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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 20-F

(Mark One)

OR

OR

 

OR

 

 

Commission File Number 001-37652

____________________________________________________________

MIDATECH PHARMA PLC

(Exact name of registrant as specified in its charter)

____________________________________________________________

England and Wales

(Jurisdiction of incorporation or organization)

 

65 Innovation Drive

Milton Park

Abingdon, Oxfordshire, OX14 4RQ, United Kingdom

(Address of principal executive offices)

 

James N. Phillips, Chief Executive Officer

65 Innovation Drive

Milton Park

Abingdon, Oxfordshire, OX14 4RQ, United Kingdom

Tel: +44 (0)1235 888 300

(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)

 

Securities registered or to be registered pursuant to Section 12(b) of the Act.

 

 

Securities registered or to be registered pursuant to Section 12(g) of the Act.

 

None

(Title of Class)

 

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act.

 

None

(Title of Class)

____________________________________________________________

 

 

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 Section 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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T ( § 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). 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 (check one):

 

 

 

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 which basis of accounting the registrant has used to prepare the financial statements included in this filing:

 

 

If “ Other ” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow. Item 17 ☐ Item 18 ☐

 

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 ☒

 

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TABLE OF CONTENTS

 

PART I
ITEM  1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS	7
ITEM  2. OFFER STATISTICS AND EXPECTED TIMETABLE	7
ITEM  3. KEY INFORMATION	7
ITEM  4. INFORMATION ON THE GROUP	44
ITEM  4A. UNRESOLVED STAFF COMMENTS	79
ITEM  5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS	79
ITEM  6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES	93
ITEM  7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS	106
ITEM  8. FINANCIAL INFORMATION	107
ITEM  9. THE OFFER AND LISTING	108
ITEM  10. ADDITIONAL INFORMATION	110
ITEM  11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	114
ITEM  12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES	115
PART II
ITEM  13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES	118
ITEM  14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS	118
ITEM  15. CONTROLS AND PROCEDURES	118
ITEM  16. [RESERVED]
ITEM  16A. AUDIT COMMITTEE FINANCIAL EXPERT	119
ITEM  16B. CODE OF ETHICS	120
ITEM  16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES	120
ITEM  16D. EXEMPTIONS FROM LISTING STANDARDS FOR AUDIT COMMITTEES	120
ITEM  16E. PURCHASE OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS	120
ITEM  16F. CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT	121
ITEM  16G. CORPORATE GOVERNANCE	121
ITEM  16H. MINE SAFETY DISCLOSURE	121
PART III
ITEM  17. FINANCIAL STATEMENTS	122
ITEM  18. FINANCIAL STATEMENTS	122
ITEM   19. EXHIBITS	123
SIGNATURES	126

  

 

GENERAL INFORMATION

 

Midatech Pharma PLC is a public limited company organized under the laws of England and Wales under registered number 09216368. In this annual report, references to “ we, ”   “ us, ”   “ our, ”   “ the Group, “ Company, ”   “ company ” or “ Midatech ” means Midatech Pharma PLC and its consolidated subsidiaries.

 

On December 4, 2015, Midatech acquired DARA BioSciences, Inc. ( “ DARA ” ) through a merger transaction (the “ Merger ” ) in which the stockholders of DARA Biosciences, Inc. received (i) American depositary shares ( “ Depositary Shares ” ) representing the ordinary shares of Midatech, nominal value 0.005p per share (the “ Ordinary Shares ” ) and (ii) contingent value rights which represents the right to receive contingent payments if specified milestones are achieved within agreed time periods. Immediately following the closing of the Merger, DARA became a wholly owned subsidiary of Midatech and changed its named to “ Midatech Pharma US Inc. ” ( “ Midatech US ” ). Where this annual report (i) provides information for dates prior to December 4, 2015, such information does not include the historical information of DARA, (ii) refers to DARA, it is referencing the DARA entity prior to December 4, 2015 and (iii) references Midatech US, it is referencing the former DARA entity from December 4, 2015 on.

 

Our principal executive offices are located at 65 Innovation Drive, Milton Park, Abingdon, Oxfordshire OX14 4RQ, United Kingdom. The telephone number at our principal executive office is +44 1235 888 300.

 

We maintain an Internet website at www.midatechpharma.com. None of the information contained on our website, or on any other website linked to our website, will be incorporated in this annual report by reference or otherwise be deemed to be a part of this annual report.

 

The trademarks, trade names and service marks appearing in this Annual Report on Form 20-F are the property of their respective owners.

 

PRESENTATION OF FINANCIAL AND OTHER DATA

 

Midatech prepares its consolidated financial statements in British pounds sterling. In this annual report, references to “ GBP, ”   “£ , ”   “ pence ” or “ p ” are each to British pounds sterling (or units thereof), and references to “ $, ”   “ USD, ”   “ US$ ” and “ United States dollar ” are each to the United States dollar. Except as otherwise stated, all monetary amounts in this annual report are presented in Great Britain pounds sterling. Solely for the convenience of the reader, unless otherwise indicated, all British pounds sterling amounts as of and for the year ended December 31, 2017 have been translated into United States dollars at the rate at December 29, 2017, of £ 1.00 to $1.3529, based on noon buying rates published by the Federal Reserve Bank of New York for the British pound sterling on such date. These translations should not be considered representations that any such amounts have been, could have been or could be converted into United States dollars at that or any other exchange rate as of that or any other date.

 

References to a particular “ fiscal ” year are to our fiscal year ended December 31 of such year. References to years not specified as being fiscal years are to calendar years.

 

As reference, the following provides a description of the different phases of clinical trials, as may be used in this annual report:

·

Phase I clinical trials involve the assessment of the safety, pharmacodynamics and pharmacokinetics of a drug candidate in a small group of healthy human subjects (typically 20 to 100 patients), or in certain indications such as cancer, patients with the target disease or condition and tested for safety, dosage tolerance, absorption, metabolism, distribution, excretion and, if possible, to gain an early indication of its effectiveness and to determine optimal dosage.

·

Phase II clinical trials involve the assessment in patients of a drug to determine its safety, dose range, possible side effects and preliminary efficacy (typically 100 to 300 patients).

·

Phase III is a clinical trial involving the assessment of the efficacy and safety of a drug, usually in comparison with a marketed product or a placebo, in the patient population for which it is intended (typically 1,000 to 3,000 patients).

   

 

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

This annual report contains certain forward-looking information about Midatech that is intended to be covered by the safe harbor for “ forward-looking statements ” provided by the Private Securities Litigation Reform Act of 1995. These statements may be made directly in this annual report or may be incorporated into this annual report by reference to other documents. Representatives of Midatech may also make forward-looking statements. Forward-looking statements are statements that are not historical facts. Words such as “ expect, ”   “ believe, ”   “ will, ”   “ may, ”   “ anticipate, ”   “ plan, ”   “ estimate, ”   “ intend, ”   “ should, ”   “ can, ”   “ likely, ”   “ could ” and similar expressions are intended to identify forward-looking statements. Forward-looking statements appear in a number of places throughout this annual report and include statements regarding Midatech’s intentions, beliefs, assumptions, projections, outlook, analyses or current expectations concerning, among other things, Midatech’s intellectual property position, success integrating Midatech US and other acquisitions, research and development projects, results of operations, cash needs, capital expenditures, financial condition, liquidity, prospects, growth and strategies, regulatory approvals and clearances, the markets and industry in which Midatech operates and the trends and competition that may affect the markets, industry or Midatech.

