review proceeding than invalidated in a litigation in a U.S. federal
court. If any of our patents are challenged by another party in such a USPTO proceeding, there is no guarantee that we or our licensors
or collaborators will be successful in defending the patent, which would result in our loss of the challenged patent right.
If we are unable to protect the confidentiality
of our trade secrets, our business and competitive position would be harmed.
In addition to our issued patents, provisional
patent, and pending patent applications, we expect to rely on trade secrets, including unpatented know-how, technology and other
proprietary information, to maintain our competitive position and protect our drug and device candidates. We seek to protect these
trade secrets, in part, by entering into non-disclosure and confidentiality agreements with parties that have access to them, such
as our employees, corporate collaborators, outside scientific collaborators, sponsored researchers, contract manufacturers, consultants,
advisors and other parties. We also enter into confidentiality and invention or patent assignment agreements with our employees
and consultants. However, any of these parties may breach such agreements and disclose our proprietary information, and we may
not be able to obtain adequate remedies for such breaches. Enforcing a claim that a party illegally disclosed or misappropriated
a trade secret can be difficult, expensive and time-consuming, and the outcome is unpredictable. If trade secrets which are material
to our business were to be obtained by a competitor, our competitive position would be harmed.
We may be subject to claims that
our employees have wrongfully used or disclosed alleged trade secrets of their former employers.
Although we try to ensure that our employees
do not use the proprietary information or know-how of others in their work for us, we may be subject to claims that we or these
employees have used or disclosed IP, including trade secrets or other proprietary information, of any such employee’s former
employer. In addition, while we typically require our employees, consultants and contractors who may be involved in the development
of IP to execute agreements assigning such IP to us, we may be unsuccessful in executing such an agreement with each party who
in fact develops IP that we regard as our own, which may result in claims by or against us related to the ownership of such IP.
We are not aware of any threatened or pending claims that any of our projects involve misappropriated IP or other proprietary information,
but in the future litigation may be necessary to defend against such claims. If we fail in defending any such claims, in addition
to paying monetary damages, we may lose valuable IP rights. Even if we are successful in defending against such claims, litigation
could result in substantial costs and be a distraction to management.
We may be unable to execute on the
optimal development plan for one or more of our existing product candidates if we are unable to obtain or maintain necessary rights
for some aspect of the developing technology through acquisitions or licenses.
Our existing programs currently use or
may in the future use additional technologies subject to proprietary rights held by others, such as particular compositions or
methods of manufacture, treatment or use. The licensing and acquisition of IP rights is a competitive area, and more established
companies may pursue strategies to license or acquire such IP rights that we may consider necessary or useful. These established
companies may have a competitive advantage over us due to their size, cash resources and greater capabilities in clinical development
and commercialization.
In addition, companies that perceive us
to be a competitor may be unwilling to assign or license rights to us. We also may be unable to license or acquire IP rights on
terms that would allow us to make an appropriate return on our investment. If we are unable to successfully obtain or maintain
licenses or other rights from other parties to use IP of those parties, our business, financial condition and prospects for growth
could suffer.
If we fail to comply with our obligations
in the agreements under which we license IP rights from other parties or otherwise experience disruptions to our business relationships
with our licensors, we could be required to pay monetary damages or could lose license rights that are important to our business.
Many of our projects (including our Lead
Projects) are based on IP which we have licensed from other parties. (See “Item 4. Information on the Company – B.
Business Overview – Intellectual Property”) Certain of these license agreements impose diligence, development or commercialization
obligations on us, such as obligations to pay royalties on net product sales of our drug and device candidates once commercialized
by us, to pay a percentage of sublicensing revenues if the licensed product is sublicensed, to make other specified milestone and/or
annual payments relating to our drug candidates or to pay license maintenance and other fees, as well as obligations to pursue
commercialization with due diligence. Specifically, a number of our license agreements also require us to meet development timelines
in order to maintain the related license(s). In spite of our efforts, our licensors might conclude that we have materially breached
our obligations under such license agreements and might therefore seek to terminate the license agreements. If one of our licensors,
despite our efforts, were to be successful in terminating its agreement with us, we would not be able to continue to develop, manufacture
or market any drug candidate under that license agreements, and we could face claims for monetary damages or other penalties under
that agreement. Such an occurrence would diminish or eliminate the value of that project to our Company, even if we are able to
negotiate new or reinstated agreements, which may have less favorable terms. Depending on the importance of the IP and the related
project, any such development could have a material adverse effect on our competitive position, business, financial conditions,
results of operations, and prospects.
Moreover, disputes may arise regarding
intellectual property subject to a licensing agreement, including:
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the scope of rights granted under the license agreement and other interpretation-related issues;
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the extent to which our technology and processes infringe on intellectual property of the licensor that is not subject to the licensing agreement;
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the sublicensing of patent and other rights under our collaborative development relationships;
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our diligence obligations under the license agreement and what activities satisfy those diligence obligations;
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the inventorship and ownership of inventions and know-how resulting from the joint creation or use of intellectual property by our licensors and us and our partners; and
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the priority of invention of patented technology.
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In addition, the
agreements under which we currently license intellectual property or technology from other parties are complex, and certain provisions
in such agreements may be susceptible to multiple interpretations. The resolution of any contract interpretation disagreement that
may arise could narrow what we believe to be the scope of our rights to the relevant intellectual property or technology, or increase
what we believe to be our financial or other obligations under the relevant agreement, either of which (depending on the importance
of the IP and the related project) could have a material adverse effect on our business, financial condition, results of operations,
and prospects. Moreover, if disputes over intellectual property that we have licensed prevent or impair our ability to maintain
our current licensing arrangement for a project on commercially acceptable terms, we may be unable to successfully develop and
commercialize the affected drug or device candidates, which could have a material adverse effect on our business, financial conditions,
results of operations, and prospects.
We may not
have complete control of the preparation, filing and prosecution of patent applications, or to maintain patents, licensed by us
from other parties.
The Company has
in-licensed, and expects in the future to in-license patents owned or controlled by others for our use as part of our development
plans. We also may out-license or sublicense patents which we own or control in collaborations with others for development and
commercialization of our products. In either case, the continuing right to control the preparation, filing and prosecution of patent
applications, or to maintain the patents, covering technology under development is a matter for negotiation and we may not always
be the party that obtains such control, in which case we will be reliant on our licensors, collaboration partners or sublicensees
for determining strategies with respect to those patents. For our existing licenses, while we have an understanding with most of
the licensors who maintain control over patent prosecution and we have jointly appointed and engaged patent agents nominated by
us under one or more of our licenses, we cannot guarantee that such licensors or collaborators will always accept prosecution strategies
proposed by us and/or our patent agents. Therefore, these patents and applications may not be prosecuted and enforced in a manner
consistent with the best interests of our business. If our current or future licensors or collaboration partners fail to establish,
maintain or protect such patents and other IP rights, such rights may be reduced or eliminated. If our licensors or joint development
partners are not fully cooperative or disagree with us as to the prosecution, maintenance or enforcement of any patent rights,
such patent rights could be compromised.
Risks Related to Our Reliance on Unrelated
Parties
We rely on unrelated parties to conduct
discovery and further improvement of our innovations and licensed technologies, as well as our preclinical studies and clinical
trials. If these unrelated parties do not successfully carry out their contractual duties or meet expected deadlines, we may not
be able to obtain regulatory approval for or commercialize our drug candidates, and our business could be substantially harmed.
We have relied upon and plan to continue
to rely upon CROs and collaborating institutions to monitor and manage data for our ongoing preclinical studies and programs. We
rely on these parties for execution of preclinical studies and clinical trials, and control only certain aspects of their activities.
Nevertheless, we are responsible for ensuring that each of our studies is conducted in accordance with the applicable protocol,
legal, and regulatory requirements and scientific standards, and our reliance on the CROs and collaborating institutions does not
relieve us of our regulatory responsibilities. If CROs, collaborating institutions or clinical investigators do not successfully
carry out their contractual duties or obligations or meet expected deadlines, development of our product candidates could be delayed
and our business could be adversely affected.
In addition, our CROs and collaborating
institutions, are subject to numerous environmental, health and safety laws and regulations, including those governing laboratory
procedures and the handling, use, storage, treatment and disposal of hazardous materials and waste. In the event of contamination
or injury resulting from our use of hazardous materials, we might be held liable for any resulting damages, and any liability could
exceed our resources. We could also be subject to civil or criminal fines and penalties, and significant associated costs.
If the Company obtains approval of
an IND for one of our drug candidates and moves into human clinical trials requiring significantly larger quantities of the candidate
to be tested, we expect to rely on unrelated parties to manufacture supplies of that candidate. If those unrelated parties fail
to provide us with sufficient quantities of clinical supply on that candidate or fail to do so at acceptable quality levels or
prices, or fail to maintain required cGMP licenses, we may not be able to manufacture that candidate in sufficient quantities to
conduct the necessary human trials. Should the failure by the CRO occur in anticipation of or after marketing approval of that
candidate, we may be unable to generate as much revenue as rapidly (and such revenue may not be as profitable) as we had anticipated.
The manufacture of many drug products,
particularly in commercial quantities, can be complex and may require significant expertise and capital investment, particularly
if the development of advanced manufacturing techniques and process controls are required. If we obtain approval of an IND for
any of our drug candidates, of which there can be no assurance, we intend to contract with outside contractors to manufacture clinical
supplies and process our drug candidates. We have not yet had our drug candidates to be manufactured or processed on a commercial
scale and may not be able to do so for any of our drug candidates.
As we expect to engage contract manufacturers,
the Company will be exposed to the following risks:
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we might be unable to identify manufacturers on acceptable terms or at all because the FDA, NMPA, EMA or other comparable regulatory authorities must approve any manufacturers we determine to use and any potential manufacturer may be unable to satisfy federal, state or international regulatory standards;
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although we would be choosing manufacturers with the type of experience most suitable for our drug candidates, it is possible that our contract manufacturers may not be able to execute unique manufacturing procedures and other logistical support requirements we have developed and they might require a significant amount of support from us to implement and maintain the infrastructure and processes required to manufacture our particular drug candidates;
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our contract manufacturers might be unable to reproduce the quantity and quality of the drugs we need to meet our clinical and commercial needs within the time frames when we require those drugs;
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our contract manufacturers may breach their contracts with us, including by not performing as agreed or not devoting sufficient resources to our drug candidates, or they may not remain in the contract manufacturing business for the time required to supply our clinical trials or to successfully produce, store and distribute our products;
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even if initially accepted by
regulatory authorities, a manufacturer remains subject to ongoing periodic unannounced inspection by regulatory authorities to
ensure strict compliance with cGMP and other government regulations, and our contract manufacturers may fail to comply with these
regulations and requirements, resulting in rescission of cGMP licenses and our inability to continue using their services, requiring
us to find a replacement manufacturer;
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depending on the terms of our agreement with a manufacturer, we may not own, or may have to share, the IP rights to any improvements made by the manufacturer in the manufacturing process for our drug candidates; and
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our contract manufacturers may have unacceptable or inconsistent product quality success rates and yields.
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Each of these risks could delay or prevent
the completion of our clinical trials or the approval of any of our drug candidates by the FDA, NMPA, EMA or other comparable regulatory
authorities, result in higher costs or adversely impact commercialization of our drug candidates.
We are also responsible for quality control
by our manufacturers. We intend to rely on those unrelated-party manufactures to perform certain quality assurance tests on our
drug candidates prior to delivery to patients. If these tests are not appropriately done and test data are not reliable, patients
could be put at risk of serious harm and the FDA, NMPA, EMA or other comparable regulatory authorities could place significant
restrictions on our Company until deficiencies are remedied.
Manufacturers of drug products often encounter
difficulties in production, particularly in scaling up or out, validating the production process, and assuring high reliability
of the manufacturing process (including the absence of contamination). These problems include logistics and shipping, difficulties
with production costs and yields, quality control, including stability of the product, product testing, operator error, availability
of qualified personnel, as well as compliance with strictly enforced federal, state and non-U.S. regulations. Furthermore, if contaminants
are discovered in our supply of our drug candidates or in the manufacturing facilities, such manufacturing facilities may need
to be closed for an extended period of time to investigate and remedy the contamination. It is possible that stability failures
or other issues relating to the manufacture of our drug candidates may occur in the future. Additionally, our manufacturers may
experience manufacturing difficulties due to resource constraints, or as a result of labor disputes or unstable political environments.
If our manufacturers were to encounter any of these difficulties, or otherwise fail to comply with their contractual obligations,
our ability to provide our drug candidate to patients in clinical trials would be jeopardized. Any delay or interruption in the
manufacturing of clinical trial supplies could delay the completion of clinical trials, increase the costs associated with maintaining
clinical trial programs and, depending upon the period of delay, require us to begin new clinical trials with additional costs
or terminate clinical trials completely.
Review of changes in the manufacturing
process of our drug candidates could cause delays resulting from the need for additional regulatory approvals.
Changes in a process or procedure for manufacturing
one of our drug candidates, including a change in the location where the drug candidate is manufactured or a change of a contract
manufacturer, could require prior review by the FDA, NMPA, EMA or other comparable regulatory authorities and approval of the manufacturing
process and procedures in accordance with the FDA, NMPA or EMA’s regulations, or comparable requirements. This review may
be costly and time-consuming and could delay or prevent the launch of a product. The new facility will also be subject to pre-approval
inspection. In addition, we would have to demonstrate that the product made at the new facility is equivalent to the product made
at the former facility by physical and chemical methods, which are costly and time-consuming. It is also possible that the FDA,
NMPA, EMA or other comparable regulatory authorities may require clinical testing as a way to prove equivalency, which would result
in additional costs and delay.
Risks Related to AML Clinic
Failure to comply with all laws and
regulations applicable to the business of AML Clinic could have a material, adverse impact on the Company’s business.
Operation of AML Clinic subjects the Company
to a variety of Hong Kong laws and regulations specific to companies and professionals in the business of delivering medical care.
We and our employees will be subject to licensing and professional qualifications that do not apply to our other businesses. Breach
of any of these laws, regulations or licensing requirements could subject the Company to significant fines and other penalties
and possibly damage the Company’s reputation, which could have a material adverse effect on the Company’s business.
Risks
Related to Our Dietary Supplements
We may be subject to government
regulations for dietary supplements
From a regulatory perspective, some of
the Company’s non-drug candidates (including those developed under the project company Nativus), may be regulated as dietary
supplements, including DOI (NLS-2). For those non-drug candidates that the Company plans to develop, they are subject to extensive
and rigorous domestic government regulation, including regulation by the FDA, the Centers for Medicare & Medicaid Services,
or CMS, other divisions of the U.S. Department of Health and Human Services, state and local governments and their respective foreign
equivalents. The FDA regulates dietary supplements, cosmetics and drugs under different regulatory schemes.
For
example, the FDA regulates the processing, formulation, safety, manufacturing, packaging, labeling, advertising and distribution
of dietary supplements and cosmetics under its dietary supplement and cosmetic authority, respectively. The FDA also regulates
the research, development, pre-clinical and clinical testing, manufacture, safety, effectiveness, record keeping, reporting, labeling,
storage, approval, advertising, promotion, sale, distribution, import and export of pharmaceutical products under various regulatory
provisions. If any drug products we develop are tested or marketed abroad, they will also be subject to extensive regulation by
foreign governments, whether or not we have obtained FDA approval for a given product and its uses. Such foreign regulation may
be equally or more demanding than corresponding U.S. regulation.
Government regulation substantially increases
the cost and risk of researching, developing, manufacturing and selling products. Our failure to comply with these regulations
could result in, by way of example, significant fines, criminal and civil liability, product seizures, recalls, withdrawals, withdrawals
of approvals and exclusion and debarment from government programs. Any of these actions, including the inability of our hormone
therapy drug candidates to obtain and maintain regulatory approval, would have a materially adverse effect on our business, financial
condition, results of operations and prospects.
In addition, the FDA’s policies may
change and additional government regulations may be issued that could prevent, limit, or delay regulatory approval of our drug
candidates, or impose more stringent product labeling and post-marketing testing and other requirements.
We intend to market DOI (NLS-2) in Hong
Kong. In Hong Kong, dietary supplements are defined as “health food” products. “Health food” containing
medicines are subject to the Pharmacy and Poisons Ordinance (Cap 138) and such “health food” containing Chinese medicines
are regulated by the Chinese Medicine Ordinance (Cap 549), where they must meet the requirements in respect of safety, quality
and efficacy before they can be registered.
For other “health
food” products which cannot be classified as Chinese medicine or western medicine are regulated under the Public Health and
Municipal Services Ordinance (Cap 132) as general food products. The Public Health and Municipal Services Ordinance requires the
manufacturers and sellers of food to ensure that their products are fit for human consumption and comply with the requirements
in respect of food safety, food standards and labelling. In addition, all prepackaged food should bear labels which correctly list
out the ingredients of the food under the Food and Drugs (Composition and Labelling) Regulations (Cap 132W) under the Ordinance.
The DOI
(NLS-2) is made with the bioactive ingredient extracted Chinese yam powder and does not contain any western or Chinese medicine;
therefore, registration is not required under the local laws for marketing in Hong Kong. We will, however, ensure the compliance
of the Food and Drugs (Composition and Labelling) Regulations (Cap 132W) with by proper labelling in place.
Risks Related to Our Device Candidates
We are subject to risks related to
obtaining regulatory approval for device candidates.
The Company’s device candidates (including
those being developed under SLS-1), are likely to be regulated as medical devices. Medical devices are subject to extensive regulations,
supervised by regulatory authorities around the world, including the FDA, NMPA and applicable national authorities in relevant
European countries. The regulatory framework related to medical devices covers research, development, design, manufacturing, safety,
reporting, testing, labeling, packaging, storage, installation, servicing, marketing, sales and distribution. The Company is and
may also be, in addition to these industry-specific regulations, subject to numerous other ongoing regulatory obligations, such
as data protection, environmental, health and safety laws and restrictions. The costs of compliance with applicable regulations,
requirements or guidelines could be substantial. Furthermore, the regulatory environment has generally become more stringent and
extensive over time. Failure to comply with these regulations could result in sanctions including fines, injunctions, civil penalties,
denial of applications for marketing approval of the Company’s products, delays, suspension or withdrawal of approvals, license
revocation, seizures or recalls of products, operating restrictions, partial suspension or total shutdown of production and criminal
prosecutions, any of which could significantly increase the Company’s costs, delay the development and commercialization
of its device candidates.
We are subject to risks related to the carrying out and
outcome of clinical trials of medical devices.
The Company may sponsor studies on human
participants in clinical studies of its device candidates. Such clinical studies are performed to support regulatory approvals
for market access or to generate evidence relating to clinical benefits and cost benefits of using such device candidates. Clinical
studies are costly and time consuming and associated with risks such as finding trial sites, recruitment of suitable patients,
the actual cost per patient exceeding budget and inadequacies in the execution of the trials. There is also a risk of delays in
the performance of clinical studies, which can occur for a variety of reasons. For example, delays in obtaining regulatory approval
to commence a trial, reaching agreements on acceptable terms with prospective contract research organizations (“CROs”)
and clinical investigational sites, obtaining institutional review board approval at each site, difficulties in patient enrolment,
patients failing to complete a trial or return for follow-up, adding new sites or obtaining sufficient supplies of products or
clinical sites dropping out of a trial. If delays persist, there is a risk that studies eventually are suspended or terminated
if the delays occur due to circumstances that a sponsor of a clinical trial has difficulties controlling, or is unable to control,
or if the measures required for conducting the studies further are deemed too costly or extensive in relation to the scopes and
goals of the studies.
There are many factors which may affect
patient enrollment. Amongst these are the size and nature of the patient population, the proximity of patients to clinical sites,
the eligibility criteria for the trial, the design of the clinical study and competing clinical studies. Furthermore, clinicians’
and patients’ perceptions as to the potential advantages of the product being studied in relation to other available therapies,
including any new products that may be approved for the indications the company is investigating. Clinical studies may also be
suspended or terminated if participating subjects are exposed to unacceptable health risks or undesired side-effects.
Furthermore, there is a risk that clinical
studies may not demonstrate the required clinical benefit for the prospective indication the trial is aimed at. Failure in premarketing
clinical studies could lead to market clearance or approvals not being obtained which could delay or jeopardize the Company’s
ability to develop, market and sell the device candidates being studied. At any stage of the development, the Company may discontinue
device candidate based on review of available preclinical and clinical data, the estimated costs of continued development, market
considerations and other factors. Furthermore, with respect to the clinical studies of device candidates conducted by CROs and
others, the Company may have less control over their timing or outcome.
Risks Related to Our Industry, Business
and Operation
If we do
not comply with laws regulating the protection of the environment and health and human safety, our business could be adversely
affected.
Our research,
development and clinic operations involve the use of hazardous materials, chemicals and various radioactive compounds/radiation
and AML Clinic may create medical waste and radiation. Our R&D Center may maintain quantities of various flammable and toxic
chemicals in our facilities that are required for our research, development and manufacturing activities. We are subject to local
laws and regulations governing the use, manufacture, storage, handling and disposal of these hazardous materials and of medical
waste at the jurisdictions where we operate our clinic and research facilities, which are currently limited to Hong Kong. We believe
our procedures for storing, handling and disposing of these materials comply with the relevant guidelines and laws of the jurisdictions
in which our facilities are located. Although we believe that our safety procedures for handling and disposing of these materials
comply with the standards mandated by applicable regulations, the risk of accidental contamination or injury from these materials
cannot be eliminated. If an accident occurs, we could be held liable for resulting damages, which could be substantial. We are
also subject to numerous environmental, health and workplace safety laws and regulations, including those governing laboratory
procedures, exposure to blood-borne pathogens and the handling of biohazardous materials and medical waste.
Although we maintain
workers’ compensation insurance to cover us for costs and expenses we may incur due to injuries to our employees resulting
from the use of these materials, this insurance may not provide adequate coverage against potential liabilities. We do not maintain
insurance for environmental liability or toxic tort claims that may be asserted against us in connection with our storage or disposal
of biological, hazardous or radioactive materials. Additional federal, state and local laws and regulations affecting our operations
may be adopted in the future. We may incur substantial costs to comply with, and substantial fines or penalties, if we violate
any of these laws or regulations.
Our future success depends on our
ability to retain our Chief Executive Officer, our scientific and clinical advisors, and other key executives and to attract, retain
and motivate qualified personnel.
We are highly dependent on Ian Huen, our
Chief Executive Officer, as well as, other principal members of our management teams, scientific teams as well as scientific and
clinical advisors. Although we have formal employment agreements, which we refer to as appointment letters, with all of our executive
officers, these agreements do not prevent our executives from terminating their employment with us at any time, subject to applicable
notice periods. Nevertheless, the loss of the services of any of these persons could impede the achievement of our research, development
and commercialization objectives.
To induce valuable employees to remain
at our Company, in addition to salary and cash incentives, we plan to provide share incentive grants that vest over time. The value
to employees of these equity grants that vest over time may be significantly affected by movements in the price of our Class A
Ordinary Shares that are beyond our control, and may at any time be insufficient to counteract more lucrative offers from other
companies. Although we have appointment letters with our key employees, any of our employees could resign at any time, with 1-month
to 3-months prior written notice or with payment in lieu of notice.
Recruiting and retaining qualified officers,
scientific, clinical, sales and marketing personnel or consultants will also be critical to our success. In addition, we rely on
consultants and advisors, including scientific and clinical advisors, to assist us in formulating our discovery and preclinical
studies development and commercialization strategy. The loss of the services of our executive officers or other key employees and
consultants could impede the achievement of our research, development and commercialization objectives and seriously harm our ability
to successfully implement our business strategy.
Furthermore, replacing executive officers
and key employees or consultants may be difficult and may take an extended period of time, because of the limited number of individuals
in our industry with the breadth of skills and experience required to successfully develop, gain regulatory approval of and commercialize
drug and device candidates. Competition to hire from this limited pool is intense, and we may be unable to hire, train, retain
or motivate these key personnel or consultants on acceptable terms given the competition among numerous pharmaceutical and biotechnology
companies for similar personnel.
We also experience competition for the
hiring of scientific and clinical personnel from universities and research institutions. Our consultants and advisors may be employed
by employers other than us and may have commitments under consulting or advisory contracts with other entities that may limit their
availability to us. If we are unable to continue to attract and retain high quality personnel, our ability to pursue our growth
strategy will be limited.
We will need to increase the size
and capabilities of our organization, and we may experience difficulties in managing our growth.
As of the date of this annual report, we have 37 employees,
including 36 full-time employees and 1 part-time employee. Of these, 12 are engaged in full-time research and development and laboratory
operations, 18 are engaged in general and administrative functions, 6 are full-time employees engaged in the clinic operation and
1 part-time employee is engaged in legal clerical support. As of the date of annual report, 37 of our employees are located in
Hong Kong. In addition, we have engaged and may continue to engage 39 independent contracted consultants and advisors to assist
us with our operations. As our development and commercialization plans and strategies develop, and as we have transitioned into
operating as a public company, we will need to establish and maintain effective disclosure and financial controls and make changes
in our corporate governance practices. We will need to add a significant number of additional managerial, operational, sales, marketing,
financial and other personnel with the appropriate public company experience and technical knowledge and we may not successfully
recruit and maintain such personnel. Future growth will impose significant added responsibilities on members of management, including:
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identifying, recruiting, integrating, maintaining and motivating additional employees;
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managing our internal development efforts effectively, including clinical, the FDA or other comparable regulatory authority review process for our drug and device candidates, while complying with our contractual obligations to contractors and others; and
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improving our operational, financial and management controls, reporting systems and procedures.
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Our future financial performance and our
ability to commercialize our drug candidates will depend, in part, on our ability to effectively manage our future growth, and
our management may also have to divert a disproportionate amount of its attention away from day-to-day activities in order to devote
a substantial amount of time to managing these growth activities.
We currently rely, and for the foreseeable
future will continue to rely, in substantial part on certain independent organizations, advisors and consultants for significant
input in selecting and evaluating new products to pursue. These independent organizations, advisors and consultants may not continue
to be available to us on a timely basis when needed, and in such case, we may not have the ability to find qualified replacements.
In addition, if we are unable to effectively manage our outsourced activities, or if the quality or accuracy of the services provided
by consultants is compromised for any reason, our clinical trials may be extended, delayed or terminated, and we may not be able
to obtain regulatory approval of our drug candidates or otherwise advance our business. Furthermore, we may not be able to manage
our existing consultants or find other competent outside contractors and consultants on economically reasonable terms, if at all.
If we are not able to effectively expand
our organization by hiring new employees and expanding our groups of consultants and contractors, we may not be able to successfully
implement the tasks necessary to further develop and commercialize our drug and device candidates and, accordingly, may not achieve
our research, development and commercialization goals.
We intend to seek additional collaborations,
strategic alliances or acquisitions or enter into royalty-seeking or sublicensing arrangements in the future, but we may not realize
the benefits of these arrangements.
We intend to form or seek strategic alliances,
create joint ventures or collaborations, acquire complimentary products, IP rights, technology or businesses or enter into additional
licensing arrangements with unrelated parties that we determine may complement or augment our development and commercialization
efforts with respect to our drug and device candidates. Any of these relationships may require us to incur non-recurring and other
charges, increase our near and long-term expenditures, issue securities that dilute our existing shareholders, or disrupt our management
and business.
We will face significant competition in
seeking appropriate strategic partners and the negotiation process is likely to be time-consuming, costly and complex. Moreover,
we may not be successful in our efforts to establish a strategic partnership or another alternative arrangement for any of our
drug and device candidates because their state of development may be deemed to be too early for collaborative effort and others
may not view our drug and device candidates as having the requisite potential to demonstrate safety and efficacy. If and when we
enter into an agreement with a collaboration partner or sublicensee for development and commercialization of a drug or device candidate,
we can expect to relinquish some or all of the control over the future success of that drug and device candidate to the unrelated-party.
Further, even if we enter into a collaboration
involving any of our drug and device candidates, the arrangement will be subject to numerous risks, which may include the following:
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the collaborators will likely have significant discretion in determining the efforts and resources that they will apply to a collaboration;
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the collaborator may ultimately choose not pursue development and commercialization of our drug candidates or may elect not to continue or renew development or commercialization programs, based on clinical trial results, changes in their strategic focus due to the acquisition of competitive drugs, availability of funding, or other external factors, such as a business combination that diverts resources or creates competing priorities;
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the collaborator may delay clinical trials, provide insufficient funding for a clinical trial, stop a clinical trial, abandon a drug or device candidate, repeat or conduct new clinical trials, or require a new formulation of a drug or device candidate for clinical testing;
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the collaborator could independently develop, or develop with unrelated parties, drugs that compete directly or indirectly with our drugs or drug and device candidates;
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the collaborator with marketing and distribution rights to one or more drugs may not commit sufficient resources to their marketing and distribution;
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the collaborator may not properly maintain or defend our IP rights or may use our IP or proprietary information in a way that gives rise to actual or threatened litigation that could jeopardize or invalidate our IP or proprietary information or expose us to potential liability;
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disputes may arise between us and the collaborator that cause the delay or termination of the research, development or commercialization of our drug and device candidates, or that result in costly litigation or arbitration that diverts management attention and resources;
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the collaboration may be terminated and, if terminated, may result the Company needing additional capital to pursue further development or commercialization of the applicable drug and device candidates;
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the collaborator may own or co-own IP covering our drugs that results from our collaborating with them, and in such cases, we would not have the exclusive right to commercialize such IP;
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the collaboration may result in increased operating expenses or the assumption of indebtedness or contingent liabilities; and
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the collaboration arrangement may result in the loss of key personnel and uncertainties in our ability to maintain key business relationships.
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As a result, if we enter into collaboration
agreements and strategic partnerships or license our drugs, we may not be able to realize the benefit of such transactions, which
could delay our timelines or otherwise adversely affect our business. Following a strategic transaction or license, we may not
achieve the revenue or specific net income that justifies such transaction. If we are unable to reach agreements with a suitable
collaborator on a timely basis, on acceptable terms, or at all, we may have to curtail the development of a drug or device candidate,
reduce or delay its development program or one or more of our other development programs, delay its potential commercialization
or reduce the scope of any sales or marketing activities, or increase our expenditures and undertake development or commercialization
activities at our own expense.
If we fail to enter into collaborations,
we may seek to fund and undertake development or commercialization activities on our own, but we may not have sufficient funds
or expertise to undertake the necessary development and commercialization activities. In such a case, we may not be able to further
develop our drug and device candidates or bring them to market and generate product sales revenue, which would harm our business
prospects, financial condition and results of operations.
Our employees, independent contractors,
consultants, commercial partners and vendors may engage in misconduct or other improper activities, including non-compliance with
regulatory standards and requirements.
We are exposed to the risk of fraud, misconduct
or other illegal activity by our employees, independent contractors, consultants, commercial partners and vendors. Misconduct by
these parties could include intentional, reckless and negligent conduct that fails to: comply with the laws of the FDA and other
similar non-U.S. regulatory authorities; provide true, complete and accurate information to the FDA and other similar non-U.S.
regulatory authorities; comply with manufacturing standards we have established; comply with healthcare fraud and abuse laws in
the United States and similar non-U.S. fraudulent misconduct laws; or report financial information or data accurately or to disclose
unauthorized activities to us. If we obtain the FDA approval for any of our drug and device candidates and begin commercializing
those drugs in the United States, our potential exposure under U.S. laws will increase significantly and our costs associated with
compliance with such laws are also likely to increase. These laws may impact, among other things, our current activities with principal
investigators of our sponsored researches and research patients and our use of information obtained in the course of patient recruitment
for clinical trials, as well as proposed and future sales, marketing and education programs. In particular, the promotion, sales
and marketing of healthcare items and services, as well as certain business arrangements in the healthcare industry, are subject
to extensive laws designed to prevent fraud, kickbacks, self-dealing and other abusive practices. These laws and regulations may
restrict or prohibit a wide range of pricing, discounting, marketing and promotion, structuring and commission(s), certain customer
incentive programs and other business arrangements generally.
It is not always possible to identify and
deter misconduct by employees and other parties, and the precautions we take to detect and prevent this activity may not be effective
in controlling unknown or unmanaged risks or losses, or in protecting us from governmental investigations or other actions or lawsuits
stemming from a failure to comply with these laws or regulations. If any such actions are instituted against us, and we are not
successful in defending ourselves or asserting our rights, those actions could have a significant impact on our business, including
the imposition of significant fines or other sanctions.
Our disclosure controls and procedures
may not prevent or detect all errors or acts of fraud.
Our disclosure controls and procedures
are designed to reasonably assure that information required to be disclosed by us in reports we file or submit under the Exchange
Act is accumulated and communicated to management, and recorded, processed, summarized and reported within the time periods specified
in the rules and forms of the SEC.
We believe that
any disclosure controls and procedures, or internal controls and procedures, no matter how well conceived and operated, can provide
only reasonable, not absolute, assurance that the objectives of the control system are met.
These inherent limitations include the
realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally,
controls can be circumvented by the individual acts of some persons, by collusion of two or more people or by an unauthorized override
of the controls. Accordingly, because of the inherent limitations in our control system, misstatements due to error or fraud may
occur and not be detected, which would likely cause investors to lose confidence in
our reported financial information. This could in turn limit our access to capital markets, harm our results of operations, and
lead to a decline in the trading price of our Class A Ordinary Shares. Additionally, ineffective internal control over financial
reporting could expose us to increased risk of fraud or misuse of corporate assets and subject us to potential delisting from the
stock exchange on which we list, regulatory investigations and civil or criminal sanctions. We may also be required to restate
our financial statements from prior periods.
If we fail
to establish and maintain proper internal financial reporting controls, our ability to produce accurate financial statements or
comply with applicable regulations could be impaired.
Pursuant to Section
404 of the Sarbanes-Oxley Act, we are required to file a report by our management on our internal control over financial reporting,
including an attestation report on internal control over financial reporting issued by our independent registered public accounting
firm. However, while we remain an emerging growth company, we will not be required to include an attestation report on internal
control over financial reporting issued by our independent registered public accounting firm. The presence of material weaknesses
in internal control over financial reporting could result in financial statement errors which, in turn, could lead to errors in
our financial reports and/or delays in our financial reporting, which could require us to restate our operating results. In connection
with the audit of our financial statements for the year ended December 31, 2018 and the period March 1, 2017 through December
31, 2017, we and our independent registered public accounting firm identified one material weakness in our internal control over
financial reporting, as defined in the standards established by the Public Company Accounting Oversight Board of the United States.
The material weakness identified was the lack of dedicated resources to take responsibility for the finance and accounting functions
and the preparation of financial statements in compliance with generally accepted accounting principles in the United States,
or U.S. GAAP.
In 2019, we took actions
to remediate the abovementioned material weakness, and we believe we have remediated the material weakness by implementing the
following measures:
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provide trainings to staff regarding to the preparation of financial statements in compliance with generally accepted accounting principles in the United States;
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change to a new and well-established accounting system to enhance effectiveness and financial and system control;
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establish clear roles and responsibilities for accounting and financial reporting staff to address finance and accounting issues; and
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continue to monitor the improvement on internal control over financial reporting.
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As of December 31,
2019, we determined that the aforementioned measures have remediated the material weakness. However, since we
are still in the process of replenishing and building up a qualified finance and accounting team with sufficient dedicated resources,
our management assessed that the deficiency related to the lack of dedicated resources to take responsibility for the finance and
accounting functions and the preparation of financial statements in compliance with generally accepted accounting principles in
the United States, or U.S. GAAP, still existed as of December 31, 2019. Therefore, based on the definition of “material weakness”
and “significant deficiency” in the standards established by the Public Company Accounting Oversight Board of the United
States, our management concluded that the deficiency now only rises to the level of a significant deficiency. However, we cannot
assure you that we will not identify additional material weaknesses or significant deficiencies in the future.
Our management concluded
that our internal controls over financial reporting were effective as of December 31, 2019. However, if we fail to maintain effective
internal controls over financial reporting in the future, our management and our independent registered public accounting firm
may conclude that our internal control over financial reporting is not effective. Investors may lose confidence in our operating
results, the price of the Class A Ordinary Shares could decline and we may be subject to litigation or regulatory enforcement
actions. In addition, if we are unable to meet the requirements of Section 404 of the Sarbanes-Oxley Act, the Class A Ordinary
Shares may not be able to remain listed on the NASDAQ Global Market.
We may market our products, if approved,
globally; if we do, we will be subject to the risk of doing business internationally.
We operate and expect to operate in various
countries, and we may not be able to market our products in, or develop new products successfully for, these markets. We may also
encounter other risks of doing business internationally including but not limited to:
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unexpected changes in, or impositions of, legislative or regulatory requirements;
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efforts to develop an international sales, marketing and distribution organization may increase our expenses, divert our management’s attention from the acquisition or development of drug candidates or cause us to forgo profitable licensing opportunities in these geographies;
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the occurrence of economic weakness, including inflation or political instability;
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the effects of applicable non-U.S. tax structures and potentially adverse tax consequences;
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differences in protection of our IP rights including patent rights of other parties;
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the burden of complying with a variety of foreign laws including difficulties in effective enforcement of contractual provisions;
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delays resulting from difficulty in obtaining export licenses, tariffs and other barriers and restrictions, potentially longer payment cycles, greater difficulty in accounts receivable collection and potentially adverse tax treatment; and
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production shortages resulting from any events affecting raw material supply or manufacturing capabilities abroad.
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In addition, we are subject to general
geopolitical risks in foreign countries where we operate, such as political and economic instability and changes in diplomatic
and trade relationships, which could affect, among other things, customers’ inventory levels and consumer purchasing, which
could cause our results to fluctuate and our net sales to decline. The occurrence of any one or more of these risks of doing business
internationally, individually or in the aggregate, could materially and adversely affect our business and results of operations.
If we engage in future acquisitions
or strategic partnerships, this may increase our capital requirements, dilute our shareholders, cause us to incur debt or assume
contingent liabilities, and subject us to other risks.
We may evaluate various acquisitions and
strategic partnerships, including licensing or acquiring complementary products, IP rights, technology or businesses. Any potential
acquisition or strategic partnership may entail numerous risks, including, but not limited to:
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increase in operating expenses and cash requirements;
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the assumption of additional indebtedness or contingent liabilities;
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the issuance of our equity securities;
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assimilation of operations, IP and products of an acquired company, including difficulties associated with integrating new personnel;
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the diversion of our management’s attention from our existing product programs and initiatives in pursuing such a strategic merger or acquisition;
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retention of key employees, the loss of key personnel, and uncertainties in our ability to maintain key business relationships;
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risks and uncertainties associated with the other party to such a transaction, including the prospects of that party and their existing drugs or drug and device candidates and regulatory approvals; and
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our inability to generate revenue from acquired technology and/or products sufficient to meet our objectives in undertaking the acquisition or even to offset the associated acquisition and maintenance costs.
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In addition, if we undertake acquisitions,
we may issue dilutive securities, assume or incur debt obligations, incur large one-time expenses and acquire intangible assets
that could result in significant future amortization expense. Moreover, we may not be able to locate suitable acquisition opportunities
and this inability could impair our ability to grow or obtain access to technology or products that may be important to the development
of our business.
If we fail to comply with the U.S.
Foreign Corrupt Practices Act (“FCPA”), or other anti-bribery laws, our reputation may be harmed and we could
be subject to penalties and significant expenses that have a material adverse effect on our business, financial condition and results
of operations.
We are subject to the FCPA. The FCPA generally
prohibits us from making improper payments to non-U.S. officials for the purpose of obtaining or retaining business. We are also
subject to the anti-bribery laws of other jurisdictions, particularly the PRC. As our business expands, the applicability of the
FCPA and other anti-bribery laws to our operations will increase. Our procedures and controls to monitor anti-bribery compliance
may fail to protect us from reckless or criminal acts committed by our employees or agents. If we, due to either our own deliberate
or inadvertent acts or those of others, fail to comply with applicable anti-bribery laws, our reputation could be harmed and we
could incur criminal or civil penalties, other sanctions and/or significant expenses, which could have a material adverse effect
on our business, including our financial condition, results of operations, cash flows and prospects.
If we commence clinical trials of
one of our drug or device candidates, and product liability lawsuits are brought against us, we may incur substantial liabilities
and the commercialization of such drug or device candidates may be affected.
If any of our drug or device candidates
enter clinical trials, we will face an inherent risk of product liability suits and will face an even greater risk if we obtain
approval to commercialize any drugs. For example, we may be sued if our drug candidates cause or are perceived to cause injury
or are found to be otherwise unsuitable during clinical testing, manufacturing, marketing or sale. Any such product liability claims
may include allegations of defects in manufacturing, defects in design, a failure to warn of dangers inherent in the drug, negligence,
strict liability or a breach of warranties. Claims could also be asserted under state consumer protection acts. If we cannot successfully
defend ourselves against product liability claims, we may incur substantial liabilities or be required to limit commercialization
of our drug candidates. Even successful defense would require significant financial and management resources. Regardless of the
merits or eventual outcome, liability claims may result in:
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decreased demand for our drugs;
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injury to our reputation;
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withdrawal of clinical trial participants and inability to continue clinical trials;
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initiation of investigations by regulators;
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costs to defend the related litigation;
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a diversion of management’s time and our resources;
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substantial monetary awards to trial participants or patients;
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product recalls, withdrawals or labeling, marketing or promotional restrictions;
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loss of revenue;
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exhaustion of any available insurance and our capital resources;
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the inability to commercialize any drug candidate; and
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a decline in the price of our Class A Ordinary Shares.
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We shall seek to obtain the appropriate
insurance once our candidates are ready for clinical trial. However, our inability to obtain sufficient product liability insurance
at an acceptable cost to protect against potential product liability claims could prevent or inhibit the commercialization of drugs
we develop, alone or with collaborators. We currently do not have in place product liability insurance and although we plan to
have in place such insurance as and when the products are ready for commercialization, as well as insurance covering clinical trials,
the amount of such insurance coverage may not be adequate, we may be unable to maintain such insurance, or we may not be able to
obtain additional or replacement insurance at a reasonable cost, if at all. Our insurance policies may also have various exclusions,
and we may be subject to a product liability claim for which we have no coverage. We may have to pay any amounts awarded by a court
or negotiated in a settlement that exceed our coverage limitations or that are not covered by our insurance, and we may not have,
or be able to obtain, sufficient capital to pay such amounts. Even if our agreements with any future corporate collaborators entitle
us to indemnification against losses, such indemnification may not be available or adequate should any claim arise.
Additionally, we may be sued if the products
that we commercialize, market or sell cause or are perceived to cause injury or are found to be otherwise unsuitable, and may result
in:
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decreased demand for those products;
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damage to our reputation;
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costs incurred related to product recalls;
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limiting our opportunities to enter into future commercial partnership; and
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a decline in the price of our Class A Ordinary Shares.
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Our insurance coverage may be inadequate
to protect us against losses.
We currently maintain property insurance
for our office premises (including one unit of server and accessories). We hold employer’s liability insurance generally
covering death or work-related injury of employees; we maintain “Office Care Plan Insurance” for those persons working
in our offices and “Medical Plan” for our employee. We hold public liability insurance covering certain incidents involving
unrelated parties that occur on or in the premises of the Company. We have directors and officers liability insurance. We do not
have key-man life insurance on any of our senior management or key personnel, or business interruption insurance. Our insurance
coverage may be insufficient to cover any claim for product liability, damage to our fixed assets or employee injuries. If any
claims for damage are brought against us, or if we experience any business disruption, litigation or natural disaster, we might
incur substantial costs and diversion of resources.
Fluctuations in exchange rates could
result in foreign currency exchange losses
Our operations and equity are funded in
U.S. dollars and we currently incur the majority of our expenses in U.S. dollars or in H.K. dollars. H.K. dollar is currently pegged
to the U.S. dollar; however, we cannot guarantee that such peg will continue to be in place in the future. Our exposure to foreign
exchange risk primarily relates to the limited cash denominated in currencies other than the functional currencies of each entity
and limited revenue contracts dominated in H.K. dollars in certain Hong Kong operating entities. We do not believe that we currently
have any significant direct foreign exchange risk and have not hedged exposures denominated in foreign currencies or any other
derivative financial instruments.
If we are exposed to foreign currency exchange
risk as our results of operations, cash flows maybe subject to fluctuations in foreign currency exchange rates. For example, if
a significant portion of our clinical trial activities may be conducted outside of the United States, and associated costs may
be incurred in the local currency of the country in which the trial is being conducted, which costs could be subject to fluctuations
in currency exchange rates. We currently do not engage in hedging transactions to protect against uncertainty in future exchange
rates between particular foreign currencies and the U.S. dollar. A decline in the value of the U.S. dollar against currencies in
countries in which we conduct clinical trials could have a negative impact on our research and development costs. Foreign currency
fluctuations are unpredictable and may adversely affect our financial condition, results of operations and cash flows.
Our investments are subject to risks
that could result in losses.
We had
unrestricted cash of $5.19 million, $12.01 million and $16.25 million as of December 31, 2019, 2018 and 2017, respectively.
We may invest our cash in a variety of financial instruments. All of these investments are subject to credit, liquidity,
market and interest rate risk. Such risks, including the failure or severe financial distress of the financial institutions
that hold our cash, cash equivalents and investments, may result in a loss of liquidity, impairment to our investments,
realization of substantial future losses, or a complete loss of the investments in the long-term, which may have a material
adverse effect on our business, results of operations, liquidity and financial condition. While we believe our cash position
does not expose us to excessive risk, future investments may be subject to adverse changes in market value.
We are exposed to risks associated
with our computer hardware, network security and data storage.
Similar to all other computer network users,
our computer network system is vulnerable to attack of computer virus, worms, trojan horses, hackers or other similar computer
network disruptive problems. Any failure in safeguarding our computer network system from these disruptive problems may cause breakdown
of our computer network system and leakage of confidential information of the Company. Any failure in the protection of our computer
network system from external threat may disrupt our operation and may damage our reputation for any breach of confidentiality to
our customers, which in turn may adversely affect our business operation and performance. In the event that our confidential information
is stolen and misused, we may become exposed to potential risks of losses from litigation and possible liability.
In addition, we are highly dependent on
our IT infrastructure to store research data and information and manage our business operations. We do not backup all data on a
real-time basis and the effectiveness of our business operations may be materially affected by any failure in our IT infrastructure.
If our communications and IT systems do not function properly, or if there is any partial or complete failure of our systems, we
could suffer financial losses, business disruption or damage to our reputation.
Business disruptions could seriously
harm our future revenue and financial condition and increase our costs and expenses.
Our operations,
and those of our research institution collaborators, CROs, suppliers and other contractors and consultants, could be subject to
earthquakes, power shortages, telecommunications failures, damage from computer viruses, material computer system failures, water
shortages, floods, hurricanes, typhoons, fires, extreme weather conditions, medical epidemics and other natural or man-made disasters
or business interruptions. In addition, we partially rely on our research institution collaborators for conducting research and
development of our drug candidates, and they may be affected by government shutdowns or withdrawn funding. The occurrence of any
of these business disruptions could seriously harm our operations and financial condition and increase our costs and expenses.
We rely on contract manufacturers to produce and process our drug candidates. Our ability to obtain clinical supplies of our drug
candidates could be disrupted if the operations of these suppliers are affected by a man-made or natural disaster or other business
interruption. A large portion of our contract manufacturer’s operations is located in a single facility. Damage or extended
periods of interruption to our corporate or our contract manufacturer’s development or research facilities due to fire, natural
disaster, power loss, communications failure, unauthorized entry or other events could cause us to cease or delay development of
some or all of our drug candidates.
Although we do not currently conduct
any business in the PRC, we may in the future; in doing so we would be exposed to various risks related to doing business in the
PRC.
Although we currently do not conduct any
business in the PRC, we are the exclusive licensee to certain PRC patents directed to our drug candidates, and we intend to file application for certain products in the PRC. The pharmaceutical industry in the PRC is subject
to comprehensive government regulation and supervision, encompassing the approval, registration, manufacturing, packaging, licensing
and marketing of new drugs. (See “Item 4. Information on the Company – B. Business Overview – Regulations”).
In recent years, the regulatory framework in the PRC regarding the pharmaceutical industry has undergone significant changes, and
we expect that it will continue to undergo significant changes. Any such changes or amendments may result in increased compliance
costs on our business or cause delays in or prevent the successful development or commercialization of our drug candidates in the
PRC and reduce the current benefits that we believe are available to us from developing and manufacturing drugs in the PRC. Chinese
authorities have become increasingly vigilant in enforcing laws in the pharmaceutical industry and any failure by us or our partners
to maintain compliance with applicable laws and regulations or obtain and maintain required licenses and permits may result in
the suspension or termination of our business activities in the PRC. We believe our strategy and approach is aligned with the PRC
government’s policies, but we cannot ensure that our strategy and approach will continue to be aligned.
If in the future, we commence business
or operation in the PRC, changes in the political and economic policies of the PRC government may materially and adversely affect
our business, financial condition and results of operations and may result in our inability to sustain our growth and expansion
strategies. Once we start doing business in the PRC, our financial condition and results of operation in the PRC could be materially
and adversely affected by government control over capital investments or changes in tax regulations that are applicable to us,
and consequently have a material adverse effect on our businesses, financial condition and results of operations.
The SEC could take the position that
we are an “investment company” subject to the extensive requirements of the Investment Company Act of 1940. Such a
characterization and the associated compliance requirements could have a material adverse effect on our business, financial condition,
and results of operations.
Our business had historically included
passive healthcare related investments in early stage companies primarily in the United States. Although we are in the process
of liquidating those securities that remain in our portfolio, we still hold some such investments and these are included as assets
of our Company on a consolidated basis. As part of the Restructure, we resolved to exit such portfolio investments over an appropriate
timeframe and focus our resources on our current business. Since the date of the Restructure, we have not held ourselves out as
an investment company and we do not believe we are an “investment company” under the Investment Company Act of
1940. If the SEC or a court, however, were to disagree with us, we could be required to register as an investment company. This
would subject us to disclosure and accounting rules geared toward investment companies, rather than operating companies, which
may limit our ability to borrow money, issue options, issue multiple classes of stock and debt, and engage in transactions with
affiliates, and may require us to undertake significant costs and expenses to meet the disclosure and regulatory requirements to
which we would be subject as a registered investment company.
If we are classified as a passive
foreign investment company for U.S. federal income tax purposes, United States holders of our Class A Ordinary Shares may be subject
to adverse United States federal income tax consequences.
A non-U.S. corporation will be a passive
foreign investment company (“PFIC”) for U.S. federal income tax purposes, for such year, if either
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At least 75% of its gross income for such year is passive income; or
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The average percentage of our assets (determined at the end of each quarter) during such year which produce passive income or which are held for the production of passive income is at least 50%.
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Passive income generally includes dividends,
interests, rents and royalties (other than rents or royalties derived from the active conduct of a trade or business) and gains
from the disposition of passive assets.
A separate determination must be made after
the close of each taxable year as to whether a non-U.S. corporation is a PFIC for that year. For purposes of the PFIC analysis,
in general, a non-U.S. corporation is deemed to own its pro rata share of the gross income and assets of any entity in which it
is considered to own at least 25% of the equity by value. Based on the current and anticipated value of our assets, we believe
we were a PFIC for U.S. federal income tax purposes for our taxable year ending December 31, 2018, and we may be a PFIC for U.S.
federal income tax purposes for our current taxable year ending December 31, 2019.
In determining whether we are a PFIC, cash
and investments are considered by the U.S. Internal Revenue Service (“IRS”) to be a passive asset. During our taxable
year ending December 31, 2019, we believe that the amount of restricted and unrestricted cash we had on hand and investments was
greater than 50% of our total assets. The composition of our assets during the current taxable year may cause us to continue to
be classified as a PFIC. The determination of whether we will be a PFIC for our current taxable year or a future year may depend
in part upon how quickly we spend our liquid assets, and on the value of our goodwill and other unbooked intangibles not reflected
on our balance sheet, which may depend upon the market value of our Class A Ordinary Shares from time to time. Further, while we
will endeavor to use a classification methodology and valuation approach that is reasonable, the IRS may challenge our classification
or valuation of our goodwill and other unbooked intangibles for purposes of determining whether we are a PFIC in the current or
one or more future taxable years.
If we are a PFIC for any taxable year during
which a U.S. Holder owns our Class A Ordinary Shares, certain adverse U.S. federal income tax consequences could apply to such
U.S. Holder. As discussed under “Taxation – Material U.S. Federal Income Tax Considerations for U.S. Holders –
Passive Foreign Investment Company Rules”, a U.S. Holder may be able to make certain tax elections that would lessen the
adverse impact of PFIC status; however, in order to make such elections the U.S. holder will usually have to have been provided
information about the company by us, and there is no assurance that the company will provide such information.
For a more detailed discussion of the application
of the PFIC rules to us and the consequences to U.S. holders if we were determined to be a PFIC. (See “Item 10. Additional
Information – E. Taxation – Material U.S. Federal Income Tax Considerations for U.S. Holders – Passive
Foreign Investment Company Rules”)
Political risks associated with conducting
business in Hong Kong.
While we operate our
business globally, our business operations are principally based in Hong Kong. Accordingly, our business operation and financial
conditions will be affected by the political and legal developments in Hong Kong. During the period covered by the financial information
incorporated by reference into and included in this report, we derive substantially all of our revenue from operations in Hong
Kong and, specifically, from the AML Clinic in Hong Kong operating under the name of Talem Medical. Any adverse economic, social
and/or political conditions, material social unrest, strike, riot, civil disturbance or disobedience, as well as significant natural
disasters, may affect the market may adversely affect the business operations of the AML Clinic. Hong Kong is a special administrative
region of the PRC and the basic policies of the PRC regarding Hong Kong are reflected in the Basic Law, namely, Hong Kong’s
constitutional document, which provides Hong Kong with a high degree of autonomy and executive, legislative and independent judicial
powers, including that of final adjudication under the principle of “one country, two systems”. However, there is no
assurance that there will not be any changes in the economic, political and legal environment in Hong Kong in the future. Since
a substantial part of our operations is based in Hong Kong, any change of such political arrangements may pose immediate threat
to the stability of the economy in Hong Kong, thereby directly and adversely affecting our results of operations and financial
positions.
