NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS - UNAUDITED
March 31, 2019
(in U.S. Dollars)
NOTE 1 – Nature of Business
|
Akari Therapeutics, Plc, (the “Company”
or “Akari”), is incorporated in the United Kingdom. The Company is a clinical-stage biopharmaceutical company focused
on developing inhibitors of acute and chronic inflammation, specifically the complement system, the eicosanoid or leukotriene system
and the bioamine system for the treatment of rare and orphan diseases.
The accompanying financial statements
have been prepared in conformity with U.S. Generally Accepted Accounting Principles, assuming that the Company will continue to
operate as a going concern. As of March 31, 2019, the Company has an accumulated deficit of $129,348,930 and cash of $6,145,555.
On September 26, 2018, the Company entered into a securities purchase agreement (the “Purchase Agreement”) with Aspire
Capital Fund, LLC, an Illinois limited liability company (“Aspire Capital”), which provides that, upon the terms and
subject to the conditions and limitations set forth therein, Aspire Capital is committed to purchase up to an aggregate of $20.0
million of the Company’s ADSs over the 30-month term of the Purchase Agreement. In consideration for entering into the Purchase
Agreement, concurrently with the execution of the Purchase Agreement, the Company issued 30,000,000 ordinary shares, par value
£0.01 per share, (“Ordinary Shares”) to Aspire Capital and sold to Aspire Capital 25,000,000 Ordinary Shares
for $0.02 per share (equivalent to $2.00 per ADS). On March 29, 2019, the Company sold to Aspire Capital 5,000,000 Ordinary Shares
of the Company for $0.0346 per share (equivalent to $3.46 per ADS) for gross proceeds of $173,000 (See Note 4 and Note 8).
The Company believes its current capital resources are sufficient to support its operations through the end of the second quarter
of 2019 without giving effect to the sale of additional shares to Aspire Capital under the Purchase Agreement.
The Company’s activities since inception
have consisted of raising capital and performing research and development activities. As of March 31, 2019, principal commercial
operations have not commenced. The Company is subject to a number of risks similar to those of clinical stage companies, including
dependence on key individuals, uncertainty of product development and generation of revenues, dependence on outside sources of
capital, risks associated with clinical trials of products, dependence on third-party collaborators for research operations, need
for regulatory approval of products, risks associated with protection of intellectual property, and competition with larger, better-capitalized
companies. In addition, the Company is subject to risks related to an active U.S. Securities and Exchange Commission (“SEC”)
investigation.
For the three months ended March 31, 2019,
the Company reported a net loss of $2,545,283 and expects to continue to incur substantial losses over the next several years
during its development phase. To fully execute its business plan, the Company will need, among other things, to complete its research
and development efforts and clinical and regulatory activities. These activities may take several years and will require significant
operating and capital expenditures in the foreseeable future. There can be no assurance that these activities will be successful.
If the Company is not successful in these activities or there is not a favorable resolution of the SEC investigation, it could
delay, limit, reduce or terminate preclinical studies, clinical trials or other research and development activities. To fund its
capital needs, the Company plans to raise funds through equity or debt financings or other sources, such as strategic partnerships
and alliance and licensing arrangements, and in the long term, from the proceeds from sales. Additional funds may not be available
when the Company needs them, on terms that are acceptable to it, or at all. These matters raise substantial doubt about the Company’s
ability to continue as a going concern. The financial statements do not include any adjustments to the carrying amounts and classifications
of assets and liabilities that would result if the Company was unable to continue as a going concern.
NOTE
2 – Summary of Significant Accounting Policies
|
Basis of Presentation
–
The accompanying condensed consolidated financial statements have been prepared in accordance with U.S. GAAP for interim financial
information and the rules and regulations of the SEC. Accordingly, they do not include all of the information and footnotes
required by U.S. GAAP for complete financial statements. These financial statements have been prepared on the same basis as the
Company’s annual financial statements and, in the opinion of management, reflect all adjustments, including normal and recurring
adjustments, which the Company considers necessary for the fair presentation of financial information. The results of operations
and comprehensive loss for the three months ended March 31, 2019 and March 31, 2018, are not necessarily indicative of expected
results for the full fiscal year or any other period.
Principles of Consolidation –
The Condensed Consolidated Financial Statements include the accounts of the Company and Volution Immuno Pharmaceuticals SA, a private
Swiss company, its wholly-owned subsidiary. All intercompany transactions have been eliminated.
AKARI THERAPEUTICS, Plc
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS - UNAUDITED
March 31, 2019
(in U.S. Dollars)
NOTE
2 – Summary of Significant Accounting Policies (cont.)
|
Foreign Currency –
The functional
currency of the Company is U.S. dollars as that is the primary economic environment in which the Company operates as well as the
currency in which it has been financed.
The reporting currency of the
Company is U.S. Dollars. The Company translated its non-U.S. operations’ assets and liabilities denominated in foreign currencies
into U.S. dollars at current rates of exchange as of the balance sheet date and income and expense items at the average exchange
rate for the reporting period. Translation adjustments resulting from exchange rate fluctuations are recorded as foreign currency
translation adjustments, a component of accumulated other comprehensive loss. Gains or losses from foreign currency transactions
are included in foreign currency exchange gains/(losses).