 

These forward-looking statements are based on currently available competitive, financial and economic data together with management ’ s views and assumptions regarding future events and business performance as of the time the statements are made and are subject to risks and uncertainties. Midatech wishes to caution you that there are some known and unknown factors that could cause actual results to differ materially from any future results, performance or achievements expressed or implied by such forward-looking statements, including but not limited to risks related to:

   

·

Midatech’s estimates regarding losses, expenses, future revenues, capital requirements and needs for additional financing;

·

Midatech’s ability to successfully test, manufacture, produce or commercialize products for conditions using the nanoparticle, nano-inclusion and sustained release drug delivery platforms;

·

Midatech’s compliance with covenants contained in the terms of the agreements governing its indebtedness;

·

the successful commercialization and manufacturing of Midatech’s licensed products, products originally licensed to Midatech US, and any future product Midatech may commercialize;

·

the success and timing of Midatech’s preclinical studies and clinical trials;

·

shifts in Midatech ’ s business and commercial strategy;

·

the filing and timing of regulatory filings, including Investigational New Drug applications, with respect to any of Midatech’s products and the receipt of any regulatory approvals;

·

the anticipated medical or other benefits of Midatech’s products;

·

the difficulties in obtaining and maintaining regulatory approval of Midatech’s product candidates, and the labeling under any approval Midatech may obtain;

·

the success and timing of the potential commercial development of Midatech’s product candidates and any product candidates Midatech may acquire in the future;

·

Midatech’s plans and ability to develop and commercialize Midatech’s product candidates and any product candidates Midatech acquires in the future;

·

the rate and degree of market acceptance of any of Midatech’s product candidates;

·

the successful development of Midatech’s commercialization capabilities, including its internal sales and marketing capabilities;

·

obtaining and maintaining intellectual property protection for Midatech’s product candidates and Midatech’s proprietary technology;

·

the success of competing therapies and products that are or become available;

·

the success of any future acquisitions;

·

Midatech’s ability to continue as a going concern;

·

the difficulties of integrating any future acquisitions into Midatech’s own business;

·

the outcome of the Company ’ s remediation plan and approach to the material weaknesses in internal control over financial reporting;

·

cybersecurity and other cyber incidents;

·

industry trends;

·

the impact of government laws and regulations;

·

regulatory, economic and political developments in the United Kingdom, the European Union, the United States and other foreign countries;

  

 

·

the difficulties doing business internationally;

·

the ownership of Midatech’s Ordinary Shares and Depositary Shares;

·

the status of Midatech’s ongoing leadership transition and Midatech’s failure to recruit or retain key scientific or management personnel or to retain Midatech’s executive officers;

·

the impact and costs and expenses of any litigation Midatech may be subject to now or in the future; and

·

the performance of third parties, including joint venture partners, Midatech’s sales force, Midatech’s collaborators, third-party suppliers and parties to Midatech’s licensing agreements.

 

Any forward-looking statements that Midatech makes in this annual report speak only as of the date of such statement, and Midatech undertakes no obligation to update such statements to reflect events or circumstances after the date of this annual report or to reflect the occurrence of unanticipated events. Comparisons of results for current and any prior periods are not intended to express any future trends or indications of future performance, unless expressed as such, and should only be viewed as historical data. You should, however, review the factors and risks Midatech describes in the reports it will file from time to time with the SEC after the date of this annual report. See “ Item 10. Additional Information-H. Documents on Display . ”

 

You should also read carefully the factors described in “ Item 3. Key Information-D. Risk Factors ” and elsewhere in this annual report to better understand the risks and uncertainties inherent in Midatech’s business and underlying any forward-looking statements. As a result of these factors, Midatech cannot assure you that the forward-looking statements in this annual report will prove to be accurate. Furthermore, if Midatech’s forward-looking statements prove to be inaccurate, the inaccuracy may be material. In light of the significant uncertainties in these forward-looking statements, you should not regard these statements as a representation or warranty by Midatech or any other person that Midatech will achieve its objectives and plans in any specified timeframe, or at all.

 

 

Midatech has obtained product liability insurance coverage with a £ 8.0 million annual aggregate coverage. Midatech ’ s insurance coverage may not be sufficient to cover all of its product liability related expenses or losses and may not cover it for any expenses or losses it may suffer. Moreover, insurance coverage is becoming increasingly expensive and, in the future, Midatech may not be able to maintain insurance coverage at a reasonable cost, in sufficient amounts or upon adequate terms to protect it against losses due to product liability. If Midatech determines that it is prudent to increase its product liability coverage based on sales of its products, Midatech may be unable to obtain this increased product liability insurance on commercially reasonable terms or at all. Large judgments have been awarded in class action or individual lawsuits based on drugs that had unanticipated side effects, including side effects that may be less severe than those of Midatech ’ s products. A successful product liability claim or series of claims brought against Midatech could cause the price of the Ordinary Shares and/or Depositary Shares to decline and, if judgments exceed Midatech ’ s insurance coverage, could decrease its cash and have a material adverse effect its business, results of operations, financial condition and prospects.

 

Midatech’s products may be faced with recalls.

 

Midatech may be faced with the necessity of recalling one or more products or batches of products from the market. This necessity may also occur if no de facto product property exists that makes a recall obligatory, in particular a side effect or defect, but rather if such a property is merely suspected of being present. A recall may result in loss of revenue, damage to reputation and consequential fall in cash flow, and product supply interruption, among other things. Affected products could not be sold any longer, and moreover, trust among, in particular, doctors and patients could be affected, which could lead to reductions in sales or profits. Further, options for refinancing on the capital market could be negatively affected or even excluded.

 

Midatech relies on third parties to conduct its preclinical and clinical trials. If these third parties do not successfully carry out their contractual duties or meet expected deadlines, Midatech may not be able to obtain regulatory approval for or commercialize its product candidates and its business could be substantially harmed.

 

Midatech is, and may continue to be, reliant on other parties for the successful development and commercialization of many of its products. Midatech relies upon CROs for the conduct of its clinical studies. Midatech relies on these parties for execution of its preclinical and clinical trials, and controls only certain aspects of their activities. Nevertheless, Midatech is responsible for ensuring that each of its studies is conducted in accordance with the applicable protocol and legal, regulatory and scientific standards, and Midatech ’ s reliance on the CROs or collaboration partners does not relieve it of its regulatory responsibilities. Midatech also relies on third parties to assist in conducting its preclinical studies in accordance with Good Laboratory Practices and requirements with respect to animal welfare. Midatech and its CROs or collaboration partners are required to comply with Good Clinical Practices ( “ GCP ” ), which are regulations and guidelines enforced by the MHRA, the FDA, the EMA and comparable foreign regulatory authorities for all of its products in clinical development. Regulatory authorities enforce these GCP through periodic inspections of trial sponsors, principal investigators and trial sites. If Midatech or any of its CROs or partners fail to comply with applicable GCP, the clinical data generated in Midatech ’ s clinical trials may be deemed unreliable and the EMA, the MHPA, the FDA or comparable foreign regulatory authorities may require Midatech to perform additional clinical trials before approving its marketing applications. Midatech cannot assure you that upon inspection by a given regulatory authority, such regulatory authority will determine that any of its clinical trials comply with GCP requirements. In addition, Midatech ’ s clinical trials must be conducted with product produced under cGMP requirements. Failure to comply with these regulations may require Midatech to repeat preclinical and clinical trials, which would delay the regulatory approval process.