The Hong Kong protests
that begun in 2019 are ongoing protests in Hong Kong (the “Hong Kong Protests”) triggered by the introduction of the
Fugitive Offenders amendment bill by the Hong Kong government. If enacted, the bill would have allowed the extradition of criminal
fugitives who are wanted in territories with which Hong Kong does not currently have extradition agreements, including mainland
China. This led to concerns that the bill would subject Hong Kong residents and visitors to the jurisdiction and legal system of
mainland China, thereby undermining the region’s autonomy and people’s civil liberties. Various sectors of the Hong
Kong economy have been adversely affected as the protests turned increasingly violent. Most notably, the airline, retail, and real
estate sectors have seen their sales decline.
Under the Basic Law
of the Hong Kong Special Administrative Region of the People’s Republic of China, Hong Kong is exclusively in charge of its
internal affairs and external relations, while the government of the PRC is responsible for its foreign affairs and defense. As
a separate customs territory, Hong Kong maintains and develops relations with foreign states and regions. We cannot assure that
the Hong Kong Protests will not affect Hong Kong’s status as a Special Administrative Region of the People’s Republic
of China and thereby affecting its current relations with foreign states and regions.
Our revenue is susceptible
to the ongoing Hong Kong Protests as well as any other incidents or factors which affect the stability of the social, economic
and political conditions in Hong Kong. Any drastic events may adversely affect our business operations. Such adverse events may
include changes in economic conditions and regulatory environment, social and/or political conditions, civil disturbance or disobedience,
as well as significant natural disasters. Given the relatively small geographical size of Hong Kong, any of such incidents may
have a widespread effect on our business operations, which could in turn adversely and materially affect our business, results
of operations and financial condition.
We cannot assure that
the Hong Kong Protests will end in the near future and that there will be no other political or social unrest in the near future
or that there will not be other events that could lead to the disruption of the economic, political and social conditions in Hong
Kong. If such events persist for a prolonged period of time or that the economic, political and social conditions in Hong Kong
are to be disrupted, our overall business and results of operations may be adversely affected.
We are subject to the risks of doing
business globally.
Because we operate
our business in Hong Kong and other countries, our business is subject to risks associated with doing business globally. Accordingly,
our business and financial results in the future could be adversely affected due to a variety of factors, including: changes in
a specific country’s or region’s political and cultural climate or economic condition; unexpected changes in laws and
regulatory requirements in local jurisdictions; difficulty of effective enforcement of contractual provisions in local jurisdictions;
inadequate intellectual property protection in certain countries; enforcement of anti-corruption and anti-bribery laws; trade-protection
measures, import or export licensing requirements and fines, penalties or suspension or revocation of export privileges; the effects
of applicable local tax regimes and potentially adverse tax consequences; and significant adverse changes in local currency exchange
rates.
Our results of operation may be negatively
affected should the 2019-nCov virus (Coronavirus) continue to spread on a wider scale in Hong Kong.
Our business could
be adversely affected by the effects of a widespread outbreak of contagious disease, including the recent outbreak of respiratory
illness caused by a novel coronavirus first identified in Wuhan, Hubei Province, China. Any outbreak of contagious diseases,
and other adverse public health developments, particularly in China, could have a material and adverse effect on our business operations.
These could include disruptions or restrictions on our ability to travel or to distribute our products, as well as temporary closures
of our facilities or the facilities of our suppliers or customers.
Risks Related to Our Corporate Structure
Our CEO has control over key decision
making as a result of his control of a majority of our voting shares.
Our Founder, CEO, and our Executive Director,
Mr. Ian Huen, and his affiliates, over which he is deemed to have control and/or have substantial influence, has voting rights
with respect to an aggregate of 18,376,617 ordinary shares, on an as converted basis (2,315,148 Class A Ordinary Shares and 16,061,469
Class B Ordinary Shares), representing approximately 70% of the voting power of our outstanding ordinary shares as of the date
hereof. As a result, Mr. Huen has the ability to control the outcome of matters submitted to our shareholders for approval,
including the election of directors and any merger, consolidation, or sale of all or substantially all of our assets. In addition,
Mr. Huen has the ability to control the management and affairs of our company as a result of his position as our CEO and his
ability to control the election of our directors. Additionally, in the event that Mr. Huen controls our company at the time of
his death, control may be transferred to a person or entity that he designates as his successor. As a board member and officer,
Mr. Huen owes a fiduciary duty to our shareholders and must act in good faith in a manner he reasonably believes to be in
the best interests of our shareholders. As a shareholder, even a controlling shareholder, Mr. Huen is entitled to vote his
shares, and shares over which he has voting control as a result of voting agreements, in his own interests, which may not always
be in the interests of our shareholders generally.
The dual class structure of our ordinary
shares has the effect of concentrating voting control with our CEO, directors and their affiliates.
Each Class B Ordinary Share has ten votes
per share and each Class A Ordinary Share has one vote per share. Shareholders who hold shares of Class B Ordinary Shares,
including our executive officers and their affiliates who hold such shares, hold approximately 97% of the voting power of our outstanding
ordinary shares as of the date of this report. Because of the ten-to-one voting ratio between our Class B and Class A
Ordinary Shares, the holders of our Class B Ordinary Shares collectively will continue to control a majority of the combined
voting power of our ordinary share and therefore be able to control all matters submitted to our shareholders for approval so long
as the shares of Class B Ordinary Shares represent at least 9.1% of all outstanding shares of our Class A Ordinary Shares
and Class B Ordinary Shares. This concentrated control will limit your ability to influence corporate matters for the foreseeable
future.
Future transfers by holders of Class B
Ordinary Shares will generally result in those shares converting to Class A Ordinary Shares, subject to limited exceptions,
such as certain transfers effected for estate planning purposes. The conversion of Class B Ordinary Shares to Class A
Ordinary Shares will have the effect, over time, of increasing the relative voting power of those holders of Class B Ordinary
Shares who retain their shares in the long term. If, for example, Mr. Huen retains a significant portion of his holdings of
Class B Ordinary Share for an extended period of time, he could, in the future, continue to control a majority of the combined
voting power of our Class A Ordinary Shares and Class B Ordinary Shares.
As a “controlled company”
under the rules of the NASDAQ Global Market, we may choose to exempt our company from certain corporate governance requirements
that could have an adverse effect on our public shareholders.
Our directors and officers beneficially
own a majority of the voting power of our outstanding Class A Ordinary Shares. Under the Rule 4350(c) of the NASDAQ Global Market,
a company of which more than 50% of the voting power is held by an individual, group or another company is a “controlled
company” and may elect not to comply with certain corporate governance requirements, including the
requirement that a majority of our directors be independent, as defined in the NASDAQ Global Market Rules, and the requirement
that our compensation and nominating and corporate governance committees consist entirely of independent directors. Although we
do not intend to rely on the “controlled company” exemption under the Nasdaq listing rules, we could elect to rely
on this exemption in the future. If we elect to rely on the “controlled company” exemption, a majority of the members
of our board of directors might not be independent directors and our nominating and corporate governance and compensation committees
might not consist entirely of independent directors. Accordingly, during any time while we remain a controlled company relying
on the exemption and during any transition period following a time when we are no longer a controlled company, you would not
have the same protections afforded to shareholders of companies that are subject to all of the NASDAQ Global Market corporate governance
requirements. Our status as a controlled company could cause our Class A Ordinary Share to look less attractive to certain
investors or otherwise harm our trading price.
Risks Related to our Securities
Shares eligible for future sale may
adversely affect the market price of our Class A Ordinary Shares if the shares are successfully listed on NASDAQ or other stock
markets, as the future sale of a substantial amount of outstanding Class A Ordinary Shares in the public marketplace could reduce
the price of our Class A Ordinary Shares.
The market price of
our Class A Ordinary Shares could decline as a result of sales of substantial amounts of our Class A Ordinary Shares in the public
market, or the perception that these sales could occur. In addition, these factors could make it more difficult for us to raise
funds through future offerings of our Class A Ordinary Shares. Most of the Class A Ordinary Shares are freely transferable without
restriction or further registration under the Securities Act. The remaining Class A Ordinary Shares will be “restricted securities”
as defined in Rule 144. These Class A Ordinary Shares may be sold without registration under the Securities Act to the extent permitted
by Rule 144 or other exemptions under the Securities Act.
A sale or perceived sale of a substantial
number of our Ordinary Shares may cause the price of our Class A Ordinary Shares to decline.
If our shareholders
sell substantial amounts of our Class A Ordinary Shares in the public market, the market price of our Class A Ordinary Shares could
fall. Moreover, the perceived risk of this potential dilution could cause shareholders to attempt to sell their shares and investors
to short our Class A Ordinary Shares. These sales also may make it more difficult for us to sell equity or equity-related securities
in the future at a time and price that we deem reasonable or appropriate.
Issuances by us of additional securities,
whether in traditional or token format, could affect ownership and voting rights over us. In addition, the issuance of preferred
shares, or options or warrants to purchase those preferred shares, could negatively impact the value of the Class A ordinary shares
as the result of preferential dividend rights, conversion rights, redemption rights and liquidation provisions granted to the stockholders
of such preferred shares.
From time to time,
we may issue in public or private sales additional securities to third party investors. Such securities may provide holders with
ownership and voting rights that could provide the holders thereof with substantial influence over our business. Any preferred
shares that may be issued shall have such rights, preferences, privileges and restrictions as may be designated from time-to-time
by our board, including preferential dividend rights, voting rights, conversion rights, redemption rights and liquidation provisions.
There cannot be any assurance that we will not issue preferred securities with rights and preferences that are more beneficial
than those provided to our Ordinary Shares.
We have not paid dividends in the
past and do not expect to pay dividends in the future, and any return on investment may be limited to the value of our shares.
We have never paid
any cash dividends on our Class A Ordinary Shares and do not anticipate paying any cash dividends on our Class A Ordinary Shares
in the foreseeable future, and any return on investment may be limited to the value of our Class A Ordinary Shares. We plan to
retain any future earnings to finance growth.
Our dividend policy
is subject to the discretion of our Board of Directors and will depend on, among other things, our earnings, financial condition,
capital requirements and other factors. There is no assurance that our Board of Directors will declare dividends even if we are
profitable. Under Cayman Islands law, dividends may be declared and paid only out of funds legally available therefor, namely out
of either profit or our share premium account, and provided further that a dividend may not be paid if this would result in our
Company being unable to pay its debts as they fall due in the ordinary course of business and the realizable value of assets of
our Company will not be less than the sum of our total liabilities, other than deferred taxes as shown on our books of account,
and our capital.
Our Class B Ordinary Shares have
stronger voting power than our Class A Ordinary Shares and certain existing shareholders have substantial influence over our Company
and their interests may not be aligned with the interests of our other shareholders.
We have a dual-class
voting structure consisting of Class A Ordinary Shares and Class B Ordinary Shares. Under this structure, holders of Class A Ordinary
Shares are entitled to one vote per share, and holders of Class B Ordinary Shares are entitled to ten votes per share, which can
cause the holders of Class B Ordinary Shares to have an unbalanced, higher concentration of voting power. Our management team as
a group beneficially owns over 18 million Class B Ordinary Shares representing 80% voting power. As a result, until such time as
their collective voting power is below 50%, our management team as a group of controlling shareholders have substantial influence
over our business, including decisions regarding mergers, consolidations and the sale of all or substantially all of our assets,
election of directors and other significant corporate actions. They may take actions that are not in the best interests of us or
our other shareholders. These corporate actions may be taken even if they are opposed by our other shareholders. Further, concentration of
ownership of our Class B Ordinary Shares may discourage, prevent or delay the consummation of change of control transactions that
shareholders may consider favorable, including transactions in which shareholders might otherwise receive a premium for their shares.
Future issuances of Class B Ordinary Shares may also be dilutive to the holders of Class A Ordinary Shares. As a result, the market
price of our Class A Ordinary Shares could be adversely affected.
Shareholders who hold
shares of Class B Ordinary Shares, including our executive officers and their affiliates, hold approximately 97% of the voting
power of our outstanding ordinary shares. Because of the ten-to-one voting ratio between our Class B and Class A Ordinary
Shares, the holders of our Class B Ordinary Shares will collectively continue to control a majority of the combined voting
power of our Ordinary Shares and therefore be able to control all matters submitted to our shareholders for approval, so long as
the Class B Ordinary Shares represent at least 9.1% of all outstanding shares of our Ordinary Shares.
Raising additional capital may cause
dilution to our shareholders, restrict our operations or require us to relinquish rights to our technology or drug and device candidates.
We may seek additional
funding through a combination of equity offerings, debt financings, collaborations, licensing arrangements, strategic alliances
and marketing or distribution arrangements. To the extent that we raise additional capital through the sale of equity or convertible
debt securities, your ownership interest will be diluted, and the terms may include liquidation or other preferences that adversely
affect your rights as a holder of our Class A Ordinary Shares. The incurrence of additional indebtedness or the issuance of certain
equity securities could result in increased fixed payment obligations, and could also result in certain additional restrictive
covenants, such as limitations on our ability to incur additional debt or issue additional equity, limitations on our ability to
acquire or license IP rights and other operating restrictions that could adversely impact our ability to conduct our business.
In addition, issuance of additional equity securities, or the possibility of such issuance, may cause the market price of our Class
A Ordinary Shares to decline. In the event that we enter into collaborations or licensing arrangements to raise capital, we may
be required to accept unfavorable terms, including relinquishing or licensing to another party on unfavorable terms our rights
to technology or drug and device candidates that we otherwise would seek to develop or commercialize ourselves or potentially reserve
for future potential arrangements when we might be able to achieve more favorable terms.
Since we are a Cayman Islands exempted
company, the rights of our shareholders may be more limited than those of shareholders of a company organized in the United States.
Our corporate affairs
are governed by our Second Amended and Restated Memorandum and Articles of Association (as may be amended from time to time) (“Memorandum
and Articles”), the Companies Law (2018 Revision) of the Cayman Islands (the “Companies Law”) and the common
law of the Cayman Islands. The rights of shareholders to take action against the directors,
actions by minority shareholders and the fiduciary responsibilities of our directors are to a large extent governed by the common
law of the Cayman Islands. This common law is derived in part from comparatively limited judicial precedent in the Cayman Islands
as well as from English common law, which has persuasive, but not binding, authority on a court in the Cayman Islands. Under
the laws of some jurisdictions in the United States, majority and controlling shareholders generally have certain fiduciary responsibilities
to the minority shareholders. Shareholder action must be taken in good faith, and actions by controlling shareholders which are
obviously unreasonable may be declared null and void. Cayman Islands law protecting the interests of minority shareholders may
not be as protective in all circumstances as the law protecting minority shareholders in some U.S. jurisdictions. In addition,
the circumstances in which a shareholder of a Cayman Islands company may sue the company derivatively, and the procedures and defenses
that may be available to the company, may result in the rights of shareholders of a Cayman Islands company being more limited than
those of shareholders of a company organized in the United States. Accordingly, shareholders may have fewer alternatives available
to them if they believe that corporate wrongdoing has occurred. The Cayman Islands courts are also unlikely to recognize or enforce
judgments from U.S. courts based on certain liability provisions of U.S. securities laws that are penal in nature. There is no
statutory recognition in the Cayman Islands of judgments obtained in the United States, although the courts of the Cayman Islands
will generally recognize and enforce non-penal judgment of a foreign court of competent jurisdiction for a liquidated sum without
retrial on its merits which is not obtained in a manner contrary to public policy in the Cayman Islands and in respect of which
there are no concurrent proceedings in the Cayman Islands. This means, even if shareholders were to sue us successfully, they may
not be able to recover anything to make up for the losses suffered.
Furthermore, our directors
have the power to take certain actions without shareholder approval which would require shareholder approval under the laws of
most U.S. jurisdictions. For example, the directors of a Cayman Islands company, without shareholder approval, may implement a
sale of any assets, property, part of the business, or securities of the Company.
While Cayman Islands
law allows a dissenting shareholder to express the shareholder’s view that a court sanctioned reorganization of a Cayman
Islands company would not provide fair value for the shareholder’s shares, Cayman Islands statutory law does not specifically
provide for shareholder appraisal rights on a merger or consolidation of a company. This may make it more difficult for you to
assess the value of any consideration you may receive in a merger or consolidation or to require that the acquirer gives you additional
consideration if you believe the consideration offered is insufficient. However, Cayman Islands’ statutory law does provide
a mechanism for a dissenting shareholder in a merger or consolidation to apply to the Grand Court for a determination of the fair
value of the dissenter’s shares, if it is not possible for the Company and the dissenter to agree a fair price within the
time limits prescribed.
Shareholders of Cayman
Islands exempted companies, such as our Company, have no general rights under Cayman Islands’ law to inspect corporate records
and accounts or to obtain copies of lists of shareholders. Our directors have discretion under our Memorandum and Articles to determine
whether or not, and under what conditions, our corporate records may be inspected by our shareholders, but are not obliged to make
them available to our shareholders. This may make it more difficult for you to obtain the information needed to establish any facts
necessary for a shareholder motion or to solicit proxies from other shareholders in connection with a proxy contest.
Lastly, under the law
of the Cayman Islands, there is little statutory law for the protection of minority shareholders. The principal protection under
statutory law is that shareholders may bring an action to enforce the constituent documents of the corporation, our Memorandum
and Articles. Shareholders are entitled to have the affairs of the company conducted in accordance with the general law and the
memorandum and articles of association.
There are common law
rights for the protection of shareholders that may be invoked, largely dependent on English company law, since the common law of
the Cayman Islands for business companies is limited. Under the general rule pursuant to English company law known as the rule
in Foss v. Harbottle, a court will generally refuse to interfere with the management of a company at the insistence of a minority
of its shareholders who express dissatisfaction with the conduct of the company’s affairs by the majority or the board of
directors. However, every shareholder is entitled to have the affairs of the company conducted properly according to law and the
constituent documents of the company. As such, if those who control the company have persistently disregarded the requirements
of company law or the provisions of the company’s memorandum and articles of association, then the courts will grant relief.
Generally, the areas in which the courts will intervene are the following: (1) an act complained of which is outside the scope
of the authorized business or is illegal or not capable of ratification by the majority; (2) acts that constitute fraud on the
minority where the wrongdoers control the company; (3) acts that infringe on the personal rights of the shareholders, such as the
right to vote; and (4) where the company has not complied with provisions requiring approval of a special or extraordinary majority
of shareholders, which are more limited than the rights afforded minority shareholders under the laws of many states in the United
States subject to limited exceptions, under Cayman Islands Law a minority shareholder may not bring a derivative action against
directors. Our Cayman Islands’ counsel has advised us that they are aware of one recent as yet unreported derivative action
having been brought in a Cayman Islands’ court. Class actions are not recognized in the Cayman Islands, but groups of shareholders
with identical interests may bring representative proceedings, which are similar.
As a result, you may
be limited in your ability to protect your interests if you are harmed in a manner that would otherwise enable you to sue in a
United States federal court. In addition, shareholders of Cayman Islands companies may not have standing to initiate a shareholder
derivative action in U.S. federal courts.
As a result of all
of the above, shareholders of our Company may have more difficulty in protecting their interests in the face of actions taken by
management, members of the board of directors or controlling shareholders than they would have as shareholders of a public U.S.
company.
You may
face difficulties in protecting your interests, and your ability to protect your rights through the U.S. federal courts may be
limited because we are incorporated under Cayman Islands law, we currently conduct substantially all of our operations outside
the United States and some of our directors and executive officers reside outside the United States.
We
are incorporated in the Cayman Islands and currently conduct substantially all of our operations outside the United States through
our subsidiaries. Some of our directors and executive officers reside outside the United States and a substantial portion of their
assets are located outside of the United States. As a result, it may be difficult or impossible for you to bring an action against
us or against these individuals in the Cayman Islands or in Hong Kong, in the event that you believe that your rights have been
infringed under the securities laws of the United States or otherwise. Even if you are successful in bringing an action of this
kind, the laws of the Cayman Islands and Hong Kong may render you unable to enforce a judgment against our assets or the assets
of our directors and officers. There is no statutory recognition in the Cayman Islands of judgments obtained in the United States
or Hong Kong, although the courts of the Cayman Islands will generally recognize and enforce a non-penal judgment of a foreign
court of competent jurisdiction without retrial on the merits if such judgment is final, for a liquidated sum, not in the nature
of taxes, a fine or penalty, is not inconsistent with a Cayman Islands’ judgment in respect of the same matters, and was
not obtained in a manner which is contrary to public policy. In addition, a Cayman Islands court may stay proceedings if concurrent
proceedings are being brought elsewhere.
As a foreign private issuer, we are
permitted to adopt certain home country practices in relation to corporate governance matters that differ significantly from the
NASDAQ Global Market corporate governance listing standards. These practices may afford less protection to shareholders than they
would enjoy if we complied fully with corporate governance listing standards.
As a foreign private
issuer, we are permitted to take advantage of certain provisions in the NASDAQ Global Market listing rules that allow us to follow
Cayman Islands law for certain governance matters. Certain corporate governance practices in the Cayman Islands may differ significantly
from corporate governance listing standards as, except for general fiduciary duties and duties of care, Cayman Islands law has
no corporate governance regime which prescribes specific corporate governance standards. We may follow Cayman Islands corporate
governance practices in lieu of the corporate governance requirements of the Nasdaq Global Market in respect of the following.
For instance, Cayman law does not require that we obtain shareholder approval to issue 20% or more of our outstanding Ordinary
Shares in a private offering. Therefore, our shareholders may be afforded less protection than they otherwise would have under
corporate governance listing standards applicable to U.S. domestic issuers.
We are an emerging growth company
within the meaning of the Securities Act and will take advantage of certain reduced reporting requirements.
We are an “emerging
growth company,” as defined in the JOBS Act and take advantage of certain exemptions from various requirements applicable
to other public companies that are not emerging growth companies including, most significantly, not being required to comply with
the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act for so long as we are an emerging growth company.
As a result, if we elect not to comply with such auditor attestation requirements, our investors may not have access to certain
information they may deem important.
The JOBS Act also provides
that an emerging growth company does not need to comply with any new or revised financial accounting standards until such date
that a private company is otherwise required to comply with such new or revised accounting standards. The Company has elected to
use the extended transition period for complying with new or revised accounting standard under Section 102(b)(2) of the Jobs Act,
that allows the Company to delay the adoption of new or revised accounting standards that have different effective dates for public
and private companies until those standards apply to private companies.
Risks Related to the SMPT tokens
There is no assurance that purchasers
of the SMPT tokens will receive a return on their investment.
On
April 24, 2019, the SMPT token was announced to be launched. The SMPT tokens are issued by Smart Pharmaceutical Limited Partnership
(“SPLP”), a limited partnership registered in Seychelles, which is managed by SMTPH as its sole general partner. SMTPH
is a wholly-owned subsidiary of Aptorum Therapeutics Limited. Aptorum Group Limited is not involved with the offer and sale of
the SMPT token in any way, other than the potential indirect benefit it will receive as a result of its subsidiary, Smart Pharma,
from drug candidates developed by the Smart-ACTTM platform. Each Token will
entitle its holder (each, a “Tokenholder”) to receive certain sales-based royalties, sublicensing income or additional
cash flow generated by drug candidates developed by the Smart-ACTTM platform (the “Token Distribution”).
As identified in the
aforementioned risk factors, a pharmaceutical company’s ability to generate revenue and achieve profitability is dependent
on its ability to complete the development of drug candidates and any future drug candidates one develops in its portfolio, obtain
necessary regulatory approvals, and have our drugs products under development manufactured and successfully marketed, of which
there can be no guarantee. Furthermore, the research methodology used may be unsuccessful in identifying potential drug candidates,
or those drug candidates identified may have harmful side effects or other undesirable characteristics that make them unmarketable
or unlikely to receive regulatory approval (See “Item 3. Key Information—D. Risk Factors – Risks Related to the Preclinical and Clinical Development
of Our Drug Candidates - We currently do not generate revenue from product sales and may never become profitable; unless we can
raise more capital through additional financings, of which there can be no guarantee, our principal source of revenue will be from
AML Clinic, which may not be substantial” and “We may not be successful in our efforts to identify or discover additional
drug candidates. Due to our limited resources and access to capital, we must continue to the prioritize development of certain
drug candidates; such decisions may prove to be wrong and may adversely affect our business”).
Therefore, we
cannot guarantee that any drug candidates currently and subsequently developed by SMTPH using the Smart-ACTTM platform
will generate any revenue that would derive any sales-based royalties, sublicensing income or additional cash flow for distribution
to Tokenholders.
Accordingly, there
is no assurance that purchasers of SMPT tokens will realize any return on their investments or that their entire investments will
not be lost.
SMPT Tokenholders’ security
interest in the intellectual property rights may affect our shareholder’s interest in the Company.
SPLP acts as the intellectual
property holding company of Smart Pharma, and holds all title, rights and ownership interest of the intellectual property rights
developed by Smart-ACTTM (“Project IP”). The SMPT tokens are secured by way of a floating charge against
the Project IP to guarantee the distribution of accrued sales-based royalties, sublicensing income or additional cash flow generated
by drug candidates developed by the Smart-ACTTM platform.
Therefore, regardless
of the number of the SMPT tokens sold and the amount of proceeds raised from the token sales, Tokenholders will only be eligible
to receive a Token Distribution if any sales-based royalties, sublicensing income or additional cash flow is generated by drug
candidates developed by the Smart-ACTTM platform, as and when SPLP declares the distribution.
Because the Token Distribution
is secured by a security interest in such intellectual property rights, if and when SPLP defaults in its distribution obligations
to the Tokenholders, or in the event of liquidation, dissolution or winding up of SPLP, the floating charge may crystallize into
a fixed charge over the charged assets (i.e., the Project IP owned by SPLP), while a receiver may be appointed by the Tokenholders
to sell off the Project IP. If this were to occur, the disposal of the Project IP by an appointed receiver may trigger a breach
of any commercialization agreements between Smart Pharma and third parties with respect to the repurposed drug project, which may
in turn affect our business, revenue and reputation.
The distributions to SMPT Tokenholders
are not correlated with the number of SMPT tokens sold or net proceeds raised through the SMPT token sales.
SMTPH intends to use
all of the proceeds raised from the SMPT token sales towards the development and operation of the Smart-ACTTM platform.
If the issuance of the SMPT tokens does not result in substantial proceeds, it could have a material adverse effect on SMTPH’s
ability to fund these objectives and carry out its related business plans, its ability to develop the Smart-ACTTM platform
may be limited.
Aptorum Group anticipates
that the net proceeds from the sales of the SMPT tokens will not be sufficient to fully fund Smart Pharma’s current and future
operations until it becomes self-sustaining. Smart Pharma’s current funding needs include funding for validation and assessment
of candidates, operation and improvement of the platform, legal/professional services and exchanges-listing.
Therefore, Smart Pharma
will likely require funding from Aptorum Group or other sources to subsidize and support its operations. The presence and level
of funding support from Aptorum Group or other sources will not affect the aggregate distribution entitled by the Tokenholders,
as the aggregate distribution is dependent on the ability for Smart-ACTTM to develop drug candidates that can generate
sales-based royalties, sublicensing income or additional cash flow and the extent of commercial success of such candidate.
Therefore, the distributions
to SMPT Tokenholders would not necessarily be correlated with the number of SMPT tokens sold or the net proceeds raised through
the SMPT token sales. The dollar value of the aggregate distributions will not be affected by proceeds from the SMPT token sales,
regardless of whether the proceeds greatly exceed or are significantly lower than the actual costs for funding Smart Pharma’s
current and future operations.
Item 4. INFORMATION ON THE COMPANY
A. History and Development of the Company
Aptorum was incorporated
under the laws of the Cayman Islands on September 13, 2010. Our share capital is $100,000,000.00 divided into 60,000,000 Class
A Ordinary Shares with a nominal or par value of $1.00 each and 40,000,000 Class B Ordinary Shares with a nominal or par value
of $1.00 each.
APTUS CAPITAL LIMITED,
which has since been renamed to AENEAS CAPITAL LIMITED and which we refer to herein as Aeneas, was always under the direct ownership
of Jurchen and not under the ownership chain of Aptorum Group. However, Aptus Asia Financial Holdings Limited (“AAFH”),
which has since been renamed to Aeneas Group Limited, was transferred out of the Aptorum Group on November 10, 2017 to be held
directly by Jurchen Investment Corporation and that subsequently, APTUS CAPITAL LIMITED was then transferred to be under AAFH.
On May 4, 2017, Mr.
Huen transferred all of the ordinary shares in the Company he owned (in the amount of 22,307,596) to Jurchen, a company incorporated
in the British Virgin Islands and wholly-owned by Mr. Huen. On October 13, 2017, as part of the Conversions (as defined below)
the ordinary shares held by Jurchen were redesignated as 2,230,760 Class A Ordinary Shares and 20,076,836 Class B Ordinary Shares.
On February 21 and
March 1, 2017, the Company’s board of directors and shareholders resolved to restructure the Company from an investment fund
with management shares and non-voting participating redeemable preference shares to a holding company with operating subsidiaries,
respectively (the “Restructuring Plan”).
According to the Restructuring
Plan, the 256,571.12 issued participating shares with par value of $0.01 (“Participating Shares”) were redeemed and
4,743,418.88 unissued Participating Shares were cancelled; following such redemption and cancellation, we no longer have any Participating
Shares authorized or issued. Additionally, the Company authorized a class of securities consisting of 100,000,000 ordinary shares,
par value $1.00 per share (“Ordinary Shares”) and issued 25,657,110 Ordinary Shares to our original investors.
During the period March
1, 2017 through October 13, 2017, an aggregate of 2,207,025 Ordinary Shares were issued at a price of approximately $3.90 per share
in a private placement we described as a “Series A” offering. Each investor of the Series A offering, in addition to
a subscription agreement, signed a shareholder agreement, which set forth the basic governance terms of the Company, as well as
our capital structure. The shareholders agreement was terminated in October 2017.
On October 13, 2017,
ordinary resolutions were passed at an extraordinary general meeting of the Company approving (the “Conversions”):
(i) converting 72,135,865 of authorized but unissued Ordinary Shares into 54,573,620 authorized but unissued Class A ordinary shares,
par value of $1.00 per share (“Class A Ordinary Shares”) and 17,562,245 authorized but unissued Class B ordinary shares,
par value of $1.00 per share (“Class B Ordinary Shares”), respectively; (ii) converting 24,930,839 Ordinary Shares
held by three shareholders into an aggregate of 2,493,085 Class A Ordinary Shares and 22,437,754 Class B Ordinary Shares; and (iii)
converting 2,933,296 Ordinary Shares held by 24 shareholders into an aggregate 2,933,296 Class A Ordinary Shares. Following these
issuances, we had 27 shareholders of record.
On October 19, 2017,
we changed our name from APTUS Holdings Limited to our current name, Aptorum Group Limited.
On March 23, 2018,
Jurchen transferred 446,152 Class A Ordinary Shares and 4,015,367 Class B Ordinary Shares to CGY Investments Limited, a company
incorporated in Hong Kong and which we deem Mr. Darren Lui controls and/or of which he has substantial influence on the disposition
rights and voting rights of such shares. Following this transfer, Jurchen owns approximately 33% and 72% of our Class A Ordinary
Shares and Class B Ordinary Shares, respectively.
On December 17, 2018,
the Company consummated its IPO of 761,419 Class A Ordinary Shares. The Registration Statement was declared effective by the U.S.
Securities and Exchange Commission on December 3, 2018 (the “Effective Date”). The shares were sold at a price of $15.80
per share, generating gross proceeds to the Company of approximately $12,030,420. Immediately following the consummation of the
IPO and automatic conversion of the Notes and Bonds, there were an aggregate of 6,537,269 Class A Ordinary Shares issued and outstanding.
On February 28, 2020,
the Company consummated a Registered Direct Offering of 1,351,350 Class A Ordinary Shares and warrants to purchase up to 1,351,350
Class A Ordinary Shares. The shares were sold at a price of $7.40 per share, generating gross proceeds to the Company of approximately
$10 million. The warrants will be exercisable immediately following the date of issuance for a period of seven years at an initial
exercise price of $7.40. Immediately following the consummation of the Registered Direct Offering, there were an aggregate of 7,948,712
Class A Ordinary Shares issued and outstanding.
Over the past three
years, we have invested approximately $9.9 million towards our principal capital expenditures, which include laboratory equipment,
premises, leasehold improvements, and medical and other equipment.
The following diagram
illustrates our corporate structure as of the date of this annual report:
Emerging Growth Company Status
We are an “emerging
growth company,” as defined in the Jumpstart Our Business Startups Act (the “JOBS Act”), and we are eligible
to take advantage of certain exemptions from various reporting and financial disclosure requirements that are applicable to other
public companies, that are not emerging growth companies, including, but not limited to, (1) not being required to comply with
the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, (2) reduced disclosure obligations regarding executive
compensation in our periodic reports and proxy statements, and (3) exemptions from the requirements of holding a non-binding advisory
vote on executive compensation and shareholder approval of any golden parachute payments not previously approved. We intend to
take advantage of these exemptions.
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. As a result, an emerging growth
company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies.
We could remain an
emerging growth company for up to five years, or until the earliest of (1) the last day of the first fiscal year in which our annual
gross revenues exceed $1.07 billion, (2) the date that we become a “large accelerated filer” as defined in Rule 12b-2
under the Exchange Act, which would occur if the market value of our Ordinary Shares that is held by non-affiliates exceeds $700
million as of the last business day of our most recently completed second fiscal quarter and we have been publicly reporting for
at least 12 months, or (3) the date on which we have issued more than $1 billion in non-convertible debt during the preceding three-year
period.
Foreign Private Issuer Status
We are a foreign private
issuer within the meaning of the rules under the Exchange. As such, we are exempt from certain provisions applicable to United
States domestic public companies. For example:
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we are not required to provide as many Exchange Act reports, or as frequently, as a domestic public company;
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for interim reporting, we are permitted to comply solely with our home country requirements, which are less rigorous than the rules that apply to domestic public companies;
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we are not required to provide the same level of disclosure on certain issues, such as executive compensation;
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we are exempt from provisions of Regulation FD aimed at preventing issuers from making selective disclosures of material information;
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we are not required to comply with the sections of the Exchange Act regulating the solicitation of proxies, consents or authorizations in respect of a security registered under the Exchange Act; and
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we are not required to comply with Section 16 of the Exchange Act requiring insiders to file public reports of their share ownership and trading activities and establishing insider liability for profits realized from any “short-swing” trading transaction.
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B. Business Overview
Overview
We are a pharmaceutical company dedicated to developing and
commercializing a broad range of therapeutic and diagnostic technologies to tackle unmet medical needs. We have obtained exclusive
licenses for our technologies. In addition, we are also developing certain proprietary technologies as product candidates. We are
pursuing therapeutic and diagnostic projects (including projects seeking to use extracts or derivatives from natural substances
to treat diseases) in neurology, infectious diseases, gastroenterology, oncology and other disease areas. We also have projects
focused on surgical robotics. (See “Item 4. Information on the Company – B. Business Overview – Lead Projects,
Dietary Supplement and Other Projects under Development – Lead Projects”) Also, we opened a medical clinic, AML Clinic,
in June 2018.
Although none of our
drug or device candidates has yet been approved for testing in humans, our goal is to develop a broad range of early stage novel
therapeutics and diagnostics across a wide range of disease/therapeutic areas. Key components of our strategy for achieving this
goal include: (for details of our strategy, See “Item 4. Information on the Company – B. Business Overview –
Our Strategy”)
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Developing therapeutic and diagnostic innovations across a wide range of disease/therapeutic areas;
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Selectively expanding our portfolio with potential products that may be able to attain orphan drug designation and/or satisfy current unmet medical needs;
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Collaborating with leading academic institutions and CROs;
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Expanding our in-house pharmaceutical development center;
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Leveraging our management’s expertise, experience and commercial networks;
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Strategically developing opportunities in Hong Kong to promote access to the PRC market; and
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Obtaining and leveraging government grants to fund project development.
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We have devoted a
portion of the proceeds from our IPO, to two therapeutic projects (“Lead Projects”). The drug candidates being
advanced as the Lead Projects are ALS-4 and SACT-1, described in further detail below. If the results of the remaining
preclinical studies of these drug candidates are positive, we expect to be able to submit by the second half of 2020, subject to regulatory review, an Investigational New Drug Application (“IND”) for at least one of these candidates to the U.S. Food and Drug
Administration (“FDA”) or an equivalent application to the regulatory authorities in one or more other
jurisdictions such as the China Food and Drug Administration (“NMPA”) and/or the European Medicines Agency
(“EMA”). Acceptance of these applications by the relevant regulatory authority would enable the Company to begin
testing that drug candidate in humans in that jurisdiction. Our ability to obtain any approval of such applications is
entirely dependent upon the results of our preclinical studies, none of which have yet been completed.
Our current business
consists of “therapeutics” and “non-therapeutics” segments. However, our focus is on the therapeutics segments.
Because of the risks, costs and extended development time required for successful drug development, we have determined to pursue
projects within our non-therapeutics segments, such as AML Clinic, to provide some interim revenue and medical robots that may
be brought to market and generate revenue more quickly.
Therapeutics
Segment. In our therapeutics segment (“Aptorum Therapeutics Group”), we are currently seeking to develop various
drug molecules (including projects seeking to use extracts or derivatives from natural substances to treat diseases) and certain
technologies for the treatment (“therapeutics”) and diagnosis (“diagnostics”) of human disease conditions
in neurology, infectious diseases, gastroenterology, oncology and other disease areas. In addition, we are seeking to identify
additional prospects which may qualify for potential orphan drug designation (e.g., rare types of cancer) or which address other
current unmet medical needs. Aptorum Therapeutics Group is operated through Aptorum’s wholly-owned subsidiary, Aptorum Therapeutics
Limited, a Cayman Islands exempted company with limited liability, whose principal place of business is in Hong Kong and its indirect
subsidiary companies (who we sometimes refer to herein as project companies), whose principal places of business are also in Hong
Kong.
Non-Therapeutics
Segment. The non-therapeutics segment (“Aptorum Non-Therapeutics Group”) encompasses three businesses:
(i) the development of surgical robotics and medical devices, (ii) AML Clinic and (iii) sales of dietary supplement. The
development of surgical robotics and medical devices business is operated through Signate Life Sciences Limited, a subsidiary
of Aptorum Therapeutics Limited. The outpatient clinic is operated through our subsidiary, Aptorum Medical Limited. Effective
as of March 2018, we leased office space in Central, Hong Kong as the home to AML Clinic. AML Clinic commenced operations
under the name of Talem Medical in June 2018. The estimated general administrative expenses and other operating expenses of
the AML Clinic is expected to be no more than USD120,000 per month. The clinic is expected to reach operating profit in 18
months from the clinic reaching its full operating capacity upon (i) the successful recruitment of a minimum of six full time
physicians (AML Clinic currently has one full time physician and six part time physicians) and (ii) establishing steady
patients flow via brand development. (See “Item 4. Information on the Company – B. Business Overview – Lead
Projects, Dietary Supplement and Other Projects under Development – Other Projects under Development – Aptorum
Medical Limited - AML Clinic”) The sale of dietary supplements is operated through Nativus Life Sciences Limited
(“Nativus”), a subsidiary of Aptorum Therapeutics Limited. As part of the commercialization, the Group, through
Nativus, entered into a regional distribution and marketing agreement with Multipak Limited, a Hong Kong based group that
operates household brands, including the Luk Yu® tea bag and other health related products. Through Multipak, the Group
will be able to increase the accessibility of the product to a large consumer base regionally. The production of Aptorum
Group’s dioscorea opposita bioactive nutraceutical tablets has commenced production in Canada and will be marketed
under the brand name NativusWellTM.
The Company has already
obtained opportunities resulting in our existing licensing agreements from various contractual relationships that we have entered
into, including service/consulting agreements with some of the world’s leading specialists and clinicians in our areas of
interest, with academic institutions and organizations, and with CROs. We anticipate that these relationships will generate additional
licensing opportunities in the future. In addition, we have established and are continuing to expand our in-house research facilities
(collectively, the “R&D Center”) to develop some of our drug and device candidates internally and to collaborate
with third-party researchers.
Prior to March 2017,
the Company had pursued passive healthcare related investments in early stage companies primarily in the United States. However,
we have since ceased pursuing further passive investment operations and intend to exit all such portfolio investments over an appropriate
timeframe to focus resources on our current business.
On April 24, 2019,
the Company signed an agreement with Aeneas Capital Limited, and A*ccelerate Technologies Pte. Ltd, the enterprise office of the
Agency for Science, Technology and Research (“A*STAR”), (collectively, the “Parties”) to co-create local
deep tech startups. This agreement, which is part of A*ccelerate’s venture co-creation (“VCC”) initiative, commits
all parties to the co-creation of local startups in the healthcare and life science sector (the “Master Collaboration Agreement”).
The goal is to create a total of up to 20 deep tech ventures in Singapore will be created by this partnership over the next 5 years.
A*STAR shall contribute a total of up to $30,000,000 to any suitable startups, at their discretion. The Company and Aeneas Capital
Limited will contribute a total of up to $30,000,000 to any suitable startups at their discretion with a focus on (i) securing
pilot customers; (ii) incorporation of the startups as companies and financial commitments of such customers; (iii) capital raising
and capital market plans; (iv) recruiting and building of the startup teams; (v) equipment and infrastructure; and (vi) licensing
of IP to the startups under the Technology License Agreements. The Master Collaboration Agreement shall continue for a period of
5 years, unless otherwise terminated or extended by the Parties.
Our Strategy
Although we plan to continue the development and improvement
of a broad range of novel therapeutics and diagnostics across a wide range of disease/therapeutic areas, over the next 24-36 months
we plan to concentrate on development of our Lead Projects, while also allocating some resources to develop SLS-1, maintaining
our AML Clinic and sale of dietary supplement.
We believe that execution
of this strategy will position the Company to catalyze the development and improvement of a broad range of early-staged novel therapeutics
and diagnostics across a wide range of disease/therapeutic areas. Failure to achieve positive results in at least one of the programs
for a Lead Project could have a material adverse effect on the Company’s prospects and business.
To achieve this goal,
we are implementing the following strategies:
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Developing therapeutic and diagnostic innovations across a wide range of disease/therapeutic
areas. We are currently developing drug and device candidates in several disease/therapeutic areas. We believe that
by diversifying our research efforts, it would increase the likelihood that at least one of our projects will achieve clinical
success and therefore add value to the Company. As of date of this annual report, we have obtained 12 exclusively licensed
technologies across the areas of neurology, infectious diseases, gastroenterology, oncology, surgical robotics and natural
health. Our initial focus will be on developing our Lead Projects, but intend to continue developing our other current projects
and seeking new licensing opportunities where we determine that the market potential justifies the additional commitment of
our limited resources.
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Selectively expanding our portfolio with potential products that may be able to attain orphan drug designation and/or satisfy current unmet medical needs. We have selected innovations for development which we believe are of superior scientific quality, whilst taking into account the potential market size and demand for same, for example, taking into consideration whether the relevant product can satisfy significant unmet medical needs. In particular, Aptorum Group Limited has established a Scientific Advisory Board, which helped us to select our current projects and which we expect will provide input from a scientific perspective towards any future opportunities for acquiring or licensing life science innovations. We intend to continue expanding our line of projects under development, and subject to our financial and other resource limitations, exploring acquisitions or licenses of additional products which may be able to attain orphan drug designations (e.g., rare types of cancer) or satisfy significant unmet medical needs and that show strong preclinical and/or early clinical data to provide promising opportunities for clinical and commercial success.
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Collaborating with leading academic institutions and CROs. In building and developing our product portfolio, we believe that accessing external innovation, expertise and technology through collaboration with leading academic institutions and CROs is a vital and cost-efficient strategy. We have established strong relationships with leading academic institutions around the world and expect to continue to strengthen our collaborations by, for example, seeking to provide their affiliated Principal Investigators resources through sponsorship to conduct further research in specialty fields of interest and association with personnel connected to our current project companies, in exchange for obtaining for the Company the first right to negotiate for an exclusive license to any resulting innovations. In addition, we have entered and will continue to actively source arrangements with pharmaceutical companies, in most cases in roles as contract research organizations, to streamline the development of our projects. This may include outsourcing part of the preclinical, clinical studies and clinical supplies manufacturing to externally accredited cGLP, cGMP and cGCP standard contract research organizations or laboratories in order to attain the required studies for submission to the regulatory authorities as part of the clinical development plan. (See “Item 4. Information on the Company – B. Business Overview – Arrangements with Other Parties”)
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Expanding our in-house pharmaceutical development center. We believe collaborations between the R&D Center operated by APD and the scientists engaged in work for our project companies will enhance clinical and commercial potential of the projects. In addition, APD will assist the project companies by engaging external pharmaceutical companies and/or contract research organizations to outsource any part of the preclinical or clinical development work that cannot be performed by the R&D Center in order to obtain the resources necessary for our development process.
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Leveraging our management’s expertise, experience and commercial networks. We believe the combination of our management’s expertise and experience, with their academic and commercial networks make us an effective platform for advancing healthcare innovations towards clinical studies and commercialization in key global markets. We have assembled a management team with global experience and an extensive record of accomplishments in medical research, consulting and financing, and identification and acquisition of pharmaceutical and biopharmaceutical drug and device candidates. Our Head of Research and Development also has extensive experiences in drug development. We also employ key management personnel with banking and financial experience, which enhances our capability to establish the most efficient financial structure for the development of our programs.
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Strategically developing opportunities in Hong Kong to provide access to the PRC market. The PRC is the world’s second largest healthcare market (https://seekingalpha.com/article/4038677-opportunities-chinas-healthcare-market) and we plan to market our products there in the future as part of our overall growth strategy. In October 2017, the PRC government announced that the country is planning to accept trial data gathered overseas to speed up drug approvals (https://www.reuters.com/article/us-china-pharmaceuticals/china-to-accept-overseas-trial-data-in-bid-to-speed-up-drug-approvals-idUSKBN1CE080 and http://www.lawinfochina.com/display.aspx?id=26778&lib=law), which is a potential boon for foreign pharmaceutical companies. We believe strategically locating our principal businesses in Hong Kong, as a Special Administrative Region of the PRC, may provide us distinctive advantages in accessing the PRC healthcare market. Two of our key collaborators, The University of Hong Kong (the “HKU”) and the Chinese University of Hong Kong (the “CUHK”) have received clinical drug trial accreditation by the NMPA for their clinical trial units/centers (http://www.crmo.med.cuhk.edu.hk/en-us/cfdaaccreditation.aspx and https://www.ctc.hku.hk/assurance_cfda.php).
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Obtaining and leveraging government grants to fund project development. The Hong Kong government pays close attention to the development of the biotechnology sector in Hong Kong and provides support and funding. We intend to aggressively seek government support from Hong Kong for our product development and to facilitate the development of some of our projects.
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Arrangements with Other Parties
As mentioned above,
part of our business model includes collaborating with research entities such as academic institutions and CROs, as well as highly
regarded experts in their respective fields. We engage these entities and researchers either for purposes of exploring new innovations
or advancing preclinical studies of our existing licensed drug candidates. Although the financial cost of these arrangements does
not represent a material expense to the Company, the relationships we can access through, specifically, sponsored research arrangements
(“SRAs”) with academic institutions and organizations can provide significant value for our business; for example,
we may decide whether to continue development of certain early-staged projects and/or out-license a project based on the data and
results from research governed by SRAs. However, as of the date of this annual report, we do not consider the particulars of any
of our SRAs to be material to the success of our current business plans.
Our drug discovery
programs are based upon licenses from universities and are mainly conducted in universities via SRAs. As for the development of
our drug candidates, our R&D Center conducts part of the CMC work. However, since our current facilities are not cGMP, cGLP
or cGCP qualified, we will have to rely on CROs to conduct that type of work, if and when our drug candidates reach the level of
development that requires such qualification.
Lead Projects, Dietary Supplement
and Other Projects under Development
We are actively operating
and managing the development of our drug and device candidates through various subsidiaries. Each candidate is being researched
in a subsidiary with a medical/scientific area of focus related to the drug and device candidate in development. We refer to these
as our “Project Companies” and their products or areas of focus as our Lead Projects (i.e., ALS-4 and SACT-1), our
dietary supplement (i.e., DOI) or Other Projects under Development (as defined below). The selection of a drug and device candidate
is based on our estimate of the market potential for that candidate, the scientific expertise required to develop it, and our overall
corporate strategy, including our ability to commit personnel and future investment to that candidate.
To pursue a number
of our current projects, our Project Companies have entered into standard license agreements with various university and licensing
entities customized to the nature of each project. These license agreements largely contain the same terms, as is typically seen
in license agreements for an early-stage life science invention; such terms include a worldwide license with licensed field comprising
indications in the intended treatment areas, having upfront payments, certain royalty rates, sublicensing royalties, as well as
provisions for payments upon occurrence of development and/or regulatory milestones. Under the license agreements, the Project
Company must also adhere to certain diligence obligations and may or may not be required to obtain prior consent from the licensor
to sublicense the invention. The license terms of our Lead Projects are discussed in detail below.
Generally speaking,
pharmaceutical development consists of preclinical and clinical phases. Our immediate efforts would be on the preclinical phase
which can further sub-divided into the following stages:
Target Identification
& Selection: The target is the naturally existing cellular or modular structure that appears to have an important role
in a particular disease pathway and will be targeted by the drug that will subsequently be developed. Target validation techniques
for different disease areas can be very different but typically include from in vitro and in silico methods through to the use
of whole animal models.
Lead Discovery:
Following “Target Identification & Selection,”
compound screening assays are developed as part of the Lead Discovery. ‘Lead’ molecules can mean slightly different
things to different researches or companies, but in this annual report, we refer to Lead Discovery as the process of identifying
one or more small molecules with the desired activity against the identified targets. Leads can be identified through one or more
approaches, which can depend on the target and what, if any, previous knowledge exists.
Lead Optimization:
In this stage of the drug discovery process, the aim is to produce a preclinical drug candidate by maintaining the desired and
favorable properties in the lead compounds, while repairing or reducing deficiencies in their structures. For example, to optimize
the chemical structures to improve, among others, efficacy, reduce toxicity, improve metabolism, absorption and pharmacokinetic
properties.
IND-Enabling Studies:
Includes all the essential studies such as GLP toxicology studies, pharmacology and efficacy, pharmacokinetics, in vitro metabolism,
CMC studies, and the data of which are used for IND submission.
In vitro validation:
At this stage, the efficacy and safety of a drug candidate are assessed at cellular levels.
In vivo validation:
At this stage, the efficacy, safety and pharmacokinetic of a drug candidate are assessed in animal models.
IND Preparation
and Submission: Preparation of a package of documents
for different sections such as CMC, clinical, nonclinical, etc. and getting them reviewed, approved and final checked and followed
by submission to regulatory agencies.
Another subsidiary,
Aptorum Medical Limited (“AML”),1 is our vehicle for developing our business of delivering medical
services in the form of AML Clinic.
We anticipate allocating
approximately 20% of our resources to develop projects other than our Lead Projects (such other projects being referred to herein
as “Other Projects under Development”), with a strong focus on DOI, SLS-1 and AML Clinic. As part of the commercialization
of DOI dietary supplement, we entered into a regional distribution and marketing agreement with Multipak Limited, a Hong Kong based
group that operates household brands, including the Luk Yu® tea bag and other health related products. Through Multipak, the
Group will be able to increase the accessibility of the product to a large consumer base regionally. The production of Aptorum
Group’s dioscorea opposita bioactive nutraceutical tablets has commenced production in Canada and will be marketed under
the brand name NativusWellTM. As a device candidate, SLS-1 may not need to undergo the same regulatory approval process
as a drug candidate and therefore we may be able to bring it to market sooner. AML Clinic is expected to provide us with a modest
amount of revenue. Even if DOI and SLS-1 achieves commercial sales, of which there can be no assurance, revenue from these products
alone will not be sufficient for us to carry out all of our plans, but it will assist with name recognition and supplement our
income while we develop our Lead Projects.
1 Clark Cheng, our Chief Medical Officer and an Executive
Director, owns 7% of Aptorum Medical Limited as of the date of this annual report.
Lead Projects
After
consideration of various factors, such as time and resources required for further development, potential success rate and
market size, the Group decided to focus the majority of its resources on ALS-4 and SACT-1 as the current Lead Projects. The
Group will continue to invest some of its resources to develop other projects, including those previously classified as Lead
Projects.
ALS-4: Small molecule for the treatment
of bacterial infections caused by Staphylococcus aureus including Methicillin-resistant Staphylococcus aureus (“MRSA”)
Just as certain strains
of viruses, such as human immunodeficiency virus (“HIV”) and influenza have developed resistance to drugs developed
to treat them, certain bacteria such as Staphylococcus aureus, Mycobacterium tuberculosis and Pseudomonas
aeruginosa have become “superbugs”, having developed resistance to many, if not all, of the existing drugs
available to treat them, rendering those treatments ineffective in many instances. MRSA is one such bacterium, a gram-positive
bacterium that is genetically different from other strains of Staphylococcus aureus. Staphylococcus aureus and MRSA can cause a
variety of problems ranging from skin infections and sepsis to pneumonia and bloodstream infections. It is estimated that about
one out of every three people (33%) carry Staphylococcus aureus in their nose, usually without any illness; about two in a hundred
(2%) carry MRSA (source: https://www.cdc.gov/mrsa/tracking/index.html). Both adults and children may carry MRSA.
Most MRSA infections
occur in people who have been in hospital or other health care settings, such as nursing homes and dialysis centers (source: https://www.mayoclinic.org/diseases-conditions/mrsa/symptoms-causes/syc-20375336),
which is known as Healthcare-Associated MRSA (“HA-MRSA”). HA-MRSA infections are typically associated with invasive
procedures or devices, such as surgeries, intravenous tubing or artificial joints. Another type of MRSA infection, known as Community-Associated
MRSA (“CA-MRSA”), has occurred in wider community among healthy people. It often begins as a painful skin boil and
spreads by skin-to-skin contact. About 85% of serious, invasive MRSA infections are healthcare associated infections (https://www.cdc.gov/media/pressrel/2007/r071016.htm).
The incidence of CA-MRSA varies according to population and geographic location. In the U.S., more than 94,000 people develop serious
MRSA infection and about 19,000 patients die as a result each year (https://www.cdc.gov/media/pressrel/2007/r071016.htm). According
to the US Centers for Disease Control and Prevention (“CDC”), Staphylococcus aureus, including MRSA, caused about 11%
of healthcare-associated infections in 2011 (source: http://www.healthcommunities.com/mrsa-infection/incidence.shtml). Each year
in the U.S., around one out of every twenty-five hospitalized patients contracts at least one infection in the hospital (N Engl
J Med. 2014, 27;370(13):1198-208). In the U.S., there were over 80,000 invasive MRSA infections and 11,285 related deaths in 2011
(source: https://edition.cnn.com/2013/06/28/us/mrsa-fast-facts/index.html). Indeed, severe MRSA infections most commonly occur
during or soon after inpatient medical care. More than 290,000 hospitalized patients are infected with Staphylococcus aureus and
of these staphylococcal infections, approximately 126,000 are related to MRSA (source: http://www.healthcommunities.com/mrsa-infection/incidence.shtml).
