Akari Therapeutics(US:AKTX)2023-04-30 16:00PART I Key Information Akari Therapeutics faces significant financial and operational risks, including recurring losses, going concern doubts, and reliance on nomacopan Risk Factors The company faces substantial financial, operational, and clinical risks, with recurring losses and auditor's doubt about its going concern ability - The company has a history of operating losses, with a net loss of $17.7 million in 2022 and an accumulated deficit of $217.5 million as of December 31, 202253 - The auditor's report on the 2022 consolidated financial statements includes an explanatory paragraph raising substantial doubt about the company's ability to continue as a going concern due to recurring losses and the need for additional financing56 - The company's business is critically dependent on the success of its sole product candidate, nomacopan, which is still in development and faces numerous clinical and regulatory risks63 - Akari may be involuntarily delisted from the Nasdaq Capital Market for failing to meet the minimum bid price and shareholders' equity requirements, which could reduce liquidity and hinder capital raising162 Information on the Company Akari Therapeutics is a clinical-stage biotech company developing nomacopan for autoimmune and inflammatory diseases, relying on third-party manufacturers and holding a patent portfolio History and Development of the Company Akari Therapeutics, Plc, established in 2004, shifted focus to rare autoimmune diseases after acquiring Volution Immuno Pharmaceuticals SA in 2015, with ADSs listed on Nasdaq - The company was originally established in 2004 and changed its name to Akari Therapeutics, Plc in 2015 following the acquisition of Volution Immuno Pharmaceuticals SA195196 - The acquisition of Volution shifted the company's focus to the development of treatments for rare and orphan autoimmune and inflammatory diseases related to complement C5 dysregulation196 - The company's American Depositary Shares (ADSs) are listed on the Nasdaq Capital Market under the symbol "AKTX", with each ADS representing one hundred ordinary shares197 Business Overview Akari is a clinical-stage biotech company focused on nomacopan for pediatric HSCT-TMA and preclinical GA, having deprioritized other programs and relying on third-party manufacturing - The lead product candidate, nomacopan, is a second-generation complement inhibitor that acts on complement component-C5 and also inhibits leukotriene B4 (LTB4) activity202 - The company's primary clinical target is pediatric HSCT-TMA, with a pivotal Part B Phase 3 trial expected to begin enrollment by the end of 2023207216217 - A long-acting version, PAS-nomacopan, is in preclinical development for geographic atrophy (GA), with an IND submission to the FDA planned for the first half of 2024226 - In 2022, the company discontinued its clinical program for nomacopan in bullous pemphigoid (BP) to prioritize the HSCT-TMA and GA programs, citing development timelines and costs228229 - Nomacopan has received Orphan Drug, Fast Track, and Rare Pediatric Disease designations from the FDA for various indications, which may provide benefits like market exclusivity and expedited review204206 Organizational Structure Akari Therapeutics, Plc operates through four wholly-owned subsidiaries, primarily engaged in research and development, with one inactive Corporate Subsidiaries | Name of Subsidiary | Jurisdiction | Activity | Holding | | :--- | :--- | :--- | :--- | | Volution Immuno Pharmaceuticals SA | Switzerland | Research & Development | 100% | | Celsus Therapeutics Inc. | Delaware, USA | Research & Development | 100% | | Morria Biopharma Ltd | Israel | Inactive | 100% | | Akari Malta Limited | Malta | Research & Development | 100% | Property, Plant and Equipment Akari Therapeutics does not own property, leasing office spaces in New York for approximately $3,000 and London for approximately $12,200 monthly on a short-term basis - Akari Therapeutics does not own any property and leases all its office spaces372 Monthly Office Lease Expenses | Location | Monthly Rent (approx.) | | :--- | :--- | | New York, NY | $3,000 | | London, England | $12,200 | Operating and Financial Review and Prospects Akari Therapeutics reported a $17.7 million net loss in 2022, driven by increased operating expenses, with its precarious financial position and auditor's going concern warning Operating Results In 2022, R&D expenses rose 5% to $9.6 million, while G&A expenses surged 67% to $13.5 million due to executive compensation and financing costs, partially offset by a $5.3 million non-cash gain from warrant liabilities Comparison of Operating Expenses (2022 vs. 2021) | Expense Category | 2022 (in millions) | 2021 (in millions) | Change (%) | | :--- | :--- | :--- | :--- | | Research & Development | $9.6 | $9.1 | +5% | | General & Administrative | $13.5 | $8.1 | +67% | - The 67% increase in G&A expenses in 2022 was primarily driven by $2.4 million in payroll and stock compensation for new executives and severance, $1.7 million in expensed issuance costs from the September 2022 offering, and $0.7 million in higher consulting fees387 - Other income was approximately $5.3 million in 2022, a significant shift from an expense of $210,000 in 2021, primarily due to a $6.9 million non-cash gain from the decrease in the fair value of warrant liabilities issued in September 2022388 Liquidity and Capital Resources As of December 31, 2022, Akari had $13.2 million cash and a $217.5 million accumulated deficit, with management expecting funds to last only through October 2023, raising substantial doubt about its going concern ability - As of December 31, 2022, the company had $13.2 million in cash and an accumulated deficit of $217.5 million390 - Management expects existing cash, including proceeds from a March 2023 offering, will only be sufficient to fund operations through October 2023, raising substantial doubt about its ability to continue as a going concern398399 Cash Flow Summary (2022 vs. 2021) | Cash Flow Activity | 2022 (in millions) | 2021 (in millions) | | :--- | :--- | :--- | | Net Cash Used in Operating Activities | $(21.5) | $(18.8) | | Net Cash Provided by Financing Activities | $25.3 | $14.3 | - The company raised gross proceeds of approximately $12.8 million in a registered direct offering in September 2022 and an additional $4.0 million in March 2023 to fund operations391392 Research and Development, Patents and Licenses R&D expenses were $9.6 million in 2022, primarily for the nomacopan program and clinical trials, involving payments to third-party organizations for manufacturing and research activities Research and Development Expenses (in thousands) | Category | 2022 | 2021 | 2020 | | :--- | :--- | :--- | :--- | | Direct Expenses: | | | | | Nomacopan | $3,912 | $3,970 | $4,363 | | Clinical trials | $4,414 | $4,517 | $4,281 | | Indirect Expenses: | | | | | Staffing | $2,086 | $2,267 | $2,348 | | Tax credits | $(2,318) | $(3,067) | $(3,372) | | Total R&D | $9,561 | $9,133 | $8,820 | Critical Accounting Estimates Critical accounting estimates include share-based compensation valued by Black-Scholes and warrants classified as liabilities due to terms preventing equity indexing, requiring fair value remeasurement - Share-based compensation is a critical estimate, with option values determined by the Black-Scholes model using subjective assumptions like expected stock price volatility and option term415417 - Warrants issued in September 2022 are classified as liabilities and remeasured to fair value at each reporting date because their terms, specifically volatility inputs, prevent them from being considered indexed to the company's own stock418419 - Warrants issued in offerings prior to September 2022 (specifically in March 2022 and December 2021) were classified as equity, as they met the necessary criteria at the time of issuance421422 Directors, Senior Management and Employees This section details the company's seven-member board, executive compensation, including significant 2022 leadership changes, and its 15 full-time employees Directors and Senior Management The company's leadership includes a seven-member board with staggered terms and a senior management team featuring key appointments in 2022, including CEO Rachelle Jacques - Rachelle Jacques was appointed President and Chief Executive Officer in March 2022, bringing experience from Enzyvant Therapeutics and Alexion Pharmaceuticals436 - Dr. Ray Prudo, a founder of a predecessor company, transitioned from Executive Chairman to Chairman of the Board effective January 1, 2023429437 - The company made several key leadership appointments in 2022, including a new CEO, COO, and CMO, strengthening its executive team436439441 Compensation Executive compensation for 2022 included approximately $3.6 million for CEO Rachelle Jacques and over $1 million for former CEO Clive Richardson, with non-employee directors receiving annual cash retainers and stock options 2022 Executive Compensation Summary | Name and Principal Position | Year | Salary ($) | Bonus ($) | Stock Awards ($) | Option Awards ($) | All Other Comp. ($) | Total ($) | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Ray Prudo, Former Exec. Chairman | 2022 | 412,000 | 206,000 | — | — | — | 618,000 | | Rachelle Jacques, President & CEO | 2022 | 