 

 

Midatech ’ s CROs are not its employees, and except for remedies available to it under such agreements with such CROs, Midatech cannot control whether or not they devote sufficient time and resources to its on-going clinical, nonclinical and preclinical programs. If CROs do not successfully carry out their contractual duties or obligations or meet expected deadlines or if the quality or accuracy of the clinical data they obtain is compromised due to the failure to adhere to Midatech ’ s clinical protocols, regulatory requirements or for other reasons, then Midatech ’ s clinical trials may be extended, delayed or terminated and it may not be able to obtain regulatory approval for or successfully commercialize its product candidates. As a result, Midatech ’ s results of operations and the commercial prospects for its product candidates would be harmed, its costs could increase and its ability to generate revenues could be delayed.

 

Because Midatech has relied on third parties, its internal capacity to perform these functions is limited. Outsourcing these functions involves risk that third parties may not perform to Midatech ’ s standards, may not produce results in a timely manner or may fail to perform at all. In addition, the use of third party service providers requires Midatech to disclose its proprietary information to these parties, which could increase the risk that this information will be misappropriated. Midatech currently has a small number of employees, which limits the internal resources it has available to identify and monitor its third party providers. To the extent it is unable to identify and successfully manage the performance of third party service providers in the future, Midatech ’ s business may be adversely affected. Though Midatech carefully manages its relationships with its CROs, there can be no assurance that it will not encounter similar challenges or delays in the future or that these delays or challenges will not have a material adverse impact on Midatech ’ s business, financial condition and prospects.

 

Midatech is dependent on third party suppliers, and if it experiences problems with any of these third parties, the manufacturing of its product candidates or products could be delayed, which could harm its results of operations.

 

Midatech is also dependent upon certain qualified suppliers, of which there are a limited number, for the supply of raw materials, components, devices and manufacturing equipment. Additionally, these suppliers may also have downstream suppliers who supply materials, components, devices and manufacturing equipment, which may indirectly impact Midatech’s business operations.  Midatech may also become dependent in the future on third party contract manufacturing organizations for the production of its product candidates for commercial sale.  Thus, the success of Midatech ’ s business may be adversely affected by the underperformance of third parties, exploitation by third parties of Midatech ’ s commercial dependence and by unforeseen interruptions to third parties ’ businesses. Although the existence of several alternative suppliers for each function mitigates the risks associated with this dependence, as does the availability of commercial insurance in respect of the impact of accidental events, the failure of a third party to properly to carry out their contractual duties or regulatory obligations could be highly disruptive to Midatech ’ s business. Supply chain failures can result in significant clinical or commercial supply interruptions which could materially hamper Midatech’s ability to conduct clinical trials or to supply adequate commercial supplies, and efforts to qualify new suppliers can be costly and time consuming.  Further, any action taken by a third party that is detrimental to Midatech ’ s reputation could have a negative impact on Midatech ’ s ability to register its trademarks and/or market and sell its products.

  

In the future, Midatech intends to license certain of its products to other companies for later stages of development and subsequent marketing, and consequently Midatech will be increasingly reliant on securing and retaining such partners once its products advance through the development process. There can be no assurance that Midatech will be able to secure such partners or that, once secured, Midatech ’ s partners will continue to make the necessary and timely investments in its products to complete their development in the expected time and achieve commercial success.

 

Midatech is exposed to risks related to its partnerships in joint ventures.

 

Midatech participates in, and may expand through, joint ventures. There are certain risks associated with joint venture partners, including the risk that joint venture partners may:

·

have economic or business interests or goals that are inconsistent with those of Midatech and be in a position to take or influence actions contrary to Midatech ’ s interests and plans, which may create impasses on decisions and affect Midatech ’ s ability to implement its strategies;

·

veto proposals in respect of joint venture operations;

·

be unable or unwilling to fulfill their obligations under the joint venture or other agreements; or

·

experience financial or other difficulties.

 

 

Any joint venture arrangements may expose Midatech to the risk that disputes develop between Midatech and joint venture partners, with any litigation or arbitration resulting from any such disputes increasing the Midatech ’ s expenses and distracting management resources. In addition, there can be no assurance that Midatech will always have a controlling interest in any joint venture in which it currently participates or into which it may enter in the future. As such, joint ventures may disproportionately divert financial and management resources, which may have a material adverse effect on Midatech ’ s business, financial condition, operating results or prospects.

 

Midatech’s counterparties may become insolvent.

 

There is a risk that parties with whom Midatech trades or has other business relationships with (including partners, joint venturers, customers, suppliers, subcontractors and other parties) may become insolvent. This may be due to general economic conditions or factors specific to that company. In the event that a party with whom Midatech trades becomes insolvent, this could have an adverse impact on the revenues and profitability of Midatech.

 

Midatech may lose its sterile production license and may encounter unexpected difficulties in the scale-up of production to viable clinical trial or commercialization levels.

 

Midatech completed a major upgrade of its infrastructure in Spain in September 2014 by integrating a separated sterile production unit within the manufacturing containment area. Through integrating the separated sterile production unit within the manufacturing facility, Midatech can produce clinical candidate compounds under sterile conditions, allowing Midatech to clinically test and evaluate candidate gold nanoparticles-based cancer therapies, which are administered by intravenous injection. A further upgrade was completed in December 2016 with the addition of a non-sterile production unit for Midatech ’ s sustained release products. The Spanish regulatory authority grants Midatech requisite licenses necessary for the activities that occur at this facility. If the Spanish regulatory authority were to revoke or fail to issue the requisite licenses, Midatech may need to outsource its requirements of the sterile production and cGMP manufacturing, which will increase Midatech ’ s reliance on third parties to manufacture the candidate compounds to the required standards, and will be therefore be at risk of underperformance and unforeseen interruptions, which could adversely affect Midatech ’ s business and financial performance.

 

Because of the complex nature of Midatech ’ s product candidates, it may not be able to manufacture the product candidates in a timely manner at cost or in quantities necessary to successfully commercialize Midatech ’ s products. Certain of Midatech ’ s product candidates have historically only been manufactured in small quantities. Later stage development and commercial supply of such products will require Midatech to scale up the manufacture of its products. There can be no assurance that this can be successfully completed or that, if completed, it will result in commercially acceptable manufacturing costs.

 

Midatech’s relationships with customers and third-party payors are subject to applicable anti-kickback, fraud and abuse and other healthcare laws and regulations, which could expose it to criminal sanctions, civil penalties, contractual damages, reputational harm and diminished profits and future earnings.