ALS-4 is a small drug
molecule which appears to target the products produced by bacterial genes that facilitate the successful colonization and survival
of the bacterium in the body or that cause damage to the body’s systems. These products of bacterial genes are referred to
as “virulence expression.” Targeting bacterial virulence is an alternative approach to antimicrobial therapy that offers
promising opportunities to overcome the emergence and increasing prevalence of antibiotic-resistant bacteria.
Professor Richard Kao
from The University of Hong Kong (who is also the Founder and Principal Investigator of Acticule and Inventor of ALS-2, ALS-3 and
ALS-4) initiated a high throughput approach for screening compounds which are active against virulence expression, which resulted
in the discovery of ALS-2, ALS-3 and ALS-4.
ALS-4 targets an enzyme
essential for Staphylococcus aureus (including MRSA) survival in vivo. This enzyme is involved in the production of Staphyloxanthin,
a carotenoid pigment produced by Staphylococcus aureus including MRSA, and is responsible for the characteristic golden color.
This pigment has proven to be an important factor in promoting bacterial invasion as well as rendering the bacteria resistant to
attack from reactive oxygen species (ROS) and neutrophils. In other words, pigmented bacteria have increased resistance to the
host’s immune defenses. ALS-4 may have particular value if it can be shown to be an effective therapy in situations where
a Staphylococcus aureus infection is resistant to available antibiotics (i.e., where the pathogen is MRSA).
In a recent study by
the inventor, Prof. Richard Kao, ALS-4 demonstrates potent activity against Staphylococcus aureus pigment formation in vitro, as
indicated in Figure 1, with an IC50 (IC50 is defined as the concentration of a drug which inhibits
half of the maximal response of a biochemical process. In this case, inhibition of the formation of the golden pigment is the response)
equal to 20 nM.
Figure 1
Figure 1: In vitro pigment inhibition
by compound ALS-4.
(A) Inhibition of wild-type (WT)
Staphylococcus aureus pigmentation in the presence of increasing concentrations of ALS-4.
(B) Pigment inhibition by ALS-4;
the IC50 for pigment formation is roughly 300 nM.
All data represent mean values
± SD.
NP16 = ALS-4
This assay was conducted in triplicate
and repeated twice for confirmation
(Adapted from mBio (8(5): e01224,
2017))
By employing a systemic
Staphylococcus aureus mouse infection model, the treatment (1mM of ALS-4 twice daily) and control groups (vehicle) were compared.
In both acute treatment and delayed treatment groups, the bacterial counts in the kidneys of mice treated with compound ALS-4 were
significantly lower than those of the no treatment group.
Figure 2
Figure 2: ALS-4 is observed to
reduce bacterial load in mice
CFU = Colony Forming Unit, a
unit used to estimate the number of viable bacteria in a sample
ALS-4 is currently undergoing
IND enabling stage to perform all the essential studies which the data will be used for IND submission.
Patent License
On October 18, 2017, the Company’s
subsidiary, Acticule, entered into an exclusive license agreement with Versitech Limited, the licensing entity of HKU, for ALS-4.
Subsequently on June 7, 2018, the parties entered into a first amendment to the exclusive license agreement, and on July 10,
2019, the parties entered into a second amendment to the license agreement.
On January 11, 2019,
Acticule and Versitech Limited entered into a second license agreement for ALS-4, where Acticule exclusively licensed the intellectual
property rights on certain HKU-owned improvements to the original licensed invention.
Under the exclusive
license agreements, we were granted an exclusive, royalty-bearing, sublicensable licenses to develop, make, have made, use, sell,
offer for sale and import products that are covered by the licensed patents (as described below). The territory of the licenses
is worldwide and the field of the licenses is for treatment or prevention of bacterial infections caused by Staphylococcus aureus
including MRSA and bacterial virulence.
We paid an upfront
fee upon entering into the license agreements. We are required to pay less than 10% of the net sales of the licensed products sold
by us or our affiliates as royalties, as well as a low teens percentage of sublicense royalties that we receive from our sublicensees,
if any. In addition, we agreed to pay to the licensor aggregate regulatory milestones of up to US$1 million subject to the following
achievements: submission of investigational new drug application; completion of phase 1, 2 and 3 clinical trials; and submission
of new drug application; grant of regulatory approval. We also agreed to pay to the licensor aggregate sales milestones of up to
US$7.8 million subject to the following achievement: first commercial sale; and annual net sales exceeding US$100 million in one
jurisdiction.
Pursuant to the license
agreements, Acticule became the exclusive licensee of 2 pending U.S. non-provisional patent applications and 2 PCT applications
(now expired). Prior to the expiration of the PCT applications, we filed national phase applications in member states of the EPO,
in PRC and 11 other jurisdictions. The claimed inventions are described as: “Compounds Affecting Pigment Production and Methods
for Treatment of Bacterial Diseases.”
Acticule has the right
to grant sublicenses to third parties under the license agreements without prior approval from Versitech Limited and to assign
the agreements to any successor to the business related to the licenses. In the event that Acticule makes an improvement to the
licensed technologies, so long as the improvement does not incorporate any licensed patents, Acticule will be the owner to such
improvement, subject to a non-exclusive royalty-free license being granted back to Versitech Limited for academic and research
purposes only.
The exclusive license
agreements shall be in effect until the expiration of all licensed patents (please refer to the patent expiration dates under “Item
4. Information on the Company – B. Business Overview – Intellectual Property”). Acticule may terminate the licenses
at any time with 6-month written notice in advance. Either party may terminate the agreements upon a material breach by other party.
SACT-1: A Repurposed Drug for the Treatment of Neuroblastoma
Drug repurposing is
a strategy for identifying new indications for approved or investigational drugs that are outside the scope of the original medical
uses. It is often viewed as a lower-cost method for drug commercialization, as it is based on already-approved drugs (which has
been proven to be safe for human use by the respective governing regulatory agency) and explores new target indications. (Ashburn,
T. T. & Thor, K. B. Drug repositioning: identifying and developing new uses for existing drugs. Nat. Rev. Drug Discov. 3, 673–683,
2004).
One of the advantages
of drug repurposing is a lower development risk due to safety and toxicity, as well as other properties related to water solubility,
absorption, distribution and metabolism, as the safety and CMC profiles of marketed drugs are usually well-established. Due to
the same reason, the development time is also shortened because there is no need to repeat the whole spectrum of the safety assessment.
As a result, the drug repurposing approach appears to be attractive due to its superior risk management, smaller capital investment
and quicker financial return. (Sudeep Pushpakom, et. al. Drug repurposing: progress, challenges and recommendations. Nat. Rev.
Drug Discov. 18, 41-58, 2019)
The cost of bringing
a repurposed drug is estimated to be around US$300 million, which is only one-tenth of the development cost for a new drug. (Nosengo,
N. Can you teach old drugs new tricks? Nature. 534, 314-316, 2016).
In summary, drug repurposing
offers the following advantages:
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Well-established safety profiles: The
development risk for new indications can be substantially reduced by applying existing drugs that are approved or have been shown
to be safe in large scale late-stage trials. Since safety accounts for approximately 30% of drug failures in clinical trials, this
is a key advantage that repositioned drugs can harness to great effect. (Key benefits of drug repositioning. (n.d.). Retrieved
from http://www.totalbiopharma.com/2012/07/04/4-key-benefits-drug-repositioning/)
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Time-saving: As repositioned drugs can
rely on existing data, including efficacy and toxicity studies, the process is usually faster than de novo development. Developing
a new chemical entity (NCE) can take 10 to 17 years, depending on indications. (Roin, B. N. Solving the Problem of New Uses, 2013).
For a drug repositioning company, the development process from compound identification to launch can be around 3 to 8 years. (Walker,
N. (2017, December 07). Accelerating Drug Development Through Repurposing, Repositioning and Rescue. Retrieved from https://www.pharmoutsourcing.com/Featured-Articles/345076-Accelerating-Drug-Development-Through-Repurposing-Repositioning-and-Rescue/)
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Cost-saving: Along with time-saving, money-saving
is also a key benefit. With a single compound to enter clinical trials costing around US$10 to $20 million, the cost of identifying
a repositioning candidate that already has phase 1 data could be as low as US$2 to $3 million. (http://www.totalbiopharma.com/2012/07/04/4-key-benefits-drug-repositioning/)
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Potential for out-licensing: Pharmaceutical
companies are said to be exploring new models to out-license some of their clinical drug candidates that may have been shelved
for pure business reasons unrelated to safety or efficacy, even though they have met their endpoints and have proven themselves
to be safe. If such drugs were to be repositioned, the pharmaceutical company increases the attractiveness of these drugs and gives
itself more options to find interested buyers. (http://www.totalbiopharma.com/2012/07/04/4-key-benefits-drug-repositioning/)
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Lower failure rate: According to BCC Research, approval rates for repurposed drugs are close to
30%, which is greater than the approval rate for new drug applications. ( Front Oncol. 2017; 7: 273)
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One of the major limitations
of the current drug repurposing and repositioning practice is that there is a lack of a systematic way to identify and reinvestigate
drugs that are approved and/or have failed approval.
SACT-1 is the first
repurposed drug candidate to be developed under the Smart-ACTTM drug discovery platform. SCAT-1 is one of the Company’s
proprietary technologies. Our first targeted indication is neuroblastoma. Neuroblastoma is a rare form of cancer, and classified
as an orphan disease, that forms in certain types of nerve tissue and most frequently in the adrenal glands as well as spine, chest,
abdomen or neck, predominantly in children, especially for those aged 5 years and below. For the high-risk group, which is close
to 20% (Annu Rev Med. 2015; 66: 49–63.) of total new patient population per year, the 5-year survival rate of this condition
is around 40-50% as observed by the American Cancer Society (https://www.cancer.org/cancer/neuroblastoma/detection-diagnosis-staging/survival-rates.html).
The current high drug treatment cost for high risk patients can average USD200,000 per regimen (all 6 cycles) (https://www.cadth.ca/sites/default/files/pcodr/Reviews2019/10154DinutuximabNeuroblastoma_fnEGR_NOREDACT-ABBREV_Post_26Mar2019_final.pdf
). In addition, most pediatric patients often do not tolerate or survive the relevant chemotherapy stage which, subject to further
clinical studies, may be positively addressed by the SACT-1 candidate due to the potential synergistic effects when applied with
standard chemotherapy.
In our recent studies,
SACT-1 has been shown to be effective against numerous neuroblastoma cell lines, of which 2 are MYCN-amplified cells, which represent
the high-risk neuroblastoma patient group. In addition, by using a bliss score as a quantitative measure of the extent of drug
interaction, Aptorum Group has seen a high and robust synergism between SACT-1 and traditional chemotherapy in vitro (Figure 3),
indicating a potential efficacy enhancement/dose reduction of the chemotherapy.
Figure 3 synergism
between SACT-1 and traditional chemotherapy in vitro
In addition, in our
recent study, the maximum tolerable dose of SACT-1 in a rodent model was determined to be higher than 400mg/kg. Compared with the
MTD of standard chemotherapy such as paclitaxel (20-30mg/kg) (Clin Cancer Res. 5(11):3632-8) and cisplatin (6mg/kg) (BMC Cancer
17: 684 (2017)), the safety profile of SACT-1 appears to be very impressive. Based on our internal observations of pre-existing
information from approved products, (subject to FDA’s approval and on a case-by-case basis, a 505(b)(2) Application can rely in
part on existing information from approved products (such as the FDA’s previous findings on safety and efficacy) or products in
literature (such as data available). However, typically speaking, the applicant is nonetheless required to carry out a Phase 1
bridging study to compare the Reference Listed Drug and reference the established safety and efficacy information), SACT-1 also
exhibits a well-established safety profile: at 150mg/day, the death rate was 0% in prior clinical studies with no dosage related
adverse events (Table 1). In addition, the pharmacokinetic profile of SACT-1 has also been reported (Table 2).
Table 1:
Safety Profiles of SACT-1 in Human Clinical Trials
Table 2:
The pharmacokinetic Profile of SACT-1 in Humans
We are currently developing
a pediatric formulation of SACT-1 to better address the needs of neuroblastoma patients who are exclusively children younger than
5. SACT-1 is currently undergoing the final stage of in vivo validation and an IND package is also being prepared and IND submission
to FDA is targeted at the second half of 2020.
Statistical Significance
The term statistical
significance is to define the probability that a measured difference between two groups (e.g. two treatment groups, treatment versus
control groups) is the result of a real difference in the tested variations and not the result of chance. It means that the result
of a test does not appear randomly or by chance, but because of a specific change that is tested, so it can be attributed to a
specific cause.
The confidence level
indicates to what percentage the test results will not commit a type 1 error, the false positive. A false positive occurs when
a change in the result is due to randomness (or other noise) and not the change in variations. At a 95% confidence level (p = 0.05),
there is a 5% chance that the test results are due to a type 1 error. 95% has become the standard and usually be the minimum confidence
level for the tests. To make the test more stringent, a 99% confidence level (p = 0.01) is also commonly employed, which means
that there is a 1% chance that the test results are due to a type 1 error.
In other words, a p
value represents the confidence level. For example, if the p-value for a test is < 0.05, it means that there is less than 5%
chance the difference between two groups is due to random error or by chance. If the p-value is < 0.01, it means that there
is less than 1% chance the difference between two groups is due to random error or by chance.
We employed statistical
testing to compare different treatment groups in animal studies simply for proof of concept and to aid internal decision making
for further development. We do not intend to use this standard for any regulatory submission. The US FDA or other regulatory agencies
may not necessarily employ the same statistical standard to assess the efficacy in clinical trials, the results of which would
be submitted for regulatory approval. Although a p-value of 0.05 has become the standard, the US FDA or other regulatory
agencies may also individualize their efficacy standard for different clinical programs based on the indications, the purpose of
a clinical trial, among others.
FDA Application Status
As of the date of
this annual report, we have not submitted any applications for investigational new drugs (“IND”) to the US Food
and Drug Administration (“FDA”). By the second half of 2020, subject to regulatory review, we expect to be in a position to submit at
least one application for one of our drug candidates to commence trials in humans (INDs to the FDA or an equivalent
application to the regulatory authorities in another jurisdiction such as the China’s National Medical Products
Administration (the “NMPA”) or the European Medicines Agency (“EMA”)). However, there can be no
assurance we will be able to make any such application by such time. Should we be delayed in making such filing or should
such filing not be approved, our business will be adversely affected.
Other Projects under Development
The following provides
additional detail regarding Other Projects under Development. As noted elsewhere in this report, based on certain criteria, we
sometimes cease work on certain projects to focus on projects we believe are more promising. For example, prior filings disclose
that we were developing the drug candidate NLS-3. However, we have discontinued the development of such candidate because the expected
result could not be generated, so we decided to focus our capital and efforts on our other candidates.
SACT-COV19: Drug repurposing for the
treatment of infections caused by COVID-19
SACT-COV19 is a drug
repurposing program for the treatment of infections caused by COVID-19. We have completed initial screening under the Smart-ACT™
platform to select, out of more than 2,600 small drug molecules that were previously approved for other indications, at least 3
potential candidates for further preclinical investigation against the new coronavirus disease, COVID-19. We are collaborating
with Toronto based Covar Pharmaceuticals and have also entered into agreement with the University of Hong Kong’s Microbiology
Department to conduct further preclinical investigation of the selected candidates prior to seeking approval from regulatory agencies
to initiate clinical trials on suitable candidates.
Drug candidates from
the SACT-COV19 program are currently undergoing in vitro validation.
ALS-1: Small molecule intended
for the treatment of viral infections caused by Influenza virus A
Professor Richard Kao,
the Inventor of ALS-1, was the first to identify viral nucleoproteins (NP) as an effective drug target (Nature Biotechnology. 28:600-605)
We are exploring ALS-1 as a potential treatment for viral infections caused by Influenza virus A.
It is our hypothesis
that Influenza A NP is an essential protein for the proliferation of the influenza virus. ALS-1 targets NP and triggers the aggregation
of NP and this prevents the aggregated NP from entering the nucleus. In an animal study published by the inventor, Prof. Richard
Kao, in Nature Biotechnology (28 (6): 600, 2010), after treating with ALS-1, 50% of the mice receiving two doses of ALS-1 (100
μl of 2.3 mg/ml ALS-1) per day for 7 days survived for more than 21 days compared with 100% mortality in the treatment-free
control group within 7 days. In addition, about a 10x reduction of viral load in the lungs of the ALS-1-treated mice was observed
compared to the untreated control group. The animal study results suggest that ALS-1 has the potential to be developed into a useful
anti-influenza therapeutic.
ALS-1 is designed to
target a broad range of NP variants, a novel therapeutic target. Compared with the currently marketed antiviral drugs for which
the viruses have acquired extensive resistance, ALS-1 acts on a completely different therapeutic target.
ALS-1 is currently
undergoing Lead Optimization to optimize its drug-like properties.
ALS-2: Small molecule for the treatment of bacterial infections
caused by Staphylococcus aureus including MRSA
ALS-2 is a next generation
small molecule targeting bacterial virulence for the treatment of bacterial infections caused by Staphylococcus aureus including
MRSA. In a recent paper published by the inventor, Professor Richard Kao from The University of Hong Kong (also the Founder and
Principal Investigator of Acticule), in PNAS (115(310: 8003, 2018), ALS-2 suppresses the expression of multiple virulence factors
in Staphylococcus aureus simultaneously. In a lethal infection mouse model, compared with the vehicle group, ALS-2 protected against
Staphylococcus aureus for all the mice in the group, with significant differences between the treatment and control groups [P =
0.0057, by log-rank (Mantel-Cox) test].
ALS-2 is currently
at the Lead Optimization stage to optimize its drug-like properties.
ALS-3: Small molecule acting synergistically with certain
existing antibiotics
ALS-3 is a novel small
molecule that is at present under investigation to combine with certain classes of existing antibiotics to overcome drug resistance.
We are exploring ALS-3 for the treatment of bacterial infections including MRSA. ALS-3 is currently at the Lead Optimization stage
to optimize its drug-like properties.
CLS-1: An orally administered macromolecule for the treatment
of obesity based on chemical signaling of gut microbiome
The prevalence of obesity
continues to escalate globally; however, there is no current optimal therapy for this condition. For the majority of obese patients,
conventional medical therapies (i.e., diet, exercise, behavioral counseling) often have a high failure rate for the long term.
(Obes Surg. 2012:22(6):956-66). We believe current pharmacotherapy has limited efficacy and is associated with substantial safety
issues.
Chemical signaling
of gut microbiota is known to be one of the major causes of obesity. CLS-1 is an orally administered non-absorbable macromolecule
that we believe modulate the metabolite excreted by gut microbiota with high affinity and specificity. In this way, we believe
the absorption of this particular metabolite, which is linked to obesity, can be inhibited.
CLS-1 is undergoing
Lead Optimization.
NLS-1: A Derivative of Epigallocatechin-3-Gallate
(“Pro-EGCG”) for the treatment of Endometriosis
NLS-1, a drug molecule
derived from natural products (green tea), is currently under development for the treatment of endometriosis, a disease in which
the tissue that normally lines the uterus (endometrium) grows outside the uterus.
NLS-1 acts as an anti-angiogenic
to offer a potential novel treatment of endometriosis. In a paper published by the inventors in Angiogenesis (16:59, 2013), NLS-1
brought a statistically significantly reduction in the lesion size and weight compared with EGCG and the control without any treatment
in an experimental endometriosis mouse model (Student t-test, p < 0.05). In addition, the inhibition by NLS-1 in all of the
angiogenesis parameters was statistically significantly greater than that by EGCG (Student t-test, p < 0.05). In addition, NLS-1
significantly (Student t-test, p < 0.05) reduces the lesion size in both prevention and treatment group compared with both saline
and EGCG groups. Moreover, NLS-1 also had better bioavailability and greater antioxidation and anti-angiogenesis capacities compared
with EGCG. As a follow-up study in an animal model of endometriosis, orally administered NLS-1 reduced the lesion size significantly
better than oral EGCG (p<0.05-0.001 at week 3- 8, ANOVA) and other hormone-based therapy such as intramuscular GnRH analog (p<0.05
at week 4-8, ANOVA) and other synthetic anti-angiogenesis agents such as intraperitoneal PTK787 (p<0.05-0.01 at week 4-8, ANOVA).
Regarding safety, there was no signs of stress to NLS-1 administration were observed during the treatment period. No significant
weight change was observed over the course of the experiment. Histological examination revealed no obvious reproductive effects
on ovarian follicles and endometrial glands under NLS-1 treatments. Also, vascularization of the ovaries and the uterus was not
affected in the NLS-1 treatment group.
We
are currently undergoing some activities to enable NLS-1 to enter IND-enabling studies.
SPLS-1: A quinoline derivate for liver
cancer treatment
SPLS-1, a novel quinoline
derivative from Ephedra pachyclada, is at present under active investigation for the treatment of liver cancer. It is currently
at the Lead Discovery stage.
VLS-1: Curcumin-conjugated superparamagnetic
iron oxide nanoparticles (“Curcumin-MNP”) for MRI (“magnetic resonance imaging”) imaging of amyloid beta
plaques in Alzheimer’s disease (“AD”)
VLS-1 is an MRI contrast
agent, which the Company believes may enable superior imaging for identifying amyloid beta plaques in Alzheimer’s disease.
VLS-1 differs from other existing contrast agents for amyloid imaging, such as Amyvid (Eli Lilly), Vizamyl (GE Healthcare) and
Neuraceq (Piramal Healthcare), in the following respects: 1) utilization of a natural compound, curcumin, with a known high amyloid
beta binding affinity and proven safety; 2) a nanoparticle-based system to enhance delivery efficiency to the brain; and 3) the
combination of curcumin with iron oxide, known to be an effective MRI contrast agent. VLS-1 is currently at the Lead Discovery
stage.
VLS-2: mTOR-independent transcription
factor EB activator (“MITA”) as autophagy activator for treatment of neurodegenerative diseases
Autophagy is an endogenous
cellular mechanism for clearing multiple pathological protein aggregates including tau, the presence of which is believed to account
for neurodegeneration in AD and other neurodegenerative diseases. mTOR is part of a biological pathway that is a central regulator
of mammalian metabolism and physiology. Inhibition of mTOR activity is associated with various side effects, such as immunosuppression.
Many other molecules that activate autophagy also inhibit mTOR activity. VLS-2 is a small drug molecule that appears to activate
autophagy without inhibiting mTOR function. VLS-2 is currently at the Lead Discovery stage.
VLS-4: Other contrast agents for MRI diagnostics
In addition to VLS-1,
the Company is actively developing a new class of MRI contrast agents for diagnosis of neurodegenerative diseases. The design of
these agents takes into consideration the physicochemical properties that need to be optimized for best imaging performance, and
the novel agents are currently undergoing rigorous evaluation. VLS-4 is currently at the Lead Discovery stage.
SLS-1: Robotic Catheter Platform for Intra-operative MRI-guided
Cardiac Catheterization
SLS-1 is our robotic
catheter platform for MRI-guided cardiovascular intervention for the treatment of arrhythmia. The platform consists of a magnetic
resonance imaging-guided (“MRI-guided”) robotic electrophysiology (“EP”) catheter system, an MR-based positional
tracking unit, and a navigation interface. This platform has the potential to offer a major step toward achievement of several
clinical goals: (i) enhancing catheter manipulation and lesion ablation, which we believe will decrease the chance of arrhythmia
recurrence; (ii) improving the safety of catheter navigation, thereby decreasing the rates of undesired or inadvertent tissue damage;
and (iii) enhancing catheter control, thus facilitating shorter learning curves for surgeons and better treatment in more complex
patient cases. Should such goals be demonstrated, patient outcomes should be improved, compensating for the cost of using MRI and
reducing the overall expenditure.
To date, a product
prototype has been developed. Lab-based experiments have been conducted to verify the performance of the robot towards an image-guided
pulmonary vein isolation (“PVI”) task. The MR-based tracking unit has also been developed and validated in MRI scanners.
The next step is to test the robotic catheterization using a dynamic heart phantom simulated with the pulsatile liquid flow. Preclinical
trials can then be conducted with all the components ready. Radiofrequency ablation will be conducted in a live porcine model,
prepared with arrhythmia. If all the results are positive, we will approach the US FDA or other regulatory agencies to apply for
conducting clinical trials on the equipment.
SLS-1 is currently
in Lab-based Phantom Trial and it will follow the regulatory pathway for approval as indicated in the table in Page 43.
Aptorum Medical Limited - AML Clinic
Incorporated in August
2017, Aptorum Medical Limited is a Hong Kong-based company incorporated in Cayman Islands focused on delivering premium healthcare
and clinic services. AML can draw on the expertise of many of the region’s most experienced medical practitioners, and is
committed to providing a comprehensive cross-functional facility for healthcare professionals to practice evidence-based medicine
and offer high-quality medical services to their patients. We also intend that AML will offer to conduct clinical trials of both
the Company’s and third parties’ new drug and device products.
Effective as of March
2018, we leased office space in Central, Hong Kong, the commercial and financial heart of Hong Kong, as the home to AML Clinic.
We operate the AML Clinic under the name of Talem Medical. AML Clinic commenced operation in June 2018.
The recently renovated
medical center is staffed by our group of medical professionals and offers state-of-the-art facilities. Initially we expect to
focus our expertise on treatment of chronic diseases resulting from modern sedentary lifestyles and an aging population.
Dietary supplement
NLS-2: DOI, a Bioactive Ingredient (DOI)
in Chinese Yam for the Relief of Menopausal Symptoms as a Dietary Supplement.
DOI is a dietary supplement
made with the bioactive ingredient extracted Chinese yam powder containing “DOI”, which is Aptorum Group’s non-hormonal
approach intended to meet certain growing consumer nutritional trends and concerns. It is estimated that 1.2 billion women worldwide
will be menopausal or postmenopausal by the year 20301. The global woman’s health supplement market for menopausal
symptoms is projected to reach over USD$50bn by 2025 with a CAGR rate of 16.4% (2016-2025)2. Initially, the supplement
will be commercialized and sold in Hong Kong; the Company is seeking regulatory clearance to market the product in other major
jurisdictions.
1 World
Health Technical Report Series. Research on the Menopause in the 1990’s. Geneva, Switzerland: World Health Organization; 1996.
2
https://www.grandviewresearch.com/press-release/global-isoflavones-market
As part of the commercialization,
Aptorum Group, through its wholly-owned subsidiary Nativus Life Sciences Limited, entered into a regional distribution and marketing
agreement with Multipak Limited, a Hong Kong based group that operates household brands, including the Luk Yu® tea bag and
other health related products (the “Multipak Agreement”). Pursuant to the Multipak Agreement, Multipak is appointed
as a non-exclusive distributor for the distribution and release of NativusWellTM, yam powder tablets to be formulated
according to proprietary technologies of Nativus and the Group in Hong Kong and China, and such other territories as agreed by
both parties from time to time.
Through Multipak, Aptorum
Group will be able to increase the accessibility of the product to a large consumer base regionally. The production of Aptorum
Group’s dioscorea opposita bioactive nutraceutical tablets has commenced production in Canada and will be marketed under
the brand name NativusWellTM. The Multipak Agreement has a term of one year, which shall automatically renew for four
additional one-year terms, unless terminated by either party with at least 30 days prior written notice. Either party may also
terminate the Multipak Agreement upon written notice to the other party if such other party commits a material breach of the terms
and conditions of the agreement and it is not remedied within 30 days’ notice or if the other party cannot pay its debts
or becomes insolvent, or otherwise is involved in a bankruptcy or liquidation proceeding. Nativus also has the option to terminate
the agreement upon written notice to Multipak upon the occurrent of certain events, including: if Multipak is later by more than
30 days in paying amounts due under the agreement, Multipak challenges the validity of any of Nativus’ or the Group’s
intellectual property, Multipak does something that could reasonably be expected to have an adverse effect on the reputation of
Nativus or the Group, or Multipak has a change in control for which Nativus did not pre-approve. During the 3-month period following
any termination (the “Sell-Off Period”), Multipak may sell of it stock of products, but may not return any, nor shall
Nativus have any liability for breach of warranty for such product during the Sell-Off Period. At the end of Multipak Agreement
also provides for certain indemnitees of each party.
The NativusWellTM
tablets are natural, non-hormonal supplements containing DOI. The yam powder with DOI utilizes a non-hormonal approach that is
intended to boost the general wellness of women undergoing menopause. Third party scientific studies indicate that DOI, the naturally
occurring bioactive ingredient in Chinese yam, appears to stimulate estradiol biosynthesis, induce estradiol and progesterone secretion
and increase bone density, thereby potentially counteracting the progression of osteoporosis3, one of the common symptoms
associated with menopause4.
Competition
Our industry is highly
competitive and subject to rapid and significant change. While we believe that our development and commercialization experience,
scientific knowledge and industry relationships provide us with competitive advantages, we face competition from pharmaceutical
and biotechnology companies, including specialty pharmaceutical companies, and generic drug companies, academic institutions, government
agencies and research institutions.
There are a number
of large pharmaceutical and biotechnology companies that currently market and sell drugs or are pursuing the development of drugs
and devices for the diagnosis and treatment of diseases for which we are developing products or technology. Moreover, a number
of additional drugs are currently in clinical trials and may become competitors if and when they receive regulatory approval.
Many of our competitors
have longer operating histories, better name recognition, stronger management capabilities, better supplier relationships, a larger
technical staff and sales force and greater financial, technical or marketing resources than we do. Mergers and acquisitions in
the pharmaceutical and biotechnology industries may result in even more resources being concentrated among a smaller number of
our competitors. Our commercial opportunity could be reduced or eliminated if our competitors develop or market products or other
novel therapies that are more effective, safer or less costly than our current drug candidates, or any future drug candidates we
may develop, or obtain regulatory approval for their products more rapidly than we may obtain approval for our current drug candidates
or any such future drug candidates. Our success will be based in part on our ability to identify, develop and manage a portfolio
of drug and device candidates that are safer and more effective than competing products.
3
https://www.ke.hku.hk/story/innovation/the-magic-of-chinese-yam-for-treatment-of-menopausal-syndrome; see also, Scientific Reports,
5-10179.
4 https://www.everydayhealth.com/menopause/osteoporosis-and-menopause.aspx
Inflation
Inflation affects us
by generally increasing our cost of labor and research and development costs, the way it does to all labor and research costs.
However, we do not anticipate that inflation will materially affect our business in the foreseeable future.
Seasonality
We believe our operation
and sales do not experience seasonality.
Employees
As of the date of this annual report, we have 37 employees,
including 36 full-time employees and 1 part-time employee. Of these, 12 are engaged in full-time research and development and laboratory
operations, 18 are engaged in general and administrative functions, 6 are full-time employees engaged in the clinic operation and
1 part-time employee is engaged in legal clerical support. As of the date of this annual report, 37 of our employees are located
in Hong Kong. In addition, we have engaged and may continue to engage 39 independent contracted consultants and advisors to assist
us with our operations. None of our employees are represented by a labor union or covered by a collective bargaining agreement.
We have never experienced any employment related work stoppages, and we consider our relations with our employees to be good.
Intellectual Property
The technologies underlying
our various research and development projects are the subject of various patents and patent applications claiming, in certain instances,
composition of matter and, in other instances, methods of use. Prosecution, maintenance and enforcement of these patents, as well
as those on any future protectable technologies we may acquire, are and will continue to be an important part of our strategy to
develop and commercialize novel medicines and medical devices, as described in more detail below. Through entering into license
agreements with their owners, we have obtained exclusive rights to these patents, applications and related know-how in the U.S.
and certain other countries to develop, manufacture and commercialize the products using or incorporating the protected inventions
that are described in this annual report and that are expected to contribute significant value to our business. The technologies
protected by these patents may also for the basis for the development of other products.
In addition to licensed
intellectual property, our in-house science team has been actively developing our own proprietary intellectual property. We have
filed a number of provisional applications to establish earlier filing dates for certain of our other ongoing researches, the specifics
of which are currently proprietary and confidential, including our Lead Project SACT-1.
The U.S. patent system
permits the filing of provisional and non-provisional patent applications (i.e., a regular patent application). A non-provisional
patent application is examined by the USPTO, and can mature into a patent once the USPTO determines that the claimed invention
meets the standards for patentability. On the other hand, a provisional patent application is not examined for patentability, and
automatically expires 12 months after its filing date. As a result, a provisional patent application cannot mature into a patent.
Provisional applications
are often used, among other things, to establish an earlier filing date for a subsequent non-provisional patent application. The
term of individual patents depends upon the legal term of the patents in the countries in which they are obtained.
The effective filing
date of a non-provisional patent application is used by the USPTO to determine what information is prior art when it considers
the patentability of a claimed invention. If certain requirements are satisfied, a non-provisional patent application can claim
the benefit of the filing date of an earlier filed provisional patent application. As a result, the filing date accorded by the
provisional patent application may supersede information that otherwise could preclude the patentability of an invention.
A provisional patent
application is not eligible to become an issued patent unless, among other things, we file a non-provisional patent application
within 12 months of the filing date of the provisional patent application. If we do not timely file a non-provisional patent
application claiming priority to said provisional application, we may lose our priority date with respect to our provisional patent
applications. Further, if any (self or by others) publication of the invention is made after such priority date, and if we do not
file a non-provisional application claiming priority to said provisional application, our invention may become unpatentable.
Moreover, we cannot
predict whether such future patent applications will result in the issuance of patents that effectively protect any of our product
candidates or will effectively prevent others from commercializing competitive products.
We do not expect to
incur material expenses in the prosecution of the provisional applications or other licensed patent applications. We expect to
fund the patent costs from our cash and restricted cash.
The value of
our drug and device products will depend significantly on our ability to obtain and maintain patent and other proprietary protection
for those products, preserve the confidentiality of our trade secrets and operate without infringing the valid and enforceable
patents and proprietary rights of other parties.
As of the date
hereof, we are the patentee of a number of provisional and non-provisional patent applications, both on our proprietarily developed
projects and improvement to our in-licensed projects.
The following table
sets forth a list of our patent rights under the exclusive licenses as of the date of this annual report related to our Lead Project,
ALS-4; on the other hand, our other Lead Project, SACT-1 is a proprietary technology not subject to any license agreement:
Project Company / Project name
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License Agreement
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Licensor(s)
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Licensee
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Licensed / IP Rights
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Patent Expiration Dates
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Acticule / ALS-4
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Exclusive Patent License Agreement, dated October 18, 2017
First Amendment to Exclusive License Agreement, dated June 7,
2018
Second Amendment to Exclusive License Agreement dated July 10,
2019
Exclusive Patent License Agreement dated January 11, 2019
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Versitech Limited
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Acticule Life Sciences Limited
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Exclusive licensee: 1 U.S. patent (US10471045), 2 pending U.S.
applications (16/041,838 and US 16/679,313), 2 pending European applications (EP18835480.7 and EP18835238.9), 2 pending PRC application
(CN201880048665.6 and 201880048674.5), 17 pending applications in other foreign jurisdictions including Australia, Brazil, Canada,
Chile, Eurasia, Israel, Japan, Korea, Malaysia, New Zealand, Singapore
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The licensed IP rights include granted patents in the U.S. and
pending patent applications in the U.S., Europe, PRC and 11 other foreign jurisdictions.
The U.S. patent will expire in 2038; any other patent based
on the pending application, if granted, will have a 20-year patent term from 2018.
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Because of the extensive
time required for clinical development and regulatory review of a drug we may develop, it is possible that, before any of our drug
and device candidates can be commercialized, any related patent may expire or remain in force for only a short period following
commercialization, thereby reducing any advantage of any such patent. If appropriate, the Company may seek to extend the period
during which it has exclusive rights to a product by pursuing patent term extensions and marketing exclusivity periods that are
available from the regulatory authorities of certain countries (including the United States) and the EPO.
Even though the Company
has certain patent rights, the ability to obtain and maintain protection of biotechnology and pharmaceutical products and processes
such as those we intend to develop and commercialize involves complex legal and factual questions. No consistent policy regarding
the breadth of claims allowed in such patents has emerged to date in the U.S. The scope of patent protection outside the United
States is even more uncertain. Changes in the patent laws or in interpretations of patent laws in the United States and other countries
have diminished (and may further diminish) our ability to protect our inventions and enforce our IP rights and, more generally,
could affect the value of IP.
While we have already
secured rights to a number of issued patents directed to our drug candidates, we cannot predict the breadth of claims that may
issue from the pending patent applications and provisional patents that we have licensed or that we have filed. Substantial scientific
and commercial research has been conducted for many years in the areas in which we have focused our development efforts, which
has resulted in other parties having a number of issued patents, provisional patents and pending patent applications relating to
such areas. The patent examiner in any particular jurisdiction may take the view that prior issued patents and prior publications
render our patent claims “obvious” and therefore unpatentable or require us to reduce the scope of the claims for which
we are seeking patent protection.
In addition, patent
applications in the United States and elsewhere generally are not available to the public until at least 18 months from the priority
date, and the publication of discoveries in the scientific or patent literature frequently occurs substantially later than the
date on which the underlying discoveries were made. Therefore, patent applications relating to drugs and devices similar to our
drug and device candidates may have already been filed, which (if they result in issued patents) could restrict or prohibit our
ability to commercialize our drug and device candidates.
The biotechnology and
pharmaceutical industries are characterized by extensive litigation regarding patents and other IP rights. Our ability to prevent
competition for our drug and device candidates and technologies will depend on our success in obtaining patents containing substantial
and enforceable claims for those candidates and enforcing those claims once granted. With respect to any applications which have
not yet resulted in issued patents, there can be no assurance that meaningful claims will be obtained. Even issued patents may
be challenged or invalidated. If others have prepared and filed patent applications in the United States that also claim technology
to which we have filed patent applications or otherwise wish to challenge our patents, we may have to participate in interferences,
post-grant reviews, inter parties reviews, derivation or other proceedings in the USPTO and other patent offices to determine issues
such as priority of claimed invention or validity of such patent applications as well as our own patent applications and issued
patents. Patents may also be circumvented, and our competitors may be able to independently develop and commercialize similar drugs
or mimic our technology, business model or strategy without infringing our patents. The rights granted under any issued patents
may not provide us with proprietary protection or competitive advantages against competitors with similar technology.
We may rely, in some
limited circumstances, on unpatented trade secrets and know-how to protect aspects of our technology. However, it is challenging
to monitor and prevent the disclosure of trade secrets. We seek to protect our proprietary trade secrets and know-how, in part,
by entering into confidentiality agreements with consultants, scientific advisors and contractors and invention assignment agreements
with our employees. We also seek to preserve the integrity and confidentiality of our data and trade secrets by maintaining physical
security of our premises and physical and electronic security of our information technology systems. While we have confidence in
these individuals, organizations and systems, agreements or security measures may be breached, giving our competitors knowledge
of our trade secrets and know-how, and we may not have adequate remedies for any such breach, in which case our business could
be adversely affected. Our trade secrets will not prevent our competitors from independently discovering or developing the same
know-how. Although our agreements with our consultants, contractors or collaborators require them to provide us only original work
product and prohibit them from incorporating or using IP owned by others in their work for us, if they breach these obligations,
disputes may arise as to the rights in any know-how or inventions that arise from their work.
Our commercial success
will also depend in part on not infringing the proprietary rights of other parties. Although we seek to review the patent landscape
relevant to our technologies on an ongoing basis, we may become aware of a new patent which has been issued to others with claims
covering or related to aspects of one of our drug or device candidate. The issuance of such a patent could require us to alter
our development plans for that candidate, redesign the candidate, obtain a license from the patent holder or cease development.
Our inability to obtain a license to proprietary rights that we may require to develop or commercialize any of our drug and device
candidates would have a material adverse impact on us.
Trademarks
As of the date of this
annual report, we own trademark registrations covering the trade names and logos of Aptorum and our subsidiaries, including but
not limited to “APTORUM”, “APTORUM THERAPEUTICS,” “VIDENS
LIFE SCIENCES,” “ACTICULE LIFE SCIENCES,”, “CLAVES LIFE SCIENCES”, “NATIVUS LIFE SCIENCES”,
“:SCIPIO LIFE SCIENCES, “TALEM,” “Talem in Chinese characters,” “SMART PHARMA”, in jurisdictions
Hong Kong, EU and the United Kingdom and PRC. Furthermore, we are in the process of applying for registration of trademarks in
jurisdictions including the U.S. and PRC.
We also own certain
unregistered trademark rights or have submitted applications for trademarks for our and our subsidiaries’ trade names and
logos.
All other trade names,
trademarks and service marks of other companies appearing in this annual report are the property of their respective holders.
Solely for convenience, the trademarks and trade names in annual report are referred to without the ® and ™
symbols, but such references should not be construed as any indicator that their respective owners will not assert, to the
fullest extent under applicable law, their rights thereto. We do not intend our use or display of other companies’ trademarks
and trade names to imply a relationship with, or endorsement or sponsorship of us by, any other companies.
Legal Proceedings
From time to time,
we are subject to legal proceedings, investigations and claims incidental to the conduct of our business. We are not currently
a party to any legal proceeding or investigation which, in the opinion of our management, is likely to have a material adverse
effect on our business, financial condition or results of operations.
Regulations
Government authorities
in the United States at the federal, state and local level and in other countries extensively regulate, among other things, the
research and clinical development, testing, manufacture, quality control, approval, labeling, packaging, storage, record-keeping,
promotion, advertising, distribution, post-approval monitoring and reporting, marketing, pricing, export and import of drug and
device products (“Regulated Products”), such as those we are developing. Generally, before a new Regulated Product
can be marketed, considerable data demonstrating its quality, safety and efficacy must be obtained, organized to address the requirements
of and in the format specific to each regulatory authority, submitted for review and approved by the regulatory authority. This
process is very lengthy and expensive, and success is uncertain.
Regulated Products
are also subject to other federal, state and local statutes and regulations in the United States and other countries, as applicable.
The process of obtaining regulatory approvals and the subsequent compliance with appropriate federal, state, local and foreign
statutes and regulations require the expenditure of substantial time and financial resources. Failure to comply with the applicable
regulatory 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, among other actions, the regulatory authority’s
refusal to approve pending applications, withdrawal of an approval, clinical holds, untitled or warning letters, voluntary product
recalls or withdrawals from the market, product seizures, total or partial suspension of production or distribution, injunctions,
disbarment, fines, refusals of government contracts, restitution, disgorgement, or civil or criminal penalties. Any such administrative
or judicial enforcement action could have a material adverse effect on us.
As the Company’s
principal place of business is in Hong Kong, and because AML Clinic is located there, the Company is subject to various Hong Kong
laws and regulation covering its business activities there, described in further detail below. Also, the Company anticipates that,
if it obtains marketing approval for any of its drug and device candidates, it intends to focus its marketing and sales efforts
primarily in three regions: the United States, Europe and PRC. The regulatory framework for each of these regions is described
below.
U.S. Drug Development Process
The process of obtaining
regulatory approvals and maintaining compliance with appropriate federal, state and local statutes and regulations requires 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
or lead to voluntary product recalls. Administrative or judicial sanctions could include the FDA’s refusal to approve pending
applications, withdrawal of an approval, a clinical hold, untitled or warning letters, product seizures, total or partial suspension
of production or distribution, injunctions, fines, refusals of government contracts, restitution, disgorgement or civil or criminal
penalties. The process required by the FDA before a drug may be marketed in the United States generally involves the following:
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completion of non-clinical laboratory tests, preclinical studies according to cGLP and manufacturing of clinical supplies according to cGMP;
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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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approval by an independent IRB, at each clinical site before each trial may be initiated;
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performance of adequate and well-controlled human clinical trials according to cGCP, to establish the safety and efficacy of the proposed product for its intended use;
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preparation and submission to the FDA of an NDA, for a drug;
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satisfactory completion of an FDA advisory committee review, if applicable;
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satisfactory completion of an FDA inspection of the manufacturing facility or facilities at which the product, or components thereof, are produced to assess compliance with cGMP; and
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payment of user fees and the FDA review and approval of the NDA.
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Devices are subject
to different forms of testing and approval, but (except for certain laboratory-developed diagnostic tests) still require satisfaction
of various FDA requirements in order to be brought to market. As of the date of this annual report, the device candidate currently
under development is SLS-1. We do not currently have a commercialization timeline for SLS-1 and cannot assure you that SLS-1 will
ever be ready for commercialization.
The testing and approval
process requires substantial time, effort and financial resources and we cannot be certain that any approvals for our drug candidates,
or any future drug candidates we may develop, will be granted on a timely basis, if at all.
Once a drug candidate
is identified for development, it enters the non-clinical testing stage. Non-clinical tests include laboratory evaluations of product
chemistry, toxicity, formulation and stability, as well as preclinical studies. An IND sponsor must submit the results of the non-clinical
tests, together with manufacturing information, analytical data and any available clinical data or literature, to the FDA as part
of the IND prior to commencing any testing in humans. An IND sponsor must also include a protocol detailing, among other things,
the objectives of the clinical trial, dosing procedures, subject selection and exclusion criteria, the parameters to be used in
monitoring safety, and the effectiveness criteria to be evaluated if the initial clinical trial lends itself to an efficacy evaluation.
Some non-clinical testing may continue even after the IND is submitted. The IND automatically becomes effective 30 days after receipt
by the FDA, unless the FDA raises concerns or questions related to a proposed clinical trial and places the trial on a clinical
hold within that 30-day time period. In such a case, the IND sponsor and the FDA must resolve any outstanding concerns before the
clinical trial can begin. Clinical holds also may be imposed by the FDA at any time before or during clinical trials due to safety
concerns or non-compliance, and may be imposed on all products within a certain class of products. The FDA also can impose partial
clinical holds, for example, prohibiting the initiation of clinical trials for certain duration or for certain doses.
All clinical trials
must be conducted under the supervision of one or more qualified investigators in accordance with cGCP regulations. These regulations
include the requirement that all research subjects provide informed consent in writing before their participation in any clinical
trial. Further, an IRB representing each institution participating in a clinical trial must review and approve the plan for any
clinical trial before it commences at that institution, and the IRB must conduct continuing review and reapprove the study at least
annually. An IRB is responsible for protecting the rights of clinical trial subjects and considers, among other things, whether
the risks to individuals participating in the clinical trial are minimized and are reasonable in relation to anticipated benefits.
The IRB also approves the information regarding the clinical trial and the consent form that must be provided to each clinical
trial subject or his or her legal representative and must monitor the clinical trial until completed. Each new clinical protocol
and any amendments to the protocol must be submitted to the FDA for review, and to the IRBs for approval. Protocol detail, among
other things, includes the objectives of the clinical trial, testing procedures, sublease selection and exclusion criteria, and
the parameters to be used to monitor subject safety.
Human clinical trials
are typically conducted in three sequential phases that may overlap or be combined:
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Phase 1. Phase 1 includes the initial introduction of an investigational new drug into humans. These studies are closely monitored and may be conducted in patients, but are usually conducted in healthy volunteer subjects. These studies are designed to determine the metabolic and pharmacologic actions of the drug in humans, the side effects associated with increasing doses, and, if possible, to gain early evidence on effectiveness. During Phase 1, sufficient information about the drug’s pharmacokinetics and pharmacological effects should be obtained to permit the design of well-controlled, scientifically valid, Phase 2 studies. Phase 1 studies also evaluate drug metabolism, structure-activity relationships, and the mechanism of action in humans. These studies also determine which investigational drugs are used as research tools to explore biological phenomena or disease processes. The total number of subjects included in Phase 1 studies varies with the drug, but is generally in the range of twenty to eighty.
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Phase 2. Phase 2 includes the early controlled clinical studies conducted to obtain some preliminary data on the effectiveness of the drug for a particular indication or indications in patients with the disease or condition. This phase of testing also helps determine the common short-term side effects and risks associated with the drug. Phase 2 studies are typically well-controlled, closely monitored, and conducted in a relatively small number of patients, usually involving several hundred people.
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Phase 3. Phase 3 studies are expanded controlled and uncontrolled trials. They are performed after preliminary evidence suggesting effectiveness of the drug has been obtained in Phase 2, and are intended to gather the additional information about effectiveness and safety that is needed to evaluate the overall benefit-risk relationship of the drug. Phase 3 studies are designed to provide an adequate basis for extrapolating the results to the general population and transmitting that information in the physician labeling. Phase 3 studies usually include several hundred to several thousand people.
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Progress reports detailing
the results of the clinical trials must be submitted at least annually to the FDA and safety reports must be submitted to the FDA
and clinical investigators within 15 calendar days for serious and unexpected suspected adverse events, any clinically important
increase in the rate of a serious suspected adverse reaction over that listed in the protocol or investigator’s brochure,
or any findings from other studies or animal or in vitro testing that suggest a significant risk in humans exposed to the drug
candidate. Additionally, a sponsor must notify the FDA of any unexpected fatal or life-threatening suspected adverse reaction no
later than 7 calendar days after the sponsor’s receipt of the information. There is no assurance that Phase 1, Phase 2 and
Phase 3 testing can be completed successfully within any specified period, or at all. The FDA or the sponsor may suspend or terminate
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 product has been associated with
unexpected serious harm to subjects.
Concurrent with clinical
trials, companies usually complete additional preclinical studies and must also develop additional information about the chemistry
and physical characteristics of the product 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 drug
and, among other things, the manufacturer must develop methods for testing the identity, strength, quality and purity of the final
product. Additionally, appropriate packaging must be selected and tested and stability studies must be conducted to demonstrate
that the product drug does not undergo unacceptable deterioration over its shelf life.
The results of product
development, non-clinical studies and clinical trials, together with other detailed information regarding the manufacturing process,
analytical tests conducted on the product, proposed labeling and other relevant information, are submitted to the FDA as part of
an NDA requesting approval to market the new drug. The FDA reviews all NDAs submitted within 60 days of submission to ensure that
they are sufficiently complete for substantive review before it accepts them for filing. If the submission is accepted for filing,
the FDA begins an in-depth substantive review.
The approval process
is lengthy and difficult and the FDA may refuse to approve an NDA if the applicable regulatory criteria are not satisfied or may
require additional clinical data or other data and information. Even if such data and information are submitted, the FDA may ultimately
decide that the NDA 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 will issue a complete response letter if the agency
decides not to approve the NDA in its present form. The complete response letter usually describes all of the specific deficiencies
that the FDA identified in the NDA that must be satisfactorily addressed before it can be approved. The deficiencies identified
may be minor, for example, requiring labeling changes, or major, for example, requiring additional clinical trials. Additionally,
the complete response letter may include recommended actions that the applicant might take to place the application in a condition
for approval. If a complete response letter is issued, the applicant may either resubmit the NDA, addressing all of the deficiencies
identified in the letter, or withdraw the application or request an opportunity for a hearing.
If after such review
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. Further, the FDA may require that certain
contraindications, warnings or precautions be included in the product labeling. Any products for which we receive the FDA approval
would be subject to continuing regulation by the FDA, including, among other things, record-keeping requirements, reporting of
adverse experiences with the product, providing the FDA with updated safety and efficacy information, product sampling and distribution
requirements, complying with certain electronic records and signature requirements and complying with the FDA promotion and advertising
requirements. In addition, the FDA may require post-approval studies, including Phase 4 clinical trials, to further assess a product’s
safety and effectiveness after NDA approval and may require testing and surveillance programs to monitor the safety of approved
products that have been commercialized. The FDA also may conclude that an NDA may only be approved with a Risk Evaluation and Mitigation
Strategy designed to mitigate risks through, for example, a medication guide, physician communication plan, or other elements to
assure safe use, such as restricted distribution methods, patient registries and other risk minimization tools.
Post-Approval Requirements
Any products for which
we receive the FDA approval are subject to continuing regulation by the FDA, including, among other things, record-keeping requirements,
reporting of adverse experiences with the product, providing the FDA with updated safety and efficacy information, product sampling
and distribution requirements, complying with certain electronic records and signature requirements and complying with the FDA
promotion and advertising requirements. The FDA strictly regulates labeling, advertising, promotion and other types of information
on products that are placed on the market. Products may be promoted only for the approved indications and in accordance with the
provisions of the approved label. Further, manufacturers must continue to comply with cGMP requirements, which are extensive and
require considerable time, resources and ongoing investment to ensure compliance. In addition, changes to the manufacturing process
generally require prior the FDA approval before being implemented and other types of changes to the approved product, such as adding
new indications and additional labeling claims, are also subject to further the FDA review and approval.
The FDA may withdraw
a product approval if compliance with regulatory requirements is not maintained or if problems occur after the product reaches
the market. Later discovery of previously unknown problems with a product may result in restrictions on the product’s marketing
or even complete withdrawal of the product from the market. Further, the failure to maintain compliance with regulatory requirements
may result in administrative or judicial actions, such as fines, untitled or warning letters, holds on clinical trials, product
seizures, product detention or refusal to permit the import or export of products, refusal to approve pending applications or supplements,
restrictions on marketing or manufacturing, injunctions or consent decrees, or civil or criminal penalties, or may lead to voluntary
product recalls.
Patent Term Restoration and Marketing
Exclusivity
Because drug approval
can take an extended period of time, there may be limited remaining life for the patents covering the approved drug, meaning that
the company has limited time to use the patents to protect the sponsor’s exclusive rights to make, use and sell that drug.
In such a case, U.S. patents may be eligible for limited patent term extension under the Drug Price Competition and Patent Term
Restoration Act of 1984, commonly referred to as the Hatch-Waxman Act. The Hatch-Waxman Act permits a patent restoration term of
up to five years as compensation for patent term lost during product development and the FDA regulatory review process. However,
patent term restoration cannot extend the remaining term of a patent beyond a total of 14 years from the product’s approval
date.
In addition, the FDCA
provides a five-year period of non-patent marketing exclusivity within the United States to the first applicant to gain approval
of an NDA for a new chemical entity. A drug is a new chemical entity if the FDA has not previously approved any other new drug
containing the same active moiety, which is the molecule or ion responsible for the action of the drug substance. During the exclusivity
period, the FDA may not accept for review an abbreviated new drug application (“ANDA”) or a 505(b)(2) Application submitted
by another company for another version of such drug where the applicant does not own or have a legal right of reference to all
the data required for approval.