Use of Estimates –
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and judgments that may
affect the reported amounts of assets, liabilities, equity, revenue, expenses and related disclosure of contingent assets and liabilities.
Management’s estimates and judgments include assumptions used in the evaluation of impairment and useful lives of intangible
assets (patents), accrued liabilities, deferred income taxes, liabilities related to stock options, stock-based compensation and
various other assumptions that are believed to be reasonable under the circumstances. Actual results may differ from those estimates
under different assumptions or conditions.
Fair Value Measurements
– The carrying amounts of financial instruments, including cash, restricted cash, accounts payable and accrued expenses approximate
fair value due to their short-term maturities.
The Company’s liabilities
related to options relate to RPC Pharma Limited (“RPC”), Akari’s majority shareholder, and are recognized on
the balance sheet at their fair value, with changes in the fair value accounted for in the Condensed Consolidated Statements of
Comprehensive Loss and included in changes in fair value of option liabilities gains.
Cash
– The Company considers
all highly-liquid investments with original maturities of 90 days or less at the time of acquisition to be cash equivalents. The
Company had no cash equivalents as of March 31, 2019 and December 31, 2018.
Restricted cash -
Restricted
cash is collateral for a letter of credit related to the Company’s former office leases.
Prepaid Expenses and Other
Current Assets –
Prepaid expenses and other current assets consist principally of VAT receivables and prepaid expenses.
Deferred Financing Costs
–
Deferred financing costs relate to the upfront commitment fee paid to Aspire Capital in the form of Ordinary Shares
and are included in current assets. They are amortized proportionally as the Company sells shares to Aspire Capital.
Property and equipment, net –
Property and equipment are stated at cost, net of accumulated depreciation. Depreciation is calculated using the straight-line
method over the estimated useful lives of the assets at the following annual rates:
|
|
|
Years
|
|
|
|
|
|
|
|
Computers, peripheral, and scientific equipment
|
|
|
3
|
|
|
Office furniture and equipment
|
|
|
3
|
|
Depreciation expense for the
three months ended March 31, 2019 and 2018 was $4,591 and $8,553, respectively.
AKARI THERAPEUTICS, Plc
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS - UNAUDITED
March 31, 2019
(in U.S. Dollars)
NOTE
2 – Summary of Significant Accounting Policies (cont.)
|
Long-Lived Assets
–
The Company reviews all long-lived assets for impairment whenever events or circumstances indicate the carrying amount of such
assets may not be recoverable. Recoverability of assets to be held or used is measured by comparison of the carrying value of the
asset to the future undiscounted net cash flows expected to be generated by the asset. If such asset is considered to be impaired,
the impairment recognized is measured by the amount by which the carrying value of the asset exceeds the discounted future cash
flows expected to be generated by the asset.
Patent Acquisition Costs
– Patent acquisition costs and related capitalized legal fees are amortized on a straight-line basis over the shorter of
the legal or economic life. The estimated useful life is 22 years. The Company expenses costs associated with maintaining and defending
patents subsequent to their issuance in the period incurred. Amortization of patent acquisition costs for the three months ended
March 31, 2019 and 2018 was $975 and $791, respectively.
Accrued Expenses
– As part
of the process of preparing the condensed consolidated financial statements, it requires the estimate of accrued expenses. This
process involves identifying services that third parties have performed on the Company’s behalf and estimating the level
of service performed and the associated cost incurred on these services as of each balance sheet date in the Company’s condensed
consolidated financial statements. Examples of estimated accrued expenses include contract service fees in conjunction with pre-clinical
and clinical trials, professional service fees and contingent liabilities. In connection with these service fees, the Company’s
estimates are most affected by its understanding of the status and timing of services provided relative to the actual services
incurred by the service providers. In the event that the Company does not identify certain costs that have been incurred or it
under or over-estimates the level of services or costs of such services, the Company’s reported expenses for a reporting
period could be understated or overstated. The date on which certain services commence, the level of services performed on or before
a given date, and the cost of services are often subject to the Company’s estimation and judgment. The Company makes these
judgments based upon the facts and circumstances known to it in accordance with U.S. GAAP.
Research and Development
(Income) Expenses –
Costs associated with research and development are expensed as incurred. Research and development
(income) expenses include, among other costs, personnel expenses, costs incurred by outside laboratories, manufacturers’
and other accredited facilities in connection with clinical trials and preclinical studies. Research and development (income) expenses
for the three months ended March 31, 2019 and 2018 were ($2,318,360) and $1,008,388, respectively. The Company accounts for research
and development tax credits at the time its realization becomes probable. In March 2019 and March 2018, respectively, the Company
realized research and development tax credits of $4,872,716 and $3,794,094, that was recorded as a credit to research and development
costs in the Condensed Consolidated Statements of Comprehensive Loss, for the 2017 and 2016 tax years, respectively.