 

Healthcare providers, physicians and third-party payors play a primary role in the recommendation and prescription of any of Midatech ’ s products or any product candidate for which Midatech obtains marketing approval. Midatech ’ s arrangements with third party payors and customers exposes it to broadly applicable fraud and abuse and other healthcare laws and regulations that may constrain the business or financial arrangements and relationships through which it markets, sells and distributes its products for which it obtains marketing approval. For example, in the United States, restrictions under applicable federal and state healthcare laws and regulations include the following:

·

the federal healthcare anti-kickback statute;

·

the federal civil False Claims;

·

the federal Health Insurance Portability and Accountability Act of 1996 (“HIPAA”), as amended by the Health Information Technology for Economic and Clinical Health Act;

·

the federal Physician Payment Sunshine Act, being implemented as the Open Payments Program; and

·

analogous state laws and regulations, such as state anti-kickback and false claims laws.

 

 

Midatech, through Midatech US, has initiated participation in the federal Medicaid Rebate Program established by the Omnibus Budget Reconciliation Act of 1990, as subsequently amended, including by the Affordable Care Act, as well as several state supplemental rebate programs, in connection with the sale of Soltamox and would anticipate participating in these programs with respect to future pharmaceutical products, including Oravig and Zuplenz. Though to date invoices for rebates have not been material, under the Medicaid rebate program, Midatech anticipates paying a rebate to each state Medicaid program for its products that are reimbursed by those programs. Federal law requires that any company that participates in the Medicaid rebate program extend comparable discounts to qualified purchasers under the Public Health Service Act pharmaceutical pricing program, which requires Midatech to sell its products to certain customers at prices lower than Midatech otherwise might be able to charge. If products are made available to authorized users of the Federal Supply Schedule, additional pricing laws and requirements apply. Pharmaceutical companies have been prosecuted under federal and state false claims laws in connection with allegedly inaccurate information submitted to the Medicaid Rebate Program or for knowingly submitting or using allegedly inaccurate pricing information in connection with federal pricing and discount programs.

 

Pricing and rebate calculations vary among products and programs. The calculations are complex and may be subject to interpretation by Midatech or its contractors, governmental or regulatory agencies and the courts. Midatech ’ s methodologies for calculating these prices could be challenged under false claims laws or other laws. Midatech or its contractors could make a mistake in calculating reported prices and required discounts, revisions to those prices and discounts, or determining whether a revision is necessary, which could result in retroactive rebates (and interest, if any). Governmental agencies may also make changes in program interpretations, requirements or conditions of participation, some of which may have implications for amounts previously estimated or paid. If this were to occur, Midatech could face, in addition to prosecution under federal and state false claims laws, substantial liability and civil monetary penalties, exclusion of Midatech ’ s products from reimbursement under government programs, criminal fines or imprisonment or the entry into a corporate integrity agreement, deferred prosecution agreement, or similar arrangement.

 

In the United Kingdom and other European Union member states, comparable regulations and laws exist in order to maintain a fair healthcare market. The United Kingdom Bribery Act 2010 may also have jurisdiction in relation to unlawful payments or kickbacks in the United Kingdom and elsewhere.

 

The shifting commercial compliance environment and the need to build and maintain robust and expandable systems to comply with different compliance or reporting requirements in multiple jurisdictions increase the possibility that a healthcare or pharmaceutical company may fail to comply fully with one or more of these requirements.  Efforts to ensure that Midatech ’ s business arrangements with third parties will comply with applicable healthcare laws and regulations will involve substantial costs. It is possible that governmental authorities will conclude that Midatech ’ s business practices may not comply with applicable fraud and abuse or other healthcare laws and regulations. If Midatech ’ s operations, including activities conducted by Midatech ’ s sales team in the promotion of Midatech ’ s licensed or co-promoted products, are found to be in violation of any of these laws or any other governmental regulations that may apply to us, Midatech may be subject to significant civil, criminal and administrative penalties, damages, fines, exclusion from government funded healthcare programs, such as Medicare and Medicaid in the United States, and the curtailment or restructuring of Midatech ’ s operations. If any of the physicians or other providers or entities with whom Midatech expects to do business is found to not be in compliance with applicable laws, they may be subject to criminal, civil or administrative sanctions, including exclusions from government funded healthcare programs.  Even if Midatech is not determined to have violated these laws, government investigations into these issues typically require the expenditure of significant resources and generate negative publicity, which could harm Midatech’s financial condition and divert resources and the attention of its management from operating its business.

 

Midatech is subject to cybersecurity risks and other cyber incidents, including the misappropriation of Midatech’s information and other breaches of information security that may result in disruption and the incurrence of costs in an effort to minimize those risks.

In the normal course of conducting its business, Midatech collects and stores sensitive data on its networks, including intellectual property, personal information of its employees, and its proprietary business information and that of its customers, vendors and business partners.  Despite the security measures Midatech has in place and any additional measures it may implement in the future to safeguard its systems and to mitigate potential security risks, Midatech’s facilities and systems, and those of its third-party service providers, could be vulnerable to security breaches, computer viruses, lost or misplaced data, programming errors, human errors, acts of vandalism or other events. Any steps Midatech takes to deter and mitigate these risks may not be successful and may cause Midatech to incur increasing costs. Any disruption of its systems or security breach or event resulting in the misappropriation, loss or other unauthorized disclosure of confidential information, whether by Midatech directly or by its third-party service providers, could damage Midatech’s reputation, result in the incurrence of costs, expose Midatech to the risks of litigation and liability, result in regulatory penalties under laws that protect privacy of personal information, disrupt Midatech’s business or otherwise affect its results of operations.

 

Midatech is currently undergoing a leadership transition and this transition, along with the possibility that Midatech may in the future be unable to retain and recruit qualified scientists, ke y executives, ke y emplo y ees or key consultants, may delay its development efforts or otherwise harm its business.

 

On March 15, 2018, Midatech announced that Dr. James Phillips, its Chief Executive Officer and a member of the Board of Directors, would step down at the end of May 2018.  Dr. Craig Cook, currently Midatech’s Chief Operating Officer and Head of Research and Development, has been appointed by the Board of Directors to succeed Dr. Phillips, effective as of June 1, 2018.  While Midatech has confidence in Dr. Cook and its remaining leadership team, the uncertainty inherent in this ongoing leadership transition may be difficult to manage, may cause concerns from third parties with whom Midatech does business, and may increase the likelihood of turnover of other key officers and employees.

In addition, Midatech ’ s future development and prospects depend to a large degree on the experience, performance and continued service of its senior management team, including members of its Board of Directors. Midatech has invested in its management team at all levels. Midatech has entered into contractual arrangements with its directors and senior management team with the aim of securing the services of each of them. However, retention of these services or the identification of suitable replacements cannot be guaranteed. There can be no guarantee that the services of the current directors and senior management team will be retained, or that suitably skilled and qualified individuals can be identified and employed, which may adversely impact Midatech ’ s ability to develop its technologies and/or provide its services at the time requested by its customers or its ability to market its services and technologies, and otherwise to grow its business, could be impaired. The loss of the services of any of the directors or other members of the senior management team and the costs of recruiting replacements may have a material adverse effect on Midatech and its commercial and financial performance.