In the future, if appropriate,
we intend to apply for restorations of patent term and/or marketing exclusivity for some of our products; however, there can be
no assurance that any such extension or exclusivity will be granted to us.
Disclosure of Clinical Trial Information
Sponsors of clinical
trials of the FDA-regulated products, including drugs are required to register and disclose certain clinical trial information,
which is publicly available at www.clinicaltrials.gov. Information related to the product, patient population, phase of investigation,
study sites and investigators, and other aspects of the clinical trial is then made public as part of the registration. Sponsors
are also obligated to disclose the results of their clinical trials after completion. Disclosure of the results of these trials
can be delayed until the new product or new indication being studied has been approved. Competitors may use this publicly available
information to gain knowledge regarding the progress of development programs.
Pharmaceutical Coverage, Pricing
and Reimbursement
Much of the revenue
generated by new Regulated Products depends on the willingness of third-party payors to reimburse the price of the product. Significant
uncertainty exists as to the coverage and reimbursement status of any products for which we may obtain regulatory approval. In
the United States, sales of any products for which we may receive regulatory approval for commercial sale will depend in part on
the availability of coverage and reimbursement from third-party payors. Third-party payors include government authorities, managed
care providers, private health insurers and other organizations. The process for determining whether a payor will provide coverage
for a product may be separate from the process for setting the reimbursement rate that the payor will pay for the product. Third-party
payors may limit coverage to specific products on an approved list, or formulary, which is not required to include all of the FDA-approved
products for a particular indication. Moreover, a payor’s decision to provide coverage for a product does not imply that
an adequate reimbursement rate will be approved. Adequate third-party reimbursement may not be available to enable us to maintain
price levels sufficient to realize an appropriate return on our investment in product development.
Third-party payors
are increasingly challenging the price and examining the medical necessity and cost- effectiveness of medical products and services,
in addition to their safety and efficacy. To obtain coverage and reimbursement for any product that might be approved for sale,
we may need to conduct expensive pharmacoeconomic studies in order to demonstrate the medical necessity and cost-effectiveness
of any products, in addition to the costs required to obtain regulatory approvals. Our product candidates may not be considered
medically necessary or cost-effective. If third-party payors do not consider a product to be cost-effective compared to other available
therapies, they may not cover the product after approval as a benefit under their plans or, if they do, the level of payment may
not be sufficient to allow a company to sell its products at a profit.
The U.S. government
and state legislatures have shown significant interest in implementing cost containment programs to limit the growth of government-paid
health care costs, including price controls, restrictions on reimbursement and requirements for substitution of generic products
for branded prescription drugs. Adoption of government controls and measures, and tightening of restrictive policies in jurisdictions
with existing controls and measures, could limit payments for pharmaceuticals.
Even if favorable coverage
and reimbursement status is attained for one or more products for which we receive regulatory approval, less favorable coverage
policies and reimbursement rates may be implemented in the future. Unfavorable coverage or reimbursement policies regarding any
of the Company’s products would have a material adverse impact on the value of that product.
Other Healthcare Laws and Compliance Requirements
If we obtain regulatory
approval of our products, we may be subject to various federal and state laws targeting fraud and abuse in the healthcare industry.
These laws may impact, among other things, our proposed sales, marketing and education programs. In addition, we may be subject
to patient privacy regulation by both the federal government and the states in which we conduct our business.
Patient Protection and the Affordable Care Act
The Affordable Care
Act, enacted in March 2010, includes measures that have or will significantly change the way health care is financed in the United
States by both governmental and private insurers. Among the provisions of the Affordable Care Act of greatest importance to the
pharmaceutical industry are the following:
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The Medicaid Drug Rebate Program requires pharmaceutical manufacturers to enter into and have in effect a national rebate agreement with the Secretary of the Department of Health and Human Services as a condition for states to receive federal matching funds for the manufacturer’s outpatient drugs furnished to Medicaid patients. The Affordable Care Act increased pharmaceutical manufacturers’ rebate liability on most branded prescription drugs from 15.1% of the average manufacturer price to 23.1% of the average manufacturer price, added a new rebate calculation for line extensions of solid oral dosage forms of branded products, and modified the statutory definition of average manufacturer price. The Affordable Care Act also expanded the universe of Medicaid utilization subject to drug rebates by requiring pharmaceutical manufacturers to pay rebates on Medicaid managed care utilization and expanding the population potentially eligible for Medicaid drug benefits.
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In order for a pharmaceutical product to receive federal reimbursement under the Medicare Part B and Medicaid programs or to be sold directly to U.S. government agencies, the manufacturer must extend discounts to entities eligible to participate in the 340B drug pricing program. The Affordable Care Act expanded the types of entities eligible to receive discounted 340B pricing.
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The Affordable Care Act imposed a requirement on manufacturers of branded drugs to provide a 50% discount off the negotiated price of branded drugs dispensed to Medicare Part D patients in the coverage gap (i.e., the “donut hole”).
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The Affordable Care Act imposed an annual, non-deductible fee on any entity that manufactures or imports certain branded prescription drugs, apportioned among these entities according to their market share in certain government healthcare programs, although this fee does not apply to sales of certain products approved exclusively for orphan indications.
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In addition to these
provisions, the Affordable Care Act established a number of bodies whose work may have a future impact on the market for certain
pharmaceutical products. These include the Patient-Centered Outcomes Research Institute, established to oversee, identify priorities
in, and conduct comparative clinical effectiveness research, the Independent Payment Advisory Board, which has authority to recommend
certain changes to the Medicare program to reduce expenditures by the program, and the Center for Medicare and Medicaid Innovation
within the Centers for Medicare and Medicaid Services, to test innovative payment and service delivery models to lower Medicare
and Medicaid spending.
These and other laws
may result in additional reductions in healthcare funding, which could have a material adverse effect on customers for our product
candidates, if we gain approval for any of them. Although we cannot predict the full effect on our business of the implementation
of existing legislation or the enactment of additional legislation pursuant to healthcare and other legislative reform, we believe
that legislation or regulations that would reduce reimbursement for, or restrict coverage of, our products could adversely affect
how much or under what circumstances healthcare providers will use our product candidates if we gain approval for any of them.
U.S. Medical Device Regulatory Approval
Process
Medical Devices are
subject to different forms of testing and approval, and require satisfaction of various FDA requirements including the Food, Drug
and Cosmetic Act (FDCA) in order to be brought to market.
The two primary types
of FDA marketing authorization applicable to a medical device are premarket notification, also called 510(k) clearance, and premarket
approval. The type of marketing authorization is generally linked to the classification of the device. The FDA classifies medical
devices into one of three classes — Class I, Class II or Class III — based on the degree of risk the FDA determines
to be associated with a device and the level of regulatory control deemed necessary to ensure the device’s safety and effectiveness.
Devices requiring fewer controls because they are deemed to pose lower risk are placed in Class I or II. Class I devices are deemed
to pose the least risk and are subject only to general controls applicable to all devices, such as requirements for device labeling,
premarket notification, and adherence to the FDA’s Good Manufacturing Practices. Class II devices are intermediate risk devices
that are subject to general controls and may also be subject to special controls such as performance standards, product-specific
guidance documents, special labeling requirements, patient registries, or post-market surveillance. Class III devices are those
for which insufficient information exists to assure safety and effectiveness solely through general controls or if the device is
a life-sustaining, life-supporting or a device of substantial importance in preventing impairment of human health, or which presents
a potential, unreasonable risk of illness or injury and special controls are not adequate to assure safety and effectiveness.
Most Class I devices
and some Class II devices are exempted by regulation from the 510(k) clearance requirement and can be marketed without prior authorization
from the FDA. Most Class II devices (and certain Class I devices that are not exempt) are eligible for marketing through the 510(k)
clearance pathway. By contrast, devices placed in Class III generally require premarket approval or 510(k) de novo clearance prior
to commercial marketing. The premarket approval process is more stringent, time-consuming, and expensive than the 510(k) clearance
process. However, the 510(k) clearance process has also become increasingly stringent and expensive.
510(k) Clearance Pathway.
When a 510(k) clearance is required, a premarket notification must be submitted to the FDA demonstrating that a proposed device
is “substantially equivalent” to a previously cleared and legally marketed 510(k) device or a device that was in commercial
distribution before May 28, 1976 for which the FDA has not yet called for the submission of a premarket approval application, which
is commonly known as the “predicate device.” A device is substantially equivalent if, with respect to the predicate
device, it has the same intended use and has either (i) the same technological characteristics or (ii) different technological
characteristics and the information submitted demonstrates that the device is as safe and effective as a legally marked device
and does not raise different questions of safety or effectiveness. By law, the FDA is required to clear or deny a 510(k) premarket
notification within 90 days of submission of the application. As a practical matter, clearance often takes significantly longer.
The FDA may require further information, including clinical data, to make a determination regarding substantial equivalence. If
the FDA determines that the device, or its intended use, is not substantially equivalent to a previously-cleared device or use,
the FDA will issue a not substantially equivalent decision. This means the device cannot be cleared through the 510k process and
will require marketing authorization through the premarket approval pathway.
Premarket Approval
Pathway. A premarket approval application must be submitted to the FDA if the device cannot be cleared through the 510(k) process.
The premarket approval application process is much more demanding than the 510(k) premarket notification process and requires the
payment of significant user fees. A premarket approval application must be supported by valid scientific evidence, which typically
requires extensive data, including but not limited to technical, preclinical, clinical trials, manufacturing and labeling to demonstrate
to the FDA’s satisfaction reasonable evidence of safety and effectiveness of the device. The FDA has 45 days from its receipt
of a premarket approval application to determine whether the application will be accepted for filing based on the FDA’s threshold
determination that it is sufficiently complete to permit substantive review. After the FDA determines that the application is sufficiently
complete to permit a substantive review, the FDA will accept the application and begin its in-depth review. The FDA has 180 days
to review an “accepted” premarket approval application, although this process typically takes significantly longer
and may require several years to complete. During this review period, the FDA may request additional information or clarification
of the information already provided. Also, an advisory panel of experts from outside the FDA may be convened to review and evaluate
the application and provide recommendations to the FDA as to the approvability of the device. In addition, the FDA will conduct
a preapproval inspection of the manufacturing facility to ensure compliance with quality system regulations. The FDA may delay,
limit or deny approval of a premarket approval application for many reasons, including:
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failure of the applicant to demonstrate that there is reasonable assurance that the medical device is safe or effective under the conditions of use prescribed, recommended or suggested in the proposed labeling;
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insufficient data from the preclinical studies and clinical trials;
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the manufacturing processes, methods, controls or facilities used for the manufacture, processing, packing or installation of the device do not meet applicable requirements. If the FDA evaluations of both the premarket approval application and the manufacturing facilities are favorable, the FDA will either issue an approval order or an approvable letter, which usually contains a number of conditions that must be met in order to secure final approval of the premarket approval application. If the FDA’s evaluation of the premarket approval application or manufacturing facilities is not favorable, the FDA will deny approval of the premarket approval application or issue a not approvable letter. A not approvable letter will outline the deficiencies in the application and, where practical, will identify what is necessary to make the premarket approval application. The FDA may also determine that additional clinical trials are necessary, in which case the premarket approval application may be delayed for several months or years while the trials are conducted and then the data submitted in an amendment to the premarket approval application. Once granted, a premarket approval application may be withdrawn by the FDA if compliance with post approval requirements, conditions of approval or other regulatory standards is not maintained or problems are identified following initial marketing.
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Clinical Trials. Clinical
trials are almost always required to support premarket approval and are sometimes required for 510(k) clearance. In the United
States, these trials generally require submission of an application for an Investigational Device Exemption, or IDE, to the FDA.
The IDE application must be supported by appropriate data, such as animal and laboratory testing results, showing it is safe to
test the device in humans and that the testing protocol is scientifically sound. The FDA must approve the IDE in advance of trials
for a specific number of patients unless the product is deemed a non-significant risk device eligible for more abbreviated IDE
requirements or the clinical investigation is exempt from the IDE regulations. Clinical trials for significant risk devices may
not begin until the IDE application is approved by the FDA and the appropriate institutional review boards, or IRBs, at the clinical
trial sites. The applicant, the FDA or the IRB at each site at which a clinical trial is being performed may suspend a clinical
trial at any time for various reasons, including a belief that the risks to study subjects outweigh the benefits. Even if a trial
is completed, the results of clinical testing may not demonstrate the safety and efficacy of the device, may be equivocal or may
otherwise not be sufficient to obtain approval or clearance of the product.
Both the 510(k) and
premarket approval processes can be expensive and lengthy and require the payment of significant fees, unless an exemption applies.
The FDA’s 510(k) clearance process usually takes from approximately three to 12 months, but may take longer. The process
of obtaining a premarket approval is much more costly and uncertain than the 510(k) clearance process and generally takes from
approximately one to five years, or longer, from the time the application is submitted to the FDA until an approval is obtained.
The process of obtaining regulatory clearances or approvals to market a medical device can be costly and time consuming, and the
applicant may not be able to obtain these clearances or approvals on a timely basis, if at all.
As of the date of this
annual report, our sole device candidate currently under development is SLS-1, which is a platform for the dexterous manipulation
of cardiovascular robotic surgical catheter, conventionally classified as a cardiovascular steerable catheter, in the MRI environment. We
do not currently have a commercialization timeline for SLS-1 and cannot assure you that SLS-1 will ever be ready for commercialization.
If we are ready to seek regulatory approval for the SLS-1 device in the U.S., we expect that the FDA will classify it as a Class
II non-exempted device requiring premarket clearance under Section 510(k) of the FDCA. If our device cannot clear through the 510(k)
process, we will need to obtain marketing authorization through the premarket approval pathway, which will be more costly, lengthy
and uncertain.
European Union
Regulation
Regulation in the European Union
The process governing
approval of medicinal products in the EU generally follows the same lines as in the United States. It entails satisfactory completion
of pharmaceutical development, non-clinical studies and adequate and well-controlled clinical trials to establish the safety and
efficacy of the medicinal product for each proposed indication. It also requires the submission to relevant competent authorities
for clinical trials authorization and to the European Medicines Authority, or EMA, for a marketing authorization application, or
MAA, and granting of a marketing authorization by these authorities before the product can be marketed and sold in the EU.
Clinical Trial Approval
Pursuant to the currently
applicable Clinical Trials Directive 2001/20/EC and the Directive 2005/28/EC on cGCP, a system for the approval of clinical trials
in the EU (the equivalent of the IND process in the United States) has been implemented through national legislation of the EU
member states. Under this system, an applicant must obtain approval from the competent national authority of an EU member state
in which the clinical trial is to be conducted or in multiple EU member states if the clinical trial is to be conducted in a number
of EU member states. Furthermore, the applicant may only start a clinical trial at a specific study site after the independent
ethics committee has issued a favorable opinion. The clinical trial application, or CTA, must be accompanied by an investigational
medicinal product dossier with supporting information prescribed by Directive 2001/20/EC and Directive 2005/28/EC and corresponding
national laws of the EU member states and further detailed in applicable guidance documents.
In April 2014, the
EU adopted a new Clinical Trials Regulation (EU) No 536/2014, which is set to replace the current Clinical Trials Directive 2001/20/EC.
It is expected that the new Clinical Trials Regulation will apply in 2019. It will overhaul the current system of approvals for
clinical trials in the EU. Specifically, the new regulation, which will be directly applicable in all EU member states, aims at
simplifying and streamlining the approval of clinical trials in the EU. For instance, the new Clinical Trials Regulation provides
for a streamlined application procedure using a single entry point and strictly defined deadlines for the assessment of clinical
trial applications.
Marketing Authorization
To obtain a marketing
authorization for a product under the EU regulatory system (the equivalent of the NDA process in the United States), an applicant
must submit an MAA, either under a centralized procedure administered by the EMA or one of the procedures administered by competent
authorities in EU member states (decentralized procedure, national procedure, or mutual recognition procedure). A marketing authorization
may be granted only to an applicant established in the EU. Regulation (EC) No. 1901/2006 provides that prior to obtaining a marketing
authorization in the EU, an applicant must demonstrate compliance with all measures included in an EMA-approved Pediatric Investigation
Plan, or PIP, covering all subsets of the pediatric population, unless the EMA has granted a product-specific waiver, class waiver,
or a deferral for one or more of the measures included in the PIP.
The centralized procedure
provides for the grant of a single marketing authorization by the European Commission that is valid for all EU member states. Pursuant
to Regulation (EC) No. 726/2004, the centralized procedure is compulsory for specific products, including for medicines produced
by certain biotechnological processes, products designated as orphan medicinal products, advanced therapy products and products
with a new active substance indicated for the treatment of certain diseases, including products for the treatment of cancer. For
products with a new active substance indicated for the treatment of other diseases and products that are highly innovative or for
which a centralized process is in the interest of patients, the centralized procedure may be optional.
Under the centralized
procedure, the Committee for Medicinal Products for Human Use, or the CHMP, established by the EMA is responsible for conducting
the assessment of a product to define its risk/benefit profile. Under the centralized procedure, the maximum timeframe for the
evaluation of an MAA is 210 days, excluding clock stops when additional information or written or oral explanation is to be provided
by the applicant in response to questions of the CHMP. Accelerated evaluation may be granted by the CHMP in exceptional cases,
when a medicinal product is of major interest from the point of view of public health and, in particular, from the viewpoint of
therapeutic innovation.
If the CHMP accepts
such a request, the time limit of 210 days will be reduced to 150 days, but it is possible that the CHMP may revert to the standard
time limit for the centralized procedure if it determines that it is no longer appropriate to conduct an accelerated assessment.
Periods of Authorization and Renewals
A marketing authorization
is valid for five years, in principle, and it may be renewed after five years on the basis of a reevaluation of the risk benefit
balance by the EMA or by the competent authority of the authorizing Member State. To that 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 period. Any authorization that is not followed by the placement of the drug on the EU market (in the case of the centralized
procedure) or on the market of the authorizing Member State within three years after authorization ceases to be valid.
Regulatory Requirements after Marketing
Authorization
Following approval,
the holder of the marketing authorization is required to comply with a range of requirements applicable to the manufacturing, marketing,
promotion and sale of the medicinal product. These include compliance with the EU’s stringent pharmacovigilance or safety
reporting rules, pursuant to which post-authorization studies and additional monitoring obligations can be imposed. In addition,
the manufacturing of authorized products, for which a separate manufacturer’s license is mandatory, must also be conducted
in strict compliance with the EMA’s cGMP requirements and comparable requirements of other regulatory bodies in the EU, which
mandate the methods, facilities and controls used in manufacturing, processing and packing of drugs to assure their safety and
identity. Finally, the marketing and promotion of authorized products, including industry-sponsored continuing medical education
and advertising directed toward the prescribers of drugs and/or the general public, are strictly regulated in the EU under Directive
2001/83EC, as amended.
Orphan Drug Designation and Exclusivity
Regulation (EC) No.
141/2000 and Regulation (EC) No. 847/2000 provide that a product can be designated as an orphan drug by the European Commission
if its sponsor can establish: that the product is intended for the diagnosis, prevention or treatment of (1) a life-threatening
or chronically debilitating condition affecting not more than five in ten thousand persons in the EU when the application is made,
or (2) a life-threatening, seriously debilitating or serious and chronic condition in the EU and that without incentives it is
unlikely that the marketing of the drug in the EU would generate sufficient return to justify the necessary investment. For either
of these conditions, the applicant must demonstrate that there exists no satisfactory method of diagnosis, prevention, or treatment
of the condition in question that has been authorized in the EU or, if such method exists, the drug has to be of significant benefit
compared to products available for the condition.
An orphan drug designation
provides a number of benefits, including fee reductions, regulatory assistance and the possibility to apply for a centralized EU
marketing authorization. Marketing authorization for an orphan drug leads to a ten-year period of market exclusivity. During this
market exclusivity period, neither the EMA nor the European Commission or the EU 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 contained in an authorized orphan medicinal product,
and which is intended for the same therapeutic indication. The market exclusivity period for the authorized therapeutic indication
may, however, be reduced to six years if, at the end of the fifth year, it is established that the product no longer meets the
criteria for orphan drug designation because, for example, the product is sufficiently profitable not to justify market exclusivity.
European Medical Device Regulatory
Approval Process
Similar to the United
States, there is a separate regulatory framework for approval of medical devices. If the Company determines to commercialize SLS-1
or another medical device, it will become subject to all of the requirements for approval required by those regulations.
PRC Regulation
In
order to protect our potential market in the PRC, we have obtained an exclusive license of certain PRC patents directed to certain
of the drug candidates that we are developing and are currently seeking approval of additional patent and other IP filings in the
PRC. We do not otherwise conduct business in the PRC. Seeking IP approval in the PRC subjects us to some of the rules and practices
of the PRC government. Since the Company intends eventually to market its products in the PRC, at least some of our drug candidates
may become subject to regulatory approval and marketing authorization in the PRC.
Hong Kong Regulation
The operations of AML
Clinic in Hong Kong are subject to certain general laws and regulations in relation to clinic medical professionals, trade description
and safety of consumer goods, medical advertisement and importation, exportation, dealing in and sale of pharmaceutical products
and drugs.
Medical Clinics Ordinance
The Medical Clinics
Ordinance provides for the registration, control and inspection of medical clinics. It requires a medical clinic to be registered,
with name and address and other prescribed particulars. “Medical clinic” means any premises used or intended to be
used for the medical diagnosis or treatment of persons suffering from, or believed to be suffering from, any disease, injury or
disability of mind or body, with specific exceptions, including private consulting rooms used exclusively by registered medical
practitioners in the course of their practice on their own account and not bearing any title or description which includes the
word “clinic” or “polyclinic” in the English language.
The application of registration may be refused
if:
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the income derived or to be derived from the establishment or operation of the clinic is not, or will not be, applied solely towards the promotion of the objects of the clinic; or
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any portion of such income, except payment of remuneration to employed registered medical practitioners, nurses and menial servants, will be paid by way of dividend, bonus or otherwise howsoever by way of profit to the applicant himself, or to any persons properly so employed, or to any other persons howsoever.
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We do not believe that
the Medical Clinic Ordinance is applicable to the business of our Company and its subsidiaries, having considered, among others,
the following:
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the legislative intent behind the Medical Clinics Ordinance was to provide for registration of non-profit making clinics;
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the Food and Health Bureau of Hong Kong published a consultation document, “Regulation of Private Healthcare Facilities” in 2014 which specifically states that the Medical Clinics Ordinance and the Code of Practice For Clinics Registered Under The Medical Clinics Ordinance (Chapter 343 of the Laws of Hong Kong) set out the regulatory framework for non-profit-making medical clinics and that other private healthcare facilities, such as ambulatory medical centers and clinics operated by medical groups or individual medical practitioners, are not subject to direct statutory control beyond the regulation of an individual’s professional practice; and
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our business is one which makes and intends to continue making profit as a listed entity. The payment of bonuses to some of our Hong Kong Doctors is clearly a reflection of the profit-making nature of our business.
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Hence, we do not believe
that AML Clinic is required to be registered under the Medical Clinics Ordinance.
Waste Disposal Ordinance
The Waste Disposal
Ordinance (Chapter 354 of the Laws of Hong Kong) (“WDO”) and the Waste Disposal (Clinical Waste) (General) Regulation
(Chapter 354O of the Laws of Hong Kong) (the “WDR”) provide for, among others, the control and regulation of the production,
storage, collection and disposal of clinical waste.
Under the WDO, clinical
waste means waste consisting of any substance, matter or thing generated in connection with:
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a dental, medical, nursing or veterinary practice;
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any other practice, or establishment (howsoever described), that provides medical care and services for the sick, injured, infirm or those who require medical treatment;
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dental, medical, nursing, veterinary, pathological or pharmaceutical research; or
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a dental, medical, veterinary or pathological laboratory practice,
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and which consists wholly or partly of
any of the materials specified in one or more of the groups listed below:
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used or contaminated sharps;
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human and animal tissues;
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such other wastes as specified by the Director of the Environmental Protection Department (“EPD”) of Hong Kong.
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Given the medical services
provided by AML Clinic and the research works in our R&D Center may produce used or contaminated sharps such as syringes and
needles as well as dressings, we are subject to WDO, WDR and the Code of Practice.
Public Health and Municipal Services
Ordinance
We intend to market
DOI (NLS-2) in Hong Kong. In Hong Kong, dietary supplements are defined as “health food” products. “Health food”
containing medicines are subject to the Pharmacy and Poisons Ordinance (Cap 138) and such “health food” containing
Chinese medicines are regulated by the Chinese Medicine Ordinance (Cap 549), where they must meet the requirements in respect of
safety, quality and efficacy before they can be registered.
For other “health
food” products which cannot be classified as Chinese medicine or western medicine are regulated under the Public Health and
Municipal Services Ordinance (Cap 132) as general food products. The Public Health and Municipal Services Ordinance requires the
manufacturers and sellers of food to ensure that their products are fit for human consumption and comply with the requirements
in respect of food safety, food standards and labelling. In addition, all prepackaged food should bear labels which correctly list
out the ingredients of the food under the Food and Drugs (Composition and Labelling) Regulations (Cap 132W) under the Ordinance.
The DOI
(NLS-2) is made with the bioactive ingredient extracted Chinese yam powder and does not contain any western or Chinese medicine;
therefore, registration is not required under the local laws for marketing in Hong Kong. We will, however, ensure the compliance
of the Food and Drugs (Composition and Labelling) Regulations (Cap 132W) with by proper labelling in place.
Rest of the World Regulation
For other countries
in the world, the requirements governing the conduct of clinical trials, medical product licensing, pricing and reimbursement vary
from country to country. In all cases if clinical trials are required, they must be conducted in accordance with cGCP requirements
and the applicable regulatory requirements and the ethical principles having their origin in the Declaration of Helsinki.
If we fail to comply
with applicable foreign regulatory requirements, we may be subject to, among other things, fines, suspension or withdrawal of regulatory
approvals, product recalls, seizure of products, operating restrictions and criminal prosecution.
C. Our Structure
See “Item
4. Information on the Company – A. History and Development of the Company.”
D. Property, plants and equipment
We have several operating
leases, primarily for offices. Our principal executive offices are located in Hong Kong; we also have offices in London, Jersey
City and New York.
Our facilities in Hong
Kong consists of: (i) 638 square feet lab space under a lease that commenced in December 2017 and expires in December 2020, that
carries a monthly rent of $2,127 and which is used for the center run by APD (the “previous R&D Center”); (ii)
851 square feet office space under a lease that commenced in December 2017 and expires in December 2020 that carries a monthly
rent of $2,509, which is also used for the center run by APD (the “HKSTP Office Space”); (iii) 3,250 square feet office
space under a lease that commenced in February 2018 and expires in January 2021 and that carries a monthly rent of $16,667 (the
“Guangdong Investment Tower Lease”) (See “Transactions with Related Persons – Leased Facilities”);
and (iv) 3,173 square feet space under a lease that commenced in March 2018 and expires in March 2022 (the “AML Lease”,
which is home to AML Clinic).
We have a 3,424 square
feet space premise in Fo Tan, Hong Kong, which is currently under a lease and rented out to a third party, with a monthly rent
of $4,393, from October 2019 to September 2021.
In March 2020, Aptorum
Therapeutics Limited leased a 2,021 square feet lab space that commenced in March 2020 and expires in March 2023, that carries
a monthly rent of $6,348 (the “new R&D Center”). The previous R&D Center will be expected to be terminated
in second quarter of 2020.
Our office space in
London consists of approximately 172 square feet under a lease that commenced in August 2019, expires in March 2020 and has a rent
of $2,715 per month, and renewed in April 2020, expires in November 2020 and has a rent of $3,231 per month. Our office space in
Jersey City consists of approximately 81 square feet under a lease that commenced in April 2019 and expired in February 2020 and
has a rent of $1,466 per month. Our office space in New York consists of approximately 95 square feet under a lease that commenced
in February 2020, which will automatically renew until 1 month’s notice for termination, and has a rent of $1,844 per month.
Payments under operating
leases are expensed on a straight-line basis over the periods of the respective leases, and the terms of the leases do not contain
rent escalation, contingent rent, and renewal or purchase options.
We believe our current
facilities are sufficient to meet our needs.
Item 4A. UNRESOLVED STAFF COMMENTS
Not applicable.
Item 5. OPERATING AND FINANCIAL REVIEW
AND PROSPECTS
The following discussion of our financial
condition and results of operations is based upon and should be read in conjunction with our consolidated financial statements
and their related notes included in this annual report. This report contains forward-looking statements. See “Item 5. Operating
and Financial Review and Prospects— G. Safe Harbor.” In evaluating our business, you should carefully consider the
information provided under the caption “Item 3. Key Information—D. Risk Factors” in this annual report. We caution
you that our businesses and financial performance are subject to substantial risks and uncertainties.
For purposes of Item 5, reference to the
“We”, “Our”, “Ours” or “Group” means Aptorum Group Limited and all of its subsidiaries.
This annual report
includes consolidated financial statements for the years ended December 31, 2019, 2018 and 2017. However, as permitted by
Instruction 6 to Item 5 of Form 20-F, a discussion of the changes in our results of operations for the year ended December
31, 2018 and the period March 1, 2017 through December 31, 2017 has been omitted from this annual report, but may be found in
“Item 5. Operating And Financial Review And Prospects” in our annual report on Form 20-F for the
year ended December 31, 2018, filed with the SEC on April 15, 2019.
A. Operating Results
Overview
We are a pharmaceutical
company dedicated to developing and commercializing a broad range of therapeutic and diagnostic technologies to tackle unmet medical
needs. We have obtained exclusive licenses for our technologies. In addition, we are also developing certain proprietary technologies
as product candidates. We are pursuing therapeutic and diagnostic projects (including projects seeking to use extracts or derivatives
from natural substances to treat diseases) in neurology, infectious diseases, gastroenterology, oncology and other disease areas.
We also have projects focused on surgical robotics and dietary supplement. (See “Item 4. Information on the Company –
B. Business Overview – Lead Projects and Other Projects under Development”) Also, we opened a medical clinic, AML Clinic,
in June 2018.
Although none of our
drug or non-therapeutics candidates has yet been approved for testing in humans, our goal is to develop a broad range of novel
therapeutics and diagnostics across a wide range of disease/therapeutic areas. Key components of our strategy for achieving this
goal include: (for details of our strategy, See “Item 4. Information on the Company – B. Business Overview –
Our Strategy”)
|
●
|
Developing therapeutic and diagnostic innovations across a wide range of disease/therapeutic areas;
|
|
●
|
Selectively expanding our portfolio with potential products that may be able to attain orphan drug designation and/or satisfy current unmet medical needs;
|
|
●
|
Collaborating with leading academic institutions and CROs;
|
|
●
|
Expanding our in-house pharmaceutical development center;
|
|
●
|
Leveraging our management’s expertise, experience and commercial networks;
|
|
●
|
Strategically developing opportunities in Hong Kong to promote access to the PRC market; and
|
|
●
|
Obtaining and leveraging government grants to fund project development.
|
We have begun to
devote a significant percentage of our resources, including a substantial portion of the proceeds to two therapeutic projects
(“Lead Projects”). The drug candidates being advanced as the Lead Projects are ALS-4 and SACT-1, described in
further detail above. If the results of the remaining preclinical studies of these drug candidates are positive, we expect to
be able to submit by the second half of 2020, subject to regulatory review, an Investigational New Drug Application (“IND”) for at least
one of these candidates to the U.S. Food and Drug Administration (“FDA”) or an equivalent application to the
regulatory authorities in one or more other jurisdictions such as the China’s National Medical Products Administration
(“NMPA”) and/or the European Medicines Agency (“EMA”). Acceptance of these applications by the
relevant regulatory authority would enable the Company to begin testing that drug candidate in humans in that jurisdiction.
Our ability to obtain any approval of such applications is entirely dependent upon the results of our preclinical studies,
none of which have yet been completed.
Based on our evaluation
of preliminary data and our consideration of a number of factors including substantial unmet needs, benefits over existing therapies,
potential market size, competition in market, the Company decides how to prioritize its resources among projects. Overall, our
rationale for selecting Lead Projects is not based on any mechanical formula or rigid selection criteria, but instead focused on
a combination of the factors and individual attributes of the Lead Projects themselves. See “Item 3. Key Information—D.
Risk Factors— Risks Related to the Preclinical and Clinical Development of Our Drug Candidates— “Preclinical
development is a long, expensive and uncertain process, and we may terminate one or more of our current preclinical development
programs.” and “Management has discretion to terminate the development of any of our projects at any time.”
Our current business
consists of “therapeutics” and “non-therapeutics” segments. However, our focus is on the therapeutics segments.
Because of the risks, costs and extended development time required for successful drug development, we have determined to pursue
projects within our non-therapeutics segments, such as AML Clinic, to provide some interim revenue and medical robots that may
be brought to market and generate revenue more quickly.
Therapeutics
Segment. In our therapeutics segment (“Aptorum Therapeutics Group”), we are currently seeking to develop various
drug molecules (including projects seeking to use extracts or derivatives from natural substances to treat diseases) and certain
technologies for the treatment (“therapeutics”) and diagnosis (“diagnostics”) of human disease conditions
in neurology, infectious diseases, gastroenterology, oncology and other disease areas. In addition, we are seeking to identify
additional prospects which may qualify for potential orphan drug designation (e.g., rare types of cancer) or which address other
current unmet medical needs. Aptorum Therapeutics Group is operated through Aptorum’s wholly-owned subsidiary, Aptorum Therapeutics
Limited, a Cayman Islands exempted company with limited liability, whose principal place of business is in Hong Kong and its indirect
subsidiary companies (who we sometimes refer to herein as project companies), whose principal places of business are also in Hong
Kong.
Non-Therapeutics
Segment. The non-therapeutics segment (“Aptorum Non-Therapeutics Group”) encompasses three businesses: (i)
the development of surgical robotics and medical devices, (ii) AML Clinic and (iii) the sale of dietary supplement. The development
of surgical robotics and medical devices business is operated through Signate Life Sciences Limited, a subsidiary of Aptorum Therapeutics
Limited. The outpatient clinic is operated through our subsidiary, Aptorum Medical Limited. Effective as of March 2018, we leased
office space in Central, Hong Kong as the home to our medical clinic (“AML Clinic”). AML Clinic commenced operations
under the name of Talem Medical in June 2018. The estimated general administrative expenses and other operating expenses of AML
Clinic is expected to be no more than USD120,000 per month. The clinic is expected to reach operating profit in 18 months from
the clinic reaching its full operating capacity upon (i) the successful recruitment of a minimum of six full time physicians (AML
Clinic currently has one full time physician and six part time physicians) and (ii) establishing steady patients flow via
brand development. (See “Item 4. Information on the Company – B. Business Overview – Lead Projects, Dietary Supplement and Other
Projects under Development – Other Projects under Development – Aptorum Medical Limited - AML Clinic”) The sale
of dietary supplement is operated through Nativus Life Sciences Limited (“Nativus”), a subsidiary of Aptorum Therapeutics
Limited. As part of the commercialization, the Group, through Nativus, entered into a regional distribution and marketing agreement
with Multipak Limited, a Hong Kong based group that operates household brands, including the Luk Yu® tea bag and other health
related products. Through Multipak, the Group will be able to increase the accessibility of the product to a large consumer base
regionally. The production of Aptorum Group’s dioscorea opposita bioactive nutraceutical tablets has commenced production
in Canada and will be marketed under the brand name NativusWellTM.
The Company has already
obtained opportunities resulting in our existing licensing agreements from various contractual relationships that we have entered
into, including service/consulting agreements with some of the world’s leading specialists and clinicians in our areas of
interest, with academic institutions and organizations, and with contract research organizations (“CROs”). We anticipate
that these relationships will generate additional licensing opportunities in the future. In addition, we have established and are
continuing to expand our in-house research facilities (collectively, the “R&D Center”) to develop some of our drug
and device candidates internally and to collaborate with third-party researchers.
The Bond Offering
On April 6, 2018, we
entered into a subscription agreement (the “Bond Subscription Agreement”) with Peace Range Limited (“Peace Range”),
a company incorporated under the laws of the British Virgin Islands and wholly-owned special purpose vehicle of Adamas Ping An
Opportunities Fund L.P. Adamas Ping An Opportunities Fund L.P. is the third fund from Adamas Asset Management (HK) Limited (“Adamas”)
and the first fund from the joint venture between Adamas and Yun Sheng Capital Company Limited, a subsidiary of Ping An Insurance
(Group) Company of China, Limited and is advised by Ping An Capital Company Limited. Pursuant to the Bond Subscription Agreement,
we issued Peace Range a $15,000,000 convertible bond (the “Bond” and the “Bond Offering”), minus a structuring
fee equal to 2% of the principal amount of the Bond, on April 25, 2018. We also agreed to pay certain expenses, up to an aggregate
limit of $250,000, incurred by Peace Range in connection with the Bond Offering. The closing of the transaction contemplated by
the Bond Subscription Agreement and the issuance of the Bond are subject to standard closing conditions, which may be satisfied
or waived by the impacted party. The Bond earns interest at the rate of 8% per annum, payable semi-annually. The payment of the
Bond is guaranteed by our holding company, Jurchen Investment Corporation (“Jurchen”), a company wholly-owned by our
CEO, Ian Huen (See “Item 7. Major Shareholders and Related Party Transactions – Share Transfer: Change in direct substantial
shareholders of the Company”), pursuant to a deed of guarantee (the “Guarantee”). In addition, the repayment
of the principal of the Bond and interest payables is secured by a fund we set aside in a debt service reserve account, with the
funds in the debt service reserve account to be released in an amount pro rata to the principal amount of the Bond being converted.
The Bond shall mature on the twelfth calendar month following the issuance date, or with prior written consent of the holders of
the Bond, the business day falling six calendar months thereafter. 10% of the principal amount of the Bond automatically converted
into our Class A Ordinary Shares following the IPO; the rest of the Bond is convertible at the option of the holder commencing
on the closing of the IPO until the earlier of the date falling 12 calendar months after the maturity of the Bond and the date
falling 12 calendar months after the closing of the IPO. We closed the Bond Offering on April 25, 2018 and issued a Bond to Peace
Range pursuant to the Bond Subscription Agreement. Pursuant to the aforementioned conversion rights, we issued an aggregate of
119,217 shares of Class A Ordinary Shares to the Bond holder after the IPO closed. Following the IPO and pursuant to the terms
of the related agreements, the shares Jurchen previously submitted to be held in escrow to guarantee the payment of the Bond were
released to Jurchen and the related share charge agreement and escrow agreement were terminated.
On April 24, 2019,
one of our wholly owned subsidiaries, Aptorum Investment Holding Ltd., repurchased the Bonds from Peace Range. According to the
amended and restated terms and conditions of the Bonds, the Bondholder was granted certain rights to subscribe for additional ordinary
shares of the Company, in an amount up to the principal amount of the Bonds at a price of US$12.17 (subject to adjustment) on or
before 7 days prior to the maturity date (“Subscription Right”). The total consideration of the repurchase of Bonds
and the Subscription Rights was US$13.6 million in cash, excluding accrued interest. The Bond matured and was redeemed on October
25, 2019.
One of the underwriters
in the IPO also served as a placement agent for the Bond Offering and received (i) a cash success fee of $600,000 and (ii) warrants
to purchase 67,790 Class A Ordinary Shares, at an exercise price of $12.17 per share, subject to adjustment (the “Bond PA
Warrants”). The Bond PA Warrants are exercisable on a cashless basis. China Renaissance Securities (HK) Limited (“China
Renaissance”) also served as a placement agent for the Bond Offering; for such services, China Renaissance received a cash
success fee of $150,000. Prior to the commencement the IPO, Boustead assigned all such securities to a non-affiliate; the
assignment is non-recourse. As of the date hereof, there are no outstanding Bond PA Warrants.
The Series A Note Offering
On May 15, 2018, we
closed a private financing with certain investors (the “Series A Note Investors”) who purchased an aggregate of approximately
$1,600,400 Series A convertible notes, at a purchase price of $10,000 per note (the “Series A Notes”), pursuant to
a note purchase agreement. Some of the Series A Note Investors are either affiliates of the Company or “related persons”
as such term is defined in Item 404 of Regulation S-K (See “Item 7. Major Shareholders and Related Party Transactions”).
We refer to this private placement transaction as the “Series A Note Offering.” The Series A Note Investors entered
into a lock-up agreement, pursuant to which they agreed not to sell or otherwise transfer or dispose the Series A Notes or the
Class A Ordinary Shares underlying the Series A Notes during the six-month period commencing on the date our Class A Ordinary Shares
commence trading on NASDAQ Global Market. The Series A Notes automatically converted into Class A Ordinary Shares at the closing
of the IPO at a conversion price equal to a 56% discount to the actual price per Class A Ordinary Share (“Conversion Price”).
Accordingly, the Series A Notes converted into, and we issued an aggregate of 230,252 shares of Class A Ordinary Shares after the
IPO closed.
One of the underwriters
in the IPO also served as a placement agent for the Series A Note Offering and received: (i) a cash success fee of $68,516 and
(ii) warrants to purchase 12,663 Class A Ordinary Shares, at an exercise price of $6.95 per share, subject to adjustment (the “Series
A Note PA Warrants”). The Series A Note PA Warrants are also exercisable on a cashless basis, at the holder’s discretion.
As of the date hereof, there are no outstanding Series A Note PA Warrants.
Registered Direct Offering
On February 28, 2020,
we closed a Registered Direct Offering with certain non-affiliated institutional investors (the “Non-affiliated Purchasers”)
and Jurchen Investment Corporation, our largest shareholder and wholly owned by Mr. Ian Huen, our Chief Executive Officer (the
“Affiliated Purchaser” collectively with the Non-affiliated Purchasers, the “Purchasers”). The Purchasers
purchased an aggregate of 1,351,350 Class A Ordinary Shares and warrants (“Warrants”) to purchase 1,351,350 Class A
Ordinary Shares (the “Offering”), for gross proceeds of approximately $10 million. The Warrants will be exercisable
immediately following the date of issuance for a period of seven years at an initial exercise price of $7.40. The purchase price
for each Share and the corresponding Warrant is $7.40.
We agreed that we would
not issue any Class A Ordinary Shares (or Class A Ordinary Share Equivalents (as defined in the purchase agreement entered on February
25, 2020)) for 45 days following the closing of the Registered Direct Offering subject to certain customary exceptions, including,
without limitation, issuances of restricted securities to consultants or employees of the Company, share option grants and issuances
pursuant to existing outstanding securities and issuance in connection with strategic acquisition.
We agreed from the
date of the purchase agreement until the date that is the later of (i) the 12 month anniversary of the closing date or (ii) one
or more subsequent issuance by the Company or any of its subsidiaries of ordinary share equivalent having aggregate gross proceeds
of at least $20,000,000, the Purchasers shall have the right to participate in the subsequent financing up to an amount equal to
50% of the Subsequent Financing (the “Participation Maximum”) on the same terms, conditions and price provided for
in the Subsequent Financing.
We also agreed certain
most favored nation treatment of the all the Purchasers pursuant to which each Purchaser will have the opportunity to automatically
have the same benefit if the terms and conditions with respect to this Purchase Agreement or any securities offered therein the
Company offered to the other Purchasers are more favorable.
Critical Accounting Policies, Estimates
and Assumptions
Principles of presentation
and consolidation
The consolidated financial statements are
prepared in accordance with U.S. GAAP. Before March 1, 2017, the Company was an investment company under U.S. GAAP for the purposes
of financial reporting. U.S. GAAP for an investment company requires investments to be recorded at estimated fair value and the
unrealized gains and/or losses in an investment’s fair value are recognized on a current basis in the statements of operations.
In addition, the Company did not consolidate its subsidiaries, since they were operating companies and not investment companies.
Such entities were fair valued in accordance with ASC Topic 946 (“ASC 946”) and ASC Topic 820 (“ASC 820”).
As of March 1, 2017, after the change of
business purpose, legal form and substantive activities, the Company’s status changed to an operating company from an investment
company since it no longer met the criteria to qualify as an investment company under the ASC 946. The Company discontinued applying
the guidance in ASC 946 and began to account for the change in status prospectively by accounting for its investments in accordance
with other U.S. GAAP topics.
This change in status and the accounting
policies affect the comparability of the financial statements. As such, for the period January 1, 2017 through February 28, 2017,
statements of operations, changes in net assets, and cash flows have been presented on the predecessor basis of accounting as an
investment company, and on the successor basis of accounting as an operating company since March 1, 2017. The consolidated balance
sheets as of December 31, 2019 and 2018 have been presented on the successor basis.
The consolidated financial statements
of the Group are presented on the accrual basis of accounting in accordance with accounting principles generally accepted in the
United States of America (“U.S. GAAP”) and include the accounts of the Company, its direct and indirect wholly and
majority owned subsidiaries. All material intercompany balances and transactions have been eliminated in preparation of the consolidated
financial statements.
Use of estimates
The preparation of
the consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of increases and decreases in net assets from operations as well as income and expenses during
the reporting period. Significant accounting estimates reflected in the Group’s consolidated financial statements include
valuing equity securities, fair value of investments in securities, convertible debts and finance lease, the useful lives of intangible
assets and equipment, impairment of long-lived assets, and collectability of receivables. Actual results could differ from those
estimates.
Foreign currency
translation and transaction
USD is the reporting
currency. The functional currency of subsidiaries in the Cayman Islands, Seychelles, Samoa and the United States are USD, the functional
currency of subsidiaries in Hong Kong is Hong Kong Dollars (“HKD”), the functional currency of a subsidiary in Macao
is Macanese Pataca (“MOP”), the functional currency of a subsidiary in the United Kingdom is Great British Pound (“GBP”),
and the functional currency of subsidiaries in Singapore is Singapore Dollars (“SGD”). An entity’s functional
currency is the currency of the primary economic environment in which it operates, normally that is the currency of the environment
in which it primarily generates and expends cash. The management considered various indicators, such as cash flows, market expenses,
financing and inter-company transactions and arrangements in determining the Group’s functional currency.
In the consolidated
financial statements, the financial information of the Company and its subsidiaries, which use HKD, MOP, GBP and SGD as their functional
currency, has been translated into USD. Assets and liabilities are translated from each subsidiary’s functional currency
at the exchange rates on the balance sheet dates, equity amounts are translated at historical exchange rates, and revenues, expenses,
gains, and losses are translated using the average exchange rates for the year. Translation adjustments are reported as cumulative
translation adjustments and are shown as a separate component of other comprehensive income or loss in the statements of operations
and comprehensive loss.
Fair value measurement
Fair value is defined
as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market
participants at the measurement date. When determining the fair value measurements for assets and liabilities required or permitted
to be recorded at fair value, the Group considers the principal or most advantageous market in which it would transact its business,
and it considers assumptions that market participants would use when pricing the asset or liability.
As a basis for considering
such assumptions, a three-tier fair value hierarchy prioritizes the inputs utilized in measuring fair value as follows:
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|
Level 1 applies to assets or liabilities for which there are quoted prices in active markets for identical assets or liabilities.
|
|
|
|
|
●
|
Level 2 applies to assets or liabilities for which there are inputs other than quoted prices included within Level 1 that are observable for the asset or liability such as quoted prices for similar assets or liabilities in active markets; quoted prices for identical assets or liabilities in markets with insufficient volume or infrequent transactions (less active markets); or model-derived valuations in which significant inputs are observable or can be derived principally from, or corroborated by, observable market data.
|
|
|
|
|
●
|
Level 3 applies to assets or liabilities for which there are unobservable inputs to the valuation methodology that are significant to the measurement of the fair value of the assets or liabilities.
|
Impairment of long-lived
assets
The Group reviews its
long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may
no longer be recoverable. When these events occur, the Group measures impairment by comparing the carrying value of the long-lived
assets to the estimated undiscounted future cash flows expected to result from the use of the assets and their eventual disposition.
If the sum of the expected undiscounted cash flow is less than the carrying amount of the assets, the Group would recognize an
impairment loss, which is the excess of carrying amount over the fair value of the assets, using the expected future discounted
cash flows.
Revenue recognition
Revenue is recognized when (or as) the
Company satisfies performance obligations by transferring a promised goods or services to a customer. Revenue is measured at the
transaction price which is based on the amount of consideration that the Company expects to receive in exchange for transferring
the promised goods or services to the customer. Contracts with customers are comprised of invoices and written contracts. Revenue
from healthcare services is measured upon the provision of the relevant services.
Income taxes
The Group accounts
for income taxes under the asset and liability method. Under this method, deferred income taxes are determined based on differences
between the financial carrying amounts of existing assets and liabilities and their tax bases. Income taxes are provided for in
accordance with the laws of the relevant taxing authorities.
A valuation allowance
is provided for deferred tax assets if it is more likely than not that these items will either expire before the Group is able
to realize their benefits, or that future deductibility is uncertain. Valuation allowances are established, when necessary, to
reduce deferred tax assets to the amount expected to be realized.
RESULTS OF OPERATION
Financial statements
and information are presented for the years ended December 31, 2019 and 2018.
The following table
summarizes our results of operations for the years ended December 31, 2019 and 2018.
|
|
Year Ended
December 31,
2019
|
|
|
Year Ended
December 31,
2018
|
|
|
|
|
|
|
|
|
Revenue
|
|
|
|
|
|
|
Healthcare service income
|
|
$
|
535,166
|
|
|
$
|
383,450
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
Cost of healthcare service
|
|
|
(794,545
|
)
|
|
|
(318,011
|
)
|
Research and development expenses
|
|
|
(6,939,051
|
)
|
|
|
(3,101,432
|
)
|
General and administrative fees
|
|
|
(7,373,425
|
)
|
|
|
(4,919,626
|
)
|
Legal and professional fees
|
|
|
(3,405,705
|
)
|
|
|
(1,811,770
|
)
|
Other operating expenses
|
|
|
(220,891
|
)
|
|
|
(560,709
|
)
|
Total expenses
|
|
|
(18,733,617
|
)
|
|
|
(10,711,548
|
)
|
|
|
|
|
|
|
|
|
|
Other (loss) income
|
|
|
|
|
|
|
|
|
(Loss) gain on investments in marketable securities, net
|
|
|
(81,839
|
)
|
|
|
501,522
|
|
Gain on non-marketable investments
|
|
|
1,147,190
|
|
|
|
-
|
|
Gain (loss) on investments in derivatives, net
|
|
|
87,599
|
|
|
|
(974,444
|
)
|
Gain on use of digital currencies
|
|
|
46,717
|
|
|
|
-
|
|
Gain on extinguishment of convertible debts
|
|
|
1,198,490
|
|
|
|
-
|
|
Changes in fair value of warrant liabilities
|
|
|
(866,300
|
)
|
|
|
124,726
|
|
Interest expense, net
|
|
|
(3,699,672
|
)
|
|
|
(4,458,191
|
)
|
Rental income
|
|
|
16,868
|
|
|
|
-
|
|
Sundry income
|
|
|
232,460
|
|
|
|
-
|
|
Total other loss, net
|
|
|
(1,918,487
|
)
|
|
|
(4,806,387
|
)
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(20,116,938
|
)
|
|
|
(15,134,485
|
)
|
Impact of COVID-19 Outbreak
On
January 30, 2020, the World Health Organization declared the coronavirus outbreak a “Public Health Emergency of International
Concern” and on March 10, 2020, declared it to be a pandemic. Actions taken around the world to help mitigate the spread
of the coronavirus include restrictions on travel, and quarantines in certain areas, and forced closures for certain types of public
places and businesses. The coronavirus and actions taken to mitigate it have had and are expected to continue to have an adverse
impact on the economies and financial markets of many countries, including the geographical area in which the Company operates.
While the closures and limitations on movement, domestically and internationally, are expected to be temporary, if the outbreak
continues on its current trajectory the duration of the supply chain disruption could reduce the availability, or result in delays,
of materials or supplies to and from the Group, which in turn could materially interrupt the Group’s business operations.
Given the speed and frequency of the continuously evolving developments with respect to this pandemic, the Group cannot reasonably
estimate the magnitude of the impact to its consolidated results of operations. We have taken every precaution possible to ensure
the safety of our employees.
Additionally, it is
reasonably possible that estimates made in the financial statements have been, or will be, materially and adversely impacted in
the near term as a result of these conditions, including losses on investments; impairment losses related to long-lived assets
and current obligations.
Revenue
Healthcare service
income was $535,166 and $383,450 for the years ended December 31, 2019 and 2018, which related to the service income derived from
the AML clinic.
Research and development expenses
Research and development
expenses comprised of costs incurred related to research and development activities, including payroll expenses to our research
and development staff, sponsored research programs with various universities and research institutions and costs in acquiring IP
rights which did not meet the criteria of capitalization under the U.S. GAAP. The following table sets forth a summary of our research
and development expenses for the years ended December 31, 2019 and 2018. The increase in research and development expenses was
mainly due to the increase in consultation service for projects.
|
|
Year Ended
December 31,
2019
|
|
|
Year Ended
December 31,
2018
|
|
Research and Development Expenses:
|
|
|
|
|
|
|
Payroll expenses
|
|
$
|
1,784,647
|
|
|
$
|
1,363,740
|
|
Sponsored research
|
|
|
1,403,689
|
|
|
|
796,943
|
|
Amortization and depreciation
|
|
|
873,239
|
|
|
|
437,453
|
|
Consultation
|
|
|
2,431,997
|
|
|
|
298,315
|
|
Other R&D expenses
|
|
|
445,479
|
|
|
|
174,981
|
|
Milestone payment
|
|
|
-
|
|
|
|
30,000
|
|
Total Research and Development Expenses
|
|
|
6,939,051
|
|
|
|
3,101,432
|
|
General and administrative fees
The following table
sets forth a summary of our general and administrative expenses for the years ended December 31, 2019 and 2018. The increase in
general and administration fees was mainly due to the issuance of share options to our directors, employees, external consultants
and advisors in 2019 for motivation.
|
|
Year Ended
December 31,
2019
|
|
|
Year Ended
December 31,
2018
|
|
General and Administrative Fees:
|
|
|
|
|
|
|
Administrative fees
|
|
$
|
-
|
|
|
$
|
448,718
|
|
Payroll expenses
|
|
|
4,329,039
|
|
|
|
2,510,331
|
|
Rent and rates
|
|
|
490,975
|
|
|
|
681,502
|
|
Travelling expenses
|
|
|
797,446
|
|
|
|
414,696
|
|
Amortization and depreciation
|
|
|
426,378
|
|
|
|
244,839
|
|
Insurance
|
|
|
620,312
|
|
|
|
199,698
|
|
Advertising and marketing expenses
|
|
|
316,227
|
|
|
|
125,388
|
|
Other expenses
|
|
|
393,048
|
|
|
|
294,454
|
|
Total General and Administrative Fees
|
|
|
7,373,425
|
|
|
|
4,919,626
|
|
Legal and professional fees
For the years ended December 31, 2019 and 2018, the legal and
professional fees were $3,405,705 and $1,811,770, respectively. The increase in legal and professional fees was mainly due to the
increased business consultant services engaged in 2019 and the increased in token related expenses.