458,333 | 875,000 | 253,410 | 1,965,991 | 49,865 | 3,602,600 | | Clive Richardson, Former CEO & COO | 2022 | 118,195 | 657,764 | — | — | 317,175 | 1,093,134 | | Torsten Hombeck, CFO | 2022 | 300,150 | 72,036 | — | 32,448 | 44,111 | 448,744 | - Non-employee directors received an annual retainer of $39,338 in 2022, plus additional fees for committee service and an annual stock option grant472 Board Practices The board is classified with staggered terms and has independent audit, compensation, and nominating committees, with the company following English corporate law as a foreign private issuer - The board is classified into three groups (Class A, B, C) with staggered terms, ensuring continuity but potentially delaying changes in control479 - The Audit, Compensation, and Nominating committees are composed entirely of independent directors481482483 - As a foreign private issuer, Akari follows English corporate law for certain governance matters instead of Nasdaq listing requirements480 Employees As of December 31, 2022, Akari Therapeutics had 15 full-time employees, split between R&D and management, across England and the United States Employee Distribution as of Dec 31, 2022 | Category | Number of Employees | | :--- | :--- | | Total Full-Time | 15 | | Research & Development | 7 | | Management, Admin & Finance | 8 | | Location | | | England | 7 | | United States | 8 | Major Shareholders and Related Party Transactions As of March 31, 2023, directors and executive officers owned 24.7% of shares, with Chairman Dr. Ray Prudo holding 21.8%, and related party transactions involving TDL and insider financing participation Major Shareholders As of March 31, 2023, directors and executive officers collectively owned 24.7% of shares, with Chairman Dr. Ray Prudo as the largest insider holder at 21.8%, and Deutsche Bank holding 99.9% for ADS holders Beneficial Ownership as of March 31, 2023 | Shareholder | Percentage Owned | | :--- | :--- | | Ray Prudo (Chairman) | 21.8% | | All directors and officers as a group | 24.7% | | RPC Pharma Limited | 8.0% | | PranaBio Investments, LLC | 9.9% | - Deutsche Bank Trust Company Americas, as the depositary for the ADR program, held 99.9% of the issued share capital on behalf of ADS holders as of March 31, 2023512 Related Party Transactions The company leases its UK office and procures laboratory services from The Doctors Laboratory (TDL), a related party, and insiders participated in recent financing rounds - The company leases its UK office and procures laboratory testing services from The Doctors Laboratory (TDL), where Director David Byrne is the CEO of TDL, and Chairman Ray Prudo is the Chairman of TDL's board517518 Expenses Incurred with TDL (2022) | Service | Expense (approx.) | | :--- | :--- | | Office Lease | $129,000 | | Laboratory Testing | $89,000 | - Chairman Ray Prudo and other insiders participated significantly in the company's financing activities in 2022 and 2023, purchasing shares in the March 2022, September 2022, and March 2023 offerings522523 Financial Information The full consolidated financial statements, prepared under U.S. GAAP, are in Item 18, with the company having no material legal proceedings and no plans for future cash dividends - The company's full financial statements are prepared in accordance with United States GAAP and are located in Item 18 of the report525 - The company does not anticipate declaring or paying any cash dividends in the foreseeable future, retaining earnings for business development and expansion527 Additional Information This section outlines the company's corporate governance under English law, detailing shareholder rights, director duties, and differences from Delaware law, alongside its subjection to the UK City Code on Takeovers and Mergers Memorandum and Articles of Association The company's governance under English law includes classified board terms, a 75% special resolution vote, and subjection to the UK City Code on Takeovers and Mergers, with differences from Delaware law - Shareholders are entitled to one vote per ordinary share; a special resolution, required for actions like changing the Articles of Association, requires a 75% majority vote542566 - The company's board of directors is classified into three groups with staggered terms, which can delay a change in control543570 - The company believes it is subject to the UK City Code on Takeovers and Mergers, which imposes strict rules on potential acquirers, including a mandatory cash offer requirement if an acquirer's stake reaches 30% of voting rights571613 - Under English law, directors can be removed by an ordinary shareholder resolution (simple majority), which differs from