  

The ability to continue to attract and retain employees with the appropriate expertise and skills also cannot be guaranteed. Finding and hiring any additional personnel and replacements could be costly and might require Midatech to grant significant equity awards or other incentive compensation, which could adversely impact its financial results, and there can be no assurance that Midatech will have sufficient financial resources to do so. Effective product development and innovation, upon which Midatech ’ s success is dependent, is in turn dependent upon attracting and retaining talented technical and scientific personnel, who represent a significant asset and serve as the source of Midatech ’ s technological and product innovations. If Midatech is unable to hire, train and retain such personnel in a timely manner, the development and introduction of Midatech ’ s products could be delayed and its ability to sell its products and otherwise to grow its business will be impaired and the delay and inability may have a detrimental effect upon the performance of Midatech.

 

Midatech’s employees may engage in misconduct or other improper activities, including noncompliance with regulatory standards and requirements, which could have a material adverse effect on its business.

 

Midatech is exposed to the risk of employee fraud or other misconduct. Misconduct by employees could include intentional failures to comply with applicable regulations, provide accurate information to regulatory authorities, comply with manufacturing standards, comply with healthcare fraud and abuse laws and regulations, report financial information or data accurately, or disclose unauthorized activities to Midatech. In particular, sales, marketing and business arrangements in the healthcare industry are subject to extensive laws and regulations intended 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, sales commission, customer incentive programs and other business arrangements. Employee misconduct could also involve the improper use of information obtained in the course of clinical trials, which could result in regulatory sanctions and serious harm to Midatech ’ s reputation. Midatech has adopted a Code of Business Conduct and Ethics, but it is not always possible to identify and deter employee misconduct, and the precautions Midatech has taken 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 be in compliance with such laws or regulations. If any such actions are instituted against Midatech and it is not successful in defending itself or asserting its rights, those actions could have a significant impact on its business and results of operations, including the imposition of significant fines or other sanctions.

 

 

Unexpected facility shutdowns or system failures may occur and Midatech’s disaster recovery plans may not be sufficient.

 

Midatech depends on the performance, reliability and availability of its properties, plant, machinery, laboratory equipment and information technology systems. Midatech may not be able to access its facilities as a result of events beyond its control, such as extreme weather conditions, flood, fire, theft, terrorism and acts of God. Any damage to or failure of its equipment and/or systems could also result in disruptions to Midatech ’ s operations. A complete or partial failure of Midatech ’ s information technology systems, or those of its CROs and other third parties on which it relies, or corruption of data could result in Midatech being unable to access information that it needs in order to meet its obligations to its customers or a breach of confidentiality with respect to Midatech ’ s or its customers ’ proprietary information. If such an event were to occur and cause interruptions in Midatech ’ s operations, it could result in a material disruption of its drug development programs. For example, the loss of clinical trial data from completed or ongoing or planned clinical trials could result in delays in Midatech ’ s regulatory approval efforts and significantly increase Midatech ’ s costs to recover or reproduce the data. Midatech ’ s disaster recovery plans may not adequately address every potential event and its insurance policies may not cover any loss in full or in part (including losses resulting from business interruptions) or damage that it suffers fully or at all. The occurrence of one or more of these events could have a material adverse effect on Midatech ’ s business, financial position, reputation or prospects, and might lead to a claim for damages.

 

Midatech’s business may be adversely affected by economic conditions and current economic weakness.

 

Any economic downturn either globally, regionally or locally in any country in which Midatech operates may have an adverse effect on the demand for Midatech ’ s products. A more prolonged economic downturn may lead to an overall decline in Midatech ’ s sales, limiting Midatech ’ s ability to generate a profit and positive cash flow. The markets in which Midatech offers its products are directly affected by many national and international factors that are beyond Midatech ’ s control, such as political, economic, currency, social and other factors.

  

Midatech is exposed to the risks of doing business internationally.

 

In addition to operations in the United States, Midatech also currently operates in a number of countries in Europe. Midatech ’ s international operations are subject to a number of risks inherent in operating in different countries. These include, but are not limited to, risks regarding:

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currency exchange rate fluctuations;

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restrictions on repatriation of earnings;

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efforts to develop an international sales, marketing and distribution organization, which may increase Midatech ’ s expenses, divert management ’ s attention from the acquisition or development of product candidates or cause it to forgo profitable licensing opportunities in these geographies;

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unexpected changes in foreign laws and regulatory requirements, including pharmaceutical regulations;

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difficulty of effective enforcement of contractual provisions in local jurisdictions;

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inadequate intellectual property (including confidentiality) protection in foreign countries;

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trade-protection measures, import or export licensing requirements and fines, penalties or suspension or revocation of export privileges; and

·

changes in a specific country ’ s or a region ’ s political or economic conditions, particularly in emerging markets.

 

The occurrence of any of these events or conditions could adversely affect Midatech ’ s ability to increase or maintain its operations in various countries.

 

Midatech has undertaken, and may in the future undertake, additional strategic acquisitions. Failure to integrate acquisitions could adversely affect Midatech’s value.

 

One of the ways Midatech has grown its pipeline and business is through strategic acquisitions, such as its acquisition of DARA and the acquisition of Zuplenz from Galena Biopharma, Inc. Midatech may, from time to time, evaluate additional acquisition opportunities, and may, in the future, strategically make further acquisitions of, and investments in, businesses and technologies when it believes the opportunity is advantageous to its prospects. There can be no assurance that in the future Midatech will be able to find appropriate acquisitions or investments. In connection with these acquisitions or investments, Midatech may:

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issue stock that would dilute its stockholders ’ percentage of ownership;

 

 

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be obligated to make milestone or other contingent or non-contingent payments;

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incur debt and assume liabilities; and

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incur amortization expenses related to intangible assets or incur large and immediate write-offs.

Midatech also may be unable to find suitable acquisition candidates and may not be able to complete acquisitions on favorable terms, if at all. If Midatech does complete an acquisition, this may not ultimately strengthen its competitive position or ensure that it will not be viewed negatively by customers, financial markets or investors. Further, acquisitions, including the acquisition of DARA, could also pose numerous additional risks to Midatech ’ s operations, including:

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problems integrating the purchased business, products or technologies, including the failure to achieve the expected benefits and synergies;

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increases to Midatech ’ s expenses;

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the failure to have discovered undisclosed liabilities of the acquired asset or company;

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diversion of management ’ s attention from their day-to-day responsibilities;

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harm to Midatech ’ s operating results or financial condition;

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entrance into markets in which Midatech has limited or no prior experience; and

·

potential loss of key employees, particularly those of the acquired entity.

 

Midatech may not be able to complete one or more acquisitions or effectively integrate the operations, products or personnel gained through any such acquisition without a material adverse effect on its business, financial condition and results of operations.

 

Midatech is exposed to risks related to currency exchange rates.

 

Midatech conducts a significant portion of its operations outside of the United Kingdom. Because Midatech uses the British pound sterling as its financial statement reporting currency, changes in currency exchange rates have had and could have a significant effect on its operating results when its operating results are translated from U.S. dollars or Euros into British pound sterling. Exchange rate fluctuations between local currencies and the British pound sterling create risk in several ways, including the following: weakening of the British pound sterling, as seen, for example, following the Brexit referendum, may increase the British pound sterling cost of overseas research and development expenses and the cost of sourced product components outside the United Kingdom; strengthening of the British pound sterling may decrease the value of Midatech ’ s revenues denominated in other currencies; the exchange rates on non-sterling transactions and cash deposits can distort Midatech ’ s financial results; and commercial pricing and profit margins are affected by currency fluctuations. Future changes in currency exchange rates could have a material adverse effect on Midatech ’ s financial results.