Other operating expenses
The following table
sets forth a summary of our other operating expenses for the years ended December 31, 2019 and 2018. The decrease in other operating
expenses was mainly due to less corporate events held to promote the Company in 2019.
|
|
Year Ended
December 31,
2019
|
|
|
Year Ended
December 31,
2018
|
|
Other Operating Expenses:
|
|
|
|
|
|
|
Event and meeting expenses
|
|
$
|
93,382
|
|
|
$
|
385,483
|
|
Commission expenses
|
|
|
2,761
|
|
|
|
1,517
|
|
Other expenses
|
|
|
124,748
|
|
|
|
173,709
|
|
Total Other Operating Expenses
|
|
|
220,891
|
|
|
|
560,709
|
|
Other (loss) income
The following table sets forth a summary of our other (loss)
income for the years ended December 31, 2019 and 2018. The interest expense, net, was mainly related the convertible debts
which were fully repaid in 2019.
|
|
Year Ended
December 31,
2019
|
|
|
Year Ended
December 31,
2018
|
|
Other (loss) income:
|
|
|
|
|
|
|
(Loss) gain on investments in marketable securities, net
|
|
$
|
(81,839
|
)
|
|
$
|
501,522
|
|
Gain on non-marketable investments
|
|
|
1,147,190
|
|
|
|
-
|
|
Gain (loss) on investments in derivatives, net
|
|
|
87,599
|
|
|
|
(974,444
|
)
|
Gain on use of digital currencies
|
|
|
46,717
|
|
|
|
-
|
|
Gain on extinguishment of convertible debts
|
|
|
1,198,490
|
|
|
|
-
|
|
Changes in fair value of warrant liabilities
|
|
|
(866,300
|
)
|
|
|
124,726
|
|
Interest expense, net
|
|
|
(3,699,672
|
)
|
|
|
(4,458,191
|
)
|
Rental income
|
|
|
16,868
|
|
|
|
-
|
|
Sundry income
|
|
|
232,460
|
|
|
|
-
|
|
Total other loss, net
|
|
|
(1,918,487
|
)
|
|
|
(4,806,387
|
)
|
Net loss attributable to Aptorum Group
Limited
For the years ended
December 31, 2019 and 2018, net loss attributable to Aptorum Group Limited (excluding net loss attributable to non-controlling
interests) was $18,686,762and $14,831,723, respectively.
LIQUIDITY AND CAPITAL RESOURCES
The Company reported
a net loss of $20,116,938, net operating cash outflow of $13,382,633 and working capital of $5,358,206 for the year ended December
31, 2019. In addition, the Company had an accumulated deficit of $37,555,980 as of December 31, 2019. The Company’s operating
results for future periods are subject to numerous uncertainties and it is uncertain if the Company will be able to reduce or eliminate
its net losses for the foreseeable future. If management is not able to generate significant revenues from its product candidates
currently in development, the Company may not be able to achieve profitability.
The Company’s
principal sources of liquidity have been cash, marketable securities and line of credit facility from related parties. As of the
date of issuance of the consolidated financial statements, the Company has approximately $6.3 million of restricted and unrestricted
cash and undrawn line of credit facility from related parties of approximately $12.4 million. Based upon the current market price
of the Company’s marketable securities, it anticipates it can liquidate such marketable securities, if necessary. In addition,
the Company will need to maintain its operating costs at a level which will not exceed such aforementioned sources of funds in
order to continue as a going concern for a period within one year after the issuance of its consolidated financial statements.
The Company believes that
available cash, together with the efforts from aforementioned management plan and actions, should enable the Company to meet current
anticipated cash needs for at least the next 12 months after the date that the financial statements are issued and the Company
has prepared the consolidated financial statements on a going concern basis. However, the Company continues to have ongoing obligations
and it expects that it will require additional capital in order to execute its longer-term development plan. If the Company encounters
unforeseen circumstances that place constraints on its capital resources, management will be required to take various measures
to conserve liquidity, which could include, but not necessarily be limited to, deferring some of its research, seeking to dispose
of marketable securities and drawing down from line of credit provided by related parties. Management cannot provide any assurance
that the Company will raise additional capital if needed.
CONDENSED SUMMARY OF OUR CASH FLOWS
|
|
Year Ended
December 31,
2019
|
|
|
Year Ended
December 31,
2018
|
|
Net cash used in operating activities
|
|
$
|
(13,382,633
|
)
|
|
$
|
(10,035,531
|
)
|
Net cash used in investing activities
|
|
|
(108,061
|
)
|
|
|
(6,061,987
|
)
|
Net cash (used in) provided by financing activities
|
|
|
(7,323,371
|
)
|
|
|
25,478,949
|
|
Net (decrease) increase in cash and restricted cash
|
|
|
(20,814,065
|
)
|
|
|
9,381,431
|
|
Operating activities
Net cash used in operating
activities amounted to $13.4 million and $10.0 million for the years ended December 31, 2019 and 2018. The increase in net cash
used in operating activities is mainly due to our increased net loss by $5.0 million, partly offset by the increase in non-cash
share-based compensation by $1.6 million.
Investing activities
Net cash used in investing
activities amounted to $0.1 million and $6.1 million for the years ended December 31, 2019 and 2018. The decrease in net cash used
in investing activities is mainly due to the decrease in purchases of property, plant and equipment by $4.8 million and increase
in proceeds from sales of investment securities by $1.0 million.
Financing activities
Net cash used in financing
activities amounted to $7.3 million for the year ended December 31, 2019. Net cash provided by financing activities amounted to
$25.5 million for the year ended December 31, 2018. It changed from net cash provided by financing activities to net cash used
in financing activities is due to the payment for settlement of convertible debts of $13.6 million, and decrease in proceeds from
issuance of convertible debts and shares by $16.1 million and $11.1 million respectively. It is partly offset by the increase in
loan from related parties by $6.3 million.
CAPITAL EXPENDITURES
Our capital expenditures
were $0.9 million and $6.0 million for the years ended December 31, 2019 and 2018, respectively. These capital expenditures were
incurred primarily for investments in facilities, leasehold improvements, equipment and technology.
RECENT ACCOUNTING PRONOUNCEMENTS
Recently adopted accounting pronouncements
In May 2014, the Financial Accounting Standards Board (FASB)
issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASU 2014-09”),
which was subsequently modified in August 2015 by ASU 2015-14, Revenue from Contracts with Customers: Deferral of the Effective
Date. The Group adopted this standard effective January 1, 2019 using the modified retrospective approach, in which case the cumulative
effect of applying the standard would be recognized at the date of initial application. The adoption does not have a material impact
to the consolidated financial statements.
In January 2016, the FASB issued Accounting
Standards Update No. 2016-01 (“ASU 2016-01”) “Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of
Financial Assets and Financial Liabilities,” which amends various aspects of the recognition, measurement, presentation, and
disclosure of financial instruments. The Group adopted ASU 2016-01 as of January 1, 2019 using the modified retrospective method
for marketable equity securities and the prospective method for non-marketable equity securities. The following table summarizes
the changes to the consolidated balance sheet for the adoption of ASU 2016-01:
|
|
December 31,
2018
|
|
|
Adjustment
due to ASU
2016-01
|
|
|
January 1,
2019
|
|
Accumulated deficit
|
|
$
|
(17,379,185
|
)
|
|
$
|
(1,490,033
|
)
|
|
$
|
(18,869,218
|
)
|
Accumulated other comprehensive loss
|
|
$
|
(1,484,688
|
)
|
|
$
|
1,490,033
|
|
|
$
|
5,345
|
|
The Group has elected to use the measurement
alternative for non-marketable equity securities, defined as cost adjusted for changes from observable transactions for identical
or similar investments of the same issuer, less impairment. The adoption of ASU 2016-01 increases the volatility of other income
(expense), net, as a result of the unrealized gain or loss from the remeasurement of equity securities.
Recently issued accounting standards
which have not yet been adopted
The Group is an “emerging growth
company” as defined in the Jumpstart Our Business Startups Act of 2010 (the “JOBS Act”). Under the JOBS Act,
the emerging growth companies (“EGCs”) can delay adopting new or revised accounting standards issued subsequent to
the enactment of the JOBS Act until such time as those standards apply to private companies.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit
Losses (“ASU 2016-13”). Subsequently, the FASB issued ASU 2019-05, Financial Instruments- Credit Losses (Topic 326):
Targeted Transition Relief. The amendments in ASU 2016-13 update guidance on reporting credit losses for financial assets. These
amendments affect loans, debt securities, accounts receivables, net investments in leases, off balance sheet credit exposures,
reinsurance receivables, and any other financial assets not excluded from the scope that have the contractual right to receive
cash. The amendments are effective for fiscal years beginning after December 15, 2020, and interim periods within those fiscal
years. As an EGC the Group can adopt the amendment for fiscal years beginning after December 15, 2021, and interim period within
those fiscal years. The Group is currently evaluating the impact on its consolidated financial statements of adopting this standard.
In February 2016, the FASB issued ASU 2016-02,
Leases (“ASU 2016-02”), which requires a lessee to recognize a right-of-use asset and a lease liability for operating
leases, initially measured at the present value of the future lease payments, in the balance sheet. ASU 2016-02 also requires a
lessee to recognize a single lease cost, calculated so that the cost of the lease is allocated over the lease term, generally on
a straight-line basis. This new guidance is effective for fiscal years beginning after December 15, 2019. Early adoption is permitted.
The Group has evaluated the potential effects of adopting the provisions of ASU 2016-02 on its consolidated financial statements.
The Group has estimated that the operating lease right-of-use assets of $959,641, and operating lease liabilities of $982,288 will
be recognized at January 1, 2020 in the consolidated financial statements.
In August 2018, the FASB issued ASU 2018-13,
Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement, which amends ASC 820, Fair Value
Measurement. This ASU modifies the disclosure requirements for fair value measurements by removing, modifying, or adding certain
disclosures. The amendments are effective for fiscal years beginning after December 15, 2019, and interim periods within those
fiscal years. The removed and modified disclosures will be adopted on a retrospective basis and the new disclosures will be adopted
on a prospective basis. The adoption will not have a material effect on the Group’s financial statements.
In December 2019, the
FASB issued Accounting Standards Update No. 2019-12, Income Taxes (Topic 740): “Simplifying the Accounting for Income Taxes”
(“ASU 2019-12”), which simplifies the accounting for income taxes. This standard will be effective for fiscal years
beginning after December 15, 2021, and interim periods within those fiscal years, on a prospective basis, and early adoption is
permitted. The Group is currently evaluating the impact of the new standard on its consolidated financial statements.
The Group does not believe other recently
issued but not yet effective accounting standards, if currently adopted, would have a material effect on the consolidated financial
position, statements of operations and cash flows.
RESEARCH AND DEVELOPMENT
As of December 31,
2019, the Company has obtained 12 exclusively licensed technologies in neurology, infectious diseases, gastroenterology, oncology,
surgical robotics and natural health and is in the process of developing two “in-house” projects in the neurology area.
For the years ended December 31, 2019 and 2018, the Group incurred $6,939,051 and $3,101,432, respectively, on research and development
expenses.
OFF-BALANCE SHEET ARRANGEMENTS
As at December 31, 2019,
the Company did not have any off-balance sheet debt, nor do we have any transactions, arrangements or relationships with any special
purpose entities.
F. Contractual Obligations
The following table
sets forth our contractual obligations as of December 31, 2019.
|
|
Payment Due by Period
|
|
|
|
Total
|
|
|
One to
three years
|
|
|
Three to
five years
|
|
|
|
US$
|
|
|
US$
|
|
|
US$
|
|
Operating lease commitments
|
|
|
1,070,214
|
|
|
|
1,070,214
|
|
|
|
-
|
|
Operating lease commitments
We have several operating
leases, primarily for offices. Our principal executive offices are located in Hong Kong; we also have offices in London and Jersey
City. Payments under operating leases are expensed on a straight-line basis over the periods of the respective leases, and the
terms of the leases do not contain rent escalation, contingent rent, and renewal or purchase options. The aggregate future minimum
payment under these non-cancelable operating leases are summarizes in the table above.
CONTINGENT PAYMENT OBLIGATIONS
We have entered into
agreements with independent third parties for purchasing office and laboratory equipment. As of December 31, 2019, we had non-cancellable
purchase commitments of $61,859.
We have additional
contingency payment obligations under each of the license agreements, such as milestone payments, royalties, research and development
funding, if certain condition or milestone is met.
Milestone payments
are to be made upon achievements of certain conditions, such as Investigational New Drugs (“IND”) filing or U.S. Food
and Drug Administration (“FDA”) approval, first commercial sale of the licensed products, or other achievements. The
aggregate amount of the milestone payments that we are required to pay up to different achievements of conditions and milestones
for all the license agreements signed as of December 31, 2019 are below:
|
|
Amount
|
|
Drug molecules: up to the conditions and milestones of
|
|
|
|
Preclinical to IND filing
|
|
$
|
372,564
|
|
From entering phase 1 to before first commercial sale
|
|
|
24,216,410
|
|
First commercial sale
|
|
|
15,656,410
|
|
Net sales amount more than certain threshold in a year
|
|
|
75,769,231
|
|
Subtotal
|
|
|
116,014,615
|
|
|
|
|
|
|
Surgical robotics and medical devices: up to the conditions and milestones of
|
|
|
|
|
Before FDA approval
|
|
|
270,000
|
|
FDA approval obtained
|
|
|
200,000
|
|
Subtotal
|
|
|
470,000
|
|
|
|
|
|
|
Total
|
|
$
|
116,484,615
|
|
For the years ended
December 31, 2019 and 2018, we incurred $nil and $30,000 milestone payments, respectively. For the years ended December 31, 2019
and 2018, we did not incur any royalties or research and development funding, respectively. As of December 31, 2019, no other milestone
payments had been triggered under any of the existing license agreements.
G. Safe Harbor
This annual report
contains forward-looking statements that are based on our management’s beliefs and assumptions and on information currently
available to us. These statements involve known and unknown risks, uncertainties and other factors which may cause our actual results,
performance or achievements to be materially different from those expressed or implied by the forward-looking statements.
You can identify these
forward-looking statements by words or phrases such as “may,” “will,” “expect,” “anticipate,”
“aim,” “estimate,” “intend,” “plan,” “believe,” “potential,”
“continue,” “is/are likely to” or other similar expressions. We have based these forward-looking statements
largely on our current expectations and projections about future events and financial trends that we believe may affect our financial
condition, results of operations, business strategy and financial needs. These forward-looking statements include, among other
things, statements relating to:
|
●
|
our goals and strategies;
|
|
●
|
our future business development, financial conditions and results of operations;
|
|
●
|
our expectations regarding demand for and market acceptance of our products once available;
|
|
●
|
our expectations regarding our development and commercialization of our therapeutics;
|
|
●
|
competition in our industry; and
|
|
●
|
relevant government policies and regulations relating to our industry.
|
You should thoroughly
read this annual report and the documents that we refer to in this annual report with the understanding that our actual results
in the future may be materially different from or worse than what we expect. We qualify all of our forward-looking statements by
these cautionary statements. Other sections of this annual report include additional factors which could adversely affect our business
and financial performance. Moreover, we operate in an evolving environment. New risk factors and uncertainties emerge from time
to time and it is not possible for our management to predict all risk factors and uncertainties, nor can we assess the impact of
all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially
from those contained in any forward-looking statements. Important risks and factors that could cause our actual results to be materially
different from our expectations are generally set forth in “Item 3. Key Information—D. Risk Factors” and elsewhere
in this annual report.
The forward-looking
statements made in this annual report relate only to events or information as of the date on which these statements are made in
this annual report. We undertake no obligation to update or revise any forward-looking statements, whether as a result of new information,
future events or otherwise, after the date of this annual report. You should not rely upon forward-looking statements as predictions
of future events.
Item 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
A. Directors and Senior Management
Below is a list of
our directors, senior management and any employees upon whose work we are dependent as of the date of this annual report, and a
brief account of the business experience of each of them. The business address for the directors and officers of Aptorum Group
Limited is 17th floor, Guangdong Investment Tower, 148 Connaught Road Central, Hong Kong.
On October 10, 2019,
Mr. Lui resigned from his position as Chief Business Officer.
Name
|
|
Age
|
|
Position
|
Executive Officers
|
|
|
|
|
Ian Huen
|
|
40
|
|
Founder, Chief Executive Officer and Executive Director
|
Darren Lui
|
|
39
|
|
President and Executive Director
|
Clark Cheng
|
|
40
|
|
Chief Medical Officer and Executive Director
|
Sabrina Khan
|
|
38
|
|
Chief Financial Officer
|
Thomas Lee
|
|
47
|
|
Head of Research and Development
|
Angel Ng
|
|
39
|
|
Chief Operating Officer
|
Non-Management Directors
|
|
|
|
|
Charles Bathurst
|
|
65
|
|
Independent Non-Executive Director and Chair of Audit Committee
|
Mirko Scherer
|
|
51
|
|
Independent Non-Executive Director
|
Justin Wu
|
|
50
|
|
Independent Non-Executive Director and Chair of Compensation Committee
|
Douglas Arner
|
|
50
|
|
Independent Non-Executive Director and Chair of Nominating and Corporate Governance Committee
|
Executive Officers
MR. IAN HUEN, Founder, Chief Executive
Officer and Executive Director
Mr. Ian Huen is the
Founder, Chief Executive Officer and Executive Director of Aptorum Group Limited. Mr. Huen is also Co-Founder of a Hong Kong company,
AENEAS CAPITAL LIMITED, a licensed corporation regulated by the Hong Kong Securities & Futures Commission as a Type 9 Asset
Manager, since 2005. He has over 17 years of global asset management experience and previously covered the U.S. healthcare sector
as an equity research analyst at Janus Henderson Group plc (formerly known as Janus Capital). Mr. Huen was the financial advisor
in the sale of Seng Heng Bank Limited (Macau) to Industrial and Commercial Bank of China in 2007 and was appointed as the vice
president of the Board of General Meeting in Industrial and Commercial Bank of China (Macau) Capital Limited in March 2007 for
a term of 12 years until March 2019.
As a trustee board
member of the Dr. Stanley Ho Medical Development Foundation, Mr. Huen facilitates advisory, development funding, access to research
resources across Asia and continues to establish relationships with leading academic institutions to propel innovations in healthcare.
Mr. Huen graduated
from Princeton University with an A.B. degree in Economics in June 2001, earned a MA in Comparative and Public History from CUHK
in June 2016. Mr. Huen is also a Chartered Financial Analyst (“CFA”).
MR. DARREN LUI, President
and Executive Director
Mr. Darren Lui is the
President and Executive Director of Aptorum Group Limited. Mr. Lui is also an Executive Director and Co-Founder of AENEAS CAPITAL
LIMITED, a licensed corporation regulated by the Hong Kong Securities & Futures Commission as a Type 9 Asset Manager.
Mr. Lui was previously
the founder, director and responsible officer of Varengold Capital Securities Limited and Varengold Capital Asset Management Limited
in Hong Kong, with subsidiaries operating brokerage, asset management, and investment businesses in Asia established since January
2015.
Prior to this, he was
a Director within the Fixed Income Group of Barclays Capital, where he spent over nine years from September 2005 to February 2014
developing and establishing their London, Singapore and New York structuring teams. From September 2002 to August 2005 he was qualified
as a Chartered Accountant with Ernst & Young LLP (London), specializing in capital markets advisory.
Mr. Lui graduated with
First-Class Honors from Imperial College, London with a BSc degree in Biochemistry in June 2002. He is a Chartered Accountant (ICAS),
a CFA, and an Associate of Chartered Institute of Securities & Investments (UK).
DR. CLARK CHENG, Chief Medical Officer
and Executive Director, Aptorum Group Limited
Executive Director, Aptorum Medical
Limited
Dr. Clark Cheng is
the Chief Medical Officer and Executive Director of Aptorum Group Limited; he is also an executive director of AML. Prior to this
appointment, Dr. Cheng served as the Operations Director since 2009 of Raffles Medical Group, and the company’s Deputy General
Manager since 2011, representing an expanded role in the region. During his employment with Raffles Medical Group, he practiced
as a full-time medical administrator to overlook Raffles Medical Hong Kong operations and supported its development in the PRC.
Dr. Cheng received
his medical training at the University College London, UK, in 2005 and completed his foundation year training at The Royal Free
Hospital in 2007. Pursuing his career in surgery, he obtained his membership of the Royal College of Surgeons of Edinburgh in 2009
and commenced his training in Orthopaedics where he practiced as Specialist Registrar at the National University Hospital, Singapore,
with special interest in Traumatology of the lower limbs. In 2011, he also obtained his Master in Business & Administration
with distinction from Tippie College of Business, University of Iowa, US.
Dr. Cheng is an active
member of the Singapore Chamber of Commerce, and appears regularly as a guest speaker for The Open University of Hong Kong, The
Airport Authority Hong Kong and other corporate events.
MISS SABRINA KHAN, Chief Financial Officer
Miss Sabrina Khan is
the Chief Financial Officer of Aptorum Group Limited; she is also the company secretary. She leads the Company’s
financial strategy and operations, as well as Investor Relations. She has extensive experience working at KPMG (Hong Kong) and
Ernst & Young LLP (Hong Kong). She was a regional financial controller in Asia for St. James’s Place Wealth Management
(Hong Kong), which St. James’s Place Wealth Management Group (LON: STJ) is a FTSE100 company. Prior to that, she served as
the senior finance manager of Neo Derm Group, a leading medical aesthetic group in Asia, in charge of its finance-related matters
and expansion in the PRC. From August 2009 to May 2013, she served as the senior finance manager of Global Cord Blood Corporation
(formerly known as China Cord Blood Corporation (NYSE: CO)), which was previously a subsidiary of Golden Meditech Holdings Limited
(HK: 801), where she played an important role with the NYSE listing filings, investor relations and post IPO reporting. During
her employment with Global Cord Blood Corporation, she was actively involved in the issuance of convertible bonds to Kohlberg Kravis
Roberts and various merger and acquisition projects, facilitated and liaised with investment banks on due diligence, deal structuring,
and also involved in commercial negotiation with respect to major contract terms.
Miss Khan qualified
as certified public accountant and graduated with a BBA (Hons) in Accounting & Finance at The University of Hong Kong in 2003.
She was qualified as an Advanced China Certified Taxation Consultant in 2015.
DR. THOMAS LEE, Head of Research and
Development
Dr. Thomas Lee serves
as the Head of R&D of Aptorum Group Limited since April 1, 2019; he is also the Chairman of our Scientific Advisory Board.
Dr. Lee served as Chief Executive Officer and Chief Scientific Officer of Aptorum Therapeutics Limited, a wholly-owned therapeutics
subsidiary of Aptorum Group Limited from January 2018 to March 2019. Prior to that, Dr. Lee served as an Assistant Professor in
the School of Pharmacy, Faculty of Medicine, The Chinese University of Hong Kong from August 2013 to January 2018. Dr. Lee’s
key area of research involves drug delivery with specialties including: formulation development of poorly soluble compounds, oral
delivery, Nanotechnology, and similar fields.
Prior to academia,
Dr. Lee accumulated big-pharma experience from the decade he spent at two multinational pharmaceutical companies in the U.S. From
November 2008 to July 2013, Dr. Lee worked at Celgene Corporation as a Senior Scientist of the Formulations Research & Development.
From June 2003 to November 2008, Dr. Lee worked at Novartis Pharmaceuticals Corporation, as a Principal Scientist.
Dr. Lee graduated with
B.Pharm. (Hons) Degree from The Chinese University of Hong Kong in December 1995, and received his Ph.D. in Pharmaceutical Sciences
(Drug Delivery) from the University of Wisconsin-Madison in the U.S in May 2003.
DR. ANGEL NG, Chief Operating Officer
Dr. Angel Ng serves
as the Chief Operating Officer (“COO”) of Aptorum Group Limited since April 1, 2019. Dr. Ng. served as the COO of
Aptorum Therapeutics Limited, a wholly-owned therapeutics subsidiary of Aptorum Group Limited from September 2017 to March 2019.
During this time, Dr. Ng led Aptorum Therapeutics Limited and its subsidiaries’ operations and business strategies. Dr.
Ng has extensive experience in project management with Innovation and Technology government funds and academic institutions.
Since September 2016,
Dr. Ng works as a Research Officer cum Project Manager at The University of Hong Kong (“HKU”) in project management
for various research projects including government funded project of novel medical device. During this time, Dr. Ng led the research
team towards cadaveric trial for a novel soft robotics medical device and coordinated all research related agreements. During December
2014 to September 2015, Dr. Ng served as Project Manager at Hong Kong Science & Technology Parks Corporation (“HKSTP”),
where she worked on technology transfer and commercialization for research and development projects through partnerships between
local universities and the worldwide network and expertise of the Oxford University commercial arm. Dr. Ng also worked for The
Chinese University of Hong Kong (“CUHK”) as Project Manager from September 2007 to January 2009. She managed a HK$60M
government funded R & D project with a team of specialists in CUHK where she kept close liaison with industry and government
authorities. Dr. Ng was in the precision chemical machining industry from 2003 to 2007, where she managed the manufacturing team
and business operations in PRC.
Dr. Ng serves as a
Director of Tecford Trading & Technology Company Limited since December 2017. Dr. Ng graduated with a B.Sc (Hons) from Department
of Chemistry at HKU in December 2002, received her M.Sc in Composite Materials from Imperial College London in November 2003 and
obtained her Ph.D. in Mechanical Engineering from HKU in December 2015.
Independent Non-Executive Directors
MR. CHARLES BATHURST
Mr. Bathurst is an
Independent Non-Executive Director of Aptorum Group Limited. He has over 41 years’ experience of management and senior executive
roles primarily in financial services. In 2011, he set up his own independent consultancy service, Summerhill Advisors Limited,
advising on management structure, business development, financial reporting, internal audit controls and compliance to both emerging
and multinational companies. Today he holds Non-Executive and Advisory board positions on fast-growing companies in healthcare,
technology and financial services.
Prior to establishing
Summerhill, he served as a Director for J.O. Hambro Investment Management from September 2008 to August 2011, where he oversaw
the restructuring and commercialization a range of in-house investment funds. He was appointed to the management board and supervised
reporting teams including Business development, accounting teams, regulatory reporting teams and internal controls.
From April 2004 to
March 2008, Mr. Bathurst served in multiple roles at Old Mutual Asset Managers (UK), including being a member of the senior management
team and head of international sales. Duties included business development, launching new investment funds, recruitment, establishing
and supervision of regulatory and financial reporting teams, as well as ensuring compliance with funds’ regulatory requirements
and corporate governance standards.
Prior to this, Mr.
Bathurst was an advisor to Lion Capital Advisors Limited from April 2003 to March 2004, and from June 2002 to March 2003 business
development reporting to the board of management of LCF Rothschild Asset Management Limited.
From April 1995 to
March 2002, Mr. Bathurst joined a newly formed alternative investment management team at Credit Agricole Asset Management, establishing
the London Branch as the Managing Director in 1998. He was responsible for the recruitment and development strategy for marketing,
sales, investment, financial reporting, compliance and regulatory controls and investor relations.
Between the period
of September 1989 and December 1994, Mr. Bathurst worked for GNI, the largest futures and options execution and clearing broker
on the London International Financial futures Exchange, where he focused on marketing to European and Middle East financial institutions.
In 1991, he joined a new management team to launch a series of specialist investment funds while serving as the Head of Sales and
Product Development.
Mr. Bathurst graduated
from the Royal Military Academy Sandhurst in November 1974 and commissioned into the British Army serving in the UK and Germany.
DR. MIRKO SCHERER
Dr. Mirko Scherer is
an Independent Non-Executive Director of Aptorum Group Limited. Dr. Scherer has been serving as the Chief Executive Officer at
CoFeS China (formerly known as “TVM Capital China”) in Hong Kong since March 2015. CoFeS China focuses on cross-border
activities in the life science industry between China and the West. CoFeS China acts as a bridge between China and the
West, assisting Chinese investors and pharmaceutical companies accessing western innovations, while collaborating with innovative
life science companies from the West to enter the fast-growing China market.
Dr. Mirko Scherer has
served on the Board of the Frankfurt Stock Exchange from 2005 to 2007 and has been a board member of the Stichting Preferente Aandelen
QIAGEN since 2004. From August 2016 through July 2018, Dr. Scherer served as a Non-Executive board member of Quantapore Inc. and
from April 2015 through September 2017, he was a director of China BioPharma Capital I, (GP).
Dr. Scherer is an experienced
biotechnology executive and has led numerous financing M&A and licensing transactions, in both public and private markets,
in Europe and the U.S. for over 20 years. He consulted MPM Capital for the period between July 2012 and December 2014. Dr. Scherer
was also a co-founder and partner of KI Kapital from November 2008 to February 2014, a company which was specialized in providing
consultation in life science industry.
Prior to working in
the venture capital industry, Dr. Scherer co-founded GPC Biotech (Munich and Princeton, NJ) and served as the Chief Financial
Officer from October 1997 to December 2007. GPC Biotech engaged in numerous pharmaceutical alliances with companies such as Sanofi
Aventis, Boehringer Ingelheim, Altana (now part of Takeda), Yakult, and Pharmion (now part of Celgene). Dr. Scherer has established
an extensive network in the U.S., European, and China’s biotechnology and venture capital industry. Prior to his time at
GPC Biotech, Dr. Scherer worked as a consultant from May 1993 to June 1994 at the Boston Consulting Group.
Dr. Scherer earned
a Doctorate in Finance from the European Business School in Oestrich-Winkel/Germany in 1998, a MBA from Harvard Business School
in June 1996, and a degree in Business Administration from the University of Mannheim/Germany in February 1993.
DR. JUSTIN WU
Dr. Justin Wu is an
Independent Non-Executive Director of Aptorum Group Limited. He also has been serving as the Chief Operating Officer of CUHK Medical
Centre since August 2018. He served as the Associate Dean (Development) of the Faculty of Medicine at CUHK from July 2014 to June
2018 and the Associate Dean (Clinical) of the Faculty of Medicine at CUHK from December 2012 to July 2014, and has been serving
a Professor in the Department of Medicine and Therapeutics since 2009, also the Director of the S. H. Ho Center for Digestive Health,
a research center specializing in functional gastrointestinal diseases, reflux and motility disorders, and digestive endoscopy.
Active in research publications and assessments, Dr. Wu served as the International Associate Editor of American Journal of Gastroenterology
(“AJG”), and Managing Editor of Journal of Gastroenterology and Hepatology (“JGH”). He is also the Secretary
General of the Asian Neurogastroenterology and Motility Association (“ANMA”), and Secretary General of the Asia Pacific
Association of Gastroenterology (“APAGE”).
Dr. Wu has won a number
of awards including the Emerging Leader in Gastroenterology Award by the JGH Foundation, and the Vice Chancellor’s Exemplary
Teaching Award at CUHK. Aside from his expertise in gastroenterology, Dr. Wu has an extensive interest in the development of Integrative
Medicine in Hong Kong. He is the Founding Director of the Hong Kong Institute of Integrative Medicine, working closely with the
School of Chinese Medicine to develop an integrative model at an international level. The institute aims at maximizing the strength
of Western and Chinese medicine to provide a safe and effective integrative treatment to patients.
Dr. Wu served as a
consultant and an advisory board member for Takeda Pharmaceutical, AstraZeneca, Menarini, Reckitt Benckiser and Abbott Laboratory.
He earned his Bachelor of Medicine and Bachelor of Surgery Degree (1993), and his Doctor of Medicine Degree (2000) from CUHK. Additionally,
he attained Fellowships of the Royal College of Physicians of Edinburgh and London in 2007 and 2012 respectively, Fellowship of
the Hong Kong College of Physicians in 2002, Fellowship of the Hong Kong Academy of Medicine in 2002, and has been an American
Gastroenterological Association Fellow since 2012.
PROFESSOR DOUGLAS ARNER
Professor Douglas W.
Arner is an Independent Non-Executive Director of Aptorum Group Limited. He is the Kerry Holdings Professor in Law at the University
of Hong Kong and one of the world’s leading experts on financial regulation, particularly the intersection between law, finance
and technology. At HKU, he is Faculty Director of the Faculty of Law’s LLM in Compliance and Regulation, LLM in Corporate
and Financial Law and Law, Innovation, Technology and Entrepreneurship (LITE) Programmes. He is a Senior Visiting Fellow of Melbourne
Law School, University of Melbourne, and an Executive Committee Member of the Asia Pacific Structured Finance Association. He led
the development of the world’s largest massive open online course (MOOC): Introduction to FinTech, launched on edX in May
2018, now with over 35,000 learners spanning every country in the world. From 2006 to 2011, he was the Director of HKU’s
Asian Institute of International Financial Law, which he co-founded in 1999, and from 2012 to 2018, he led a major research project
on Hong Kong’s future as a leading international financial center. He was an inaugural member of the Hong Kong Financial
Services Development Council, of which he was a member from 2013-2019. Douglas served as Head of the HKU Department of Law from
2011 to 2014 and as Co-Director of the Duke University-HKU Asia-America Institute in Transnational Law from 2005 to 2016. He has
published fifteen books and more than 150 articles, chapters and reports on international financial law and regulation, including
most recently Reconceptualising Global Finance and its Regulation (Cambridge 2016) (with Ross Buckley and Emilios Avgouleas). The
RegTech Book (forthcoming 2019, with Janos Barberis and Ross Buckley). His recent papers are available on SSRN at https://papers.ssrn.com/sol3/cf_dev/AbsByAuth.cfm?per_id=524849,
where he is among the top 150 authors in the world by total downloads.
Douglas has served
as a consultant with, among others, the World Bank, Asian Development Bank, APEC, Alliance for Financial Inclusion, and European
Bank for Reconstruction and Development, and has lectured, co-organized conferences and seminars and been involved with financial
sector reform projects around the world. He has been a visiting professor or fellow at Duke, Harvard, the Hong Kong Institute for
Monetary Research, IDC Herzliya, McGill, Melbourne, National University of Singapore, University of New South Wales, Shanghai University
of Finance and Economics, and Zurich, among others. Since March 1, 2018, Professor Arner is the Senior Regulatory & Strategic
Advisor of AENEAS CAPITAL LIMITED, a licensed corporation regulated by the Hong Kong Securities & Futures Commission as a Type
9 Asset Manager.
He holds a BA from
Drury College (where he studied literature, economics and political science) in 1992, a JD (cum laude) from Southern Methodist
University in 1995, an LLM (with distinction) in banking and finance law from the University of London (Queen Mary College) in
1996, and a PhD from the University of London in 2005.
B. Compensation of Directors and Executive
Officers
The following table sets forth all cash compensation paid by
us, as well as certain other compensation paid or accrued, in fiscal 2019 to each of the following named executive officers. The
total amount was $2.7 million in 2019. A total 69,819 options were awarded to directors and executive officers in 2019. This amount
does not include business travel, relocation, professional and business association dues and expenses reimbursed to such persons,
and other benefits commonly reimbursed or paid by companies in our industry. In addition to the compensation included in the table
below, which covers the fiscal year ended December 31, 2019, we issued an aggregate of 296,769 options to the persons included
in the table below since January 1, 2020 through the date of this report. (See “Item 6. Directors, Senior Management and
Employees – E. Share Ownership”)
The base salary of
Mr. Huen and Dr. Cheng shall remain unchanged in 2020, and the base salary of Mr. Lui has been adjusted to US$6,667 per month with
effect from January 10, 2020 due to his resignation as Chief Business Officer. The Company entered into a consulting agreement
with CGY Investment Limited effective on January 10, 2020, with a monthly service fee of HK$104,000 (approximately US$13,333 per
month). CGY is 50% held by Seng Fun Yee (Mr. Lui’s spouse), 25% held by Mandy Lui (Mr. Lui’s sister) and 25% held by
Adrian Lui (Mr. Lui’s brother). Mr. Lui controls and/or has substantial influence on the disposition and voting rights of
the shares held by his spouse, but no such control over the shares held by his sister or brother. Hence, for the purposes of this
filing and disclosure, 50% of the consulting service fee and share options will be deemed as Mr. Lui’s compensation.
Name and Principal Position
|
|
Fiscal
Year
|
|
|
Salary
($)(1)
|
|
|
Bonus
($)
|
|
|
Option
Awards
($)
|
|
|
Non-Equity
Incentive
Plan
Compensation
($)(10)
|
|
|
Change in
Pension
Value and
Nonqualified
Deferred
Compensation
Earnings
($)
|
|
|
All Other
Compensation
($)
|
|
|
Total
($)
|
|
Ian Huen(2)
(CEO)
|
|
|
2019
|
|
|
|
288,000
|
|
|
|
24,000
|
|
|
|
148,275
|
|
|
|
129,791
|
|
|
|
2,308
|
|
|
|
-
|
|
|
|
592,374
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Darren Lui(3)
(CBO, President)
|
|
|
2019
|
|
|
|
240,000
|
|
|
|
20,000
|
|
|
|
148,275
|
|
|
|
129,791
|
|
|
|
2,308
|
|
|
|
-
|
|
|
|
540,374
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Clark Cheng(4)
(CMO)
|
|
|
2019
|
|
|
|
279,295
|
|
|
|
23,275
|
|
|
|
148,275
|
|
|
|
129,791
|
|
|
|
2,308
|
|
|
|
112
|
(6)
|
|
|
583,056
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sabrina Khan(5)
(CFO)
|
|
|
2019
|
|
|
|
196,000
|
|
|
|
65,333
|
|
|
|
70,040
|
|
|
|
61,310
|
|
|
|
2,308
|
|
|
|
-
|
|
|
|
394,991
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thomas Lee (7)
(Head of R&D)
|
|
|
2019
|
|
|
|
168,000
|
|
|
|
18,667
|
|
|
|
148,275
|
|
|
|
129,791
|
|
|
|
2,308
|
|
|
|
-
|
|
|
|
467,041
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Angel Ng (8)
(COO)
|
|
|
2019
|
|
|
|
72,000
|
|
|
|
8,000
|
|
|
|
11,440
|
|
|
|
10,012
|
|
|
|
2,308
|
|
|
|
-
|
|
|
|
103,760
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dr. Keith Chan(9)
|
|
|
2019
|
|
|
|
30,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
30,000
|
|
|
(1)
|
The
Appointment Letters provide salaries in HKD; for purposes of this table, we used a conversion ratio of HKD7.80 to USD1.00 to determine
the salary in USD.
|
|
(2)
|
Mr.
Huen is the founder and was appointed as the Chief Executive Officer of Aptorum Group on October 1, 2017. Before that, he was
a director of the Company.
|
|
(3)
|
Mr.
Lui was appointed as the Chief Business Officer and President of Aptorum Group on October 1, 2017 and resigned as Chief Business
Officer on October 10, 2019.
|
|
(4)
|
Dr.
Cheng was appointed as the Chief Medical Officer of Aptorum Group on January 2, 2018.
|
|
(5)
|
Miss
Khan was appointed as the Chief Financial Officer of Aptorum Group on October 16, 2017.
|
|
(6)
|
Pursuant
to Dr. Cheng’s appointment letter, Dr. Cheng received a share bonus of 526 ordinary shares of AML, representing 5% of AML’s
issued and outstanding ordinary shares (the “Share Bonus”) in 2018. Based on the Company’s financial position
and Dr. Cheng’s performance, on each anniversary of Dr. Cheng’s employment commencement date, the Share Bonus is eligible
to increase by 1% of AML’s then issued and outstanding ordinary share count per year up to a maximum additional amount of
5% of AML’s then issued and outstanding ordinary share count by the 5th anniversary from his employment commencement date.
As of the date of this annual report, Dr. Cheng received a total of 753 ordinary shares of AML, representing 7% of AML’s
issued and outstanding ordinary shares; during fiscal 2019, Dr. Cheng received 112 ordinary shares of AML, the cash value of which
is USD112.
|
|
(7)
|
Dr. Lee was appointed as the Head of Research & Development of Aptorum Group on April 1, 2019. Before that, he was the Chief Executive Officer and Chief Scientific Officer of Aptorum Therapeutics Limited, a wholly-owned therapeutics subsidiary of Aptorum Group Limited from January 2018 to March 2019, for which he received an aggregate of $56,000 for the period
from January 1, 2019 to March 31, 2019. This table only includes the compensation paid or payable to Dr. Lee for the period from April 1, 2019 to December 31, 2019.
|
|
(8)
|
Dr. Ng was appointed as the Chief Operating Officer of Aptorum Group on April 1, 2019. Before that, she was the Chief Operating Officer of Aptorum Therapeutics Limited, a wholly-owned therapeutics subsidiary of Aptorum Group Limited from September 2017 to March 2019, for which she received an aggregate of $24,000 for the period
from January 1, 2019 to March 31, 2019. This table only includes the compensation paid or payable to Dr. Ng for the period from April 1, 2019 to December 31, 2019.
|
|
(9)
|
As described elsewhere in this report, we were party to a consulting agreement dated August 18, 2017 with GloboAsia, LLC, for which Dr. Chan serves as the Director of International Affairs. All fees payable to Dr. Chan for services provided to us as Chief Scientific Officer were paid to GloboAsia, LLC, pursuant to the consulting agreement and appointment letter with Dr. Chan. Following Dr. Chan’s resignation in March 2019, the consulting agreement was terminated effective as of March 31, 2019. (See “Item 7. Major Shareholders and Related Party Transactions – Consulting Arrangements”) No other compensation was paid or payable to Dr. Chan for the
period from April 1, 2019 to December 31, 2019.
|
|
(10)
|
Represents
deferred bonuses provided to directors and executive officers, which will be vested after 1-2 year vesting period.
|
Compensation of Non-executive Directors
The following table
sets forth information for the fiscal year ended December 31, 2019 regarding the compensation of our non-executive directors who
at December 31, 2019, were not also named executive officers. A total 8,044 options were awarded to non-executive directors
in 2019. In addition to the compensation included in the table below, which covers the fiscal year ended December 31, 2019, we
issued an aggregate of 37,460 options to the persons included in the table below since January 1, 2020 through the date of this
report.
Name
|
|
Fees
Earned or
Paid in
Cash
($)
|
|
|
Stock
Awards
($)
|
|
|
Option
Awards
($)
|
|
|
Non-Equity
Incentive
Plan
Compensation
($)
|
|
|
Non-qualified
Deferred
Compensation
Earnings
($)
|
|
|
All Other
Compensation
($)
|
|
|
Total
($)
|
|
Charles Bathurst (1)
|
|
|
48,000
|
(2)
|
|
|
-
|
|
|
|
14,832
|
|
|
|
12,987
|
|
|
|
-
|
|
|
|
-
|
|
|
|
75,819
|
|
Mirko Scherer (3)
|
|
|
30,000
|
|
|
|
-
|
|
|
|
14,832
|
|
|
|
12,987
|
|
|
|
-
|
|
|
|
-
|
|
|
|
57,819
|
|
Justin Wu (4)
|
|
|
30,000
|
|
|
|
-
|
|
|
|
14,832
|
|
|
|
12,987
|
|
|
|
-
|
|
|
|
-
|
|
|
|
57,819
|
|
Douglas Arner (5)
|
|
|
30,000
|
|
|
|
-
|
|
|
|
14,832
|
|
|
|
12,987
|
|
|
|
-
|
|
|
|
-
|
|
|
|
57,819
|
|
|
(1)
|
Mr.
Bathurst was appointed as one of our directors as of October 2017 and pursuant to his appointment letter, is entitled to receive
$48,000 annually for his combined services as a director and a committee member.
|
|
(2)
|
Mr.
Bathurst’s appointment Letter provides his salary in GBP. For purposes of this table, we used a conversion ratio of GBP0.75
to USD1.00 to determine his salary in USD; however, the ultimate amount paid is based on the actual rate as of the relevant pay
day at the end of each month.
|
|
(3)
|
Dr.
Scherer was appointed as one of our directors as of October 2017 and pursuant to his appointment letter, is entitled to receive
$30,000 annually for his services as a director.
|
|
(4)
|
Dr.
Wu was appointed as one of our directors as of October 2017 and pursuant to his appointment letter, is entitled to receive $30,000
annually for his combined services as a director and a committee member.
|
|
(5)
|
Professor
Arner’s appointment as one of our directors became effective as of April 1, 2018. Pursuant to his appointment letter, Professor
Arner is entitled to receive $30,000 annually for his combined services as a director and a committee member.
|
2017 Share Option Plan
On October 13, 2017,
we adopted the 2017 Share Option Plan (the “Option Plan”). Under the Option Plan, up to an aggregate of 5,500,000 Class
A Ordinary Shares (subject to subsequent adjustments described more fully below) may be issued pursuant to awards under the Option
Plan. Subsequent adjustments include that on each January 1, starting with January 1, 2020, an additional number of shares equal
to the lesser of (A) 2% of the outstanding number of Class A Ordinary Shares (on a fully diluted basis) on the immediate preceding
December 31, and (B) such lower number of Class A Ordinary Shares as may be determined by the board of directors, subject in all
cases to adjustments as provided in Section 10 of the Option Plan. Awards will be made pursuant to agreements and may be subject
to vesting and other restrictions as determined by the board of directors.
We adopted the Option
Plan to provide additional incentives to selected directors, officers, employees and consultants, and enable our Company to obtain
and retain the services of these individuals. The Option Plan will enable us to grant options, restricted shares or other awards
to our directors, employees and consultants. Awards will be made pursuant to agreements and may be subject to vesting and other
restrictions as determined by the board of directors.
As of the date of this
report, we have granted options that can be exercised for an aggregate of 773,104 Class A Ordinary Shares. 218,222 options were
granted on March 15, 2019. One-half of each option grant vests on January 1, 2020 and the other half vests on January 1, 2021.
The exercise price is $12.91 per share, which was based on the closing price of the shares traded on the NASDAQ stock exchange
on the trading day preceding the grant date. 554,882 options were granted on March 16, 2020. One-half of each option grant vests
on January 1, 2021 and the other half vests on January 1, 2022. The exercise price is $2.99 per share, which was based on the average
closing price of the shares traded on the NASDAQ stock exchange for the five trading days immediately preceding the grant date.
C. Board Practices
Board of Directors
Our Board of Directors
currently consists of seven members, all of whom were elected pursuant to our current Memorandum and Articles. Our nominating and
governance committee and board of directors will consider a broad range of factors relating to the qualifications and background
of nominees, which may include diversity and is not limited to race, gender or national origin. We have no formal policy regarding
board diversity. Our nominating and governance committee’s and board of directors’ priority in selecting board members
is identification of persons who will further the interests of our shareholders through his or her established record of professional
accomplishment, the ability to contribute positively to the collaborative culture among board members, knowledge of our business,
understanding of the competitive landscape and professional and personal experiences and expertise relevant to our growth strategy.
Committees of the Board of Directors
Our Board of Directors
has established an audit committee, a compensation committee and a nominating and corporate governance committee, each of which
operates pursuant to a separate charter adopted by our Board of Directors. The composition and functioning of all of our committees
will comply with all applicable requirements of the Sarbanes-Oxley Act, the Dodd-Frank Wall Street Reform and Consumer Protection
Act, the NASDAQ Global Market and SEC rules and regulations. Our Board of Directors may establish other committees from time to
time.
Audit Committee
Charles Bathurst, Douglas
Arner and Justin Wu currently serve on the audit committee, which is chaired by Charles Bathurst. Our Board of Directors has determined
that each member of the audit committee is “independent” for audit committee purposes as that term is defined in the
rules of the SEC and the applicable rules of the NASDAQ Global Market. The audit committee’s responsibilities include:
|
●
|
selecting and appointing our independent registered public accounting firm, and approving the audit and permitted non-audit services to be provided by our independent registered public accounting firm;
|
|
●
|
evaluating the performance and independence of our independent registered public accounting firm;
|
|
●
|
monitoring the integrity of our financial statements and our compliance with legal and regulatory requirements as they relate to our financial statements or accounting matters;
|
|
●
|
reviewing the adequacy and effectiveness of our accounting and internal control policies and procedures;
|
|
●
|
establishing procedures for the receipt, retention and treatment of accounting-related complaints and concerns;
|
|
●
|
reviewing and discussing with the independent registered public accounting firm the results of our year-end audit, and recommending to our Board of Directors, based upon such review and discussions, whether our financial statements shall be included in our annual report on Form 20-F;
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reviewing all related party transactions for potential conflict of interest situations and approving all such transactions; and
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reviewing the type and presentation of information to be included in our earnings press releases, as well as financial information and earnings guidance provided by us to analysts and rating agencies.
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Audit Committee Financial Expert
We have one financial
expert as of the date of this report. Our Board of Directors has determined that Mr. Charles Bathurst, Chair of our audit committee,
qualifies as an “audit committee financial expert” as defined in the SEC rules and satisfies the financial sophistication
requirements of The NASDAQ Global Market.
Compensation Committee
Charles Bathurst, Douglas
Arner and Justin Wu currently serve on the compensation committee, which is chaired by Justin Wu. Our Board of Directors has determined
that each member of the compensation committee is “independent” as that term is defined in the applicable rules of
the NASDAQ Global Market. The compensation committee’s responsibilities include:
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reviewing the goals and objectives of our executive compensation plans, as well as our executive compensation plans in light of such goals and objectives;
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evaluating the performance of our executive officers in light of the goals and objectives of our executive compensation plans and recommending to our Board of Directors with respect to the compensation of our executive officers;
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reviewing the goals and objectives of our general compensation plans and other employee benefit plans as well as our general compensation plans and other employee benefit plans in light of such goals and objectives;
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retaining and approving the compensation of any compensation advisors;
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reviewing all equity-compensation plans to be submitted for shareholder approval under the NASDAQ listing rules, and reviewing and approving all equity-compensation plans that are exempt from such shareholder approval requirement;
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evaluating the appropriate level of compensation for board and board committee service by non-employee directors; and
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reviewing and approving description of executive compensation included in our annual report on Form 20-F.
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Nominating and Corporate Governance
Committee
Charles Bathurst, Douglas
Arner and Justin Wu currently serve on the nominating and corporate governance committee, which is chaired by Professor Arner.
Our Board of Directors has determined that each member of the nominating and corporate governance committee is “independent”
as that term is defined in the applicable rules of the NASDAQ Global Market. The nominating and corporate governance committee’s
responsibilities include:
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assisting our Board of Directors in identifying prospective director nominees and recommending nominees for election by the shareholders or appointment by our Board of Directors;
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advising the board of directors periodically with respect to significant developments in the law and practice of corporate governance as well as our compliance with applicable laws and regulations, and making recommendations to our Board of Directors on all matters of corporate governance and on any corrective action to be taken;
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overseeing the evaluation of our Board of Directors; and
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recommending members for each board committee of our Board of Directors.
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Scientific
Advisory Board
We restructured the
Scientific Assessment Committee into a newly formed Scientific Advisory Board. The Scientific Advisory Board shall help the Company
sharpen its focus on innovation and technological advancements and address critical scientific challenges in our research and development;
it will provide overall advise on the scientific development of the company. As of the date of this annual report, we have 21 members
on this board.
Family Relationships
There is no family
relationship among any of our directors or executive officers.
Duties of Directors
Under Cayman Islands
law, our directors have a duty to act honestly, in good faith and bona fide with a view to our best interests. Our directors also
have a duty to exercise the care, diligence and skills that a reasonably diligent person would exercise in comparable circumstances.
In fulfilling their duty of care to us, our directors must ensure compliance with our Memorandum and Articles. We have the right
to seek damages if a duty owed by our directors is breached.
The functions and powers
of our Board of Directors include, among others:
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appointing officers and determining the term of office of the officers;
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authorizing the payment of donations to religious, charitable, public or other bodies, clubs, funds or associations as deemed advisable;
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exercising the borrowing powers of the company and mortgaging the property of the company;
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executing checks, promissory notes and other negotiable instruments on behalf of the company; and
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maintaining or registering a register of mortgages, charges or other encumbrances of the company.
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Terms of Directors and Officers
There is no Cayman
Islands law requirement that a director must hold office for a certain term and stand for re-election unless the resolutions appointing
the director impose a term on the appointment. The Memorandum and Articles provide that our directors will be elected annually
to serve a term of one year, or until his or her earlier resignation or removal. We do not have any age limit requirements relating
to our director’s term of office.
Our Memorandum and
Articles also provide that our directors may be removed by the directors or ordinary resolution of the shareholders, and that any
vacancy on our Board of Directors, including a vacancy resulting from an enlargement of our Board of Directors (which shall not
exceed any maximum number stated therein), may be filled by ordinary resolution or by vote of a majority of our directors then
in office.
Employment Agreements
We have entered into
agreements with our executive officers. Each of our executive officers is employed for a specified time period, which will be renewed
upon both parties’ agreement. We may terminate the employment for cause, at any time, without notice or remuneration, for
certain acts of the executive officer, including but not limited to the commitments of any serious or persistent breach or non-observance
of the terms and conditions of the employment, conviction of a criminal offense, willful disobedience of a lawful and reasonable
order, fraud or dishonesty, receipt of bribery, or severe neglect of his or her duties.
Each executive officer
has agreed to hold, both during and after the employment agreement expires, in strict confidence and not to use or disclose to
any person, corporation or other entity without written consent, any confidential information. Each executive officer has also
agreed to assign to our group all his or her all inventions, improvements, designs, original works of authorship, formulas, processes,
compositions of matter, computer software programs, databases, mask works, concepts and trade secrets.
D. Employees
As of the date of this annual report, we have 37 employees,
including 36 full-time employees and 1 part-time employee. Of these, 12 are engaged in full-time research and development and laboratory
operations, 18 are engaged in general and administrative functions, 6 are full-time employees engaged in the clinic operation and
1 part-time employee is engaged in legal clerical support. As of the date of this annual report, 37 of our employees are located
in Hong Kong. In addition, we have engaged and may continue to engage 39 independent contracted consultants and advisors to assist
us with our operations. None of our employees are represented by a labor union or covered by a collective bargaining agreement.
We have never experienced any employment related work stoppages, and we consider our relations with our employees to be good.