Stock-Based Compensation Expense –
Stock-based compensation expense is recorded using the fair-value based method for all awards granted. Compensation costs for stock
options and awards is recorded in earnings (loss) over the requisite service period based on the fair value of those options and
awards. For employees, fair value is estimated at the grant date, and for non-employees, fair value is re-measured at each reporting
date as required by ASC 718, “
Compensation-Stock Compensation
,” and ASC 505-50, “
Equity-Based Payments
to Non-Employees
.” Fair values of awards granted under the share option plans are estimated using a Black-Scholes option
pricing model. The determination of fair value for stock-based awards on the date of grant using an option pricing model requires
management to make certain assumptions regarding a number of complex and subjective variables. The Company classifies its stock-based
payments as either liability-classified awards or as equity-classified awards. The Company remeasures liability-classified awards
to fair value at each balance sheet date until the award is settled. The liability for liability-classified awards generally is
equal to the fair value of the award as of the balance sheet date multiplied by the percentage vested at the time. The Company
charges (or credits) the change in the liability amount from one balance sheet date to another to changes in fair value of option/warrant
liabilities gain (loss). The Company accounts for awards of equity instruments issued to employees and directors under the fair
value method of accounting and recognizes such amounts, upon vesting, in general administrative or research and development expenses
within its Condensed Consolidated Statements of Comprehensive Loss.
Concentration of Credit Risk –
Financial instruments that subject the Company to credit risk consist of cash. The Company maintains cash with well-capitalized
financial institutions. At times, those amounts may exceed insured limits. The Company has no significant concentrations of credit
risk.
AKARI THERAPEUTICS, Plc
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS - UNAUDITED
March 31, 2019
(in U.S. Dollars)
NOTE 2 – Summary of Significant Accounting Policies (cont.)
|
Income Taxes
–
The Company accounts for income taxes in accordance with the accounting rules that require an asset and liability approach to accounting
for income taxes based upon the future expected values of the related assets and liabilities. Deferred income tax assets and liabilities
are determined based on the differences between the financial reporting and tax bases of assets and liabilities and for tax loss
and credit carry forwards and are measured using the expected tax rates estimated to be in effect when such basis differences reverse.
Valuation allowances are established, if necessary, to reduce the deferred tax asset to the amount that will, more likely than
not, be realized. The Company has recorded a full valuation allowance on its deferred tax assets as of March 31, 2019 and December
31, 2018.
Uncertain Tax Positions –
The Company follows the provisions of ASC 740 “
Accounting for Uncertainty in Income Taxes
”, which prescribes
recognition thresholds that must be met before a tax position is recognized in the financial statements and provides guidance on
de-recognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. Under ASC 740
“
Accounting for Uncertainty in Income Taxes
,” an entity may only recognize or continue to recognize tax positions
that meet a “more-likely-than-not” threshold. Interest and penalties related to uncertain tax positions are recognized
as income tax expense. At March 31, 2019 and December 31, 2018, the Company had no uncertain tax positions.
Earnings (Loss) Per Share
–
Basic earnings (loss) per ordinary share is computed by dividing net income (loss) available to ordinary shareholders by the weighted-average
number of Ordinary Shares outstanding during the period. Diluted earnings (loss) per ordinary share is computed by dividing net
income (loss) available to ordinary shareholders by the sum of (1) the weighted-average number of Ordinary Shares outstanding during
the period, (2) the dilutive effect of the assumed exercise of options and warrants using the treasury stock method and (3) the
dilutive effect of other potentially dilutive securities.
Comprehensive Income (Loss)
–
Comprehensive loss is defined as the change in equity of a business enterprise during a period from transactions and
other events and circumstances from non-owner sources. The Company’s other comprehensive loss is comprised of foreign currency
translation adjustments.
The following table provides
details with respect to changes in accumulated other comprehensive loss, which is comprised of foreign currency translation adjustments,
as presented in the balance sheets at March 31, 2019:
|
Balance January 1, 2019
|
|
$
|
(352,426
|
)
|
|
Net current period other comprehensive income
|
|
|
107,168
|
|
|
Balance March 31, 2019
|
|
$
|
(245,258
|
)
|
Recent Accounting Pronouncements
Adopted during year –
In February 2016, the FASB issued
ASU No. 2016-02,
Leases
(“ASU 2016-02”). ASU 2016-02 establishes a right-of-use (ROU) model that requires a
lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases
will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income
statement. The new standard is effective for fiscal years beginning after December 15, 2018, including interim periods within
those fiscal years. A modified retrospective transition approach is required for lessees for capital and operating leases existing
at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain
practical expedients available. The adoption of this standard in 2019 did not have a material impact on the Company’s financial
position, results of operations or related financial statement disclosures since it does not have a lease with a term longer than
12 months.
In October 2016,
the FASB issued ASU 2016-16,
Intra-Entity Transfers of Assets Other Than Inventory
. This guidance removes the prohibition
in ASC 740 against the immediate recognition of the current and deferred income tax effects of intra-entity transfers of assets
other than inventory. This guidance is intended to reduce the complexity of U.S. GAAP and diversity in practice related to
the tax consequences of certain types of intra-entity asset transfers, particularly those involving intellectual property. This
guidance is effective for annual reporting periods beginning after December 15, 2018, and interim periods within fiscal years
beginning after December 15, 2019. The adoption of this standard in 2019 did not have a material impact on the Company’s
financial position, results of operations or related financial statements.