Risks Related to Ownership of Midatech’s Securities

 

The price of Midatech’s Ordinary Shares and American Depositary Shares may be volatile.

 

Each Depositary Share represents two Ordinary Shares. A public market has only been established for the Depositary Shares since December 2015, and such a market may not be sustained. Both the United States and United Kingdom stock markets have experienced significant volatility, including in pharmaceutical and biotechnology stocks. In particular, the closing price of Midatech ’ s Ordinary Shares on the AIM Market of the London Stock Exchange ( “ AIM ” ) has fluctuated between £ 0.36 and £ 3.30 between December 8, 2014 and December 31, 2017, and the closing price of Midatech ’ s Depositary Shares on The NASDAQ Capital Market (“NASDAQ”) has fluctuated between $0.83 and $8.09 between December 7, 2015 and December 31, 2017. The volatility of pharmaceutical and biotechnology stocks does not often relate to the operating performance of the companies represented by the stock. Other price fluctuations are, or may be, directly attributable to financial performance.

 

 

Factors that could cause volatility in the market price of each Ordinary Share and the Depositary Shares include:

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the success of competitive products or technologies;

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regulatory actions with respect to Midatech’s products or its competitors’ products;

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actual or anticipated changes in Midatech’s growth rate relative to its competitors;

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announcements by Midatech or its competitors of new products, significant acquisitions, strategic partnerships, joint ventures, collaborations or capital commitments;

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the progress of preclinical development, laboratory testing and clinical trials of Midatech’s product candidates or those of its competitors;

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the results from Midatech’s clinical programs and any future trials it may conduct;

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developments in the clinical trials of potentially similar competitive products;

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EMA, FDA or international regulatory or legal developments;

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failure of any of Midatech’s product candidates, if approved, to achieve commercial success;

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developments or disputes concerning patent applications, issued patents or other proprietary intellectual property rights;

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the recruitment or departure of key personnel;

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the level of expenses related to any of Midatech’s product candidates or clinical development programs;

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litigation or public concern about the safety of Midatech’s products;

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actual or anticipated changes in estimates as to financial results, development timelines or recommendations by securities analysts;

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actual and anticipated fluctuations in Midatech’s operating results;

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variations in Midatech’s financial results or those of companies that are perceived to be similar to it;

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share price and volume fluctuations attributable to inconsistent trading volume levels of Midatech’s shares;

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announcement or expectation of additional financing efforts;

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rumors relating to Midatech or its competitors;

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sales of Ordinary Shares or Depositary Shares by Midatech, its insiders or its other shareholders;

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changes in the structure of healthcare payment systems;

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market conditions in the pharmaceutical and biotechnology sectors;

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third party reimbursement policies;

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Brexit and any resulting economic or currency volatility;

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developments concerning current or future collaborations, strategic alliances, joint ventures or similar relationships; and

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reviews of long-term values of Midatech’s assets, which could lead to impairment charges that could reduce its earnings.

 

 

In addition, the stock market in general, NASDAQ and pharmaceutical and biotechnology companies in particular, have experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of these companies.  Broad market and industry factors may negatively affect the market price of Midatech’s Ordinary Shares, regardless of its actual operating performance.  The realization of any of the above risks or any of a broad range of other risks, including those described in these “Risk Factors,” could have a dramatic and material adverse impact on the market price of Midatech’s Ordinary Shares and Depositary Shares.

Forecasting sales of Midatech’s products and product candidates, if approved, may be difficult, and if its revenue projections are inaccurate, Midatech’s business may be harmed and its stock price may decline.

 

Sales of Midatech’s products and product candidates will be difficult to forecast.  Factors that increase the difficulty of forecasting sales of each of its current and future products include the following:

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the cost and availability of reimbursement for the product;

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treatment guidelines issued by government and non-government agencies in the United States, the United Kingdom and other foreign jurisdictions;

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the timing of market entry relative to competitive products;

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the availability of alternative therapies;

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the price of the product relative to alternative therapies, including generic versions of products that compete with Midatech’s products;

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the rates of returns and rebates;

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uncertainty about the pace of acceptance of the product;

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the ability of Midatech’s third-party manufacturers to manufacture and deliver the product in commercially sufficient quantities;

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the ability of Midatech’s third-party distributors and wholesalers to process orders in a timely manner and satisfy their obligations to it;

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the extent and success of Midatech’s marketing efforts; and

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potential side effects or unfavorable publicity concerning Midatech’s products or similar products.

 

The extent to which any of these or other factors individually or in the aggregate may impact future sales of Midatech’s products is uncertain and difficult to predict.  Midatech’s management must make forecasting decisions regarding future revenue in the course of business planning despite this uncertainty, and actual results of operations may deviate materially from projected results.  If its revenues from product sales are lower than Midatech anticipates, it will incur costs in the short term that will result in losses that are unavoidable.  A shortfall in revenue would have a direct impact on Midatech’s expected cash flow, its stock price and on its business generally.  Furthermore, to the extent that any projections Midatech disclosed publicly regarding future product sales or its financial performance are incorrect, including as a result of the challenges in forecasting such sales, its stock price could be adversely affected, and Midatech could be subject to an increased risk of litigation.  In addition, fluctuations in Midatech’s results can adversely and significantly affect the market price of the Ordinary Shares and Depositary Shares.

Midatech may be subject to securities litigation, which is expensive and could divert management attention.

The market price of the Ordinary Shares and Depositary Shares may be volatile, and in the past, some companies that have experienced volatility in the market price of their stock have been subject to securities class action litigation.  Midatech may be the target of this type of litigation in the future.  Securities litigation against Midatech could result in substantial costs and divert management’s attention from other business concerns, which could seriously harm Midatech’s business.

 

 

Depositary Shares may not be as liquid as Ordinary Shares.

 

Some companies that have issued American depositary shares on United States stock exchanges have experienced lower levels of liquidity in their American depositary shares than is the case for their ordinary shares listed on their domestic exchange. Although the Depositary Shares now trade on NASDAQ, an active trading market for the Depositary Shares may not be sustained. It may be difficult for holders to sell their Depositary Shares without depressing the market price for the Depositary Shares or at all. As a result of these and other factors, holders of Depositary Shares may not be able to sell their Depositary Shares. In addition, such holders may incur higher transaction costs when buying and selling Depositary Shares than they would incur in buying and selling common stock.

Further, an inactive market may also impair Midatech’s ability to raise capital by selling Depositary Shares and Ordinary Shares and may impair its ability to enter into strategic partnerships or acquire companies or products by using its Ordinary Shares as consideration.

The Ordinary Shares and Depositary Shares trade on two different markets and this may result in price variations and regulatory compliance issues.

 

Depositary Shares representing the Ordinary Shares are listed for trading on NASDAQ and the Ordinary Shares are traded on AIM. Trading in Midatech’s securities on these markets is made in different currencies and at different times, including as a result of different time zones, different trading days and different public holidays in the U.S. and the United Kingdom. Consequently, the effective trading prices of Midatech’s securities on these two markets may differ. Any decrease in the trading price of Midatech’s securities on one of these markets could cause a decrease in the trading price of Midatech’s securities on the other market.