E. Share Ownership
The following table
sets forth information with respect to the beneficial ownership, within the meaning of Rule 13d-3 under the Exchange Act, of our
Ordinary Shares as of April 29, 2020.
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each
of our directors and executive officers who beneficially own our Ordinary Shares; and
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each
person known to us to own beneficially more than 5.0% of our Ordinary Shares.
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Beneficial ownership includes voting or investment power with
respect to the securities. Except as indicated below, and subject to applicable community property laws, the persons named in the
table have sole voting and investment power with respect to all Ordinary Shares shown as beneficially owned by them. Percentage
of beneficial ownership of each listed person is based on 7,948,712 Class A Ordinary Shares and 22,437,754 Class B Ordinary Shares
outstanding as of April 29, 2020.
Information with respect
to beneficial ownership has been furnished by each director, officer or beneficial owner of 5% or more of our Ordinary Shares.
Beneficial ownership is determined in accordance with the rules of the SEC and generally requires that such person have voting
or investment power with respect to securities. In computing the number of Ordinary Shares beneficially owned by a person listed
below and the percentage ownership of such person, Ordinary Shares underlying options, warrants or convertible securities held
by each such person that are exercisable or convertible within 60 days of the date of this annual report are deemed outstanding,
but are not deemed outstanding for computing the percentage ownership of any other person. Except as otherwise indicated in the
footnotes to this table, or as required by applicable community property laws, all persons listed have sole voting and investment
power for all Ordinary Shares shown as beneficially owned by them. As of the date of the annual report, we have 4 shareholders
of record holding beneficial ownership of 5% or more, none of which are located in the United States.
Unless otherwise indicated,
the business address of each of the individuals is 17th Floor, Guangdong Investment Tower, 148 Connaught Road Central, Hong Kong.
Name and Address of Beneficial Owner
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Class A
Ordinary
Shares
Beneficially
Owned
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Class B
Ordinary
Shares
Beneficially
Owned
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Percentage
of Total
Class A and
Class B
Ordinary
Shares(1)
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Percentage
of Total
Voting
Power(2)
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Ian Huen(3)
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2,865,742
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16,061,469
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62.29
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%
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70.37
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%
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Darren Lui(4)
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260,809
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2,141,333
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7.91
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%
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9.33
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%
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Clark Cheng(5)
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*
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-
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*
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*
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Sabrina Khan(6)
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*
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-
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*
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*
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Thomas Lee Wai Yip(7)
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*
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-
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*
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*
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Angel Ng Siu Yan(8)
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*
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-
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*
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*
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Charles Bathurst(9)
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*
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-
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*
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*
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Mirko Scherer(10)
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*
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-
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*
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*
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Justin Wu(11)
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207,566
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-
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0.68
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%
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0.09
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%
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Douglas Arner(12)
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*
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-
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*
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*
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All directors and executive officers as a group (10 persons)
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3,334,117
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18,202,802
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70.88
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%
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79.79
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%
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5% Beneficial Owner
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Jurchen Investment Corporation(3)
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2,855,688
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16,061,469
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62.26
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%
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70.36
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%
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Sui Fong Isabel Huen Ng(13)
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211,986
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1,907,870
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6.98
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%
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8.30
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%
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CGY Investments Limited(14)
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471,809
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4,015,367
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14.77
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%
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17.49
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%
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(1)
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For each person and group
included in this column, percentage ownership is calculated by dividing the number of Class A Ordinary Shares and Class B Ordinary
Shares beneficially owned by such person or group, including shares that such person or group has the right to acquire within 60
days after April 29, 2020, by the sum of Class A Ordinary Shares and Class B Ordinary
Shares, and the number of Class A Ordinary Shares that such person or group has the right to acquire beneficial ownership
within 60 days after April 29, 2020. Following the IPO, each Class B Ordinary
Share can be converted at any time on a one-for-one basis into Class A Ordinary Shares at the discretion of the holder.
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(2)
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For each person and group included in this column, percentage of total voting power represents voting power based on both Class A Ordinary Shares and Class B Ordinary Shares beneficially owned by such person or group with respect to all of our outstanding Class A Ordinary Shares and Class B Ordinary Shares as one single class. Holders of Class A Ordinary Shares are entitled to one vote per share and holders of Class B Ordinary Shares are entitled to ten votes per share on all matters subject to a shareholders’ vote.
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(3)
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Includes 2,315,148 Class A Ordinary Shares owned by Jurchen, warrants held by Jurchen to purchase 540,540 Class A Ordinary Shares, options granted to Mr. Huen to purchase 10,054 Class A Ordinary Shares, and 16,061,469 Class B Ordinary Shares owned by Jurchen. Jurchen Investment Corporation, is a company wholly-owned by Mr. Huen. Mr. Huen maintains sole voting control over the shares held by Jurchen, the principal office address of which is at 17th Floor, Guangdong Investment Tower, 148 Connaught Road Central, Hong Kong. Does not include 10,053 Class A Ordinary Shares issuable upon exercise of outstanding options issued on March 15, 2019 and 66,890 Class A Ordinary Shares issuable upon exercise of outstanding options issued on March 16, 2020 to Mr. Huen pursuant to the Option Plan, since such options have not vested and will not be exercisable within 60 days of April 29, 2020.
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(4)
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Includes (i) 14,850
Class A Ordinary Shares and 133,649 Class B Ordinary Shares held by DSF Investment Holdings Limited, which is 29.5% held by Mr.
Lui, and 70.5% held by Eternal Clarity Holdings Limited which is wholly-owned by Mr. Lui’s mother, Ms. Emily Woo, and is
located at Flat A2, 11th Floor, Wing Hang Insurance Building, 11 Wing Kut Street, Hong Kong, (ii) 235,905 Class A Ordinary Shares
and 2,007,684 Class B Ordinary Shares held by CGY Investments Limited, which is 50% held by Seng Fun Yee (Mr. Lui’s spouse),
25% held by Mandy Lui (Mr. Lui’s sister) and 25% held by Adrian Lui (Mr. Lui’s brother), and (iii) options granted
to Mr. Lui to purchase 10,054 Class A Ordinary Shares. Mr. Lui only controls and/or has substantial influence on the disposition
and voting rights of 29.5% of the Aptorum shares DSF owns; Mr. Lui controls and/or has substantial influence on the disposition
and voting rights of the shares held by his spouse, but no such control over the shares held by his sister or brother regarding
the CGY shares. Does not include 10,053 Class A Ordinary Shares issuable upon exercise of outstanding options issued on March
15, 2019 and 66,890 Class A Ordinary Shares issuable upon exercise of outstanding options issued on March 16, 2020 to CGY Investments
Limited, of which 50% is deemed controlled by Mr. Lui, pursuant to the Option Plan, since such options have not vested and will
not be exercisable within 60 days of April 29, 2020.
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(5)
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Pursuant to his appointment letter, Dr. Cheng received a stock bonus of 7% of Aptorum Medical Limited’s ordinary shares as of the date of this annual report. Does not include 10,053 Class A Ordinary Shares issuable upon exercise of outstanding options issued on March 15, 2019 and 66,890 Class A Ordinary Shares issuable upon exercise of outstanding options issued on March 16, 2020 to Dr. Cheng pursuant to the Option Plan, since such options have not vested and will not be exercisable within 60 days of April 29, 2020.
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(6)
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Does not include 4,749 Class A Ordinary Shares issuable upon exercise of outstanding options issued on March 15, 2019 and 54,627 Class A Ordinary Shares issuable upon exercise of outstanding options issued on March 16, 2020 to Miss Khan pursuant to the Option Plan, since such options have not vested and will not be exercisable within 60 days of April 29, 2020.
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(7)
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Does not include 10,053 Class A Ordinary Shares issuable upon exercise of outstanding options issued on March 15, 2019 to and 66,890 Class A Ordinary Shares issuable upon exercise of outstanding options issued on March 16, 2020 Dr. Lee pursuant to the Option Plan, since such options have not vested and will not be exercisable within 60 days of April 29, 2020.
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(8)
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Does not include 775 Class A Ordinary Shares issuable upon exercise of outstanding options issued on March 15, 2019 and 8,027 Class A Ordinary Shares issuable upon exercise of outstanding options issued on March 16, 2020 to Dr. Ng pursuant to the Option Plan, since such options have not vested and will not be exercisable within 60 days of April 29, 2020.
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(9)
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Does not include
1,005 Class A Ordinary Shares issuable upon exercise of outstanding options issued on March 15, 2019 and 9,365 Class A Ordinary
Shares issuable upon exercise of outstanding options issued on March 16, 2020 to Mr. Bathurst pursuant to the Option Plan, since
such options have not vested and will not be exercisable within 60 days of April 29, 2020.
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(10)
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Does not include 1,005 Class A Ordinary Shares issuable upon exercise of outstanding options issued on March 15, 2019 and 9,365 Class A Ordinary Shares issuable upon exercise of outstanding options issued on March 16, 2020 to Mr. Scherer pursuant to the Option Plan, since such options have not vested and will not be exercisable within 60 days of April 29, 2020.
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(11)
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Includes (i) 129,589 Class A Ordinary Shares held by Chi Ling Lily Heung, the wife of Dr. Wu, (ii) 76,971 Class A Ordinary Shares held by Dr. Wu, and (iii) options granted to Dr. Wu to purchase 1,006 Class A Ordinary Shares. Does not include 1,005 Class A Ordinary Shares issuable upon exercise of outstanding options issued on March 15, 2019 and 9,365 Class A Ordinary Shares issuable upon exercise of outstanding options issued on March 16, 2020 to Dr. Wu pursuant to the Option Plan, since such options have not vested and will not be exercisable within 60 days of April 29, 2020.
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(12)
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Does not include 1,005 Class A Ordinary Shares issuable upon exercise of outstanding options issued on March 15, 2019 and 9,365 Class A Ordinary Shares issuable upon exercise of outstanding options issued on March 16, 2020 to Dr. Arner pursuant to the Option Plan, since such options have not vested and will not be exercisable within 60 days of April 29, 2020.
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(13)
|
Sui Fong Isabel Huen Ng is the mother of Mr. Ian Huen. Mr. Ian Huen does not have control nor substantial influence on the disposition and voting rights of the shares held by his mother.
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(14)
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CGY Investments Limited is 50% held by Seng Fun Yee (Mr. Lui’s spouse), 25% held by Mandy Lui (Mr. Lui’s sister) and 25% held by Adrian Lui (Mr. Lui’s brother). Mr. Lui controls and/or has substantial influence on the disposition and voting rights of the shares held by his spouse, but no such control over the shares held by his sister or brother. Does not include 66,890 Class A Ordinary Shares issuable upon exercise of outstanding options issued on March 16, 2020 to CGY Investments Limited pursuant to the Option Plan, since such options have not vested and will not be exercisable within 60 days of April 29, 2020.
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Item 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
A. Major Shareholders
Please refer to “Item 6. Directors, Senior Management
and Employees—E. Share Ownership.”
B. Related Party Transactions
Sales and Purchases of Securities
Share Issuances
KHE Holdings Limited,
which is owned by Dr. Kenny Yu’s family, purchased $200,000 Series A Notes in our private Note offering, which closed on
May 15, 2018; such notes automatically converted into 28,776 Class A Ordinary Shares upon the closing of the IPO.
A total of 5,504 shares
were purchased in the IPO by related persons.
Share Transfer: Change in direct substantial
shareholders of the Company
On May 4, 2017, Mr.
Huen transferred all of the ordinary shares in the Company he owned (in the amount of 22,307,596) to Jurchen, a company incorporated
in the British Virgin Islands and wholly-owned by Mr. Huen. On October 13, 2017, the ordinary shares held by Jurchen were redesignated
as 2,230,760 Class A Ordinary Shares and 20,076,836 Class B Ordinary Shares.
On March 23, 2018,
Jurchen transferred 446,152 Class A Ordinary Shares and 4,015,367 Class B Ordinary Shares to CGY Investments Limited, a company
incorporated in Hong Kong and which we deem Mr. Darren Lui controls and/or of which he has substantial influence on the disposition
rights and voting rights of such shares. Following this transfer, Jurchen owned approximately 33% and 72% of our Class A Ordinary
Shares and Class B Ordinary Shares, respectively.
Consulting Arrangements
GloboAsia, LLC
We entered into a consulting
agreement with GloboAsia effective as of August 18, 2017 (the “2017 GA Agreement”); GloboAsia is not associated or
affiliated with any FINRA members. However, the 2017 GA Agreement was terminated when Dr. Chan resigned from his position as our
Chief Scientific Officer in March 2019. Dr. Chan serves as the Director of International Affairs of GloboAsia.
Effective as of April
1, 2019, GloboAsia, through Dr. Chan, shall serve as a member on our Scientific Advisory Board. To formalize such service, we entered
into that certain consulting agreement with GloboAsia dated March 13, 2019 (the “2019 GA Agreement”). Pursuant to the
2019 GA Agreement, GloboAsia provides advisory and management services to us and as a member of the Scientific Advisory Board,
they provide advice to us regarding research and development, the scientific merit of licenses or products and other related scientific
issues. We agreed to pay GloboAsia an hourly rate of USD300 for work actually performed. The initial term of 2019 GA Agreement
is until December 31, 2020 and shall thereafter be automatically renewed for successive one-year terms, unless earlier terminated
by either party upon three months’ notice prior to the end of the then applicable term; either party may also terminate the
agreement upon 2 months written notice and the Company may terminate the agreement if Dr. Chan is no longer with GloboAsia or if
GloboAsia commits any act of fraud or dishonesty.
Aeneas
a. In March 2017, we
entered into a new Management Agreement with Aeneas (the “2017 Agreement”), pursuant to which Aeneas will provide certain
management and administrative functions, as well as investment functions related to the Company, IP acquisitions and other investor
relations services (the “Services”). In consideration for the Services, we agreed to pay Aeneas HK$500,000 per month
(approximately US$64,103 per month), payable on the last day of each month. The 2017 Agreement was terminated in July 2018. Prior
to the termination, we paid Aeneas an aggregate of $1.1 million pursuant to the terms of the 2017 Agreement.
b. On April 24, 2019,
the Company signed an agreement with Aeneas Capital Limited, and A*ccelerate Technologies Pte. Ltd, the enterprise office of the
Agency for Science, Technology and Research (“A*STAR”), (collectively, the “Parties”) to co-create local
deep tech startups. This agreement, which is part of A*ccelerate’s venture co-creation (“VCC”) initiative, commits
all parties to the co-creation of local startups in the healthcare and life science sector (the “Master Collaboration Agreement”).
The goal is to create a total of up to 20 deep tech ventures in Singapore will be created by this partnership over the next 5 years.
A*STAR shall contribute a total of up to $30,000,000 to any suitable startups, at their discretion. The Company and Aeneas Capital
Limited will contribute a total of up to $30,000,000 to any suitable startups at their discretion with a focus on (i) securing
pilot customers; (ii) incorporation of the startups as companies and financial commitments of such customers; (iii) capital raising
and capital market plans; (iv) recruiting and building of the startup teams; (v) equipment and infrastructure; and (vi) licensing
of IP to the startups under the Technology License Agreements. The Master Collaboration Agreement shall continue for a period of
5 years, unless otherwise terminated or extended by the Parties.
c. On January 1, 2019,
Aptus Management Limited (one of our wholly-owned subsidiaries) (“Aptus Management”) entered into an Administrative
consultant Services Agreement with Aeneas Management Limited (a subsidiary of Aeneas Limited). Pursuant to this agreement, Aeneas
shall provide certain business and financial services to Aptus Management Limited; Aeneas shall be paid a monthly service fee of
HK$452,000 per month (approximately US$57,949 per month), payable by the 25th day of each month during the term of the agreement,
which was until December 31, 2019. Either party was able to terminate the agreement by providing 3-months written notice to the
other party. On December 16, 2019, the parties agreed to renew the agreement under the same terms, but with an expiration date
of December 31, 2020. On January 29, 2020, both parties agreed the agreement would terminate no later than April 30, 2020, with
the final monthly payment to have been paid in March 2020.
d. On January 1, 2019,
Aenco Limited (“Aenco”) (a subsidiary of AGL) and Aptus Management entered into a Secondment Agreement. Pursuant to
this agreement, Aenco shall assign certain of its employees to Aptus Management from time to time to assist Aptus Management with
information technology development and maintenance activities for Aptus Management’s affiliates; such employees shall be
integrated into Aptus Management’s organization only to the extent necessary to carry out such employees specific duties
for Aptus Management. Aptus Management shall pay all salary and benefits up to HK$540,000 per month (approximately US$69,231 per
month); Aenco shall be responsible for the costs associated with any employee relocation required as a result of this agreement.
The agreement was originally set to terminate on December 31, 2019, although either party may terminate the agreement upon giving
the other party 3-months written notice. On December 16, 2019 the parties agreed to renew the agreement under the same terms, but
with an expiration date of December 31, 2020. On January 29, 2020, both parties agreed to replace the agreement no later than April
30, 2020.
On April 1, 2020, the
agreement was replaced and superseded with a New Secondment Agreement. Pursuant to this New Secondment Agreement, Aenco shall assign
certain of its employees to Aptus Management from time to time to assist Aptus Management with information technology application
development and maintenance activities for Aptus Management’s affiliates; such employees shall be integrated into Aptus Management’s
organization only to the extent necessary to carry out such employees specific duties for Aptus Management. Aptus Management shall
pay all salary and benefits up to HK$700,000 per month (approximately US$89,744 per month); Aenco shall be responsible for the
costs associated with any employee relocation required as a result of this agreement. The agreement shall terminate on December
31, 2020, although either party may terminate the agreement upon giving the other party 3-months written notice.
e. In July 2019, Smart
Pharmaceutical Limited Partnership, (“SPLP”), a wholly owned subsidiary of the Group, transferred 100,000,000 Smart
Pharma Tokens (“SMPT token”) to Aenco Solutions Limited, a related party, in exchange of the service to deal with the
token creation, offering and 5-years consultancy service. The 100,000,000 SMPT tokens were equivalents to $300,000.
Aeneas is
wholly-owned by Aeneas Group Limited (“AGL”), which in turn is wholly-owned by Aeneas Limited (“AL”).
AL is wholly-owned by Jurchen, which is wholly-owned by Mr. Huen, our CEO. Mr. Huen and Mr. Lui both serve as the executive
directors of Aeneas and Professor Arner, one of our directors, is a Senior Regulatory and Strategic Advisor for Aeneas. Under
his agreement with AGL dated March 12, 2018, Professor Arner shall, among other services, advise the board of AGL with its
management, execution of business, and regulatory initiatives of AGL and AL, assist AGL with access to expert networks as
appropriate and required. Professor Arner’s compensation thereunder is HK$234,000 per year (approximately US$30,000 per
year) and Professor Arner is entitled to participate in AGL’s share option plans.
In addition, AGL was
one of the selected dealers for our IPO.
CGY Investment Limited
We entered into a consulting
agreement with CGY Investment Limited (“CGY”) effective on January 10, 2020. Pursuant to this agreement, CGY shall
provide certain consultancy, advisory, and management services to the Group on potential investment projects related to health
care or R&D platform; CGY shall be paid a monthly service fee of HK$104,000 per month (approximately US$13,333 per month),
during the term of the agreement, which is remain in effect unless it is terminated. The agreement may be terminated by either
party providing 1-months written notice to the other party.
CGY is 50% held by
Seng Fun Yee (Mr. Lui’s spouse), 25% held by Mandy Lui (Mr. Lui’s sister) and 25% held by Adrian Lui (Mr. Lui’s
brother). Mr. Lui, President and Executive Director of the Group, controls and/or has substantial influence on the disposition
and voting rights of the shares held by his spouse, but no such control over the shares held by his sister or brother. Hence, 50%
of the consulting service fee will be deemed as Mr. Lui’s compensation.
Lease
Our lease for our office
at Guangdong Investment Tower is a Sub-Tenancy Agreement between Jurchen Investment Corporation and Aptus Management Limited, which
is one of our wholly-owned subsidiaries.
The Series A Note Offering
On May 15, 2018, we
closed a private financing with certain investors (the “Series A Note Investors”) who purchased an aggregate of $1,600,400
Series A convertible notes, at a purchase price of $10,000 per note (the “Series A Notes”), pursuant to a note purchase
agreement. Some of the Series A Note Investors are either affiliates of the Company or “related persons,” as such
term is defined in Item 404 of Regulation S-K (See “Item 7. Major Shareholders and Related Party Transactions”). We
refer to this private placement transaction as the “Series A Note Offering.” The Series A Note Investors entered into
a lock-up agreement, pursuant to which they agreed not to sell or otherwise transfer or dispose the Series A Notes or the Class
A Ordinary Shares underlying the Series A Notes during the six-month period commencing on the date our Class A Ordinary Shares
commence trading on NASDAQ Global Market. The Series A Notes automatically converted into 230,252 Class A Ordinary Shares at the
closing of the Offering and at the commencement of trading our Class A Ordinary Shares on NASDAQ Global Market at a conversion
price equal to a 56% discount to the actual price per Class A Ordinary Share (“Conversion Price”). Accordingly, the
Series A Notes converted into, and we issued an aggregate of 230,252 shares of Class A Ordinary Shares after the IPO closed.
One of the underwriters
in the IPO also served as a placement agent for the Series A Note Offering and received: (i) a cash success fee of $68,516 and
(ii) warrants to purchase 12,663 Class A Ordinary Shares, at an exercise price of $6.95 per share, subject to adjustment (the “Series
A Note PA Warrants”). The Series A Note PA Warrants are also exercisable on a cashless basis, at the holder’s discretion.
The issuance and sale
of Series A Notes, and the underlying Class A Ordinary Shares to the Series A Note Investors in the Series A Note Offering were
made in reliance on an exemption from registration contained in either Regulation D or Regulation S of the Securities Act of 1933,
as amended (the “Securities Act”). The securities sold in the Series A Note Offering are not registered by the Registration
Statement and have not been registered under the Securities Act, and may be offered or sold only pursuant to an effective registration
statement or pursuant to an available exemption from the registration requirements of the Securities Act. However, the Series A
Note Investors have piggyback registration rights with respect to the Class A Ordinary Shares underlying the Series A Notes that
entitle the Series A Note Investors to request their securities be included in a future Securities Act registration statement,
after our IPO, subject to certain exceptions and conditions. However, we decided to include the Class A Ordinary Shares underlying
the Series A Notes in the Registration Statement.
The Bond Offering
As described above
in Item 5A. Operating Results, on April 6, 2018, we entered into the Bond Subscription Agreement with Peace Range. We repurchased
the Bond on April 24, 2019 and the Bond matured and was redeemed on October 25, 2019.
Credit Agreements and Promissory Notes
On August 13, 2019
(the “Effective Date”), Aptorum Therapeutics Limited (“ATL”), one of our wholly-owned subsidiaries, entered
into two separate Promissory Notes and Line of Credit Agreements (the “Agreements”) with Aeneas Group Limited (“Aeneas
Group”) and Jurchen Investment Corporation (“Jurchen”). The Aeneas Group Agreement and Jurchen Agreement provide
ATL with a line of credit up to twelve million dollars ($12,000,000) and three million dollars ($3,000,000), respectively (collectively,
the “Line of Credit”), representing the maximum aggregate amount of the advances of funds from the Line of Credit that
may be outstanding at any time under the Line of Credit (the “Principal Indebtedness”). ATL may draw down from the
Line of Credit at any time through the day immediately preceding the third anniversary of the Effective Date (the “Maturity
Date”). Interest will be payable on the outstanding Principal Indebtedness at the rate of eight percent (8%) per annum, payable
semi-annually in arrears on February 12 and August 12 in each year. ATL may pre-pay in whole or in part, the Principal Indebtedness
of the Line of Credit, and all interest accrued at any time prior to the Maturity Date, without penalty. Under the Agreements,
in addition to certain standard covenants, we are also not permitted, without the prior written consent of Aeneas Group and Jurchen
to (i) liquidate, dissolve or wind-up our business and affairs; (ii) effect any merger or consolidation transaction; (iii) sell,
lease, transfer, license or otherwise dispose, in a single transaction or series of related transactions, all or substantially
all of our assets; or (iv) consent to any of the foregoing. The Agreements are subject to standard events of default, which if
not cured within the agreed upon cure period, permits Aeneas Group or Jurchen, as applicable, to declare the outstanding Principal
Indebtedness immediately due and payable, to exercise any other remedy provided for in the Agreements or any other right available
to Aeneas Group or Jurchen as provided at law or in equity. Jurchen and Aeanas Group also maintain the right to set-off during
the term of the Agreements.
Registered Direct Offering
As described above
in Item 5A. Operating Results, Jurchen Investment Corporation, our largest shareholder and wholly owned by Mr. Huen, our Chief
Executive Officer, purchased 540,540 Class A Ordinary Shares and Warrants to purchase 540,540 Class A Ordinary Shares in a Registered
Direct Offering, which closed on February 28, 2020. The Warrants will be exercisable immediately following the date of issuance
for a period of seven years at an initial exercise price of $7.40.
Employment Agreements
See “Item 6.
Directors, Senior Management and Employees — C. Board Practices — Employment Agreements”.
C. Interests of Experts and Counsel
Not applicable.
Item 8. FINANCIAL INFORMATION
A. Consolidated Statements and Other
Financial Information
We have appended consolidated
financial statements filed as part of this annual report.
Legal Proceedings
From time to time,
we are subject to legal proceedings, investigations and claims incidental to the conduct of our business. We are not currently
a party to any legal proceeding or investigation which, in the opinion of our management, is likely to have a material adverse
effect on our business, financial condition or results of operations.
Dividend Policy
We have never declared
or paid cash dividends to our shareholders, and we do not intend to pay cash dividends in the foreseeable future. We intend to
reinvest any earnings in developing and expanding our business. Any future determination relating to our dividend policy will be
at the discretion of our Board of Directors and will depend on a number of factors, including future earnings, our financial condition,
operating results, contractual restrictions, capital requirements, business prospects, our strategic goals and plans to expand
our business, applicable law and other factors that our Board of Directors may deem relevant.
Under Cayman Islands
law, dividends may be declared and paid only out of funds legally available therefor, namely out of either profit or our share
premium account, and provided further that a dividend may not be paid if this would result in our Company being unable to pay its
debts as they fall due in the ordinary course of business.
B. Significant Changes
Except as disclosed
elsewhere in this annual report, we have not experienced any significant changes since the date of our audited consolidated financial
statements included in this annual report.
Item 9. THE OFFER AND LISTING
A. Offering and Listing Details.
Our Class A Ordinary
Shares are currently listed on NASDAQ Global Market under the symbol “APM”.
B. Plan of Distribution
Not applicable.
C. Markets
Our Class A Ordinary
Shares are currently listed on NASDAQ Global Market under the symbol “APM”.
D. Selling Shareholders
Not applicable.
E. Dilution
Not applicable.
F. Expenses of the Issue
Not applicable.
Item 10. ADDITIONAL INFORMATION
A. Share Capital
Not applicable.
B. Amended and Restated Memorandum and Articles of Association
The
description of our Amended and Restated Memorandum and Articles of Association is incorporated by reference from the Registration
Statement. Our amended and restated memorandum and articles of association were filed as Exhibit 3.1 to the Registration
Statement and are hereby incorporated by reference into this annual report.
C. Material Contracts
We have not entered
into any material contracts other than in the ordinary course of business and other than those described in “Item 4. Information
on the Company” or elsewhere in this annual report.
D. Exchange Controls
There are no governmental
laws, decrees, regulations or other legislation in the Cayman Islands or Hong Kong that may affect the import or export of capital,
including the availability of cash and cash equivalents for use by us, or that may affect the remittance of dividends, interest,
or other payments by us to non-resident holders of our ordinary shares, other than withholding tax requirements. There is no limitation
imposed by Cayman Islands law, Hong Kong law or our articles of association on the right of non-residents to hold or vote shares.
E. Taxation
Cayman Islands
Tax Considerations
The
Cayman Islands currently levies no taxes on individuals or corporations based upon profits, income, gains or appreciation and
there is no taxation in the nature of inheritance tax or estate duty. There are no other taxes likely to be material to us levied
by the government of the Cayman Islands except for stamp duties which may be applicable on instruments executed in, or brought
within, the jurisdiction of the Cayman Islands. The Cayman Islands is not party to any double tax treaties which are applicable
to any payments made by or to our Company. There are no exchange control regulations or currency restrictions in the Cayman Islands.
Payments
of dividends and capital in respect of our Class A Ordinary Shares will not be subject to taxation in the Cayman Islands and no
withholding will be required on the payment of a dividend or capital to any holder of our Class A Ordinary Shares, nor will gains
derived from the disposal of our Class A Ordinary Shares be subject to Cayman Islands income or corporation tax.
No
stamp duty is payable in respect of the issue of our Class A Ordinary Shares or on an instrument of transfer in respect of our
Class A Ordinary Shares except on instruments executed in, or brought within, the jurisdiction of the Cayman Islands.
Material U.S.
Federal Income Tax Considerations for U.S. Holders
The
following is a description of the material U.S. federal income tax consequences to U.S. Holders (as defined below) of purchasing,
owning and disposing of Class A Ordinary Shares. It is not a comprehensive description of all U.S. federal income tax considerations
that may be relevant to a particular person’s decision to acquire Class A Ordinary Shares. This discussion applies only
to a U.S. Holder that holds a Class A Ordinary Share as a capital asset for U.S. federal income tax purposes (generally, property
held for investment). In addition, it does not describe all of the tax consequences that may be relevant in light of a U.S. Holder’s
particular circumstances, including state and local tax consequences, non-U.S. tax consequences, federal estate or gift tax consequences,
alternative minimum tax consequences, the potential application of the provisions of the Code known as the Medicare Contribution
Tax, and tax consequences applicable to U.S. Holders subject to special rules, such as:
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banks
and other financial institutions;
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insurance companies;
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dealers or traders
in securities who use a mark-to-market method of tax accounting;
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persons holding
Class A Ordinary Shares as part of a hedging transaction, “straddle,” wash sale, conversion transaction or integrated
transaction or persons entering into a constructive sale with respect to the Class A Ordinary Shares;
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persons whose “functional
currency” for U.S. federal income tax purposes is not the U.S. dollar;
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tax exempt entities,
including “individual retirement accounts” and “Roth IRAs”;
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former citizens
or long-term residents of the United States;
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entities or arrangements
classified as partnerships for U.S. federal income tax purposes;
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regulated investment
companies or real estate investment trusts;
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persons who acquired
our Class A Ordinary Shares pursuant to the exercise of an employee share option or otherwise as compensation;
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persons that own
or are deemed to own ten percent or more of our shares; and
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persons holding
Class A Ordinary Shares in connection with a trade or business conducted outside the United States.
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If
an entity or arrangement that is classified as a partnership for U.S. federal income tax purposes holds Class A Ordinary Shares,
the U.S. federal income tax treatment of such partnership and each partner thereof will generally depend on the status of the
partner and the activities of the partnership. Partnerships holding Class A Ordinary Shares and partners in such partnerships
are encouraged to consult their tax advisors as to the particular U.S. federal income tax consequences of purchasing, holding
and disposing of Class A Ordinary Shares.
The
discussion is based on the Code, the Treasury Regulations issued thereunder, and administrative and judicial interpretations thereof,
all as in effect on the date hereof and all of which are subject to change, possibly with retroactive effect, or to different
interpretation. Such change could materially and adversely affect the tax consequences described below.
For
purposes of this discussion, a “U.S. Holder” is a holder who, for U.S. federal income tax purposes, is a beneficial
owner of Class A Ordinary Shares and that is:
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an individual citizen
or resident of the United States;
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(2)
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a corporation, or
other entity taxable as a corporation, created or organized in or under the laws of the United States, any state therein or
the District of Columbia;
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(3)
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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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(4)
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a trust, (i) if
a court within the United States is able to exercise primary supervision over its administration and one or more “U.S.
persons” (within the meaning of the Code) have the authority to control all of its substantial decisions, or (ii) if
a valid election is in effect for the trust to be treated as a U.S. person.
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U.S.
Holders are encouraged to consult their tax advisors concerning the U.S. federal, state, local and foreign tax consequences of
purchasing, owning and disposing of Class A Ordinary Shares in their particular circumstances.
Taxation
of Distributions
Subject
to the discussion below under “Passive Foreign Investment Company Rules,” a U.S. Holder will be required to include
in gross income as dividend income the gross amount of any distributions paid on Class A Ordinary Shares (including any amount
of taxes withheld), other than certain pro rata distributions of Class A Ordinary Shares, to the extent paid
out of our current or accumulated earnings and profits (as determined under U.S. federal income tax principles). Distributions
in excess of our current and accumulated earnings and profits would be treated as a non-taxable return of capital to the extent
of the U.S. Holder’s adjusted tax basis in the Class A Ordinary Shares and thereafter as a gain from the sale of the Class
A Ordinary Shares. However, because we do not calculate our earnings and profits under U.S. federal income tax principles, we
expect that distributions generally will be reported to U.S. Holders as dividends.
In
case of a U.S. Holder that is a corporation, dividends paid on the Class A Ordinary Shares will be subject to regular corporate
rates and will not be eligible for the “dividends received” deduction generally allowed to corporate shareholders
with respect to dividends received from U.S. corporations.
Dividends
received by an individual, trust or estate will be subject to taxation at standard tax rates. A reduced income tax rate applies
to dividends paid by a “qualified foreign corporations” (if certain holding period requirements and other conditions
are met). A non-U.S. corporation generally will be considered to be a qualified foreign corporation (i) if it is eligible for
the benefits of a comprehensive tax treaty with the United States which includes an exchange of information program or (ii) with
respect to any dividend it pays on stock which is readily tradable on an established securities market in the United States. US.
Treasury Department guidance indicates that our Class A Ordinary Shares, which is listed on the NASDAQ Global Market is readily
tradable on an established securities market in the United States. There can be no assurance, however, that our Class A Ordinary
Shares will be considered readily tradable on an established securities market in later years.
Non-corporate
U.S. Holders will not be eligible for reduced rates of taxation on any dividends received from us if we are a PFIC in the taxable
year in which such dividends are paid or in the preceding taxable year (See “Item 10. Additional Information – E.
Taxation – Material U.S. Federal Income Tax Considerations for U.S. Holders – Passive Foreign Investment
Company Rules” below).
A
U.S. Holder may be eligible, subject to a number of complex limitations, to claim a foreign tax credit in respect of any foreign
withholding taxes imposed on dividends received on the Class A Ordinary Shares. A U.S. Holder who does not elect to claim a foreign
tax credit for foreign income tax withheld may instead claim a deduction for U.S. federal income tax purposes in respect of such
withholding, but only for a year in which such investor elects to do so for all creditable foreign income taxes. For purposes
of calculating the foreign tax credit limitation, dividends paid by us will, depending on the circumstances of the U.S. Holder,
be either general or passive income.
While
we do not expect to pay dividends in the near future, in the event any dividends are paid and if a dividend is paid in non-U.S.
currency, it must be included in a U.S. Holder’s income as a U.S. dollar amount based on the exchange rate in effect on
the date such dividend is actually or constructively received, regardless of whether the dividend is in fact converted into U.S.
dollars. If the dividend is converted to U.S. dollars on the date of receipt, a U.S. Holder generally will not recognize a foreign
currency gain or loss. If the non-U.S. currency is converted into U.S. dollars on a later date, however, the U.S. Holder must
include in income any gain or loss resulting from any exchange rate fluctuations. Such gain or loss will generally be ordinary
income or loss and will be from sources within the United States for foreign tax credit limitation purposes. U.S. Holders should
consult their own tax advisors regarding the tax consequences to them if we pay dividends in non-U.S. currency.
Sale
or Other Taxable Disposition of Shares
Subject
to the discussion below under “Passive Foreign Investment Company Rules,” gain or loss realized on the sale or other
taxable disposition of Class A Ordinary Shares will be capital gain or loss, and will be long-term capital gain or loss if the
U.S. Holder held the Class A Ordinary Shares for more than one year. The amount of the gain or loss will equal the difference
between the U.S. Holder’s tax basis in the Class A Ordinary Shares disposed of and the amount realized on the disposition.
Long-term capital gain of a non-corporate U.S. Holder is generally taxed at preferential rates. This gain or loss will generally
be U.S.-source gain or loss for foreign tax credit purposes. The deductibility of capital losses is subject to limitations. U.S.
Holders are urged to consult their tax advisors regarding the tax consequences if a foreign tax is imposed on the disposition
of Class A Ordinary Shares, including the availability of the foreign tax credit under an investor’s own particular circumstances.
A
U.S. Holder that receives non-U.S. currency on the disposition of the Class A Ordinary Shares will realize an amount equal to
the U.S. dollar value of the foreign currency received on the date of disposition (or in the case of cash basis and electing accrual
basis taxpayers, the settlement date) whether or not converted into U.S. dollars at that time. Very generally, the U.S. Holder
will recognize currency gain or loss if the U.S. dollar value of the currency received on the settlement date differs from the
amount realized with respect to the Class A Ordinary Shares. Any currency gain or loss on the settlement date or on any subsequent
disposition of the foreign currency generally will be U.S.-source ordinary income or loss.
Passive
Foreign Investment Company Rules
Special
U.S. federal income tax rules apply to a U.S. Holder that holds stock in a foreign corporation classified as a PFIC for U.S. federal
income tax purposes. In general, a non-U.S. corporation will be classified as a PFIC for any taxable year in which, after applying
certain look-through rules, either:
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at least 75% of
its gross income for such taxable year is passive income (e.g., dividends, interest, capital gains and rents derived other
than in the active conduct of a rental business); or
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at least 50% of
its gross assets (determined on the basis of a quarterly average) is attributable to assets that produce passive income or
are held for the production of passive income.
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We
will be treated as owning our proportionate share of the assets and earning our proportionate share of the income of any other
corporation in which we own, directly or indirectly, 25% or more (by value) of the equity.
A
separate determination must be made after the close of each taxable year as to whether we are a PFIC for that year. As a result,
our PFIC status may change. In particular, the total value of our assets generally will be calculated using the market price of
our Class A Ordinary Shares, which may fluctuate considerably. Fluctuations in the market price of our Class A Ordinary Shares
may result in our being a PFIC for any taxable year.
Due
to the amount of restricted and unrestricted cash that we had on hand during our year ending December 31, 2018, we believe that
we were classified as a PFIC for that tax year. Depending on the future composition and value of our assets, we may be classified
as a PFIC for 2019, as well, and for future years.
If
we were to be classified as a PFIC, a U.S. Holder would be subject to different taxation rules depending on whether the U.S. Holder
(i) takes no action, (ii) makes an election to treat us as a “Qualified Electing Fund” (a “QEF election”)
or (iii) if permitted, makes a “mark-to-market” election with respect to our Class A Ordinary Shares. A U.S. Holder
of our Class A Ordinary Shares will also be required under applicable Treasury Regulations to file an annual information return
(Form 8621) containing information regarding our company. Additional explanations of the PFIC rules are set forth below: this
material is complex and may affect different U.S. Holders differently. Accordingly, U.S. Holders should consult their own tax
advisors about the consequences of our company being classified as a PFIC and about what steps, if any, they might take to lessen
the tax impact of our PFIC status on them.
A
U.S. Holder who does not make a timely QEF or mark-to-market election (a “Non-Electing Holder”), as discussed below,
will be subject to special tax rules with respect to any “excess distribution” that you receive and any gain you realize
from a sale or other disposition (including a pledge) of Class A Ordinary Shares. Distributions you receive in a taxable year
that are greater than 125% of the average annual distributions you received during the shorter of the three preceding taxable
years or your holding period for the Class A Ordinary Shares will be treated as an excess distribution. Under these special tax
rules:
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the excess distribution
or gain will be allocated ratably over your holding period for the Class A Ordinary Shares;
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the amount allocated
to the current taxable year, and any taxable year prior to the first taxable year in which we became a PFIC, will be treated
as ordinary income; and
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the amount allocated
to each other year will be subject to the highest tax rate in effect for that year and the interest charge generally applicable
to underpayments of tax will be imposed on the resulting tax attributable to each such year.
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It
should be noted that, until such time as we make a distribution, there are no tax consequences to Non-Electing Holders. However,
if we ever did make a distribution it would in all likelihood be an excess distribution (because we would not have previously
made any distributions to holders of Class A Ordinary Shares). At that point, and for all subsequent distributions, the rules
described above would apply to Non-Electing Holders. The tax liability for amounts allocated to years prior to the year of disposition
or “excess distribution” cannot be offset by any net operating losses for such years, and gains (but not losses) realized
on the sale of the Class A Ordinary Shares cannot be treated as capital, even if you hold the Ordinary Shares as capital assets.
Certain
elections may be available that would result in alternative treatments. The adverse consequences of owning stock in a PFIC could
be mitigated if a U.S. Holder makes a valid QEF election (a U.S. Holder which we refer to as an “Electing Holder”)
which, among other things, would require the Electing Holder to include currently in income its pro rata share of the PFIC’s
net capital gain and ordinary earnings, if any, for our taxable year that ends with or within the taxable year of the Electing
Holder, regardless of whether or not the Electing Holder actually received distributions from us. When an Electing Holder makes
a QEF election, its adjusted tax basis in our Class A Ordinary Shares is increased to reflect taxed but undistributed earnings
and profits. Distributions of earnings and profits that had been previously taxed will result in a corresponding reduction in
the adjusted tax basis in our Class A Ordinary Shares and will not be taxed again once distributed. An Electing Holder would generally
recognize capital gain or loss on the sale, exchange or other disposition of our Class A Ordinary Shares.
A
U.S. Holder can make a QEF election with respect to any year that we are a PFIC by filing IRS Form 8621 with its U.S. federal
income tax return. This election must be made by the deadline (including extensions) for filing the U.S. Holder’s federal
tax return for the year in question. U.S. Holders should discuss their election alternatives with their own tax advisors. Once
an election is made, the Electing Holder is subject to the QEF rules for as long as we are a PFIC.
It
should be noted that in order to make a QEF election a U.S. Holder needs information from us concerning our PFIC status and our
financial results for the year. We cannot assure our U.S. Holders that we will provide such information.
As
an alternative to making a QEF election, a U.S. Holder may make a “mark-to-market” election with respect to our Class
A Ordinary Shares provided our Class A Ordinary Shares are treated as “marketable stock.” The Class A Ordinary Shares
generally will be treated as marketable stock if they are regularly traded on a “qualified exchange or other market”
(within the meaning of applicable Treasury Regulations) on at least 15 days during each calendar quarter (other than in de minimis
amounts).
If
a U.S. Holder makes an effective mark-to-market election, for each taxable year that we are a PFIC, the U.S. Holder will include
as ordinary income the excess of the fair market value of its Class A Ordinary Shares at the end of the year over its adjusted
tax basis in the Class A Ordinary Shares. You will be entitled to deduct as an ordinary loss in each such year the excess of your
adjusted tax basis in the Class A Ordinary Shares over their fair market value at the end of the year, but only to the extent
of the net amount previously included in income as a result of the mark-to-market election. A U.S. Holder’s adjusted tax
basis in the Class A Ordinary Shares will be increased by the amount of any income inclusion and decreased by the amount of any
deductions under the mark-to-market rules. In addition, upon the sale or other disposition of your Class A Ordinary Shares in
a year that we are PFIC, any gain will be treated as ordinary income and any loss will be treated as ordinary loss, but only to
the extent of the net amount of previously included income as a result of the mark-to-market election.
If
a U.S. Holder makes a mark-to-market election, it will be effective for the taxable year for which the election is made and all
subsequent taxable years unless the Class A Ordinary Shares are no longer regularly traded on a qualified exchange or other market,
or the IRS consents to the revocation of the election. You are urged to consult your tax advisor about the availability of the
mark-to-market election, and whether making the election would be advisable in your particular circumstances.
Information Reporting
and Backup Withholding
Payments
of dividends and sales proceeds that are made within the United States or through certain U.S.-related financial intermediaries
generally are subject to information reporting, and may be subject to backup withholding, unless (i) the U.S. Holder is a
corporation or other exempt recipient or (ii) in the case of backup withholding, the U.S. Holder provides a correct taxpayer
identification number and certifies that it is not subject to backup withholding.
Backup
withholding is not an additional tax. The amount of any backup withholding from a payment to a U.S. Holder will be allowed as
a credit against the holder’s U.S. federal income tax liability and may entitle it to a refund, provided that the required
information is timely furnished to the IRS.
Information with
Respect to Foreign Financial Assets
Certain
U.S. Holders may be required to report information relating to the Class A Ordinary Shares, subject to certain exceptions (including
an exception for Class A Ordinary Shares held in accounts maintained by certain U.S. financial institutions). U.S. Holders should
consult their tax advisors regarding their reporting obligations with respect to their purchase, ownership and disposition of
the Class A Ordinary Shares.
F. Dividends and Paying Agents
Not applicable.
G. Statement by Experts
Not applicable.
H. Documents on Display
We have previously filed the
Registration Statement with the SEC.
We are subject to
the periodic reporting and other informational requirements of the Exchange Act. Under the Exchange Act, we are required to file
reports and other information with the SEC. Specifically, we are required to file annually a Form 20-F within four months after
the end of each fiscal year. Copies of reports and other information, when so filed, may be inspected without charge and may be
obtained at prescribed rates at the public reference facilities maintained by the SEC at Judiciary Plaza, 100 F Street, N.E.,
Washington, D.C. 20549. The public may obtain information regarding the Washington, D.C. Public Reference Room by calling the
SEC at 1-800-SEC-0330. The SEC also maintains a web site at http://www.sec.gov that contains reports, proxy and information statements,
and other information regarding registrants that make electronic filings with the SEC using its EDGAR system. As a foreign private
issuer, we are exempt from the rules of the Exchange Act prescribing, among other things, the furnishing and content of proxy
statements to shareholders, and our executive officers, directors and principal shareholders are exempt from the reporting and
short-swing profit recovery provisions contained in Section 16 of the Exchange Act.
We also maintain a
corporate website at www.aptorumgroup.com. Information contained on, or that can be accessed through, our website does not constitute
a part of this report.
I. Subsidiary Information
For a listing of our
subsidiaries, see “Item 4. Information on the Company — A. History and Development of the Company.”
Item 11. QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
For purposes of
Item 11, reference to the “Group” means Aptorum Group Limited and all of its subsidiaries.
Foreign Exchange Risk
Currency risk is the risk
that the value of financial assets or liabilities will fluctuate due to changes in foreign exchange rates.
Currency risk sensitivity analysis
At December 31, 2019, 2018
and 2017, the Group has no significant foreign currency risk because its business is principally conducted in Hong Kong and most
of the transactions are denominated in Hong Kong dollar. Since the Hong Kong dollar is pegged to the United States dollar, the
Group’s exposure to foreign currency risk in respect of the balances denominated in Hong Kong dollars is considered to be
minimal.
Credit Risk
Financial assets which
potentially subject the Group to concentrations of credit risk consist principally of bank deposits and balances.
The Group takes on exposure
to credit risk on cash and restricted cash balances held with HSBC, DBS Bank Ltd, Hong Kong Branch, Industrial and Commercial Bank
of China (Macao) Limited, Bank of China (Hong Kong) Limited, Mitsubishi UFJ Financial Group and Silicon Valley Bank for the purposes
of payments of Group expenses.
All transactions in listed
securities are settled or paid for upon delivery using approved and reputable brokers. The risk of default is considered minimal,
as delivery of securities sold is only made when the broker has received payment. Payment is made on a purchase when the securities
have been received by the broker. The trade will fail if either party fails to meet its obligation. The Group limits its exposure
to credit risk by transacting all of its securities and contractual commitment activities with broker-dealers, banks and regulated
exchanges with high credit ratings and that the Group considers to be well established.
Liquidity Risk
Liquidity risk is the risk
that the Group will encounter difficulty in raising funds to meet commitments associated with financial assets and liabilities.
Liquidity risk may result from an inability to sell a financial asset quickly at an amount close to its fair value.
The Group invests in private
equities which are generally unquoted and not readily marketable. The Group manages its liquidity risk by setting investment limits
on unlisted securities that cannot be readily disposed of. Investment of the Group’s assets in unquoted securities may restrict
the ability of the Group to dispose of its investment at a price and time it wishes to do so.
Interest Rate Risk
Interest rate risk arises
from the possibility that changes in interest rates will affect future cash flows or the fair values of financial instruments.
Interest rate risk sensitivity analysis
The Group’s cash
held with the Cash Custodian and the Custodian are exposed to interest rate risk. However, Management considers the risk to be
minimal as they are short-term with terms less than one month.
Inflation Risk
In recent years, inflation
has not had a material impact on our results of operations.
Item 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
Items 12.D.3 and 12.D.4
of this Item 12 is not applicable, as the Company does not have any American Depositary Shares; all other applicable information
required by this Item 12 is included in Exhibit 2.3.
APTORUM GROUP LIMITED
CONSOLIDATED BALANCE SHEETS (SUCCESSOR
BASIS)
December 31, 2019 and 2018
(Stated in U.S. Dollars)
|
|
December 31,
2019
|
|
|
December 31,
2018
|
|
ASSETS
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
Cash
|
|
$
|
5,189,003
|
|
|
$
|
12,006,624
|
|
Restricted cash
|
|
|
104,170
|
|
|
|
14,100,614
|
|
Digital currencies
|
|
|
1,539
|
|
|
|
-
|
|
Accounts receivable
|
|
|
40,543
|
|
|
|
2,827
|
|
Inventories
|
|
|
34,185
|
|
|
|
30,642
|
|
Marketable securities, at fair value
|
|
|
1,063,111
|
|
|
|
1,014,338
|
|
Investments in derivatives
|
|
|
203,320
|
|
|
|
115,721
|
|
Amounts due from related parties
|
|
|
962
|
|
|
|
169,051
|
|
Due from brokers
|
|
|
317,005
|
|
|
|
818,968
|
|
Other receivables and prepayments
|
|
|
1,079,043
|
|
|
|
464,156
|
|
Total current assets
|
|
|
8,032,881
|
|
|
|
28,722,941
|
|
Property, plant and equipment, net
|
|
|
7,093,035
|
|
|
|
4,260,602
|
|
Non-marketable investments
|
|
|
7,112,180
|
|
|
|
7,094,712
|
|
Intangible assets, net
|
|
|
1,311,683
|
|
|
|
1,409,540
|
|
Amounts due from related parties
|
|
|
50,000
|
|
|
|
50,000
|
|
Long-term deposits
|
|
|
294,606
|
|
|
|
3,417,178
|
|
Other non-current asset
|
|
|
59,833
|
|
|
|
119,667
|
|
Total Assets
|
|
$
|
23,954,218
|
|
|
$
|
45,074,640
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Amounts due to related parties
|
|
$
|
41,593
|
|
|
$
|
33,417
|
|
Accounts payable and accrued expenses
|
|
|
2,586,527
|
|
|
|
1,247,147
|
|
Finance lease payable, current portion
|
|
|
46,555
|
|
|
|
43,877
|
|
Warrant liabilities
|
|
|
-
|
|
|
|
753,118
|
|
Convertible debts
|
|
|
-
|
|
|
|
10,107,306
|
|
Total current liabilities
|
|
|
2,674,675
|
|
|
|
12,184,865
|
|
Finance lease payable, non-current portion
|
|
|
97,319
|
|
|
|
143,873
|
|
Loan payables to related parties
|
|
|
6,330,472
|
|
|
|
-
|
|
Total Liabilities
|
|
$
|
9,102,466
|
|
|
$
|
12,328,738
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
EQUITY
|
|
|
|
|
|
|
|
|
Class A Ordinary Shares ($1.00 par value; 60,000,000
shares authorized, 6,597,362 shares issued and outstanding at December 31, 2019 and 6,537,269 shares issued and outstanding
at December 31, 2018, respectively)
|
|
$
|
6,597,362
|
|
|
$
|
6,537,269
|
|
Class B Ordinary Shares ($1.00 par value; 40,000,000 shares authorized,
22,437,754 shares issued and outstanding as at December 31, 2019 and 2018)
|
|
|
22,437,754
|
|
|
|
22,437,754
|
|
Additional paid-in capital
|
|
|
24,887,624
|
|
|
|
23,003,285
|
|
Accumulated other comprehensive loss
|
|
|
(5,552
|
)
|
|
|
(1,484,688
|
)
|
Accumulated deficit
|
|
|
(37,555,980
|
)
|
|
|
(17,379,185
|
)
|
Total equity attributable to the shareholders of Aptorum Group Limited
|
|
|
16,361,208
|
|
|
|
33,114,435
|
|
Non-controlling interests
|
|
|
(1,509,456
|
)
|
|
|
(368,533
|
)
|
Total equity
|
|
|
14,851,752
|
|
|
|
32,745,902
|
|
Total Liabilities and Equity
|
|
$
|
23,954,218
|
|
|
$
|
45,074,640
|
|
See accompanying notes to the consolidated
financial statements.