AKARI THERAPEUTICS, Plc
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS - UNAUDITED
March 31, 2019
(in U.S. Dollars)
NOTE
3 – Fair Value Measurements
|
Fair value of financial instruments:
The estimated fair value of financial instruments
has been determined by the Company using available market information and valuation methodologies. Considerable judgment is required
in estimating fair values. Accordingly, the estimates may not be indicative of the amounts the Company could realize in a current
market exchange.
The carrying amounts of cash, restricted
cash, accounts payable and accrued expenses approximate their fair value due to the short-term maturity of such instruments.
Fair value is an exit price, representing
the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants.
As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would
use in pricing an asset or a liability. As a basis for considering such assumptions, ASC 820,
Fair Value Measurements
and Disclosures
establishes a three-tier value hierarchy, which prioritizes the inputs used in the valuation methodologies
in measuring fair value:
Level 1 - quoted
prices in active markets for identical assets or liabilities;
Level 2 - inputs
other than Level 1 that are observable, either directly or indirectly, such as quoted prices in active markets for similar
assets or liabilities, quoted prices for identical or similar assets or liabilities in markets that are not active, or other inputs
that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities;
or
Level 3 - unobservable
inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
The fair value hierarchy also requires
an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.
In accordance with ASC No. 820, the Company
measures its liabilities related to options on a recurring basis at fair value. The liabilities related to options are classified
within Level 3 value hierarchy because the liabilities are based on present value calculations and external valuation models whose
inputs include market interest rates, estimated operational capitalization rates, volatilities and illiquidity. Unobservable inputs
used in these models are significant.
In June 2015, the Company raised short-term
working capital in the form of loans from shareholders of approximately $3 million with the loans carrying with it, options in
RPC, equivalent to 15% of the current outstanding equity issued by RPC. RPC is a private company that is a majority shareholder
of the Company. The RPC options were accounted for in accordance with ASC 718,
Compensation – Stock Compensation
.
The fair value of the RPC options was estimated using the fair value of Akari Ordinary Shares times RPC’s ownership in Akari
Ordinary Shares times 15% and was initially valued at approximately $26 million. These options do not relate to the share capital
of Akari. The exact terms of these options have not been finalized.
The fair value of the RPC options was $4,201,196
and $1,842,424 as of March 31, 2019 and December 31, 2018, respectively. The fair value of the RPC options for the three months
ended March 31, 2019 increased by $2,358,772 and the change, which represents a loss, was recognized as change in fair value of
option liabilities (loss)/gains in the Condensed Consolidated Statements of Comprehensive Loss. The Company accounts for the RPC
options as a liability in accordance with ASC 815-40-25,
Accounting for Derivative Financial Instruments Indexed to, and Potentially
Settled in, a Company’s Own Stock
and ASC 815-40-15,
Determining Whether an Instrument (or Embedded Feature) Is Indexed
to an Entity’s Own Stock
.
The Company’s financial assets and
liabilities measured at fair value on a recurring basis, consisted of the following instruments as of the following dates:
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
|
2019
|
|
|
2018
|
|
|
RPC options
|
|
$
|
4,201,196
|
|
|
$
|
1,842,424
|
|
AKARI THERAPEUTICS, Plc
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS - UNAUDITED
March 31, 2019
(in U.S. Dollars)
|
NOTE 3 – Fair Value Measurements (cont.)
|
Fair value measurements using significant
unobservable inputs (Level 3):
|
|
|
Fair value of
liabilities related
to stock options
|
|
|
Balance at December 31, 2017
|
|
$
|
5,081,335
|
|
|
|
|
|
|
|
|
Changes in values of liabilities related to options
|
|
|
(2,945,531
|
)
|
|
|
|
|
|
|
|
Balance at March 31, 2018
|
|
$
|
2,135,804
|
|
|
|
|
Fair value of
liabilities related
to stock options
|
|
|
Balance at December 31, 2018
|
|
$
|
1,842,424
|
|
|
|
|
|
|
|
|
Changes in values of liabilities related to options
|
|
|
2,358,772
|
|
|
|
|
|
|
|
|
Balance at March 31, 2019
|
|
$
|
4,201,196
|
|
NOTE
4 – Shareholders’ Equity
|
Share Capital
– The Company
has 10,000,000,000 Ordinary Shares of authorized capital and 1,585,693,413 and 1,580,693,413 Ordinary Shares outstanding at March
31, 2019 and December 31, 2018, respectively.
Purchase Agreement and Registration Rights Agreement with
Aspire Capital
On September 26, 2018, the Company entered
into a Purchase Agreement with Aspire Capital, which provides that, upon the terms and subject to the conditions and limitations
set forth therein, Aspire Capital is committed to purchase up to an aggregate of $20.0 million of the Company’s ADS, with
each ADS representing one hundred (100) Ordinary Shares, during a 30-month period beginning on the effective date of a registration
statement related to the transaction. Concurrently with entering into the Purchase Agreement, the Company also entered into a registration
rights agreement with Aspire Capital (the “Registration Rights Agreement”), in which the Company agreed to file one
or more registration statements, as permissible and necessary to register under the Securities Act of 1933, as amended (the “Securities
Act”), the sale of the Company’s securities that have been and may be issued to Aspire Capital under the Purchase Agreement.