 

The rights of holders of Depositary Shares are not the same as the rights of holders of Ordinary Shares.

 

Midatech is a public limited company organized under the laws of England and Wales. The Depositary Shares represent a beneficial ownership interest in Ordinary Shares. The rights of holders of Depositary Shares will be governed by English law, Midatech ’ s constitutional documents, the listing rules of AIM (the “ AIM Rules ” ), and the deposit agreement pursuant to which the Depositary Shares are issued. The rights and terms of the Depositary Shares are designed to replicate, to the extent reasonably practicable, the rights attendant to the Ordinary Shares, for which there is currently no active trading market in the United States. However, because of aspects of British law, Midatech ’ s constitutional documents and the terms of the deposit agreement, the rights of holders of Depositary Shares will not be identical to and, in some respects, may be less favorable than, the rights of holders of Ordinary Shares.

 

 

Holders of Depositary Shares may be subject to limitations on transfer of their Depositary Shares.

 

Holders of Depositary Shares are transferable on the books of the depositary. However, the depositary may close its books at any time or from time to time when it deems expedient in connection with the performance of its duties. The depositary may refuse to deliver, transfer or register transfers of your Depositary Shares generally when Midatech ’ s books or the books of the depositary are closed, or at any time if Midatech or the depositary deems it advisable to do so because of any requirement of law or government or governmental body, or under any provision of the deposit agreement, or for any other reason.

 

Securities traded on AIM may carry a higher risk than shares traded on other exchanges that may impact the value of your investment.

The Ordinary Shares are currently traded on the AIM. Investment in equities traded on AIM is perceived to carry a higher risk than an investment in equities quoted on exchanges with more stringent listing requirements, such as the London Stock Exchange, New York Stock Exchange or NASDAQ. This is because AIM imposes less stringent corporate governance and ongoing reporting requirements than those other exchanges. In addition, AIM requires only semi-annual, rather than quarterly, financial reporting. You should be aware that the value of the Ordinary Shares may be influenced by many factors, some of which may be specific to Midatech and some of which may affect AIM-listed companies generally, including the depth and liquidity of the market, Midatech’s performance, a large or small volume of trading in the Ordinary Shares, legislative changes and general economic, political or regulatory conditions, and that the prices may be volatile and subject to extensive fluctuations. Therefore, the market price of the Ordinary Shares underlying the Depositary Shares may not reflect the underlying value of Midatech.

It may be difficult for investors to bring any action or enforce any judgment obtained in the United States against Midatech or members of Midatech’s Board of Directors, which may limit the remedies otherwise available to them.

 

Midatech is incorporated as a public limited company in England and Wales. In addition, all of the members of the Midatech Board of Directors are nationals and residents of countries, including the United Kingdom, outside of the United States. Most or all of the assets of these individuals are located outside the United States. As a result, it may be difficult or impossible for investors to bring an action against Midatech or against these individuals in the United States if they believe their rights have been infringed under the securities laws or otherwise. In addition, a United Kingdom court may prevent investors from enforcing a judgment of a United States court against Midatech or these individuals based on the securities laws of the United States or any state thereof. A United Kingdom court may not allow investors to bring an action against Midatech or its directors based on the securities laws of the United States or any state thereof.

  

Midatech has no present intention to pay dividends on its Ordinary Shares in the foreseeable future and, consequently, investors’ only opportunity to achieve a return on their investment during that time may be if the price of Depositary Shares appreciates.

 

Midatech has no present intention to pay dividends on its Ordinary Shares in the foreseeable future. Any determination by Midatech ’ s Board of Directors to pay dividends will depend on many factors, including its financial condition, results of operations, legal requirements and other factors. Accordingly, if the price of the Depositary Shares falls in the foreseeable future and an investor sells its Depositary Shares, such investor will lose money on their investment, without the likelihood that this loss will be offset in part or at all by cash dividends.

 

Midatech is a “foreign private issuer” under the rules and regulations of the SEC and, as a result, is exempt from a number of rules under the Exchange Act and is permitted to file less information with the SEC than a company incorporated in the United States.

 

Midatech is incorporated as a public limited company in England and Wales and is deemed to be a “ foreign private issuer ” under the rules and regulations of the SEC. As a foreign private issuer, Midatech is exempt from certain rules under the Exchange Act that would otherwise apply if Midatech were a company incorporated in the United States, including:

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the requirement to file periodic reports and financial statements with the SEC as frequently or as promptly as United States companies with securities registered under the Exchange Act;

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the requirement to file financial statements prepared in accordance with GAAP;

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the proxy rules, which impose certain disclosure and procedural requirements for proxy solicitations; and

 

 

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the requirement to comply with Regulation FD, which imposes certain restrictions on the selective disclosure of material information.

In addition, Midatech ’ s officers, directors and principal shareholders are exempt from the reporting and “ short-swing ” profit recovery provisions of Section 16 of the Exchange Act and the related rules with respect to their purchases and sales of Ordinary Shares and Depositary Shares. Accordingly, an investor may receive less information about Midatech than it would receive about a public company incorporated in the United States and may be afforded less protection under the United States federal securities laws than investors would be if Midatech were incorporated in the United States.

 

Additional reporting requirements may apply if Midatech loses its status as a foreign private issuer.

 

If Midatech loses its status as a foreign private issuer at some future time, then it will no longer be exempt from such rules and, among other things, will be required to file periodic reports and financial statements as if it were a company incorporated in the United States. The costs incurred in fulfilling these additional regulatory requirements could be substantial.

 

As a foreign private issuer, Midatech is not required to comply with many of the corporate governance standards of NASDAQ applicable to companies incorporated in the United States.

 

Midatech’s Board of Directors is required to maintain an audit committee comprised solely of three or more directors satisfying the independence standards of NASDAQ applicable to audit committee members. As a foreign private issuer, however, Midatech is not required to comply with most of the other corporate governance rules of NASDAQ, including the requirement to maintain a majority of independent directors, and nominating and compensation committees of its Board of Directors comprised solely of independent directors. Although the AIM Rules and the United Kingdom Corporate Governance Code have comparable requirements, holders of Depositary Shares may not be afforded the benefits of the corporate governance standards of NASDAQ to the same extent applicable to companies incorporated in the United States.

 

Midatech is an “emerging growth company” and it cannot be certain if the reduced disclosure requirements applicable to emerging growth companies will make its securities less attractive to investors.

 

Midatech is an “ emerging growth company, ” as defined under the Jumpstart Our Business Startups Act. Midatech will remain an “ emerging growth company ” for up to five years; provided, however, that if Midatech ’ s annual gross revenues exceed $1.0 billion, or its non-convertible debt issued within a three-year period or revenues exceeds $1 billion, or the market value of its common shares that are held by non-affiliates exceeds $700 million on the last day of the second fiscal quarter of any given fiscal year, Midatech would cease to be an emerging growth company as of the following fiscal year. As an emerging growth company, Midatech is not required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002 (the “ Sarbanes-Oxley Act ” ), it has reduced disclosure obligations, including with regard to its financial statements and executive compensation, and it is exempt from the requirements of holding a nonbinding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved.