APTORUM GROUP LIMITED
CONSOLIDATED STATEMENTS OF OPERATIONS AND
COMPREHENSIVE LOSS
(SUCCESSOR BASIS)
For Years Ended December 31, 2019 and 2018, and the period March 1, 2017 through December 31, 2017
(Stated in U.S. Dollars)
|
|
Year Ended
December 31,
2019
|
|
|
Year Ended
December 31,
2018
|
|
|
March 1,
2017
through
December 31,
2017
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
Healthcare service income
|
|
$
|
535,166
|
|
|
$
|
383,450
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of healthcare service
|
|
|
(794,545
|
)
|
|
|
(318,011
|
)
|
|
|
-
|
|
Research and development expenses
|
|
|
(6,939,051
|
)
|
|
|
(3,101,432
|
)
|
|
|
(2,560,323
|
)
|
General and administrative fees
|
|
|
(7,373,425
|
)
|
|
|
(4,919,626
|
)
|
|
|
(1,480,093
|
)
|
Legal and professional fees
|
|
|
(3,405,705
|
)
|
|
|
(1,811,770
|
)
|
|
|
(1,395,490
|
)
|
Other operating expenses
|
|
|
(220,891
|
)
|
|
|
(560,709
|
)
|
|
|
(257,177
|
)
|
Total expenses
|
|
|
(18,733,617
|
)
|
|
|
(10,711,548
|
)
|
|
|
(5,693,083
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other (loss) income
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) gain on investments in marketable securities, net
|
|
|
(81,839
|
)
|
|
|
501,522
|
|
|
|
3,912,500
|
|
Gain on non-marketable investments
|
|
|
1,147,190
|
|
|
|
-
|
|
|
|
-
|
|
Gain (loss) on investments in derivatives, net
|
|
|
87,599
|
|
|
|
(974,444
|
)
|
|
|
(827,501
|
)
|
Gain on use of digital currencies
|
|
|
46,717
|
|
|
|
-
|
|
|
|
-
|
|
Gain on extinguishment of convertible debts
|
|
|
1,198,490
|
|
|
|
-
|
|
|
|
-
|
|
Changes in fair value of warrant liabilities
|
|
|
(866,300
|
)
|
|
|
124,726
|
|
|
|
-
|
|
Interest (expense) income, net
|
|
|
(3,699,672
|
)
|
|
|
(4,458,191
|
)
|
|
|
44,269
|
|
Rental income
|
|
|
16,868
|
|
|
|
-
|
|
|
|
-
|
|
Dividend income
|
|
|
-
|
|
|
|
-
|
|
|
|
2,308
|
|
Sundry income
|
|
|
232,460
|
|
|
|
-
|
|
|
|
-
|
|
Total other (loss) income, net
|
|
|
(1,918,487
|
)
|
|
|
(4,806,387
|
)
|
|
|
3,131,576
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(20,116,938
|
)
|
|
|
(15,134,485
|
)
|
|
|
(2,561,507
|
)
|
Less: net loss attributable to non-controlling interests
|
|
|
(1,430,176
|
)
|
|
|
(302,762
|
)
|
|
|
(14,045
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to Aptorum Group Limited
|
|
$
|
(18,686,762
|
)
|
|
$
|
(14,831,723
|
)
|
|
$
|
(2,547,462
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share – basic and diluted
|
|
$
|
(0.64
|
)
|
|
$
|
(0.53
|
)
|
|
$
|
(0.09
|
)
|
Weighted-average shares outstanding – basic and diluted
|
|
|
29,008,445
|
|
|
|
27,909,788
|
|
|
|
26,963,435
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(20,116,938
|
)
|
|
$
|
(15,134,485
|
)
|
|
$
|
(2,561,507
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized loss on investments in available-for-sale securities
|
|
|
-
|
|
|
|
(1,122,251
|
)
|
|
|
(367,782
|
)
|
Exchange differences on translation of foreign operations
|
|
|
(10,897
|
)
|
|
|
5,345
|
|
|
|
-
|
|
Other Comprehensive loss
|
|
|
(10,897
|
)
|
|
|
(1,116,906
|
)
|
|
|
(367,782
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
|
(20,127,835
|
)
|
|
|
(16,251,391
|
)
|
|
|
(2,929,289
|
)
|
Less: comprehensive loss attributable to non-controlling interests
|
|
|
(1,430,176
|
)
|
|
|
(302,762
|
)
|
|
|
(14,045
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss attributable to the shareholders of Aptorum Group Limited
|
|
|
(18,697,659
|
)
|
|
|
(15,948,629
|
)
|
|
|
(2,915,244
|
)
|
See accompanying notes to the consolidated
financial statements.
APTORUM GROUP LIMITED
STATEMENT OF OPERATIONS (PREDECESSOR BASIS)
For the Period January 1, 2017 through February
28, 2017
(Stated in U.S. Dollars)
|
|
January 1,
2017
through
February 28,
2017
|
|
Investment income
|
|
|
|
Dividend income from unaffiliated issuers
|
|
$
|
-
|
|
Interest income
|
|
|
3,011
|
|
Total investment income
|
|
|
3,011
|
|
|
|
|
|
|
Expenses
|
|
|
|
|
General and administrative fees
|
|
|
17,516
|
|
Management fees
|
|
|
108,958
|
|
Legal and professional fees
|
|
|
98,646
|
|
Other operating expenses
|
|
|
1,907
|
|
Total expenses
|
|
|
227,027
|
|
|
|
|
|
|
Net investment loss
|
|
$
|
(224,016
|
)
|
|
|
|
|
|
Realized and unrealized losses
|
|
|
|
|
Net realized losses on investments in unaffiliated issuers
|
|
$
|
(15,327
|
)
|
Net change in unrealized depreciation on investments
|
|
|
|
|
Aptorum Therapeutics - related party
|
|
|
(98,434
|
)
|
Unaffiliated issuers
|
|
|
(288,307
|
)
|
Net realized and unrealized losses
|
|
|
(402,068
|
)
|
|
|
|
|
|
Net decrease in net assets resulting from operations
|
|
$
|
(626,084
|
)
|
See accompanying notes to the consolidated financial
statements.
APTORUM GROUP LIMITED
CONSOLIDATED STATEMENTS OF EQUITY (SUCCESSOR BASIS)
For Years Ended December 31, 2019 and 2018, and the period March 1, 2017 through December 31, 2017
(Stated in U.S. Dollars)
|
|
Ordinary shares
|
|
|
Class A Ordinary Shares
|
|
|
Class B Ordinary Shares
|
|
|
Additional Paid-in Capital
|
|
|
Accumulated deficit
|
|
|
Accumulated other comprehensive loss
|
|
|
Non-
controlling interests
|
|
|
Total
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Amount
|
|
|
Amount
|
|
|
Amount
|
|
|
Amount
|
|
|
Amount
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, March 1, 2017
|
|
|
25,657,110
|
|
|
$
|
25,657,110
|
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
|
$
|
-
|
|
|
$
|
(1,168,448
|
)
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
24,488,662
|
|
Proceeds from issuance of shares
|
|
|
2,207,025
|
|
|
|
2,207,025
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
6,394,976
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
8,602,001
|
|
Converted from ordinary shares
|
|
|
(27,864,135
|
)
|
|
|
(27,864,135
|
)
|
|
|
5,426,381
|
|
|
|
5,426,381
|
|
|
|
22,437,754
|
|
|
|
22,437,754
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Unrealized loss on investments in available-for-sale securities
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(367,782
|
)
|
|
|
-
|
|
|
|
(367,782
|
)
|
Gain on disposal of entity under common control
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
67,874
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
67,874
|
|
Net loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(2,547,462
|
)
|
|
|
-
|
|
|
|
(14,045
|
)
|
|
|
(2,561,507
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2017
|
|
|
-
|
|
|
$
|
-
|
|
|
|
5,426,381
|
|
|
$
|
5,426,381
|
|
|
|
22,437,754
|
|
|
$
|
22,437,754
|
|
|
$
|
5,294,402
|
|
|
$
|
(2,547,462
|
)
|
|
$
|
(367,782
|
)
|
|
$
|
(14,045
|
)
|
|
$
|
30,229,248
|
|
Issuance of initial public offering of ordinary shares on December 17, 2018 at $15.8 per share, net of underwriting discount and offering expenses
|
|
|
-
|
|
|
|
-
|
|
|
|
761,419
|
|
|
|
761,419
|
|
|
|
-
|
|
|
|
-
|
|
|
|
9,536,631
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
10,298,050
|
|
Proceeds from non-controlling interest
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
51,727
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(51,726
|
)
|
|
|
1
|
|
Converted from convertible debts
|
|
|
-
|
|
|
|
-
|
|
|
|
349,469
|
|
|
|
349,469
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,683,839
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,033,308
|
|
Unrealized loss on investments in available-for-sale securities
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,122,251
|
)
|
|
|
-
|
|
|
|
(1,122,251
|
)
|
Exchange difference on translation of foreign operation
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
5,345
|
|
|
|
-
|
|
|
|
5,345
|
|
Beneficial conversion feature
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
5,436,686
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
5,436,686
|
|
Net loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(14,831,723
|
)
|
|
|
-
|
|
|
|
(302,762
|
)
|
|
|
(15,134,485
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2018
|
|
|
-
|
|
|
$
|
-
|
|
|
|
6,537,269
|
|
|
$
|
6,537,269
|
|
|
|
22,437,754
|
|
|
$
|
22,437,754
|
|
|
$
|
23,003,285
|
|
|
$
|
(17,379,185
|
)
|
|
$
|
(1,484,688
|
)
|
|
$
|
(368,533
|
)
|
|
$
|
32,745,902
|
|
Adjustment to opening balance of equity
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,490,033
|
)
|
|
|
1,490,033
|
|
|
|
-
|
|
|
|
-
|
|
Balance, January 1, 2019
|
|
|
-
|
|
|
|
-
|
|
|
|
6,537,269
|
|
|
$
|
6,537,269
|
|
|
|
22,437,754
|
|
|
$
|
22,437,754
|
|
|
$
|
23,003,285
|
|
|
$
|
(18,869,218
|
)
|
|
$
|
5,345
|
|
|
$
|
(368,533
|
)
|
|
$
|
32,745,902
|
|
Issuance of shares to non-controlling interest
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
10,672
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(10,672
|
)
|
|
|
-
|
|
Issuance of tokens
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
300,000
|
|
|
|
300,000
|
|
Reacquisition of convertible bonds
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,298,490
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,298,490
|
)
|
Disposal of a subsidiary
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(75
|
)
|
|
|
(75
|
)
|
Share-based compensation
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,612,832
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1, 612,832
|
|
Exercise of warrants
|
|
|
-
|
|
|
|
-
|
|
|
|
60,093
|
|
|
|
60,093
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,559,325
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,619,418
|
|
Exchange difference on translation of foreign operation
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(10,897
|
)
|
|
|
-
|
|
|
|
(10,897
|
)
|
Net loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(18,686,762
|
)
|
|
|
-
|
|
|
|
(1,430,176
|
)
|
|
|
(20,116,938
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2019
|
|
|
-
|
|
|
$
|
-
|
|
|
|
6,597,362
|
|
|
$
|
6,597,362
|
|
|
|
22,437,754
|
|
|
$
|
22,437,754
|
|
|
$
|
24,887,624
|
|
|
$
|
(37,555,980
|
)
|
|
$
|
(5,552
|
)
|
|
$
|
(1,509,456
|
)
|
|
$
|
14,851,752
|
|
See accompanying notes to the consolidated
financial statements.
APTORUM GROUP LIMITED
STATEMENT OF CHANGES IN NET ASSETS (PREDECESSOR
BASIS)
For the Period January 1, 2017 through February
28, 2017
(Stated in U.S. Dollars)
|
|
January 1,
2017
through
February 28, 2017
|
|
|
|
|
|
Operations
|
|
|
|
Net investment losses
|
|
$
|
(224,016
|
)
|
Net realized losses
|
|
|
(15,327
|
)
|
Net change in unrealized depreciation
|
|
|
(386,741
|
)
|
Net decrease in net assets resulting from operations
|
|
|
(626,084
|
)
|
|
|
|
|
|
Distributions to shareholders
|
|
|
|
|
Equalization payable
|
|
|
9,663
|
|
Return of capital
|
|
|
(9,663
|
)
|
Total distributions
|
|
|
-
|
|
|
|
|
|
|
Total decrease in net assets
|
|
|
(626,084
|
)
|
|
|
|
|
|
Net assets
|
|
|
|
|
Beginning of period
|
|
|
25,114,746
|
|
End of period
|
|
$
|
24,488,662
|
|
See accompanying notes to the consolidated financial
statements.
APTORUM GROUP LIMITED
CONSOLIDATED STATEMENTS OF CASH FLOWS (SUCCESSOR BASIS)
For Years Ended December 31, 2019 and 2018, and the period March 1, 2017 through December 31, 2017
(Stated in U.S. Dollars)
|
|
Year Ended
December 31,
2019
|
|
|
Year Ended
December 31,
2018
|
|
|
March 1,
2017
through December 31,
2017
|
|
Cash flows from operating activities
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(20,116,938
|
)
|
|
$
|
(15,134,485
|
)
|
|
$
|
(2,561,507
|
)
|
Adjustments to reconcile net loss to net cash used in operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization and depreciation
|
|
|
1,299,618
|
|
|
|
682,292
|
|
|
|
58,903
|
|
Share-based compensation
|
|
|
1,612,832
|
|
|
|
-
|
|
|
|
-
|
|
Loss (gain) on investments in marketable securities, net
|
|
|
81,839
|
|
|
|
(501,522
|
)
|
|
|
(3,912,500
|
)
|
Gain on non-marketable investments
|
|
|
(1,147,190
|
)
|
|
|
-
|
|
|
|
-
|
|
(Gain) loss on investments in derivatives, net
|
|
|
(87,599
|
)
|
|
|
974,444
|
|
|
|
827,501
|
|
Changes in fair value of warrant liabilities
|
|
|
866,300
|
|
|
|
(124,726
|
)
|
|
|
-
|
|
Gain on use of digital currencies
|
|
|
(46,717
|
)
|
|
|
-
|
|
|
|
-
|
|
Settlement of service fee by digital currencies and tokens
|
|
|
437,178
|
|
|
|
-
|
|
|
|
-
|
|
Gain on extinguishment of convertible debts
|
|
|
(1,198,490
|
)
|
|
|
-
|
|
|
|
-
|
|
Interest income
|
|
|
(79,558
|
)
|
|
|
(108,512
|
)
|
|
|
-
|
|
Interest expense and accretion of convertible debts
|
|
|
3,769,263
|
|
|
|
4,559,714
|
|
|
|
-
|
|
Accretion of finance lease obligation
|
|
|
9,967
|
|
|
|
6,989
|
|
|
|
-
|
|
Changes in operating assets and liabilities
|
|
|
|
|
|
|
|
|
|
|
-
|
|
Accounts receivable
|
|
|
(37,716
|
)
|
|
|
(2,827
|
)
|
|
|
-
|
|
Inventories
|
|
|
(3,543
|
)
|
|
|
(30,642
|
)
|
|
|
-
|
|
Other receivables and prepayments
|
|
|
(427,541
|
)
|
|
|
(45,911
|
)
|
|
|
(303,925
|
)
|
Other non-current asset
|
|
|
-
|
|
|
|
(179,500
|
)
|
|
|
-
|
|
Long-term deposits
|
|
|
55,429
|
|
|
|
(111,951
|
)
|
|
|
(20,092
|
)
|
Due from brokers
|
|
|
501,963
|
|
|
|
751
|
|
|
|
(54,158
|
)
|
Amounts due from related parties
|
|
|
168,089
|
|
|
|
(79,204
|
)
|
|
|
-
|
|
Amounts due to related parties
|
|
|
(26,060
|
)
|
|
|
1,004
|
|
|
|
-
|
|
Accounts payable and accrued expenses
|
|
|
986,241
|
|
|
|
58,555
|
|
|
|
183,083
|
|
Net cash used in operating activities
|
|
|
(13,382,633
|
)
|
|
|
(10,035,531
|
)
|
|
|
(5,782,695
|
)
|
Cash flows from investing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of digital currencies
|
|
|
(200,000
|
)
|
|
|
-
|
|
|
|
-
|
|
Advances to related parties
|
|
|
-
|
|
|
|
-
|
|
|
|
(186,898
|
)
|
Purchases of intangible assets
|
|
|
(70,109
|
)
|
|
|
(417,794
|
)
|
|
|
(968,730
|
)
|
Purchases of property, plant and equipment
|
|
|
(837,062
|
)
|
|
|
(5,646,505
|
)
|
|
|
(2,090,721
|
)
|
Proceeds from sales of investment securities
|
|
|
999,110
|
|
|
|
2,312
|
|
|
|
16,049,067
|
|
Disbursement of a loan to a third party
|
|
|
(1,400,000
|
)
|
|
|
(3,000,000
|
)
|
|
|
-
|
|
Repayment of a loan from a third party
|
|
|
1,400,000
|
|
|
|
3,000,000
|
|
|
|
-
|
|
Net cash (used in) provided by investing activities
|
|
|
(108,061
|
)
|
|
|
(6,061,987
|
)
|
|
|
12,802,718
|
|
Cash flows from financing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan from related parties
|
|
|
6,330,472
|
|
|
|
-
|
|
|
|
-
|
|
Payment for settlement of convertible debts
|
|
|
(13,600,000
|
)
|
|
|
-
|
|
|
|
-
|
|
Proceeds from issuance of convertible debts
|
|
|
-
|
|
|
|
16,120,400
|
|
|
|
480,000
|
|
Proceeds from issuance of shares
|
|
|
-
|
|
|
|
11,054,319
|
|
|
|
8,602,001
|
|
Payments of initial public offering costs
|
|
|
-
|
|
|
|
(538,122
|
)
|
|
|
-
|
|
Payments for debt issuance costs
|
|
|
-
|
|
|
|
(1,099,316
|
)
|
|
|
-
|
|
Payment of finance lease obligations
|
|
|
(53,843
|
)
|
|
|
(58,332
|
)
|
|
|
-
|
|
Net cash (used in) provided by financing activities
|
|
|
(7,323,371
|
)
|
|
|
25,478,949
|
|
|
|
9,082,001
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (decrease) increase in cash and restricted cash
|
|
|
(20,814,065
|
)
|
|
|
9,381,431
|
|
|
|
16,102,024
|
|
Cash and restricted cash – Beginning of period
|
|
|
26,107,238
|
|
|
|
16,725,807
|
|
|
|
623,783
|
|
Cash and restricted cash – End of period
|
|
|
5,293,173
|
|
|
$
|
26,107,238
|
|
|
|
16,725,807
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flow information
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest paid
|
|
$
|
557,333
|
|
|
$
|
606,989
|
|
|
$
|
-
|
|
Income taxes paid
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Proceeds in broker accounts
|
|
$
|
999,110
|
|
|
$
|
640,227
|
|
|
$
|
-
|
|
Non-cash operating, investing and financing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of token in exchange of services
|
|
$
|
300,000
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Net settlement of related party balances
|
|
$
|
-
|
|
|
$
|
164,973
|
|
|
$
|
-
|
|
Equipment acquired through finance lease
|
|
$
|
-
|
|
|
$
|
239,093
|
|
|
$
|
-
|
|
Conversion of convertible debts
|
|
$
|
-
|
|
|
$
|
3,033,308
|
|
|
$
|
-
|
|
Settlement of service fee by digital currencies and tokens
|
|
$
|
437,178
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Reconciliation of cash and restricted cash
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
5,189,003
|
|
|
$
|
12,006,624
|
|
|
$
|
16,245,807
|
|
Restricted cash
|
|
|
104,170
|
|
|
|
14,100,614
|
|
|
|
480,000
|
|
Total cash and restricted cash shown in the consolidated statements of cash flows
|
|
$
|
5,293,173
|
|
|
$
|
26,107,238
|
|
|
$
|
16,725,807
|
|
See accompanying notes to the consolidated
financial statements.
APTORUM GROUP LIMITED
STATEMENT OF CASH FLOWS (PREDECESSOR BASIS)
For the Period January 1, 2017 through February
28, 2017
(Stated in U.S. Dollars)
|
|
January 1, 2017
through
February 28,
2017
|
|
Cash flows from operating activities
|
|
|
|
Net decrease in net assets resulting from operations
|
|
$
|
(626,084
|
)
|
Adjustments to reconcile net decrease in net assets resulting from operations to net cash used in operating activities:
|
|
|
|
|
Net change in unrealized depreciation on investments
|
|
|
386,741
|
|
Net realized loss on sales of investments in unaffiliated issuers
|
|
|
15,327
|
|
Proceeds from sales of investment securities
|
|
|
28,425
|
|
Increase in interest receivable
|
|
|
(5,099
|
)
|
Increase in due from brokers
|
|
|
(28,438
|
)
|
Decrease in other receivable and prepayments
|
|
|
2,520
|
|
Increase in accounts payable and accrued expenses
|
|
|
13,778
|
|
Decrease in management fees payable - related party
|
|
|
(58,830
|
)
|
Net cash used in operating activities
|
|
|
(271,660
|
)
|
|
|
|
|
|
Net decrease in cash
|
|
|
(271,660
|
)
|
|
|
|
|
|
Cash - Beginning of period
|
|
|
301,643
|
|
Cash - End of period
|
|
$
|
29,983
|
|
Supplemental disclosures of cash flow information
|
|
|
|
|
Interest paid
|
|
$
|
-
|
|
Income taxes paid
|
|
$
|
-
|
|
See accompanying notes to the consolidated financial
statements.
APTORUM GROUP LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Stated in U.S. Dollars)
1. ORGANIZATION
The consolidated financial statements include
the financial statements the Aptorum Group Limited (the “Company”) and its subsidiaries. The Company and its subsidiaries
are hereinafter collectively referred to as the “Group”.
The Company, formerly known as APTUS Holdings
Limited and STRIKER ASIA OPPORTUNITIES FUND CORPORATION, is a company incorporated on September 13, 2010 under the laws of the
Cayman Islands with limited liability.
On March 1, 2017, the Company changed from
an investment fund with management shares and non-voting participating redeemable preference shares to a holding company with
operating subsidiaries. After that, the Company has become a biopharmaceutical company. The Company researches and develops life
science and biopharmaceutical products within its wholly-owned subsidiary, Aptorum Therapeutics Limited, formerly known as APTUS
Therapeutics Limited (“Aptorum Therapeutics”) and its indirect subsidiary companies (collectively, “Aptorum
Therapeutics Group”).
Below summarizes the list of the major subsidiaries consolidated
as of December 31, 2019:
Name
|
|
Incorporation
date
|
|
Ownership
|
|
Place
of
incorporation
|
|
Principle
activities
|
Aptorum Therapeutics Limited
|
|
June 30, 2016
|
|
100%
|
|
Cayman Islands
|
|
Research and development of life science and
biopharmaceutical products
|
APTUS MANAGEMENT LIMITED
|
|
May 16, 2017
|
|
100%
|
|
Hong Kong
|
|
Provision of management services to its holding company
and fellow subsidiaries
|
Aptorum Medical Limited
|
|
August 28, 2017
|
|
94%
|
|
Cayman Islands
|
|
Provision of medical clinic services
|
Aptus Therapeutics (Hong Kong) Limited
|
|
June
30, 2016
|
|
100%
|
|
Hong Kong
|
|
Research and development
of life science and biopharmaceutical products
|
Aptorum Pharmaceutical Development Limited
|
|
August 28, 2017
|
|
100%
|
|
Cayman Islands
|
|
Research and development of life science and
biopharmaceutical products
|
Aptorum Innovations Holding Limited
|
|
April 15, 2019
|
|
100%
|
|
Cayman Islands
|
|
Investment holding company
|
Aptorum Innovations Holding Pte. Ltd.
|
|
June 5, 2019
|
|
100%
|
|
Singapore
|
|
Research and development of life science and
biopharmaceutical products
|
Aptorum Investment Holding Limited
|
|
March 29, 2019
|
|
100%
|
|
Cayman Islands
|
|
Investment holding company
|
Acticule Life Sciences Limited
|
|
June 30, 2017
|
|
80%
|
|
Cayman Islands
|
|
Research and development of life science and
biopharmaceutical products
|
Claves Life Sciences Limited
|
|
August 2, 2017
|
|
100%
|
|
Cayman Islands
|
|
Research and development of life science and
biopharmaceutical products
|
Nativus Life Sciences Limited
|
|
July 7, 2017
|
|
100%
|
|
Cayman Islands
|
|
Research and development of life science and
biopharmaceutical products
|
Videns Incorporation Limited
|
|
March 2, 2017
|
|
100%
|
|
Cayman Islands
|
|
Research and development of life science and
biopharmaceutical products
|
mTOR (Hong Kong) Limited
|
|
November 4, 2016
|
|
90%
|
|
Hong Kong
|
|
Research and development of life science and
biopharmaceutical products
|
Scipio Life Sciences Limited
|
|
July 19, 2017
|
|
100%
|
|
Cayman Islands
|
|
Research and development of life science and
biopharmaceutical products
|
Signate Life Sciences Limited
|
|
August 28, 2017
|
|
100%
|
|
Cayman Islands
|
|
Research and development of life science and
biopharmaceutical products
|
SMTPH Limited
|
|
April 18, 2019
|
|
100%
|
|
Seychelles
|
|
Investment holding company
|
Smart Pharmaceutical Research Limited
|
|
April 24, 2019
|
|
100%
|
|
Samoa
|
|
Pharmaceutical research and analysis
|
Smart Pharmaceutical Development Pte. Limited
|
|
May 10, 2019
|
|
100%
|
|
Singapore
|
|
Research and development of life science and
biopharmaceutical products
|
Smart Pharmaceutical Limited Partnership
|
|
June 7, 2019
|
|
100%
|
|
Seychelles
|
|
Issuance of asset backed securities
|
Initial public offering
On December 17, 2018, the Group completed
an initial public offering (the “IPO” or “Offering”) with new issuance of 761,419 ordinary shares at $15.80
for total offering size of approximately $12.0 million before deducting commissions and expenses. The net proceeds from the IPO
was approximately $10.3 million, net off underwriting discount of approximately $1.2 million and offering costs of approximately
$0.5 million. After the IPO, the ordinary shares began trading on the NASDAQ Global Market under the ticker symbol “APM”.
APTORUM GROUP LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Stated in U.S. Dollars)
Deferred offering costs
Deferred offering costs consist principally
of legal, printing and registration costs in connection with the Group’s IPO. Such costs are deferred until the closing
of the Offering, at which time the deferred costs are offset against the offering proceeds. Deferred offering costs as of December
31, 2019 and 2018 amounted to $nil on the consolidated balance sheets. At the completion of the IPO, $1,732,229 offering costs
was charged to additional paid-in capital.
2. LIQUIDITY
The Company reported a net loss of $20,116,938,
net operating cash outflow of $13,382,633 and working capital of $5,358,206 for the year ended December 31, 2019. In addition,
the Company had an accumulated deficit of $37,555,980 as of December 31, 2019. The Company’s operating results for future
periods are subject to numerous uncertainties and it is uncertain if the Company will be able to reduce or eliminate its net losses
for the foreseeable future. If management is not able to generate significant revenues from its product candidates currently in
development, the Company may not be able to achieve profitability.
The Company’s principal sources
of liquidity have been cash, marketable securities and line of credit facility from related parties. As of the date of issuance
of the consolidated financial statements, the Company has approximately $6.3 million of restricted and unrestricted cash and undrawn
line of credit facility from related parties of approximately $12.4 million. Based upon the current market price of the Company’s
marketable securities, it anticipates it can liquidate such marketable securities, if necessary. In addition, the Company will
need to maintain its operating costs at a level which will not exceed such aforementioned sources of funds in order to continue
as a going concern for a period within one year after the issuance of its consolidated financial statements.
The Company believes that available cash,
together with the efforts from aforementioned management plan and actions, should enable the Company to meet current anticipated
cash needs for at least the next 12 months after the date that the financial statements are issued and the Company has prepared
the consolidated financial statements on a going concern basis. However, the Company continues to have ongoing obligations and
it expects that it will require additional capital in order to execute its longer-term development plan. If the Company encounters
unforeseen circumstances that place constraints on its capital resources, management will be required to take various measures
to conserve liquidity, which could include, but not necessarily be limited to, deferring some of its research, seeking to dispose
of marketable securities and drawing down from line of credit provided by related parties. Management cannot provide any assurance
that the Company will raise additional capital if needed.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of presentation and consolidation
The consolidated financial statements are
prepared in accordance with U.S. GAAP. Before March 1, 2017, the Company was an investment company under U.S. GAAP for the purposes
of financial reporting. U.S. GAAP for an investment company requires investments to be recorded at estimated fair value and the
unrealized gains and/or losses in an investment’s fair value are recognized on a current basis in the statements of operations.
In addition, the Company did not consolidate its subsidiaries, since they were operating companies and not investment companies.
Such entities were fair valued in accordance with ASC Topic 946 (“ASC 946”) and ASC Topic 820 (“ASC 820”).
As of March 1, 2017, after the change of business
purpose, legal form and substantive activities, the Company’s status changed to an operating company from an investment company
since it no longer met the criteria to qualify as an investment company under the ASC 946. The Company discontinued applying the
guidance in ASC 946 and began to account for the change in status prospectively by accounting for its investments in accordance
with other U.S. GAAP topics.
This change in status and the accounting policies affect the
comparability of the financial statements. As such, for the period January 1, 2017 through February 28, 2017, statements of operations,
changes in net assets, and cash flows have been presented on the predecessor basis of accounting as an investment company, and
on the successor basis of accounting as an operating company since March 1, 2017. The consolidated balance sheets as of December
31, 2019 and 2018 have been presented on the successor basis.
The consolidated financial statements of the Group are presented
on the accrual basis of accounting in accordance with accounting principles generally accepted in the United States of America
(“U.S. GAAP”) and include the accounts of the Company, its direct and indirect wholly and majority owned subsidiaries.
All material intercompany balances and transactions have been eliminated in preparation of the consolidated financial statements.
Non-controlling interests
Non-controlling interests represent the equity
interests that are not attributable to the Group.
Use of estimates
The preparation of the consolidated financial
statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements
as well as income and expenses during the reporting period. Significant accounting estimates reflected in the Group’s consolidated
financial statements include valuation of equity securities, fair value of investments in securities, convertible debts and finance
lease, the useful lives of intangible assets and property, plant and equipment, impairment of long-lived assets, valuation allowance
for deferred tax assets, and collectability of receivables. Actual results could differ from those estimates.
APTORUM GROUP LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Stated in U.S. Dollars)
Foreign currency translation and transaction
USD is the reporting currency. The functional
currency of subsidiaries in the Cayman Islands, Seychelles, Samoa and the United States are USD, the functional currency of subsidiaries
in Hong Kong is Hong Kong Dollars (“HKD”), the functional currency of a subsidiary in Macao is Macanese Pataca (“MOP”),
the functional currency of a subsidiary in the United Kingdom is Great British Pound (“GBP”), and the functional currency
of subsidiaries in Singapore is Singapore Dollars (“SGD”). An entity’s functional currency is the currency of
the primary economic environment in which it operates, normally that is the currency of the environment in which it primarily
generates and expends cash. The management considered various indicators, such as cash flows, market expenses, financing and inter-company
transactions and arrangements in determining the Group’s functional currency.
In the consolidated financial statements,
the financial information of the Company and its subsidiaries, which use HKD, MOP, GBP, and SGD as their functional currency,
has been translated into USD. Assets and liabilities are translated from each subsidiary’s functional currency at the exchange
rates on the balance sheet dates, equity amounts are translated at historical exchange rates, and revenues, expenses, gains, and
losses are translated using the average exchange rates for the year. Translation adjustments are reported as cumulative translation
adjustments and are shown as a separate component of other comprehensive income or loss in the statements of operations and comprehensive
loss.
Cash
Cash consists of cash on hand and bank deposits
and cash denominated in foreign currencies, which is unrestricted as to withdraw and use.
Restricted cash
Restricted cash represented a time deposit
pledged for banking facilities or cash deposited into the escrow account from investors for the purpose of the subscription of
convertible debts.
Digital currencies
Digital currencies represented BitCoin, Ethereum,
or other virtual currencies that the Group purchased and used to settle certain token related expenses.
Digital currencies are included in current
assets in the consolidated balance sheets. Digital currencies purchased are recorded at cost.
Digital currencies held are accounted for
as intangible assets with indefinite useful lives. An intangible asset with an indefinite useful life is not amortized but assessed
for impairment annually, or more frequently, when events or changes in circumstances occur indicating that it is more likely than
not that the indefinite-lived asset is impaired. Impairment exists when the carrying amount exceeds its fair value, which is measured
using the quoted price of the digital currency at the time its fair value is being measured. In testing for impairment, the Group
has the option to first perform a qualitative assessment to determine whether it is more likely than not that an impairment exists.
If it is determined that it is not more likely than not that an impairment exists, a quantitative impairment test is not necessary.
If the Company concludes otherwise, it is required to perform a quantitative impairment test. To the extent an impairment loss
is recognized, the loss establishes the new cost basis of the asset. Subsequent reversal of impairment losses is not permitted.
Purchases of digital currencies by the Group
are included within investing activities in the consolidated statements of cash flows. The utilization of digital currencies in
exchange of services are included within operating activities in the consolidated statements of cash flows and any gains or losses
from such use are included in other income (expense) in the consolidated statements of operations. The Company accounts for its
gains or losses in accordance with the first in first out (FIFO) method.
Inventories
Inventories are stated at lower of cost and net realizable value. Cost is determined using the weighted average method.
Where there is evidence that the utility of
inventories, in their disposal in the ordinary course of business, will be less than cost, whether due to physical deterioration,
obsolescence, changes in price levels, or other causes, the inventories are written down to net realizable value.
Accounts receivable
Accounts receivable are stated at the original
amount less an allowance for doubtful receivables, if any, based on a review of all outstanding amounts at period end. An allowance
is also made when there is objective evidence that the Group will not be able to collect all amounts due according to the original
terms of the receivables. The Group analyzes the aging of the customer accounts, historical and current economic trends and the
age of the receivables when evaluating the adequacy of the allowance for doubtful accounts.
APTORUM GROUP LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Stated in U.S. Dollars)
Marketable securities
Marketable securities are publicly traded
stocks measured at fair value and classified within Level 1 and 2 in the fair value hierarchy because the Group uses quoted prices
for identical assets in active markets or inputs that are based upon quoted prices for similar instruments in active markets.
Loss on investments in marketable securities, net, amounted
to $81,839, was recognized in the consolidated statements of operations for the year ended December 31, 2019. Gain on investments
in marketable securities, net, amounted to $501,522 and $3,912,500, respectively, were recognized in the consolidated statements
of operations for the year ended December 31, 2018 and the period March 1, 2017 through December 31, 2017.
For the years ended December 31, 2019 and
2018, the Group disposed marketable securities, with sales proceeds of $999,110 and $637,582 received and recorded in due from
brokers, respectively, and recognized a realized gain of $538,425 and $501,522 in the consolidated statements of operations, respectively.
During the period March 1, 2017 to December
31, 2017, the Group disposed the trading securities and available-for-sale securities, with sales proceeds of $15,738,517 and $310,550
received, and recognized a gain of $3,917,046 and a loss of $4,546 on the consolidated statements of operations.
Investments in derivatives
Investments in derivatives consisted of warrants,
which are measured at fair value, with gains or losses from changes in fair value recorded through earnings. The fair value of
these warrants have been determined using the Black-Scholes pricing mode. The Black-Scholes pricing model provides for assumptions
regarding volatility, call and put features and risk-free interest rates within the total period to maturity.
No disposal was recorded during the year ended December 31,
2019 and the period March 1, 2017 through December 31, 2017. For the year ended December 31, 2018, the Group disposed of warrants
with proceeds of $4,957 received. Unrealized gain on the investments in derivatives amounted to $87,599 was recognized in the consolidated
statements of operations for the year ended December 31, 2019. Unrealized loss on the investments in derivatives amounted to $974,444
and $827,501, respectively, were recognized in the consolidated statements of operations for the year ended December 31, 2018 and
the period March 1, 2017 to December 31, 2017.
Non-marketable investments
Non-marketable investments are comprising
of investments in non-redeemable preferred shares of privately-held companies that are not required to be consolidated under
the variable interest or voting models. Non-marketable investments are classified as non-current assets on the consolidated
balance sheets as those investments do not have stated contractual maturity dates.
The non-marketable equity securities not accounted
for under the equity method are measured at cost, less any impairment, plus or minus changes resulting from observable price changes
in orderly transactions for identical or similar investments of the same issuer. Adjustments are determined primarily based on
a market approach as of the transaction date.
Fair value measurement
Fair value is defined as the price that would
be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the
measurement date. When determining the fair value measurements for assets and liabilities required or permitted to be recorded
at fair value, the Group considers the principal or most advantageous market in which it would transact its business, and it considers
assumptions that market participants would use when pricing the asset or liability.
APTORUM GROUP LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Stated in U.S. Dollars)
As a basis for considering such assumptions,
a three-tier fair value hierarchy prioritizes the inputs utilized in measuring fair value as follows:
|
●
|
Level 1 applies
to assets or liabilities for which there are quoted prices in active markets for identical assets or liabilities.
|
|
|
|
|
●
|
Level 2 applies
to assets or liabilities for which there are inputs other than quoted prices included within Level 1 that are observable for
the asset or liability such as quoted prices for similar assets or liabilities in active markets; quoted prices for identical
assets or liabilities in markets with insufficient volume or infrequent transactions (less active markets); or model-derived
valuations in which significant inputs are observable or can be derived principally from, or corroborated by, observable market
data.
|
|
|
|
|
●
|
Level 3 applies
to assets or liabilities for which there are unobservable inputs to the valuation methodology that are significant to the
measurement of the fair value of the assets or liabilities.
|
The hierarchy requires the Group to maximize
the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. A financial instrument’s
categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement.
The Group has estimated the fair value amounts of its financial instruments using the available market information and valuation
methodologies considered to be appropriate and has determined that the carrying value of the Group’s cash, restricted cash,
accounts receivable, due from brokers, other receivables and prepayments, amounts due from/to related parties and accounts payable
and accrued expenses as of December 31, 2019 and 2018 approximate fair value due to the short-term nature of these assets and
liabilities.
Property, plant and equipment
Property, plant and equipment is stated at
cost less accumulated depreciation and impairment losses. Cost represents the purchase price of the asset and other costs incurred
to bring the asset into its existing use. Maintenance, repairs and betterments, including replacement of minor items, are charged
to expense; major additions to physical properties are capitalized.
Assets under construction are stated at
cost less impairment losses. Cost comprises of cost of laboratory equipment delivered but not ready to be used, together with interest
expense capitalized during the period of construction or installation and testing. Capitalization of these costs ceases and the
asset concerned is transferred to the appropriate fixed assets category when substantially all the activities necessary to prepare
the asset for its intended use are completed.
Depreciation of property, plant and equipment
is provided using the straight-line method over their estimated useful lives:
Building
|
|
29 years
|
Computer equipment
|
|
3 years
|
Furniture, fixture, and office and medical equipment
|
|
5 years
|
Leasehold improvements
|
|
Shorter of the remaining
lease terms or 5 years
|
Laboratory equipment
|
|
5 years
|
Motor vehicle
|
|
5 years
|
Upon sale or disposal, the applicable amounts
of asset cost and accumulated depreciation are removed from the accounts and the net amount less proceeds from disposal is charged
or credited to income.
Other non-current asset
Other non-current asset represents laboratory
supplies that can be used for more than one year. It is stated at cost less accumulated depreciation and impairment losses. Cost
represents the purchase price of the supplies.
Amortization of other non-current asset is provided using the
straight-line method over their estimated useful lives. The amortization expenses for the years ended December 31, 2019 and 2018,
and the period March 1, 2017 through December 31, 2017 are $59,834, $59,833 and $nil, respectively.
APTORUM GROUP LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Stated in U.S. Dollars)
Intangible assets
Indefinite-lived intangible assets are tested
for impairment at least annually and are reviewed for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Indefinite-lived intangible assets are impaired if their estimated fair values
are less than their carrying values.
Finite-lived intangible assets are carried
at cost less accumulated amortization and impairment if any. The finite intangible assets are amortized over their estimated useful
life, which is the period over which the assets are expected to contribute directly or indirectly to the future cash flows of
the Group. These intangible assets are tested for impairment at the time of a triggering event, if one were to occur. Finite-lived
intangible assets may be impaired when the estimated undiscounted future cash flows generated from the assets are less than their
carrying amounts.
The Group may rely on a qualitative assessment when performing its intangible asset impairment test. Otherwise, the impairment
evaluation is performed at the lowest level of identifiable cash flows independent of other assets.
The Group’s intangible assets mainly
consist of computer software, exclusive rights in prepaid patented and unpatented licenses. The prepaid patented licenses are
for clinical purpose or further development into other products. Prepaid unpatented license is for further development, once the
associated research and development efforts are completed, the prepaid unpatented license will be reclassified as a finite-lived
asset and is amortized over its useful life. The estimated useful life of the exclusive rights in using patents is generally the
remaining patent life from the acquisition date to expiration date under the law, which is 17 to 20 years, the Group will reassess
the remaining patent life on annual basis, and the Group will assess the intangible assets for impairment whenever events or changes
in circumstances indicate that the carrying amount of an asset may no longer be recoverable.
Impairment of long-lived assets
The Group reviews its long-lived assets for
impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may no longer be recoverable.
When these events occur, the Group measures impairment by comparing the carrying value of the long-lived assets to the estimated
undiscounted future cash flows expected to result from the use of the assets and their eventual disposition. If the sum of the
expected undiscounted cash flow is less than the carrying amount of the assets, the Group would recognize an impairment loss,
which is the excess of carrying amount over the fair value of the assets, using the expected future discounted cash flows.
Convertible debts
The Group determines the appropriate accounting
treatment of its convertible debts in accordance with the terms in relation to the conversion feature, call and put option, beneficial
conversion feature (“BCF”) and settlement feature. After considering the impact of such features, the Group concluded
that, the convertible debts contained a contingent beneficial conversion feature, which shall not be recognized in earnings until
the contingency is resolved, and therefore accounted for such instrument as a liability in its entirety.
Convertible debts were subsequently measured
at amortized cost, using the effective interest rate method. Amortized cost is calculated by taking into account any discount
or premium on acquisition and fees or costs that are an integral part of the effective interest rate. The effective interest rate
amortization is included in interest expense in the consolidated statements of operations.
APTORUM GROUP LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Stated in U.S. Dollars)
Management concluded that the contingency
was effectively resolved upon the completion of the IPO on December 17, 2018 so that part of the convertible debts were converted
automatically accordingly. The BCF derecognized upon automatic conversion was recorded as interest expense with a corresponding
increase to additional paid-in capital. The remaining BCF was recorded as debt discount, which was amortized through the maturity
of the convertible debts, with a corresponding increase to additional paid-in capital.
On April 24, 2019, the Group repurchased
its convertible debts at approximately $13.6 million with carrying amount of approximately $13.5 million and a gain on extinguishment
on convertible debts of approximately $1.2 million was recognized. The repurchasing of convertible debts is considered an extinguishment
and the difference between the repurchasing price of debt, the net carrying amount of the extinguished debt and the intrinsic value
of BCF is recognized in the consolidated statements of operations. The intrinsic value of BCF of approximately $1.3 million at
the extinguishment date was recorded as a reduction of additional paid-in capital.
Finance lease
Leases that transfer substantially all
the rewards and risks of ownership of assets to the Group, other than legal title, are accounted for as finance leases. At the
inception of a finance lease, the cost of the leased asset is capitalized at the present value of the minimum lease payments and
recorded together with the obligation, excluding the interest element, to reflect the purchase and financing. Assets held under
capitalized finance leases are included in property, plant and equipment, and depreciated over the shorter of the lease terms and
the estimated useful lives of the assets. The interest expenses of such leases are charged to the consolidated statements of operations
to provide a constant periodic rate of charge over the lease terms.
Warrant liabilities
For warrants that are not indexed to the Group’s
shares, the Group records the fair value of the issued warrants as liabilities at each balance sheet date and records changes
in the estimated fair value as a non-cash gain or loss in the consolidated statements of operations and comprehensive loss. The
warrant liabilities are recognized in the consolidated balance sheets at the fair value (level 3). The fair value of these warrants
have been determined using the Black-Scholes pricing mode. The Black-Scholes pricing model provides for assumptions regarding
volatility, call and put features and risk-free interest rates within the total period to maturity.
Revenue recognition
Revenue is recognized when (or as) the Company
satisfies performance obligations by transferring a promised goods or services to a customer. Revenue is measured at the transaction
price which is based on the amount of consideration that the Company expects to receive in exchange for transferring the promised
goods or services to the customer. Contracts with customers are comprised of invoices and written contracts. Revenue from healthcare
services is measured upon the provision of the relevant services.
Cost of healthcare service
Cost of healthcare service rendered represents
cost in relation to the medical services provided including the compensation of the physicians and cost of pharmaceutical supplies
and medicine.
Research and development expenses
Research and development costs are expensed
as incurred. Research and development expenses are comprised of costs incurred in performing research and development activities,
including amortization of the patent license, depreciation of laboratory equipment, external costs of outside vendors engaged
to conduct preclinical development activities and trials.
APTORUM GROUP LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Stated in U.S. Dollars)
Income taxes
The Group accounts for income taxes under
the asset and liability method. Under this method, deferred income taxes are determined based on differences between the financial
carrying amounts of existing assets and liabilities and their tax bases. Income taxes are provided for in accordance with the
laws of the relevant taxing authorities.
A valuation allowance is provided for deferred
tax assets if it is more likely than not that these items will either expire before the Group is able to realize their benefits,
or that future deductibility is uncertain. Valuation allowances are established, when necessary, to reduce deferred tax assets
to the amount expected to be realized.
Uncertain tax positions
The Group accounts for uncertainty in income
taxes using a two-step approach to recognizing and measuring uncertain tax positions. The first step is to evaluate the tax position
for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position
will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure
the tax benefit as the largest amount that is more than 50% likely of being realized upon settlement. Interest and penalties related
to uncertain tax positions are recognized and recorded as necessary in the provision for income taxes. The Group recognizes interest
on non-payment of income taxes and penalties associated with tax positions when a tax position does not meet more likely than not
thresholds be sustained under examination. The tax returns of the Group’s Hong Kong subsidiaries are subject to examination
by the relevant tax authorities. According to the Hong Kong Inland Revenue Department, the statute of limitation is six years if
any company chargeable with tax has not been assessed or has been assessed at less than the proper amount, the statute of limitation
is extended to ten years if the underpayment of taxes is due to fraud or willful evasion. According to United Kingdom, Singapore,
the United States and Samoa tax rule, trading losses are available to be carried forward indefinitely. According to the Seychelles
tax rule, net operating losses are available to be carried forward for 5 years. The Group did not have any material interest or
penalties associated with tax positions for the years ended December 31, 2019 and 2018, and the period March 1, 2017 through December
31, 2017, and did not have any significant unrecognized uncertain tax positions as of December 31, 2019 and 2018. The Group does
not believe that its assessment regarding unrecognized tax benefits will materially change over the next twelve months.
Comprehensive income or loss
U.S. GAAP generally requires that recognized
revenue, expenses, gains and losses be included in net income or loss. Although certain changes in assets and liabilities are
reported as separate components of the equity section of the consolidated balance sheets, such items, along with net income or
loss, are components of comprehensive income or loss. The components of other comprehensive income or loss consist of exchange
differences on translation of foreign operations.
Loss per share
Basic loss per share is computed by dividing
net loss attributable to ordinary shareholders by the weighted average number of ordinary shares outstanding during the period.
Diluted loss per share reflects the potential dilution that could occur if securities or other contracts to issue ordinary shares
were exercised or converted into ordinary shares. Potential dilutive securities are excluded from the calculation of diluted loss
per share in loss periods as their effect would be anti-dilutive.
Risks and Uncertainties
The Company is subject to a number of risks associated with
companies at a similar stage, including dependence on key individuals, competition from similar services and larger companies,
volatility of the industry, ability to obtain regulatory clearance, ability to obtain adequate financing to support growth, the
ability to attract and retain additional qualified personnel to manage the anticipated growth of the Company and general economic
conditions.
APTORUM GROUP LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Stated in U.S. Dollars)
Recently adopted accounting pronouncements
In May 2014, the Financial Accounting Standards
Board (FASB) issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASU 2014-09”),
which was subsequently modified in August 2015 by ASU 2015-14, Revenue from Contracts with Customers: Deferral of the Effective
Date. The Group adopted this standard effective January 1, 2019 using the modified retrospective approach, in which case the cumulative
effect of applying the standard would be recognized at the date of initial application. The adoption does not have a material impact
to the consolidated financial statements.
In January 2016, the FASB issued Accounting
Standards Update No. 2016-01 (“ASU 2016-01”) "Financial Instruments-Overall (Subtopic 825-10): Recognition and
Measurement of Financial Assets and Financial Liabilities," which amends various aspects of the recognition, measurement,
presentation, and disclosure of financial instruments. The Group adopted ASU 2016-01 as of January 1, 2019 using the modified retrospective
method for marketable equity securities and the prospective method for non-marketable equity securities. The following table summarizes
the changes to the consolidated balance sheet for the adoption of ASU 2016-01:
|
|
December 31,
2018
|
|
|
Adjustment
due to ASU
2016-01
|
|
|
January 1,
2019
|
|
Accumulated deficit
|
|
$
|
(17,379,185
|
)
|
|
$
|
(1,490,033
|
)
|
|
$
|
(18,869,218
|
)
|
Accumulated other comprehensive loss
|
|
$
|
(1,484,688
|
)
|
|
$
|
1,490,033
|
|
|
$
|
5,345
|
|
The Group has elected to use the measurement
alternative for the non-marketable equity securities, defined as cost adjusted for changes from observable transactions for identical
or similar investments of the same issuer, less impairment. The adoption of ASU 2016-01 increases the volatility of other income
(expense), net, as a result of the unrealized gain or loss from the remeasurement of the Group’s equity securities.
Recently issued accounting standards which have not yet been
adopted
The Group is an “emerging growth company”
as defined in the Jumpstart Our Business Startups Act of 2010 (the “JOBS Act”). Under the JOBS Act, the emerging growth
companies (“EGCs”) can delay adopting new or revised accounting standards issued subsequent to the enactment of the
JOBS Act until such time as those standards apply to private companies.
In June 2016, the FASB issued ASU 2016-13,
Financial Instruments—Credit Losses ("ASU 2016-13"). Subsequently, the FASB issued ASU 2019-05, Financial Instruments-
Credit Losses (Topic 326): Targeted Transition Relief. The amendments in ASU 2016-13 update guidance on reporting credit losses
for financial assets. These amendments affect loans, debt securities, accounts receivables, net investments in leases, off balance
sheet credit exposures, reinsurance receivables, and any other financial assets not excluded from the scope that have the contractual
right to receive cash. The amendments are effective for fiscal years beginning after December 15, 2020, and interim periods within
those fiscal years. As an EGC the Group can adopt the amendment for fiscal years beginning after December 15, 2021, and interim
period within those fiscal years. The Group is currently evaluating the impact on its consolidated financial statements of adopting
this standard.
In February 2016, the FASB issued ASU 2016-02,
Leases (“ASU 2016-02”), which requires a lessee to recognize a right-of-use asset and a lease liability for operating
leases, initially measured at the present value of the future lease payments, in the balance sheet. ASU 2016-02 also requires
a lessee to recognize a single lease cost, calculated so that the cost of the lease is allocated over the lease term, generally
on a straight-line basis. This new guidance is effective for fiscal years beginning after December 15, 2019. Early adoption is
permitted. The Group has evaluated the potential effects of adopting the provisions of ASU 2016-02 on its consolidated financial
statements. The Group has estimated that the operating lease right-of-use assets of $959,641, and operating lease liabilities
of $982,288 will be recognized at January 1, 2020 in the consolidated financial statements.
In August 2018, the FASB issued ASU 2018-13,
Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement, which amends ASC 820, Fair Value
Measurement. This ASU modifies the disclosure requirements for fair value measurements by removing, modifying, or adding certain
disclosures. The amendments are effective for fiscal years beginning after December 15, 2019, and interim periods within those
fiscal years. The removed and modified disclosures will be adopted on a retrospective basis and the new disclosures will be adopted
on a prospective basis. The adoption will not have a material effect on the Group’s financial statements.
In December 2019, the FASB issued Accounting
Standards Update No. 2019-12, Income Taxes (Topic 740): “Simplifying the Accounting for Income Taxes” (“ASU 2019-12”),
which simplifies the accounting for income taxes. This standard will be effective for fiscal years beginning after December 15,
2021, and interim periods within fiscal years beginning after December 15, 2022, on a prospective basis, and early adoption is
permitted. The Group is currently evaluating the impact of the new standard on its consolidated financial statements.
The Group does not believe other recently
issued but not yet effective accounting standards, if currently adopted, would have a material effect on the consolidated financial
position, statements of operations and cash flows.
APTORUM
GROUP LIMITED
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Stated
in U.S. Dollars)
4.
REVENUE
The
Company adopted ASC 606 using the modified retrospective method as applied to customer contracts that were not completed as of
January 1, 2019. As a result, financial information for reporting periods beginning after January 1, 2019 are presented under
ASC 606, while comparative financial information has not been adjusted and continues to be reported in accordance with the Company’s
historical accounting policy for revenue recognition prior to the adoption of ASC 606.
For
the year ended December 31, 2019, all revenue came from provision of healthcare services in Hong Kong.
5.