Under the Purchase Agreement, after the
SEC has declared effective the registration statement referred to above (which occurred in March 2019), on any trading day selected
by the Company, the Company has the right, in its sole discretion, to present Aspire Capital with a purchase notice (each, a “Purchase
Notice”), directing Aspire Capital (as principal) to purchase up to 150,000 ADSs per business day and up to $20.0 million
of the Company’s ADSs in the aggregate at a per share price (the “Purchase Price”) equal to the lesser of:
|
|
·
|
the lowest sale price of the Company’s ADSs on the purchase date; or
|
|
|
·
|
the arithmetic average of the three (3) lowest closing sale prices for the ADSs during the ten (10) consecutive business days ending on the business day immediately preceding such Purchase Date (to be appropriately adjusted for any reorganization, recapitalization, non-cash dividend, stock split, reverse stock split or other similar transaction).
|
AKARI THERAPEUTICS, Plc
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS - UNAUDITED
March 31, 2019
(in U.S. Dollars)
NOTE 4 – Shareholders’ Equity (cont.)
|
In addition, on any date on which the Company
submits a Purchase Notice to Aspire Capital in an amount of 150,000 ADSs, the Company also has the right, in its sole discretion,
to present Aspire Capital with a volume-weighted average price purchase notice (each, a “VWAP Purchase Notice”) directing
Aspire Capital to purchase an amount of ADSs equal to up to 30% of the aggregate shares of the Company’s ADSs traded on its
principal market on the next trading day (the “VWAP Purchase Date”), subject to a maximum number of 250,000 ADSs. The
purchase price per share pursuant to such VWAP Purchase Notice is generally 97% of the volume-weighted average price for the Company’s
ADSs traded on its principal market on the VWAP Purchase Date.
The Purchase Price will be adjusted for
any reorganization, recapitalization, non-cash dividend, stock split, or other similar transaction occurring during the period(s)
used to compute the Purchase Price. The Company may deliver multiple Purchase Notices and VWAP Purchase Notices to Aspire Capital
from time to time during the term of the Purchase Agreement, so long as the most recent purchase has been completed.
The Purchase Agreement provides that the
Company and Aspire Capital shall not effect any sales under the Purchase Agreement on any purchase date where the closing sale
price of the Company’s ADSs is less than $0.25. There are no trading volume requirements or restrictions under the Purchase
Agreement, and the Company will control the timing and amount of sales of the Company’s ADSs to Aspire Capital. Aspire Capital
has no right to require any sales by the Company but is obligated to make purchases from the Company as directed by the Company
in accordance with the Purchase Agreement. There are no limitations on use of proceeds, financial or business covenants, restrictions
on future fundings, rights of first refusal, participation rights, penalties or liquidated damages in the
Purchase Agreement. In consideration for
entering into the Purchase Agreement, concurrently with the execution of the Purchase Agreement, the Company issued to Aspire Capital
30,000,000 Ordinary Shares of the Company (the “Commitment Shares”) and sold to Aspire Capital 25,000,000 Ordinary
Shares (the “Initial Shares”) for $0.02 per share (equivalent to $2.00 per ADS). In March 2019, the Company sold to
Aspire Capital an additional 5,000,000 Ordinary Shares for $0.0346 per share (equivalent to $3.46 per ADS) for gross proceeds of
$173,000. The Company recorded the value of the Commitment shares as deferred financing costs and included the costs
in current assets. They are amortized proportionally as the Company sells shares to Aspire. As of March 31, 2019, the Company recognized
$20,190 of such costs and included the costs in additional paid-in capital. The Purchase Agreement may be terminated by the Company
at any time, at its discretion, without any cost to the Company. Aspire Capital has agreed that neither it nor any of its agents,
representatives and affiliates shall engage in any direct or indirect short-selling or hedging of the Company’s securities
during any time prior to the termination of the Purchase Agreement. Any proceeds the Company receives under the Purchase Agreement
are expected to be used for working capital and general corporate purposes.
Share option plan
–
In accordance with the Company’s
2014 Equity Incentive Plan (the “Plan”), the number of shares that may be issued upon exercise of options under the
Plan shall not exceed 183,083,207 Ordinary Shares. At March 31, 2019, 89,986,209 Ordinary Shares are available for future issuance
under the Plan. The option plan is administered by the Company’s board of directors and grants are made pursuant thereto
by the compensation committee. The per share exercise price for the shares to be issued pursuant to the exercise of an option
shall be such price equal to the fair market value of the Company’s Ordinary Shares on the grant date and set forth in the
individual option agreement. Options expire ten years after the grant date and typically vest over one to four years.