the 'for cause' requirement for classified boards under Delaware law575 Taxation This section details UK and U.S. tax implications for U.S. ADS holders, noting no UK dividend withholding tax but potential adverse PFIC consequences for 2022 - Under current UK tax law, no tax is withheld at the source from cash dividends paid to U.S. resident holders627 - The company may have been a Passive Foreign Investment Company (PFIC) for 2022; if classified as a PFIC, U.S. Holders could face adverse tax consequences, such as gains being taxed as ordinary income and an interest charge on deemed deferred tax648649 - Dividends paid to non-corporate U.S. Holders are expected to be treated as "qualified dividends" taxable at a maximum rate of 20%, provided the company is not a PFIC641 Quantitative and Qualitative Disclosures About Risk The company faces foreign currency exchange risk due to international operations but no significant interest rate risk as it has no debt and does not use hedging instruments - The company's operating results are subject to foreign currency exchange risk due to operations in the UK and Europe, with results translated into U.S. dollars for reporting667 - The company has no short-term or long-term debt, so it is not currently exposed to significant interest rate risk on liabilities669 - Akari has not entered into any hedging instruments to mitigate currency or interest rate risks668669 Controls and Procedures As of December 31, 2022, management concluded that both disclosure controls and internal control over financial reporting were effective, with no material changes identified - Management concluded that the company's disclosure controls and procedures were effective as of December 31, 2022687 - Management concluded that the company's internal control over financial reporting was effective as of December 31, 2022, based on the COSO 2013 framework689 - The report does not include an attestation report from the registered public accounting firm on internal controls, as the company is not an accelerated filer689 PART III Financial Statements The consolidated financial statements as of December 31, 2022, show recurring losses, a net capital deficiency, and an auditor's going concern warning, with key figures including $13.2 million cash and a $17.7 million net loss Report of Independent Registered Public Accounting Firm The auditor's report confirms fair financial presentation but includes a 'Going Concern Uncertainty' due to recurring losses and a critical audit matter regarding warrant classification - The auditor's report contains a paragraph expressing substantial doubt about the Company's ability to continue as a going concern due to recurring losses from operations and a net capital deficiency718 - A critical audit matter was the evaluation of the financial statement classification for warrants issued in December 2021 and September 2022, due to accounting complexities in the warrant agreements724 Consolidated Balance Sheets As of December 31, 2022, total assets were $13.8 million, liabilities increased to $12.0 million due to a $7.9 million warrant liability, and shareholders' equity decreased to $1.8 million Consolidated Balance Sheet Highlights (as of Dec 31) | Account | 2022 | 2021 | | :--- | :--- | :--- | | Cash | $13,249,945 | $9,361,270 | | Total Assets | $13,831,612 | $11,648,028 | | Warrant liability | $7,852,000 | $0 | | Total Liabilities | $12,040,866 | $6,093,446 | | Total Shareholders' Equity | $1,790,746 | $5,554,582 | Consolidated Statements of Operations and Comprehensive Loss For 2022, the net loss was $17.7 million, driven by increased operating expenses, particularly G&A, partially offset by a non-cash gain on warrant liabilities Statement of Operations Highlights (Year Ended Dec 31) | Account | 2022 | 2021 | | :--- | :--- | :--- | | Research and development expenses | $9,560,897 | $9,133,455 | | General and administrative expenses | $13,527,311 | $8,080,681 | | Loss from operations | $(23,088,208) | $(17,214,136) | | Total other income (expense) | $5,340,146 | $(210,101) | | Net loss | $(17,748,062) | $(17,424,237) | Consolidated Statements of Cash Flows In 2022, net cash used in operating activities was $21.5 million, offset by $25.3 million from financing, resulting in a $3.9 million cash increase and a year-end balance of $13.2 million Cash Flow Summary (Year Ended Dec 31) | Category | 2022 | 2021 | | :--- | :--- | :--- | | Net cash used in operating activities | $(21,504,522) | $(18,846,528) | | Net cash provided by financing activities | $25,288,109 | $14,292,753 | | Net increase (decrease) in cash | $3,888,675 | $(4,694,507) | | Cash, end of period | $13,249,945 | $9,361,270 |