FAIR VALUE MEASUREMENT
The
following table provides the assets and liabilities carried at fair value measured on a recurring basis as of December 31, 2019
and 2018:
December 31, 2019
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Current Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketable securities
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stocks
|
|
$
|
806,778
|
|
|
$
|
256,333
|
|
|
$
|
-
|
|
|
$
|
1,063,111
|
|
Investments in derivatives
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants
|
|
|
-
|
|
|
|
-
|
|
|
|
203,320
|
|
|
|
203,320
|
|
Total assets at fair value
|
|
$
|
806,778
|
|
|
$
|
256,333
|
|
|
$
|
203,320
|
|
|
$
|
1,266,431
|
|
December 31, 2018
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Current Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketable securities – Available-for-sale securities
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stocks
|
|
$
|
813,728
|
|
|
$
|
200,610
|
|
|
$
|
-
|
|
|
$
|
1,014,338
|
|
Investments in derivatives
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants
|
|
|
-
|
|
|
|
-
|
|
|
|
115,721
|
|
|
|
115,721
|
|
Total assets at fair value
|
|
$
|
813,728
|
|
|
$
|
200,610
|
|
|
$
|
115,721
|
|
|
$
|
1,130,059
|
|
The
following is a reconciliation of Level 3 assets during the year ended December 31, 2019:
|
|
Warrants
|
|
Balance at January 1, 2019
|
|
$
|
115,721
|
|
Change in unrealized appreciation
|
|
|
87,599
|
|
Balance at December 31, 2019
|
|
$
|
203,320
|
|
Net change in unrealized appreciation relating to investments still held at December 31, 2019
|
|
|
87,599
|
|
APTORUM
GROUP LIMITED
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Stated
in U.S. Dollars)
The
following is a reconciliation of Level 3 assets for the year ended December 31, 2018:
|
|
Warrants
|
|
Balance at January 1, 2018
|
|
$
|
1,070,940
|
|
Change in unrealized depreciation
|
|
|
(955,219
|
)
|
Balance at December 31, 2018
|
|
$
|
115,721
|
|
Net change in unrealized depreciation relating to investments still held at December 31, 2018
|
|
|
(955,219
|
)
|
The following is a reconciliation of Level 3 assets for the
period February 28, 2017 through December 31, 2017:
|
|
Aptorum
Therapeutics–
related party
|
|
|
Common
Stocks
|
|
|
Preferred
Stocks
|
|
|
Warrants
|
|
|
Convertible
Notes
|
|
|
Total
|
|
Balance at February 28, 2017
|
|
$
|
757,647
|
|
|
$
|
7,920,000
|
|
|
$
|
4,314,998
|
|
|
$
|
1,907,470
|
|
|
$
|
3,082,020
|
|
|
$
|
17,982,135
|
|
Transfer out of Level 3 due to change in status – consolidated subsidiary (a)
|
|
|
(757,647
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(757,647
|
)
|
Transfer out of fair value leveling since recorded as cost method (b)
|
|
|
-
|
|
|
|
(7,920,000
|
)
|
|
|
(4,314,998
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(12,234,998
|
)
|
Balance at March 1, 2017
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1,907,470
|
|
|
$
|
3,082,020
|
|
|
$
|
4,989,490
|
|
Reclassification between different investment type (c)
|
|
|
-
|
|
|
|
-
|
|
|
|
3,079,715
|
|
|
|
-
|
|
|
|
(3,079,715
|
)
|
|
|
-
|
|
Transfer out of fair value leveling since recorded as cost method (c)
|
|
|
-
|
|
|
|
-
|
|
|
|
(3,079,715
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(3,079,715
|
)
|
Change in unrealized depreciation
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(836,530
|
)
|
|
|
(2,305
|
)
|
|
|
(838,835
|
)
|
Balance at December 31, 2017
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1,070,940
|
|
|
$
|
-
|
|
|
$
|
1,070,940
|
|
Net change in unrealized depreciation relating to investments still held at December 31, 2017
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(836,530
|
)
|
|
|
-
|
|
|
|
(836,530
|
)
|
a.
|
Upon the effective date of the change in status, March 1, 2017, the subsidiaries were no longer recognized at fair value and were instead consolidated when preparing the financial statements.
|
b.
|
The equity investments of common stock and preferred stock were non-marketable investments under cost method upon change in status. Subsequently, Athenex Inc. was listed on the NASDAQ stock exchange on June 14, 2017 and common stock with an amount of $7,920,000 has been transferred to common stock in Level 1 with amount of $7,920,000, which was subsequently sold in December 2017 with a gain from the marketable securities of $3,722,234 recognized.
|
c.
|
On March 9, 2017, the convertible promissory notes (including its accrued interest, totally $520,822) of Centrexion Therapeutics Corporation was converted into preferred stock (Series C) of the same company. On May 25, 2017, the convertible promissory notes (including its accrued interest, totaling $2,558,893) of Alzheon Inc., was converted into preferred stock (Series B) of the same company. The preferred stocks are considered non-marketable investments and were therefore reclassified out of the fair value hierarchy to be reported under cost method.
|
The
following table presents the quantitative information about the Group’s Level 3 fair value measurements of investment as
of December 31, 2019 and 2018, which utilized significant unobservable internally-developed inputs:
December
31,
2019
|
|
Valuation
technique
|
|
Unobservable
input
|
|
Range
(weighted
average)
|
|
Sensitivity
of fair
value
to input
|
|
|
|
|
|
|
|
|
|
Warrants
|
|
Black-Scholes Model
|
|
Estimated time to exit Historical Volatility
|
|
12-18 months 73% - 301%
|
|
10% increase (decrease) in volatility would
result in increase (decrease) in fair value by $17,871
|
December
31,
2018
|
|
Valuation
technique
|
|
Unobservable
input
|
|
Range
(weighted
average)
|
|
Sensitivity
of fair
value
to input
|
|
|
|
|
|
|
|
|
|
Warrants
|
|
Black-Scholes Model
|
|
Estimated time to exit Historical Volatility
|
|
12-30 months 73% - 188%
|
|
10% increase (decrease) in volatility would
result in increase (decrease) in fair value by $19,691
|
Warrants
As
of December 31, 2019 and 2018, the volume of the Group’s derivative activities based on their notional amount and number
of contracts, categorized by primary underlying risk, are as follows:
|
|
Long Exposure
|
|
|
|
December 31, 2019
|
|
|
December 31, 2018
|
|
Primary underlying risk
|
|
Notional
Amounts
|
|
|
Number of Contracts
|
|
|
Notional Amounts
|
|
|
Number of Contracts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity Price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants
|
|
$
|
265,576
|
|
|
|
2,234,373
|
|
|
$
|
218,270
|
|
|
|
2,257,682
|
|
APTORUM
GROUP LIMITED
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Stated
in U.S. Dollars)
The following table identifies the fair
value amounts of derivative instruments included in the consolidated balance sheets as derivative contracts, categorized by primary
underlying risk, as of December 31, 2019 and 2018.
|
|
December 31,
2019
|
|
|
December 31,
2018
|
|
Primary underlying risk
|
|
Derivative
assets
|
|
|
Derivative
liabilities
|
|
|
Derivative
assets
|
|
|
Derivative
liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity Price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants
|
|
$
|
203,320
|
|
|
$
|
-
|
|
|
$
|
115,721
|
|
|
$
|
-
|
|
The following table identifies the net gain and loss amounts
included in the consolidated statement of operations as net unrealized gain (loss) from derivative contracts, categorized by primary
underlying risk, for the years ended December 31, 2019 and 2018, and the period March 1, 2017 through December 31, 2017:
|
|
Year ended
December 31, 2019
|
|
|
Year ended
December 31, 2018
|
|
|
March 1, 2017 through December 31, 2017
|
|
Primary underlying risk
|
|
Realized
loss
|
|
|
Unrealized
gain
|
|
|
Realized
loss
|
|
|
Unrealized
loss
|
|
|
Realized
loss
|
|
|
Unrealized
loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity Price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants
|
|
$
|
-
|
|
|
$
|
87,599
|
|
|
$
|
(19,225
|
)
|
|
$
|
(955,219
|
)
|
|
$
|
(7,094
|
)
|
|
$
|
(820,407
|
)
|
Non-marketable
equity securities remeasured for the year ended December 31, 2019 are classified within Level 3 in the fair value hierarchy
because the Group estimated the value based on valuation methods using the observable transaction price at the transaction date
and other unobservable inputs including volatility, rights, and obligations of the securities hold.
The
following is a summary of unrealized gains and losses recorded in other income (expense), net, and included as adjustments to
the carrying value of non-marketable investments held as of December 31, 2019:
|
|
Year ended
December 31,
2019
|
|
Upward adjustments
|
|
$
|
1,017,468
|
|
Total unrealized gain for non-marketable investments
|
|
$
|
1,017,468
|
|
The
following table summarizes the total carrying value of our non-marketable investments held as of December 31, 2019 including
cumulative unrealized upward and downward adjustments made to the initial cost basis of the investments:
|
|
December 31,
2019
|
|
Initial cost basis
|
|
$
|
6,094,712
|
|
Upward adjustments
|
|
|
1,017,468
|
|
Total carrying value at the end of the period
|
|
$
|
7,112,180
|
|
APTORUM
GROUP LIMITED
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Stated
in U.S. Dollars)
6. OTHER
RECEIVABLES AND PREPAYMENTS
Other
receivables and prepayments as of December 31, 2019 and 2018 consisted of:
|
|
December 31,
2019
|
|
|
December 31,
2018
|
|
|
|
|
|
|
|
|
Prepaid insurance
|
|
$
|
154,011
|
|
|
$
|
147,864
|
|
Prepaid service fee
|
|
|
296,565
|
|
|
|
75,224
|
|
Rental deposits
|
|
|
8,584
|
|
|
|
8,576
|
|
Prepaid rental expenses
|
|
|
37,169
|
|
|
|
46,948
|
|
Prepaid research and development expenses
|
|
|
453,634
|
|
|
|
41,614
|
|
Other receivables
|
|
|
109,714
|
|
|
|
109,435
|
|
Others
|
|
|
19,366
|
|
|
|
34,495
|
|
|
|
$
|
1,079,043
|
|
|
$
|
464,156
|
|
As
of December 31, 2019, the balance included $108,000 prepayment to Aenco Solutions Limited, a related party which is controlled
by Ian Huen, the Chief Executive Officer and Executive Director of the Group, for tokens consultancy services (see note 13).
7.
Digital Currencies
The
following table presents additional information about digital currencies:
|
|
December
31,
2019
|
|
|
December
31,
2018
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
-
|
|
|
$
|
-
|
|
Purchase of digital currencies
|
|
|
200,000
|
|
|
|
-
|
|
Utilization of digital currencies to settle service fee
|
|
|
(245,178
|
)
|
|
|
-
|
|
Gain on use of digital currencies
|
|
|
46,717
|
|
|
|
-
|
|
Ending balance
|
|
$
|
1,539
|
|
|
$
|
-
|
|
8.
PROPERTY, PLANT AND EQUIPMENT, NET
Property,
plant and equipment as of December 31, 2019 and 2018 consisted of:
|
|
December 31,
2019
|
|
|
December 31,
2018
|
|
|
|
|
|
|
|
|
Building
|
|
$
|
1,488,396
|
|
|
$
|
1,488,396
|
|
Computer equipment
|
|
|
76,365
|
|
|
|
64,911
|
|
Furniture, fixture, and office and medical equipment
|
|
|
271,009
|
|
|
|
262,819
|
|
Leasehold improvements
|
|
|
665,546
|
|
|
|
664,713
|
|
Laboratory equipment
|
|
|
4,029,640
|
|
|
|
2,045,034
|
|
Motor vehicle
|
|
|
239,093
|
|
|
|
239,093
|
|
Assets in construction
|
|
|
1,899,169
|
|
|
|
-
|
|
|
|
|
8,669,218
|
|
|
|
4,764,966
|
|
Less: accumulated depreciation
|
|
|
1,576,183
|
|
|
|
504,364
|
|
Property, plant and equipment, net
|
|
$
|
7,093,035
|
|
|
$
|
4,260,602
|
|
Depreciation expenses for property, plant
and equipment amounted to $1,071,799, $497,908 and $6,470 for the years ended December 31, 2019 and 2018, and the period March
1, 2017 through December 31, 2017, respectively.
APTORUM
GROUP LIMITED
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Stated
in U.S. Dollars)
9.
INTANGIBLE ASSETS, NET
|
|
December
31,
2019
|
|
|
December 31,
2018
|
|
|
|
|
|
|
|
|
Gross carrying amount
|
|
|
|
|
|
|
Prepaid unpatented license
|
|
$
|
200,000
|
|
|
$
|
200,000
|
|
Prepaid patented licenses
|
|
|
1,322,820
|
|
|
|
1,322,820
|
|
Computer software
|
|
|
97,462
|
|
|
|
61,384
|
|
|
|
|
1,620,282
|
|
|
|
1,584,204
|
|
|
|
|
|
|
|
|
|
|
Less: accumulated amortization
|
|
|
|
|
|
|
|
|
Prepaid patented licenses
|
|
|
257,619
|
|
|
|
155,026
|
|
Computer software
|
|
|
50,980
|
|
|
|
19,638
|
|
|
|
|
308,599
|
|
|
|
174,664
|
|
|
|
|
|
|
|
|
|
|
Intangible assets, net
|
|
|
|
|
|
|
|
|
Prepaid unpatented license
|
|
|
200,000
|
|
|
|
200,000
|
|
Prepaid patented licenses
|
|
|
1,065,201
|
|
|
|
1,167,794
|
|
Computer software
|
|
|
46,482
|
|
|
|
41,746
|
|
Intangible assets, net
|
|
$
|
1,311,683
|
|
|
$
|
1,409,540
|
|
As
of December 31, 2019 and 2018, the Group has capitalized seven of the exclusive licenses which includes seven patented and one
unpatented technologies in the areas of neurology, infectious diseases, gastroenterology, oncology, surgical robotics and natural
health. Pursuant to the license agreements, the Group paid upfront payments and became the exclusive licensee to prosecute certain
patents developed or licensed under the applicable agreements.
The Group recognized the prepaid unpatented
license to reflect the fair value of the subsidiaries as of the date of the change in status from an investment company to an
operating entity. The Group capitalizes the prepaid patented license for the exclusive rights with completed filing of patents
in certain jurisdictions (e.g., the United States of America and Europe) and alternative future uses.
Prepaid unpatented license is indefinite-lived intangible assets
which are tested for impairment annually. Prepaid patented licenses and computer software are finite-lived intangible assets which
are amortized over their estimated useful life. Amortization expenses for finite-lived intangible assets amounted to $167,985,
$124,551 and $52,433 for the years ended December 31, 2019 and 2018, and the period March 1, 2017 through December 31, 2017, respectively.
The Group wrote off the cost and the related amortization of $34,400, $2,320 and $nil after the expiration of the computer software
for the years ended December 31, 2019 and 2018, and the period March 1, 2017 through December 31, 2017, respectively.
The
Group expects amortization expense related to its finite-lived intangible assets for the next five years and thereafter to be
as follows as of December 31, 2019:
For the years ending December 31,
|
|
Amount
|
|
|
|
|
|
2020
|
|
$
|
146,826
|
|
2021
|
|
|
104,842
|
|
2022
|
|
|
102,593
|
|
2023
|
|
|
102,593
|
|
2024
|
|
|
97,099
|
|
Thereafter
|
|
|
557,730
|
|
Total
|
|
$
|
1,111,683
|
|
APTORUM
GROUP LIMITED
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Stated
in U.S. Dollars)
10.
LONG-TERM DEPOSITS
Long-term
deposits as of December 31, 2019 and 2018 consisted of:
|
|
December
31,
2019
|
|
|
December 31,
2018
|
|
|
|
|
|
|
|
|
Rental deposits
|
|
$
|
132,043
|
|
|
$
|
132,043
|
|
Prepayments for equipment
|
|
|
162,563
|
|
|
|
3,285,135
|
|
|
|
$
|
294,606
|
|
|
$
|
3,417,178
|
|
11.
ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts
payable and accrued expenses as of December 31, 2019 and 2018 consisted of:
|
|
December
31,
2019
|
|
|
December 31,
2018
|
|
|
|
|
|
|
|
|
Research and development expenses payable
|
|
$
|
554,791
|
|
|
$
|
398,899
|
|
Cost of healthcare services payable
|
|
|
45,234
|
|
|
|
40,139
|
|
Professional fees payable
|
|
|
171,037
|
|
|
|
178,117
|
|
Insurance expense payable
|
|
|
70,811
|
|
|
|
-
|
|
Interest payable
|
|
|
8,802
|
|
|
|
223,802
|
|
Payables for leasehold improvement and equipment
|
|
|
26,779
|
|
|
|
73,864
|
|
Deferred bonus and salaries payable
|
|
|
1,570,324
|
|
|
|
183,065
|
|
Deferred rent
|
|
|
55,484
|
|
|
|
58,810
|
|
Others
|
|
|
83,265
|
|
|
|
90,451
|
|
|
|
$
|
2,586,527
|
|
|
$
|
1,247,147
|
|
12.
INCOME TAXES
The Company
and its subsidiaries file tax returns separately.
Income
taxes
Cayman
Islands: under the current laws of the Cayman Islands, the Company and its subsidiaries in the Cayman Islands are not subject
to taxes on their income and capital gains.
Hong Kong: in accordance with the relevant
tax laws and regulations of Hong Kong, a company registered in Hong Kong is subject to income taxes within Hong Kong at the applicable
tax rate on taxable income. In March 2018, the Hong Kong Government introduced a two-tiered profit tax rate regime by enacting
the Inland Revenue (Amendment) (No.3) Ordinance 2018 (the “Ordinance”). Under the two-tiered profits tax rate regime,
the first $2 million of assessable profits of qualifying corporations is taxed at 8.25% and the remaining assessable profits at
16.5%. The Ordinance is effective from the year of assessment 2018-2019. According to the policy, if no election has been made,
the whole of the taxpaying entity’s assessable profits will be chargeable to Profits Tax at the rate of 16.5% or 15%, as
applicable. Because the preferential tax treatment is not elected by the Group, all the subsidiaries registered in Hong Kong are
subject to income tax at a rate of 16.5%. The subsidiaries registered in Hong Kong did not have assessable profits that were derived
Hong Kong during the years ended December 31, 2019 and 2018, and the period March 1, 2017 through December 31, 2017. Therefore,
no Hong Kong profit tax has been provided for in the periods presented.
APTORUM
GROUP LIMITED
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Stated
in U.S. Dollars)
United Kingdom: in accordance with the
relevant tax laws and regulations of United Kingdom, a company registered in the United Kingdom is subject to income taxes within
United Kingdom at the applicable tax rate on taxable income. All the United Kingdom subsidiaries that are not entitled to any tax
holiday were subject to income tax at a rate of 19%. The subsidiary in United Kingdom did not have assessable profits that were
derived from United Kingdom during the years ended December 31, 2019 and 2018, and the period March 1, 2017 through December 31,
2017. Therefore, no United Kingdom profit tax has been provided for in the periods presented.
Singapore: in accordance with the relevant
tax laws and regulations of Singapore, a company registered in the Singapore is subject to income taxes within Singapore at the
applicable tax rate on taxable income. All the Singapore subsidiaries that are not entitled to any tax holiday were subject to
income tax at a rate of 17%. The subsidiary in Singapore did not have assessable profits that were derived from Singapore during
the years ended December 31, 2019 and 2018, and the period March 1, 2017 through December 31, 2017. Therefore, no Singapore profit
tax has been provided for in the periods presented.
Seychelles: in accordance with the relevant
tax laws and regulations of Seychelles, a company registered in the Seychelles is subject to income taxes within Seychelles at
the applicable tax rate on taxable income. All the Seychelles subsidiaries that are not entitled to any tax holiday were subject
to income tax at a rate of 25%. The subsidiary in Seychelles did not have assessable profits that were derived from Seychelles
during the years ended December 31, 2019 and 2018, and the period March 1, 2017 through December 31, 2017. Therefore, no Seychelles
profit tax has been provided for in the periods presented.
Samoa: in accordance with the relevant
tax laws and regulations of Samoa, a company registered in the Samoa is subject to income taxes within Samoa at the applicable
tax rate on taxable income. All the Samoa subsidiaries that are not entitled to any tax holiday were subject to income tax at a
rate of 27%. The subsidiary in Samoa did not have assessable profits that were derived from Samoa during the years ended December
31, 2019 and 2018, and the period March 1, 2017 through December 31, 2017. Therefore, no Samoa profit tax has been provided for
in the periods presented.
United States (Nevada): in accordance with
the relevant tax laws and regulations of the United States, a company registered in the United States is subject to income taxes
within the United States at the applicable tax rate on taxable income. All the United States subsidiaries in Nevada that are not
entitled to any tax holiday were subject to income tax at a rate of 21%. The subsidiary in the United States did not have assessable
profits that were derived from the United States during the years ended December 31, 2019 and 2018, and the period March 1, 2017
through December 31, 2017. Therefore, no United States profit tax has been provided for in the periods presented.
The
components of the provision for income taxes expenses are:
|
|
|
Year ended December 31, 2019
|
|
|
|
Year ended December 31, 2018
|
|
|
|
March 1, 2017
through December 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Deferred
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total income taxes expense
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
The
reconciliation of income taxes expenses computed at the Hong Kong statutory tax rate applicable to income tax expense is as follows:
|
|
Year ended
December 31,
2019
|
|
|
Year ended
December 31,
2018
|
|
|
March 1,
2017
through
December 31,
2017
|
|
|
|
|
|
|
|
|
|
|
|
Net loss before tax
|
|
$
|
(20,116,938
|
)
|
|
$
|
(15,134,485
|
)
|
|
$
|
(2,561,507
|
)
|
Provision for income taxes at Hong Kong statutory income tax rate (16.5%)
|
|
|
(3,319,294
|
)
|
|
|
(2,497,190
|
)
|
|
|
(422,649
|
)
|
Impact of different tax rates in other jurisdictions
|
|
|
(91,623
|
)
|
|
|
(3,066
|
)
|
|
|
-
|
|
Non-taxable income
|
|
|
(389,714
|
)
|
|
|
(95,018
|
)
|
|
|
-
|
|
Non-deductible expenses
|
|
|
702,433
|
|
|
|
540,893
|
|
|
|
-
|
|
Prior year tax effect
|
|
|
-
|
|
|
|
-
|
|
|
|
(576,970
|
)
|
Change in valuation allowance
|
|
|
3,098,198
|
|
|
|
2,054,381
|
|
|
|
999,619
|
|
Effective income tax expense
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
APTORUM
GROUP LIMITED
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Stated
in U.S. Dollars)
Deferred
tax asset, net
Deferred
tax assets and deferred tax liabilities reflect the tax effects of temporary differences between the carrying amounts of assets
and liabilities for financial reporting purpose and the tax bases used for income tax purpose. The following represents the tax
effect of each major type of temporary difference.
|
|
December 31,
2019
|
|
|
December 31,
2018
|
|
Deferred tax asset:
|
|
|
|
|
|
|
Tax loss carry forward
|
|
$
|
6,699,345
|
|
|
$
|
3,499,428
|
|
Deferred tax liability:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
(547,147
|
)
|
|
|
(445,428
|
)
|
Net deferred tax assets before valuation allowance
|
|
|
6,152,198
|
|
|
|
3,054,000
|
|
Valuation allowance
|
|
|
(6,152,198
|
)
|
|
|
(3,054,000
|
)
|
Deferred tax asset, net
|
|
$
|
-
|
|
|
$
|
-
|
|
As of December 31, 2019 and 2018, the
Group had net operating loss carry-forwards of $40,329,428 and $21,191,279, respectively, including its Hong Kong, Singapore,
Seychelles, Samoa, the United States and the United Kingdom operations, which are available to reduce future taxable income. Net
operating loss carry forward from Seychelles amounting to $439,345 as of December 31, 2019 are available to be carried forward
for 5 years, while all of the other losses can be carried forward indefinitely.
Valuation allowance was provided against
deferred tax assets in entities where it was determined, it was more likely than not that the benefits of the deferred tax assets
will not be realized. The Group had deferred tax assets which consisted of tax loss carry forward, which can be carried forward
to offset future taxable income. The Group maintains a full valuation allowance on its net deferred tax assets. The management
determines it is more likely than not that all of its deferred tax assets will not be utilized. The valuation allowance increased
by $3,098,198, $2,054,381 and $999,619, respectively, for the years ended December 31, 2019 and 2018, and the period March 1, 2017
through December 31, 2017.
APTORUM
GROUP LIMITED
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Stated
in U.S. Dollars)
13.
RELATED PARTY BALANCES AND TRANSACTIONS
The
following is a list of a director and related parties to which the Group has transactions with:
(a)
|
Ian
Huen, the Chief Executive Officer and Executive Director of the Group;
|
(b)
|
AENEAS CAPITAL LIMITED,
an entity controlled by Ian Huen;
|
(c)
|
Aeneas Limited,
an entity controlled by Ian Huen;
|
(d)
|
Aeneas Group Limited,
an entity controlled by Ian Huen;
|
(e)
|
Aeneas Management
Limited, an entity controlled by Ian Huen;
|
(f)
|
Aenco Solutions
Limited, an entity controlled by Ian Huen;
|
(g)
|
Aenco Limited, an
entity controlled by Ian Huen;
|
(h)
|
Jurchen Investment
Corporation, the holding company and an entity controlled by Ian Huen;
|
(i)
|
Clark Cheng, the
Executive Director of the Group;
|
(j)
|
Sabrina Khan, the
Chief Financial Officer of the Group.
|
Amounts
due from related parties
Amounts
due from related parties consisted of the following as of December 31, 2019 and 2018:
|
|
December 31,
2019
|
|
|
December 31,
2018
|
|
Current
|
|
|
|
|
|
|
Aeneas Management Limited
|
|
$
|
962
|
|
|
$
|
-
|
|
AENEAS CAPITAL LIMITED
|
|
|
-
|
|
|
|
169,051
|
|
Total
|
|
$
|
962
|
|
|
$
|
169,051
|
|
|
|
|
|
|
|
|
|
|
Non-current
|
|
|
|
|
|
|
|
|
Jurchen Investment Corporation (Note e)
|
|
|
50,000
|
|
|
|
50,000
|
|
Amounts
due to related parties
Amounts
due to related parties consisted of the following as of December 31, 2019 and 2018:
|
|
December 31,
2019
|
|
|
December 31,
2018
|
|
Current
|
|
|
|
|
|
|
Aenco Solutions Limited
|
|
$
|
5,782
|
|
|
$
|
-
|
|
Aeneas Group Limited
|
|
|
14,247
|
|
|
|
-
|
|
Jurchen Investment Corporation
|
|
|
20,055
|
|
|
|
-
|
|
Ian Huen
|
|
|
127
|
|
|
|
2,545
|
|
Clark Cheng
|
|
|
1,114
|
|
|
|
8,893
|
|
Sabrina Khan
|
|
|
268
|
|
|
|
21,979
|
|
Total
|
|
$
|
41,593
|
|
|
$
|
33,417
|
|
|
|
|
|
|
|
|
|
|
Non-current
|
|
|
|
|
|
|
|
|
Aeneas Group Limited (Note a)
|
|
$
|
3,330,472
|
|
|
$
|
-
|
|
Jurchen Investment Corporation (Note a)
|
|
|
3,000,000
|
|
|
|
-
|
|
|
|
|
6,330,472
|
|
|
|
-
|
|
APTORUM
GROUP LIMITED
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Stated
in U.S. Dollars)
Related
party transactions
Related party transactions consisted of
the following for the years ended December 31, 2019 and 2018, and the period March 1, 2017 through December 31, 2017:
|
|
Year ended
December 31,
2019
|
|
|
Year ended
December 31,
2018
|
|
|
March 1,
2017
through
December 31,
2017
|
|
Borrowings from related parties (Note a)
|
|
|
|
|
|
|
|
|
|
|
|
|
- Aeneas Group Limited
|
|
$
|
3,330,472
|
|
|
$
|
-
|
|
|
$
|
-
|
|
- Jurchen Investment Corporation
|
|
$
|
3,000,000
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expenses (Note a)
|
|
|
|
|
|
|
|
|
|
|
|
|
- Aeneas Group Limited
|
|
$
|
14,247
|
|
|
$
|
-
|
|
|
$
|
-
|
|
- Jurchen Investment Corporation
|
|
$
|
20,055
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments on behalf of the Group (Note b)
|
|
|
|
|
|
|
|
|
|
|
|
|
- AENEAS CAPITAL LIMITED
|
|
$
|
5,057
|
|
|
$
|
-
|
|
|
$
|
64,038
|
|
- Aeneas Management Limited
|
|
$
|
5,372
|
|
|
$
|
156,961
|
|
|
$
|
-
|
|
- Aenco Solutions Limited
|
|
$
|
186,671
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prepayments to related parties (Note b)
|
|
|
|
|
|
|
|
|
|
|
|
|
- Aenco Solutions Limited
|
|
$
|
200,000
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expense reimbursement (Note b)
|
|
|
|
|
|
|
|
|
|
|
|
|
- AENEAS CAPITAL LIMITED
|
|
$
|
5,057
|
|
|
$
|
7,331
|
|
|
$
|
66,881
|
|
- Aeneas Management Limited
|
|
$
|
5,372
|
|
|
$
|
156,961
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments on behalf of related parties (Note c)
|
|
|
|
|
|
|
|
|
|
|
|
|
- AENEAS CAPITAL LIMITED
|
|
$
|
-
|
|
|
$
|
22,934
|
|
|
$
|
109,025
|
|
- Aeneas Limited
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
132,074
|
|
- Aeneas Group Limited
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1,853
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repayments from related parties (Note c)
|
|
|
|
|
|
|
|
|
|
|
|
|
- AENEAS CAPITAL LIMITED
|
|
$
|
169,051
|
|
|
$
|
132,128
|
|
|
$
|
-
|
|
- Aeneas Limited
|
|
$
|
-
|
|
|
$
|
190,427
|
|
|
$
|
-
|
|
- Aeneas Group Limited
|
|
$
|
-
|
|
|
$
|
7,451
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Healthcare services income
|
|
|
|
|
|
|
|
|
|
|
|
|
- Aeneas Management Limited
|
|
$
|
1,923
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consultant, management and administrative fees (Note d)
|
|
|
|
|
|
|
|
|
|
|
|
|
- AENEAS CAPITAL LIMITED
|
|
$
|
-
|
|
|
$
|
448,718
|
|
|
$
|
640,932
|
|
- Aeneas Management Limited
|
|
$
|
698,152
|
|
|
$
|
-
|
|
|
$
|
-
|
|
- Aenco Limited
|
|
$
|
830,769
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental expense(Note e)
|
|
|
|
|
|
|
|
|
|
|
|
|
- Jurchen Investment Corporation
|
|
$
|
227,729
|
|
|
$
|
207,841
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payment for rental deposit (Note e)
|
|
|
|
|
|
|
|
|
|
|
|
|
- Jurchen Investment Corporation
|
|
$
|
-
|
|
|
$
|
50,000
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tokens maintenance fee (Note b)
|
|
|
|
|
|
|
|
|
|
|
|
|
- Aenco Solutions Limited
|
|
$
|
67,876
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of tokens for tokens creation, offering and consultancy services (Note f)
|
|
|
|
|
|
|
|
|
|
|
|
|
- Aenco Solutions Limited
|
|
$
|
300,000
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tokens creation, offering and consultancy services expense (Note f)
|
|
|
|
|
|
|
|
|
|
|
|
|
- Aenco Solutions Limited
|
|
$
|
192,000
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prepayment of tokens consultancy services (Note f)
|
|
|
|
|
|
|
|
|
|
|
|
|
- Aenco Solutions Limited
|
|
$
|
108,000
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A borrowing from a related party (Note g)
|
|
|
|
|
|
|
|
|
|
|
|
|
- Ian Huen
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
6,410
|
|
APTORUM
GROUP LIMITED
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Stated
in U.S. Dollars)
Note
a: On August 13, 2019, the Group entered into financing arrangements with Aeneas Group Limited, a related party, and Jurchen Investment
Corporation, the ultimate parent of the Group, allowing the Group to access up to a total $15.0 million in line of credit debt
financing. The line of credit will mature on August 12, 2022 and the interest on the outstanding principal indebtedness will be
at the rate of 8% per annum.
Note
b: AENEAS CAPITAL LIMITED and Aeneas Management Limited has paid the operation fee on behalf of the Group and received the expense
reimbursement. The balances were non-interest bearing.
The
Group has prepaid Aenco Solutions Limited, of which the whole amounts were non-interest bearing. The prepayment was used for paying
on behalf of the Group of token listing fees, purchasing digital currencies and settlement of maintenance service provided by
Aenco Solutions Limited.
Note c: The Group has paid the expenses
on behalf of AENEAS CAPITAL LIMITED, Aeneas Limited and Aeneas Group Limited, of which all amounts were non-interest bearing.
There was no further payment on behalf transactions since April 2018.
Note
d: AENEAS CAPITAL LIMITED provides certain management and administrative services to the Group. For the year ended December 31,
2018, AENEAS CAPITAL LIMITED was entitled to receive a fixed amount of administrative fees of HKD500,000 (approximately $64,103)
per calendar month. On July 31, 2018, the agreement was mutually agreed to be terminated.
Aenco Limited provided certain information
technology services to the Group. For the year ended December 31, 2019, Aenco Limited was entitled to receive a fixed amount of
services fees of HKD540,000 (approximately $69,231) per calendar month with the expiry date on December 31, 2019. The agreement
was originally renewed under the same terms with the expiry date on December 31, 2020. On January 29, 2020, both parties agreed
to replace the agreement no later than April 30, 2020. Pursuant to the replaced agreement, Aenco Limited is entitled to receive
a fixed amount of services fee of HKD700,000 (approximately $89,744) per calendar month. The agreement will be expired on December
31, 2020.
Aeneas Management Limited provided certain
documentation and administrative services to the Group. For the year ended December 31, 2019, Aeneas Management Limited was entitled
to receive a fixed amount of services fees of HKD452,000 (approximately $57,949) per calendar month with the expiry date on December
31, 2019. The agreement was originally renewed under the same terms with the expiry date on December 31, 2020. On January 29, 2020,
both parties agreed to terminate the agreement no later than April 30, 2020.
Note e: Jurchen Investment Corporation
entered into a sub-tenancy agreement with a subsidiary of the Group for the rental arrangement of an office in Hong Kong. For the
period February 1, 2018 through January 31, 2021, Jurchen Investment Corporation was entitled to receive a fixed amount of rental
fee of HK$130,000 (approximately USD16,667) per calendar month. As of December 31, 2019, the amounts due from Jurchen Investment
Corporation represented a $50,000 rental deposit.
Note f: In July 2019, Smart Pharmaceutical
Limited Partnership, a wholly owned subsidiary of the Group, transferred 100,000,000 SMPT token to Aenco Solutions Limited, a related
party, in exchange of the services related to token creation and offering and consulting services for five years for an amount
of $300,000.
Note g: The non-interest-bearing loan was
borrowed from management for operation purpose and the loan was due on demand.
On November 11, 2017, the Group sold 100%
of the ownership of Aeneas Limited and its subsidiary, Aeneas Group Limited, to Jurchen Investment Corporation for cash proceeds
of $1. The Group recognized a gain on disposal of entity under common control of $67,874, net of net liabilities of Aeneas Limited
and its subsidiary of $67,874 in consolidated statement of equity.
On April 3, 2018, Aptorum Medical
Limited issued 526 shares to Clark Cheng, decreasing the equity interest of the Company from 100% to 95%. On March 29, 2019, Aptorum
Medical Limited issued 112 shares to Clark Cheng in according to the appointment agreement, decreasing the equity interest of the
Company from 95% to 94%. On January 2, 2020, Aptorum Medical Limited further issued 115 shares to Clark Cheng in according to the
appointment agreement, decreasing the equity interest of the Company from 94% to 93%.
In April 2018, the Group, AENEAS CAPITAL
LIMITED, Aeneas Management Limited and Aeneas Group Limited entered into a net settlement agreement to offset the amounts due
from related parties against the amounts due to related parties. Thereby, the Group is released from obligation for a total amount
of $164,973, netting off receivables of total amount of $197,878 and collected remaining balance of $32,905.
APTORUM
GROUP LIMITED
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Stated
in U.S. Dollars)
14.
CONVERTIBLE Debts
Convertible
bonds
On
April 6, 2018, the Group entered into a subscription agreement (the “Bond Subscription Agreement”) with Peace Range
Limited (“Peace Range”). Pursuant to the Bond Subscription Agreement, the Group issued Peace Range a $15,000,000 convertible
bond (the “Bond” and the “Bond Offering”) on April 25, 2018.
In accordance with Accounting Standards Codification (“ASC”)
470-20-30-8, the Group should record a charge equal to the lower amount of either i) the Intrinsic Value of the BCF or ii) the
proceeds realized upon the issuance of the Bond. The Group completed its IPO on December 17, 2018. Pursuant to the terms of the
Bond, 10% of the outstanding principal amount of the Bond was automatically converted into 119,217 Class A Ordinary Shares. Upon
the automatic conversion, the contingency was effectively resolved, and the value of the 10% of the BCF of $383,629 was recorded
as additional interest expense with a corresponding increase to additional paid-in capital. The remaining BCF of $3,452,657 was
recorded as debt discount, which was amortized through the maturity of the convertible debts, with a corresponding increase to
additional paid-in capital.
The
following lists the components of the ending balance of convertible debts as of December 31, 2019 and 2018, respectively:
|
|
December 31,
2019
|
|
|
December 31,
2018
|
|
|
|
|
|
|
|
|
Gross convertible debts
|
|
$
|
-
|
|
|
$
|
13,500,000
|
|
Less: Discount on issuance cost
|
|
|
-
|
|
|
|
314,744
|
|
Discount on BCF
|
|
|
-
|
|
|
|
3,077,950
|
|
Convertible debts, net
|
|
$
|
-
|
|
|
$
|
10,107,306
|
|
For the years ended December 31, 2019 and
2018, and the period March 1, 2017 through December 31, 2017, the amortization of BCF and interest accretion of convertible debts
were $3,392,694, $1,042,870 and $nil respectively. The contractual interest for the years ended December 31, 2019 and 2018, and
the period March 1, 2017 through December 31, 2017 were $342,333, $815,000 and $nil respectively
On April 24, 2019, the Group repurchased
its convertible debts at $13.6 million with carrying amount of $13.5 million and a gain on extinguishment on convertible debts
of $1.2 million was recognized. The repurchasing of convertible debts is considered an extinguishment and the difference between
the repurchasing price of debt, and the net carrying amount of the extinguished debt and the intrinsic value of BCF is recognized
on the consolidated statements of operations. The intrinsic value of BCF of $1.3 million at the extinguishment date was recorded
as a reduction of additional paid-in capital.
Convertible promissory notes
As of December 31, 2018, the Group has
issued $1,600,400 of convertible promissory notes accumulatively (the “Notes”). An unamortized debt issuance costs
and discounts of $22,935 was remaining before the IPO. For the year ended December 31, 2018, the interest accretion and the contractual
interest coupon of the Notes was $26,380 and $8,802, respectively.
The Group completed its IPO on December
17, 2018. Pursuant to the terms of the Notes, all of the outstanding principal amount of the Notes was automatically converted
into 230,252 Class A Ordinary Shares. The intrinsic value of the BCF was determined to be $1,600,400. The Group concluded that
the contingency was effectively resolved upon the automatic conversion, and recorded a one-time charge to interest expense of $1,600,400
with a corresponding increase to additional paid-in capital.
APTORUM
GROUP LIMITED
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Stated
in U.S. Dollars)
15.
FINANCE LEASE
On May 14, 2018, the Group leased a vehicle
for its operation with a lease term of 54 months, and the lease was classified as a finance lease. The following lists the components
of the net present value of finance leases obligation:
|
|
December 31,
2019
|
|
|
December 31,
2018
|
|
|
|
|
|
|
|
|
Gross finance lease obligation
|
|
$
|
157,047
|
|
|
$
|
210,891
|
|
Less: Discount on finance lease obligation
|
|
|
13,173
|
|
|
|
23,141
|
|
|
|
|
143,874
|
|
|
|
187,750
|
|
Less: Current portion of finance lease obligation
|
|
|
46,555
|
|
|
|
43,877
|
|
Net present value of finance lease obligation, net of current portion
|
|
$
|
97,319
|
|
|
$
|
143,873
|
|
The present value of the net minimum payments
on finance lease as of December 31, 2019 is as follows:
|
|
2020
|
|
|
2021
|
|
|
2022
|
|
|
Total
|
|
Minimum lease payments
|
|
$
|
53,845
|
|
|
$
|
53,845
|
|
|
$
|
49,357
|
|
|
$
|
157,047
|
|
Less: Amortization of discount
|
|
|
7,290
|
|
|
|
4,449
|
|
|
|
1,434
|
|
|
|
13,173
|
|
Finance lease obligation
|
|
$
|
46,555
|
|
|
$
|
49,396
|
|
|
$
|
47,923
|
|
|
$
|
143,874
|
|
16.
ORDINARY SHARES
On December 17, 2018, the Group consummated
its IPO of 761,419 Class A Ordinary Shares. The shares were sold at a price of $15.80 per share, generating gross proceeds to the
Group of approximately $12,030,420. At the completion of the IPO, $1,732,370 offering costs was charged to additional paid-in capital.
Following the consummation of the IPO and automatic conversion of the convertible debts instruments, there were an aggregate of
6,537,269 Class A Ordinary Shares issued and outstanding as of December 31, 2018.
On
June 19, 2019, the Group issued 60,093 Class A Ordinary Shares to warrant holders on a cashless basis. Following the exercise
of warrants (see Note 19), there were an aggregate of 6,597,362 Class A Ordinary Shares issued and outstanding as of December
31, 2019.
Holders
of Class A Ordinary Shares and Class B Ordinary Shares have the same rights except for the following: (i) each Class A Ordinary
Share is entitled to one vote while each Class B Ordinary Share is entitled to ten votes; and (ii) each Class B Ordinary Share
is convertible into one Class A Ordinary Share at any time while Class A Ordinary Shares are not convertible under any circumstances.
APTORUM
GROUP LIMITED
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Stated
in U.S. Dollars)
17.
SHARE BASED COMPENSATION
Share
option plan
A
total of 5,500,000 Class A Ordinary Shares (subject to subsequent adjustments described more fully below) may be issued pursuant
to awards under the 2017 Omnibus Incentive Plan (the “2017 Share Option Plan”). Subsequent adjustments include that
on each January 1, starting with January 1, 2020, an additional number of shares equal to the lesser of (i) 2% of the outstanding
number of Class A Ordinary Shares (on a fully diluted basis) on the immediate preceding December 31, and (ii) such lower number
of Class A Ordinary Shares as may be determined by the board of directors, subject in all cases to adjustments as provided in
Section 10 of the 2017 Share Option Plan. Awards will be made pursuant to agreements and may be subject to vesting and other restrictions
as determined by the board of directors.
On
March 15, 2019, the Company granted 218,222 share options to directors, employees, external consultants and advisors of the Group
in accordance to the 2017 Share Option Plan with an exercise price of $12.91.
A
summary of the option activity as of December 31, 2019 and changes during the period is presented below:
|
|
Number of share options
|
|
|
Weighted average exercise
price
$
|
|
|
Remaining contractual term in years
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, January 1, 2019
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
218,222
|
|
|
|
12.91
|
|
|
|
12.31
|
|
Outstanding, December 31, 2019
|
|
|
218,222
|
|
|
|
12.91
|
|
|
|
11.51
|
|
Exercisable, December 31, 2019
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Intrinsic
value is calculated as the amount by which the current market value of a share of common stock exceeds the exercise price multiplied
by the number of option. The aggregate intrinsic value of options outstanding as of December 31, 2019 was approximately $642,000.
The
fair value of each stock option award is estimated on the date of grant using the Black-Scholes option pricing model under the
following assumptions.
|
|
Date of grant
|
Expected volatility
|
|
95.02%-95.15%
|
Risk-free interest rate
|
|
2.46%-2.49%
|
Expected term from grant date (in years)
|
|
6.29-7.29
|
Dividend rate
|
|
-
|
Dilution factor
|
|
0.9962
|
Fair value
|
|
$10.10-10.52
|
In
connection with the grant of share options to employees and non-employees, the Group recorded share-based compensation charges
of $1,180,477 and $432,355, respectively.
APTORUM
GROUP LIMITED
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Stated
in U.S. Dollars)
18.
NON-CONTROLLING INTEREST
As
of December 31, 2018, non-controlling interest related to the 1% equity interest in APTUS BIOTECHNOLOGY (MACAO) LIMITED, 10% equity
interest in mTOR (Hong Kong) Limited, 5% equity interest in Aptorum Medical Limited (“AML”), 20% equity interest in
Acticule, and 20% equity interest in the Lanither Life Sciences Limited in the consolidated balance sheets was deficit of $368,533
in total.
On
March 29, 2019, AML, a majority-owned subsidiary of the Group, issued 112 shares to a director of the Group, which resulted an
increase of his equity interest of AML from 5% to 6%. A deficit of $10,672 was reclassified from additional paid-in capital to
non-controlling interests within the Group’s consolidated financial statements
On
April 24, 2019, the Smart Pharma Tokens (“SMPT tokens”) was announced to be launched. The SMPT tokens are secured
by way of a floating charge against the Project intellectual property (“IP”) to guarantee the distribution of accrued
sales-based royalties, sublicensing income or additional cash flow generated by drug candidates developed by the Smart-ACTTM
platform. SMPT token holders will only be eligible to receive a token distribution if any sales-based royalties, sublicensing
income or additional cash flow is generated by drug candidates developed by the Smart-ACTTM platform, as and when SPLP
declares the distribution. Because the token distribution is secured by a security interest in such intellectual property rights,
if and when SPLP defaults in its distribution obligations to the SMPT token holders, or in the event of liquidation, dissolution
or winding up of SPLP, the floating charge may crystallize into a fixed charge over the charged assets (i.e., the Project IP owned
by SPLP).
Total 1 billion SMPT tokens are offered
by Smart Pharmaceutical Limited Partnership (“SPLP”), a wholly owned subsidiary of the Group. In July 2019, SPLP transferred
100,000,000 SMPT tokens to Aenco Solutions Limited, a related party of the Group, in exchange for the services related to the tokens
creation, offering and 5-year consultancy service. Amount of $300,000 were classified as a component of non-controlling interests
within the Group’s consolidated financial statements. The remaining 900,000,000 SMPT tokens are remained and kept by SPLP.
As
of December 31, 2019, non-controlling interest related to 10% equity interest in mTOR (Hong Kong) Limited, 6% equity interest
in Aptorum Medical Limited, 20% equity interest in Acticule, 20% equity interest in the Lanither Life Sciences Limited and the
token issued by SPLP in the consolidated balance sheets was deficit of $1,509,456 in total.
For the years ended December 31, 2019
and 2018, and the period March 1, 2017 through December 31, 2017, non-controlling interest in the consolidated statements of operations
were loss of $1,430,176, $302,762 and $14,045, respectively.
19.
Warrants
On
November 30, 2018 and December 17, 2018, the Company entered into several agreements with underwriter. In return for the underwriter’s
services, the Company issued an aggregate of 80,453 and 38,071 warrants to purchase the same number of the Company’s ordinary
shares, for the convertible debts and the IPO, respectively. The shares were fully vested upon the IPO completion date and the
fair value of the warrants was $659,697 and $218,147, respectively, which was calculated using the Black-Scholes pricing model,
with the following weighted-average assumptions.
The
Group analyzed the warrants issued in the IPO and the convertible debts in accordance with ASC Topic 815 “Derivatives and
Hedging”. In accordance with ASC Topic 815, the Group determined that the warrants should not be considered index to its
own stock, as the strike price of the warrants is dominated in a currency (USD) other than the primary economy environment currency
of the Group (HKD). As a result, the warrants do not meet the scope exception of ASC Topic 815, therefore, should be accounted
for as derivative liabilities and measure at fair value with changes in fair value be recorded in earnings in each reporting period.
All
warrants were exercised on June 19, 2019 on a cashless basis. $866,300 loss in changes in fair value of warrant liabilities was
recorded in consolidated statements of operations.
|
|
December 31,
2019
|
|
|
December 31,
2018
|
|
Expected volatility
|
|
|
-
|
%
|
|
|
58.18
|
%
|
Risk-free interest rate
|
|
|
-
|
|
|
|
2.820%-2.822%
|
|
Expected term from grant date (in years)
|
|
|
-
|
|
|
|
2.43
|
|
Dividend rate
|
|
|
-
|
|
|
|
-
|
|
Fair value
|
|
$
|
-
|
|
|
$
|
4.60-9.48
|
|
Expected
Volatility
The
expected volatility used for the year ended December 31, 2018 is based upon the Company’s peer group trading history.
APTORUM
GROUP LIMITED
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Stated
in U.S. Dollars)
Risk-Free
Interest Rate
The
risk-free interest rate assumption is based on U.S. Treasury instruments with a term consistent with the contractual term of the
warrants issued.
Expected
Term
The expected term of the warrants issued
represents the remaining contractual term of the warrants.
Dividend
Yield
The
Company has never declared or paid any cash dividends and does not plan to pay cash dividends in the foreseeable future, and therefore,
used an expected dividend yield of zero in the valuation model.
The
movement of the warrants for the years ended December 31, 2019 and 2018 are as following:
|
|
Warrants
|
|
|
Weighted Average Exercise Price
|
|
|
Weighted Average Remaining Contractual Term in Years
|
|
Outstanding, January 1, 2019
|
|
|
118,524
|
|
|
$
|
13.79
|
|
|
|
2.43
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
118,524
|
|
|
$
|
13.79
|
|
|
|
1.96
|
|
Outstanding, December 31, 2019
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, January 1, 2018
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
118,524
|
|
|
$
|
13.79
|
|
|
|
2.50
|
|
Outstanding, December 31, 2018
|
|
|
118,524
|
|
|
$
|
13.79
|
|
|
|
2.43
|
|
20.
NET LOSS PER SHARE
The
following table sets forth the computation of basic and diluted loss per share:
|
|
Year ended December 31,
2019
|
|
|
Year ended December 31,
2018
|
|
|
March 1, 2017
through December 31, 2017
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
Net loss attributable to Aptorum Group Limited
|
|
$
|
(18,686,762
|
)
|
|
$
|
(14,831,723
|
)
|
|
$
|
(2,547,462
|
)
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted weighted average common shares outstanding
|
|
|
29,008,445
|
|
|
|
27,909,788
|
|
|
|
26,963,435
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted loss per share
|
|
$
|
(0.64
|
)
|
|
$
|
(0.53
|
)
|
|
$
|
(0.09
|
)
|
Basic
loss per share is computed by dividing net loss attributable to ordinary shareholders by the weighted average number of ordinary
shares outstanding during the period. Diluted loss per share reflects the potential dilution that could occur if securities or
other contracts to issue ordinary shares were exercised or converted into ordinary shares. Potential dilutive securities are excluded
from the calculation of diluted loss per share in loss periods as their effect would be anti-dilutive.
APTORUM
GROUP LIMITED
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Stated
in U.S. Dollars)
21.
COMMITMENTS AND CONTINGENCIES
Lease
Commitments
The
total future minimum lease payments under the non-cancellable operating leases with respect to the offices and the laboratory
as of December 31, 2019 are as follows:
For the years ending December 31,
|
|
Amount
|
|
|
|
|
|
2020
|
|
$
|
597,198
|
|
2021
|
|
|
397,842
|
|
2022
|
|
|
75,174
|
|
2023
|
|
|
-
|
|
2024 and thereafter
|
|
|
-
|
|
Total
|
|
$
|
1,070,214
|
|
Rental expenses for the years ended December
31, 2019 and 2018, and the period March 1, 2017 through December 31, 2017 were $664,155, $591,546 and $49,518, respectively.
Contingent
Payment Obligations
The
Group has entered into agreements with independent third parties for purchasing office and laboratory equipment. As of December
31, 2019, the Group had non-cancellable purchase commitments of $61,859.
The
Group has additional contingency payment obligations under each of the license agreements, such as milestone payments, royalties,
research and development funding, if certain condition or milestone is met.
Milestone
payments are to be made upon achievements of certain conditions, such as Investigational New Drugs (“IND”) filing
or U.S. Food and Drug Administration (“FDA”) approval, first commercial sale of the licensed products, or other achievements.
The aggregate amount of the milestone payments that the Group are required to pay up to different achievements of conditions and
milestones for all the license agreements signed as of December 31, 2019 are below:
|
|
Amount
|
|
Drug molecules: up to the conditions and milestones of
|
|
|
|
Preclinical to IND filing
|
|
$
|
372,564
|
|
From entering phase 1 to before first commercial sale
|
|
|
24,216,410
|
|
First commercial sale
|
|
|
15,656,410
|
|
Net sales amount more than certain threshold in a year
|
|
|
75,769,231
|
|
Subtotal
|
|
|
116,014,615
|
|
|
|
|
|
|
Surgical robotics and medical devices: up to the conditions and milestones of
|
|
|
|
|
Before FDA approval
|
|
|
270,000
|
|
FDA approval obtained
|
|
|
200,000
|
|
Subtotal
|
|
|
470,000
|
|
|
|
|
|
|
Total
|
|
$
|
116,484,615
|
|
For the years ended December 31, 2019 and
2018, and the period March 1, 2017 through December 31, 2017, the Group incurred $nil, $30,000 and $nil milestone payments, respectively.
For the years ended December 31, 2019 and 2018, and the period March 1, 2017 through December 31, 2017, the Group did not incur
any royalties or research and development funding, respectively. As of December 31, 2019, no other milestone payments had been
triggered under any of the existing license agreements.
APTORUM
GROUP LIMITED
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Stated
in U.S. Dollars)
22.
SEGMENT REPORTING
The
Group’s chief operating decision maker, the Chief Executive Officer, reviews the consolidated results when making decisions
about allocating resources and accessing performance of the Group as a whole and hence, the Group has only one reportable segment.
The Group does not distinguish between markets or segments for the purpose of internal reporting. The Group’s long-lived
assets are substantially all located in Hong Kong and substantially all of the Group’s expense is derived from within Hong
Kong. Therefore, no geographical segments are presented.
23.
SUBSEQUENT EVENTS
The
Group has evaluated subsequent events through the date of issuance of the consolidated financial statements, and except for the
following events with material financial impact on the Group’s consolidated financial statements, no other subsequent event
is identified that would have required adjustment or disclosure in the consolidated financial statements.
On
January 14, 2020, Aptorum Group entered into a regional distribution agreement with Multipak Limited for the commercialization
of its dietary supplement for women undergoing menopause and experiencing related symptoms. The dioscorea opposita bioactive nutraceutical
tablets has commenced production in Canada and will be marketed under the brand name NativusWellTM.
On
February 25, 2020, the Company entered into certain securities purchase agreement (the “Purchase Agreement”) with
certain non-affiliated institutional investors and Jurchen Investment Corporation, the ultimate parent of the Group, pursuant
to which the Company agreed to sell total 1,351,350 Class A Ordinary Shares (the “Shares”) and warrants (“Warrants”)
to purchase 1,351,350 of the Shares, for gross proceeds of approximately $10 million. The Warrants will be exercisable immediately
following the date of issuance for a period of seven years at an initial exercise price of $7.40. The purchase price for each
Share and the corresponding Warrant is $7.40. The Shares and Warrants were issued on February 28, 2020. Additionally, the Company
issued 43,243 warrants to the placement agent on terms substantially the same as the Warrants except that the exercise price of
the warrants issued to the Placement Agent was $8.88.
On
March 16, 2020, the Company granted 554,882 share options to employees, external consultants and advisors of the Group in accordance
to the 2017 Share Option Plan with an exercise price of$2.99 per share.
On
January 30, 2020, the World Health Organization declared the coronavirus outbreak a “Public Health Emergency of International
Concern” and on March 10, 2020, declared it to be a pandemic. Actions taken around the world to help mitigate the spread
of the coronavirus include restrictions on travel, and quarantines in certain areas, and forced closures for certain types of
public places and businesses. The coronavirus and actions taken to mitigate it have had and are expected to continue to have an
adverse impact on the economies and financial markets of many countries, including the geographical area in which the Company
operates. While the closures and limitations on movement, domestically and internationally, are expected to be temporary, if the
outbreak continues on its current trajectory the duration of the supply chain disruption could reduce the availability, or result
in delays, of materials or supplies to and from the Group, which in turn could materially interrupt the Group’s business
operations. Given the speed and frequency of the continuously evolving developments with respect to this pandemic, the Group cannot
reasonably estimate the magnitude of the impact to its consolidated results of operations. Additionally, it is reasonably possible
that estimates made in the financial statements have been, or will be, materially and adversely impacted in the near term as a
result of these conditions, including losses on investments; impairment losses related to long-lived assets and current obligations.
F-36
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