AKARI THERAPEUTICS, Plc
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS - UNAUDITED
March 31, 2019
(in U.S. Dollars)
NOTE
4 – Shareholders’ Equity (cont.)
|
The following is a summary of the Company’s
share option activity and related information for employees and directors for the period ended March 31, 2019:
|
|
|
Number
of shares
|
|
|
Weighted
average
exercise
price
|
|
|
Weighted
average
grant date
fair value
|
|
|
Weighted
average
remaining
contractual
term
(in years)
|
|
|
Aggregate
intrinsic
value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding as of January 1, 2019
|
|
|
94,096,998
|
|
|
$
|
0.12
|
|
|
|
|
|
|
|
8.4
|
|
|
$
|
-
|
|
|
Changes during the period:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(1,000,000
|
)
|
|
$
|
0.02
|
|
|
$
|
0.01
|
|
|
|
|
|
|
|
|
|
|
Options outstanding at March 31, 2019
|
|
|
93,096,998
|
|
|
$
|
0.12
|
|
|
|
|
|
|
|
8.1
|
|
|
$
|
643,585
|
|
|
Exercisable options at March 31, 2019
|
|
|
41,944,103
|
|
|
$
|
0.21
|
|
|
|
|
|
|
|
7.0
|
|
|
$
|
715
|
|
The Company measures compensation cost
for all share-based awards at fair value on the date of grant and recognizes compensation expense in general administrative and
research and development (income) expenses within its Condensed Consolidated Statements of Comprehensive Loss using the straight-line
method over the service period over which it expects the awards to vest.
The Company estimates the fair value of
all time-vested options as of the date of grant using the Black-Scholes option valuation model, which was developed for use in
estimating the fair value of traded options that have no vesting restrictions and are fully transferable. Option valuation models
require the input of highly subjective assumptions, including the expected share price volatility, which is calculated based on
the historical volatility of peer companies. The Company uses a risk-free interest rate, based on the U.S. Treasury instruments
in effect at the time of the grant, for the period comparable to the expected term of the option. Given its limited history with
share option grants and exercises, the Company uses the “simplified” method in estimating the expected term, the period
of time that options granted are expected to be outstanding, for its grants.
The Company classifies its stock-based
payments as either liability-classified awards or as equity-classified awards. The Company re-measures liability-classified awards
to fair value at each balance sheet date until the award is settled. The Company measures equity-classified awards at their grant
date fair value and does not subsequently re-measure them. The Company has classified its stock-based payments, which are settled
in ordinary shares as equity-classified awards, and share-based payments that are settled in cash as liability-classified awards.
Compensation costs related to equity-classified awards generally are equal to the grant-date fair value of the award amortized
over the vesting period of the award. The liability for liability-classified awards generally is equal to the fair value of the
award as of the balance sheet date multiplied by the percentage vested at the time. The Company charges (or credits) the change
in the liability amounts from one balance sheet date to another to stock-based compensation expense.
Below are the assumptions used for the
options granted during the three months ended March 31, 2018. No options were granted in the three months ended March 31, 2019:
|
|
|
March 31,
|
|
|
|
|
2018
|
|
|
Expected dividend yield
|
|
|
0
|
%
|
|
Expected volatility
|
|
|
82.23
|
%
|
|
Risk-free interest
|
|
|
2.49
|
%
|
|
Expected life
|
|
|
6.25 years
|
|
AKARI THERAPEUTICS, Plc
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS - UNAUDITED
March 31, 2019
(in U.S. Dollars)
NOTE
4 – Shareholders’ Equity (cont.)
|
The following is a summary of the Company’s
share options granted separated into ranges of exercise price:
Exercise
price
(range) ($)
|
|
|
Options
outstanding
at
March
31, 2019
|
|
|
Weighted
average
remaining
contractual
life (years)
|
|
|
Weighted
average
exercise
price ($)
|
|
|
Options
exercisable
at
March
31, 2019
|
|
|
Remaining
contractual
life (years
for
exercisable
options)
|
|
|
Weighted
average
exercise
price ($)
|
|
|
0.02-0.05
|
|
|
|
53,300,000
|
|
|
|
9.14
|
|
|
|
0.03
|
|
|
|
7, 837,500
|
|
|
|
8.34
|
|
|
|
0.05
|
|
|
0.12-0.19
|
|
|
|
18,834,629
|
|
|
|
7.08
|
|
|
|
0.15
|
|
|
|
15,686,711
|
|
|
|
7.04
|
|
|
|
0.16
|
|
|
0.32
|
|
|
|
20,782,369
|
|
|
|
6.47
|
|
|
|
0.32
|
|
|
|
18,239,892
|
|
|
|
6.47
|
|
|
|
0.32
|
|
|
0.75-2.00
|
|
|
|
180,000
|
|
|
|
4.19
|
|
|
|
1.62
|
|
|
|
180,000
|
|
|
|
4.19
|
|
|
|
1.62
|
|
|
|
|
|
|
93,096,998
|
|
|
|
|
|
|
|
|
|
|
|
41,944,103
|
|
|
|
|
|
|
|
|
|
During the three months ended March 31,
2019 and 2018, the Company recorded approximately $394,000 and $476,000, respectively, in stock-based compensation expenses for
employees and directors. At March 31, 2019, there was approximately $1,256,000 of unrecognized compensation cost related to unvested
share-based compensation arrangements granted under the Company’s share option plans which the Company expects to recognize
over 1.6 years.
Warrants to service providers and investors –
At March 31, 2019, there were no warrants outstanding. At March 31, 2018, there were warrants to purchase 51,075 Ordinary
Shares outstanding and during the three months ended March 31, 2018, warrants to purchase 348,085 Ordinary Shares expired.