 

Midatech’s disclosure controls and procedures may not prevent or detect all errors or acts of fraud.

 

Midatech is incurring increased costs as a result of operating as a public company, and management will be required to devote substantial time to new compliance initiatives.

 

As a public company in the United Kingdom and United States, Midatech is incurring significant legal, accounting and other expenses that it did not incur as a private company, and these expenses may increase even more after Midatech is no longer an “ emerging growth company. ” Midatech will be subject to the reporting requirements of the AIM Rules, the Exchange Act, the Sarbanes-Oxley Act, the Dodd-Frank Wall Street Reform and Protection Act, as well as rules adopted, and to be adopted, by the SEC and the NASDAQ Stock Market. Midatech ’ s management and other personnel will need to devote a substantial amount of time to these compliance initiatives. Moreover, Midatech expects these rules and regulations to substantially increase its legal and financial compliance costs and to make some activities more time-consuming and costly. For example, Midatech expect these rules and regulations to make it more difficult and more expensive for it to obtain director and officer liability insurance and it may be required to incur substantial costs to maintain the sufficient coverage. The Company cannot predict or estimate the amount or timing of additional costs it may incur to respond to these requirements. The impact of these requirements could also make it more difficult for Midatech to attract and retain qualified persons to serve on its Board of Directors, its board committees or as executive officers.

Regulations related to “conflict minerals” may cause Midatech to incur additional expenses and could limit the supply and increase the cost of certain metals used in manufacturing its products.

In August 2012, the SEC adopted a rule requiring disclosures of specified minerals, known as conflict minerals, that are necessary to the functionality or production of products manufactured or contracted to be manufactured by US public companies. The conflict minerals rule requires companies annually to diligence, disclose and report whether or not such minerals originate from the Democratic Republic of Congo and other specified countries. The rule could affect sourcing at competitive prices and availability in sufficient quantities of certain minerals used in the manufacture of Midatech’s products, including gold. The number of suppliers who provide conflict-free minerals may be limited. In addition, there may be material costs associated with complying with the disclosure requirements, such as costs related to determining the source of certain minerals used in Midatech’s products, as well as costs of possible changes to products, processes, or sources of supply as a consequence of such verification activities. Since Midatech’s supply chain is complex, it may not be able to sufficiently verify the origins of the relevant minerals used in its products through the due diligence procedures that it implements, which may harm its reputation. In addition, Midatech may encounter challenges to satisfy those customers who require that all of the components of its products be certified as conflict-free, which could place it at a competitive disadvantage if it is unable to do so.

 

  

Even if Midatech is considered by HM Revenue and Customs as resident in the United Kingdom for United Kingdom tax purposes, as expected, it would nevertheless not be treated as resident in the United Kingdom if (a) it were concurrently resident in another jurisdiction (applying the tax residence rules of that jurisdiction) that has a double tax treaty with the United Kingdom and (b) there is a tiebreaker provision in that tax treaty which allocates exclusive residence to that other jurisdiction. Because this analysis is highly factual and may depend on future changes in Midatech ’ s management and organizational structure, there can be no assurance regarding the final determination of Midatech ’ s tax residence. Should Midatech be treated as resident for tax purposes in another jurisdiction other than the United Kingdom, it would be subject to taxation in such jurisdiction in accordance with such jurisdiction ’ s laws, which could result in additional costs and expenses.

Midatech may be a passive foreign investment company, referred to as a PFIC, for U.S. federal income tax purposes in 2018 or in any subsequent year. This may result in adverse U.S. federal income tax consequences for U.S. taxpayers that are holders of Midatech’s securities.

Midatech will be treated as a PFIC for U.S. federal income tax purposes in any taxable year in which either (1) at least 75% of Midatech’s gross income is “passive income” or (2) on average at least 50% of Midatech’s assets by value produce passive income or are held for the production of passive income. Passive income for this purpose generally includes, among other things, certain dividends, interest, royalties, rents and gains from commodities and securities transactions and from the sale or exchange of property that gives rise to passive income. Passive income also includes amounts derived by reason of the temporary investment of funds, including those raised in a public offering. In determining whether a non-U.S. corporation is a PFIC, a proportionate share of the income and assets of each corporation in which it owns, directly or indirectly, at least a 25% interest (by value) is taken into account. Midatech does not believe it was a PFIC for 2017 but there can be no assurance that it was not a PFIC in 2017 and will not be a PFIC in subsequent years, as its operating results for any such years may cause it to be a PFIC. If Midatech is a PFIC in 2018, or any subsequent year, and a U.S. shareholder does not make an election to treat us as a “qualified electing fund,” referred to as a QEF, or make a “mark-to-market” election, then “excess distributions” to a U.S. shareholder, and any gain realized on the sale or other disposition of Midatech’s securities will be subject to special rules. Under these rules: (1) the excess distribution or gain would be allocated ratably over the U.S. shareholder’s holding period for the securities; (2) the amount allocated to the current taxable year and any period prior to the first day of the first taxable year in which Midatech was a PFIC would be taxed as ordinary income; and (3) the amount allocated to each of the other taxable years would be subject to tax at the highest rate of tax in effect for the applicable class of taxpayer for that year, and an interest charge for the deemed deferral benefit would be imposed with respect to the resulting tax attributable to each such other taxable year. In addition, if the United States Internal Revenue Service (the “IRS”) determines that Midatech is a PFIC for a year with respect to which Midatech has determined that it was not a PFIC, it may be too late for a U.S. shareholder to make a timely QEF or mark-to-market election. U.S. shareholders who hold or have held Midatech’s securities during a period when it was or is a PFIC will be subject to the foregoing rules, even if it ceases to be a PFIC in subsequent years, subject to exceptions for U.S. shareholders who made a timely QEF or mark-to-market election. A U.S. shareholder can make a QEF election by completing the relevant portions of and filing IRS Form 8621 in accordance with the instructions thereto. If applicable, upon request, Midatech will annually furnish U.S. shareholders with information needed in order to complete IRS Form 8621 (which form would be required to be filed with the IRS on an annual basis by the U.S. shareholder) and to make and maintain a valid QEF election for any year in which Midatech or any of its subsidiaries are a PFIC.

Comprehensive tax reform legislation could adversely affect Midatech’s   business and financial condition.

On December 22, 2017, the Tax Cuts Act, was signed into law. The Tax Cuts Act, among other things, contains significant changes to corporate taxation, including, but not limited to, (i) reduction of the corporate tax rate from a top marginal rate of 35% to a flat rate of 21%, (ii) limitation of the deduction for interest and (iii) limitation of the deduction for net operating losses to 80% of current year taxable income in respect of net operating losses generated during or after 2018 and elimination of net operating loss carrybacks. Certain provisions of the Tax Cuts Act could have an adverse effect on the financial condition of the Company or its affiliates.  The interpretations of many provisions of the Tax Cuts Act are still unclear.  We cannot predict when or to what extent any U.S. federal tax laws, regulations, interpretations, or rulings clarifying the Tax Cuts Act will be issued or the impact of any such guidance on the Company. Midatech will continue to examine the impact the Tax Cuts Act may have on its business and operations.