NOTE
5 – Related Party Transactions
|
Office Lease -
A non-employee director
of the Company is also the CEO of The Doctors Laboratory (“TDL”). The Company leases its UK office space from
TDL and has incurred expenses of approximately $34,000 and $37,000 plus VAT during the three months ended March 31, 2019 and 2018,
respectively (see Note 6).
Consulting
-
A director of the Company began providing business development
consulting services in January 2018. The Company has incurred expenses of approximately $25,000 and $18,000 during the three months
ended March 31, 2019 and 2018, respectively, relating to these consulting services.
NOTE
6 – Commitments and Contingencies
|
Loss contingencies -
On April
27, 2017, the Company issued a press release stating that Edison Investment Research Ltd. (“Edison”) had withdrawn
its report issued April 26, 2017 titled “Akari’s Coversin matches Soliris in Phase II” (the “Edison Report”)
because it contained material inaccuracies, including, without limitation, with respect to the Company’s interim analysis
of its ongoing Phase II PNH trial of Coversin. Investors were cautioned not to rely upon any information contained in the Edison
Report and instead were directed to the Company’s press release issued on April 24, 2017 that discusses the interim analysis
of the Company’s then ongoing Phase II PNH trial and other matters. The Company’s Board of Directors established an
ad hoc special committee of the Board to review the involvement, if any, of its personnel with the Edison Report, which was later
retracted. Edison was retained by the Company to produce research reports about the Company. While that review was pending, Dr.
Gur Roshwalb, the Company’s former Chief Executive Officer, was placed on administrative leave and Dr. Ray Prudo in his role
as Executive Chairman temporarily assumed Dr. Roshwalb’s duties in his absence. Following that review, the Company determined
that the Edison Report was reviewed and approved by Dr. Roshwalb, in contravention of Company policy. On May 29, 2017, Dr.
Roshwalb submitted his resignation as Chief Executive Officer and member of the Company’s Board of Directors, effective immediately.
AKARI THERAPEUTICS, Plc
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS - UNAUDITED
March 31, 2019
(in U.S. Dollars)
NOTE
6 – Commitments and Contingencies (cont.)
|
On May 12, 2017, a putative securities
class action captioned Derek Da Ponte v. Akari Therapeutics, PLC, Gur Roshwalb, and Dov Elefant (Case 1:17-cv-03577) was filed
in the U.S. District Court for the Southern District of New York against the Company, its former Chief Executive Officer, and its
Chief Financial Officer. The plaintiff asserted claims alleging violations of Sections 10(b) and 20(a) of the Securities Exchange
Act of 1934 (the “Exchange Act”), based primarily on the Company’s press releases or statements issued between
April 24, 2017 and May 11, 2017 concerning the Phase II PNH trial of Nomacopan (Coversin) and the Edison Report about the Company
and actions taken by it after the report was issued. The purported class covers the period from March 30, 2017 to May 11, 2017.
The complaint seeks unspecified damages and costs and fees. On May 19, 2017, an almost identical class action complaint captioned
Shamoon v. Akari Therapeutics, PLC, Gur Roshwalb, and Dov Elefant (Case 1:17-cv-03783) was filed in the same court. On July 11-12,
2017, candidates to be lead plaintiff filed motions to consolidate the cases and appoint a lead plaintiff. On August 10, 2017,
the court issued a stipulated order: (i) consolidating the class actions under the caption In re: Akari Therapeutics, PLC Securities
Litigation (Case 1:17-cv-03577); and (ii) setting out a schedule for plaintiffs to file a consolidated amended complaint and
defendants to respond thereto.
By order dated September 7, 2017, the court
appointed lead plaintiffs for the class and lead plaintiffs’ counsel. On November 6, 2017, lead plaintiffs filed a consolidated
amended complaint (the “CAC”). While the CAC contains similar substantive allegations to the initial complaints, it
adds two additional defendants, Ray Prudo and Edison Investment Research Ltd., and the purported class period was changed to April
24, 2017 through May 30, 2017. On January 10, 2018, at a hearing regarding the defendants’ impending motions to dismiss the
CAC, the Court gave plaintiffs permission to file a second consolidated amended complaint (the “SCAC”) and established
a briefing schedule for defendants’ motions to dismiss the SCAC. Pursuant to that schedule, plaintiffs’ SCAC
was filed on January 31, 2018. All briefing on the motions to dismiss was completed on April 20, 2018.
On May 9, 2018, the parties engaged in
a mediation session and came to an agreement in principle to settle the dispute. On June 8, 2018, the parties entered into a memorandum
of understanding. A memorandum of understanding is not a definitive settlement agreement, which must be approved by the Court.
By the terms of the memorandum, the parties agreed in principle to a total payment of $2.7 million in cash. The Company
recorded the $2.7 million SCAC litigation settlement loss in the Consolidated Statement of Comprehensive Loss in the year
ended December 31, 2017, which is the period in which the lawsuits were originally filed. The $2.7 million SCAC settlement
liability was recorded as a loss contingency in accrued expenses in the Company’s Consolidated Balance Sheets as of December
31, 2017. On July 26, 2018, plaintiffs filed a notice with the Court voluntarily dismissing Edison from the action. On August 3,
2018, the remaining parties executed and filed a stipulation and agreement of settlement (the terms of which were consistent with
the memorandum of understanding). On August 7, 2018, the Court granted plaintiffs’ motion for preliminary approval of the
settlement, and on November 28, 2018, following a hearing with the parties, the court ordered final approval of the settlement.
Plaintiffs subsequently moved to distribute the settlement funds to the class, and the Court granted plaintiffs’ motion on
February 4, 2019.
On August 24, 2018, the Company received
a $2.7 million payment from its directors’ and officers’ liability insurance provider, the sum of which was paid to
an escrow account for the benefit of the settlement class on August 27, 2018. This was recorded as a gain in the Consolidated Statements
of Comprehensive Loss during the third quarter of 2018.
Separately, Edison sought indemnification
from the Company pursuant to its contract with the Company, including reimbursement of all legal expenses that Edison incurs in
connection with the securities class action (to which, as discussed above, Edison was added as a defendant on November 6, 2017)
and lost profits from customer relationships that Edison claims it lost as a result of the retraction of the Edison Report. The
parties have come to an agreement and settled the dispute for an immaterial amount to the Company’s operations and cash flows.
The Company voluntarily reported to the
SEC the circumstances leading to the withdrawal of the Edison Report and the outcome of its special committee’s investigation.
In response, the SEC requested certain documents from the Company with respect to the matters it reported. The Company is cooperating
with the SEC’s requests for information. On June 5, 2018, the Company received a subpoena from the SEC, which requested further
documents and information primarily related to the Company’s Phase II clinical trial of Nomacopan (Coversin) in connection
with an investigation of the Company that the SEC is conducting. The Company is in the process of responding to the subpoena and
will continue to cooperate with the SEC.
Lease commitment –
In March
2014, the Company entered into a lease agreement for offices in London which was amended January 1, 2016. The lease term commenced
on December 1, 2014 and expired in March 2019, which we intend to renew and are currently leasing on the same terms of the lease.
The lease can be cancelled early by either party upon 3 months’ notice (See Note 5).
AKARI THERAPEUTICS, Plc
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS - UNAUDITED
March 31, 2019
(in U.S. Dollars)
NOTE
6 – Commitments and Contingencies (cont.)
|
The Company also had a five-year lease
for offices in New York, New York effective July 2014. The lease ended early in December 2018. In January 2018, the Company entered
into a sublease of office space in New York, New York for an approximately four-year term, which ended early in December 2018.
The Company currently leases office space in New York, New York on a month-to-month basis.
For the three months ended March 31, 2019
and 2018, the Company incurred rental expense in the amount of approximately $43,000 and $164,000, respectively.
Basic loss per Ordinary Share is computed
by dividing net loss available to ordinary shareholders by the weighted-average number of Ordinary Shares outstanding during the
period. Diluted loss per ordinary share is computed by dividing net loss available to ordinary shareholders by the sum of (1) the
weighted-average number of Ordinary Shares outstanding during the period, (2) the dilutive effect of the assumed exercise of share
options using the treasury stock method, and (3) the dilutive effect of other potentially dilutive securities.
The following is the calculation of the
basic and diluted weighted average shares outstanding for the three months ended March 31, 2019 and 2018, respectively:
|
|
|
Three Months Ended
March 31,
|
|
|
|
|
2019
|
|
|
2018
|
|
|
Company posted
|
|
|
Net loss
|
|
|
|
Net loss
|
|
|
Basic weighted average shares outstanding
|
|
|
1,580,860,080
|
|
|
|
1,525,693,393
|
|
|
Dilutive effect of Ordinary Share equivalents
|
|
|
None
|
|
|
|
None
|
|
|
Dilutive weighted average shares outstanding
|
|
|
1,580,860,080
|
|
|
|
1,525,693,393
|
|
For purposes of the diluted net
loss per share calculation, share options and warrants are considered to be potentially dilutive securities and are excluded from
the calculation of diluted net loss per share because their effect would be anti-dilutive. Therefore, basic and diluted net loss
per share was the same for the periods presented due to the Company’s net loss position.
The following table shows the
number of share equivalents that were excluded from the computation of diluted loss per share for the respective periods because
the effect would have been anti-dilutive:
|
|
|
Three Months Ended
March 31,
|
|
|
|
|
2019
|
|
|
2018
|
|
|
Total share options
|
|
|
93,096,998
|
|
|
|
89,861,998
|
|
|
Total warrants- equity classified
|
|
|
-
|
|
|
|
51,075
|
|
|
Total share options and warrants
|
|
|
93,096,998
|
|
|
|
89,913,073
|
|
NOTE
8 – Subsequent Event
|
On May 21, 2019, the Company
sold to Aspire Capital 10,000,000 Ordinary Shares of the Company for $0.0261 per share (equivalent to $2.61 per ADS) for gross
proceeds of $261,000 and on May 24, 2019, the Company sold to Aspire Capital 10,000,000 Ordinary Shares of the Company for $0.0234
per share (equivalent to $2.34 per ADS) for gross proceeds of $234,000.
