UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

FORM 10-Q

 

x       QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2017

 

¨       TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from ___________ to _____________.

 

Commission file number 0-20713

 

CASI PHARMACEUTICALS, INC .

(Exact name of registrant as specified in its charter)

 

Delaware 58-1959440
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)  

 

9620 Medical Center Drive, Suite 300

Rockville, Maryland

(Address of principal executive offices)

 

20850

(Zip code)

 

(240) 864-2600

(Registrant’s telephone number, including area code)

 

(Former name, former address and former fiscal year, if changed since last report)

 

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  x      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 during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

 

YES  x      NO   ¨

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer  ¨ Accelerated filer  ¨ Non-accelerated filer  ¨ Smaller reporting company  þ
      Emerging growth  company ¨

 

If an emerging growth company, 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 checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

 

YES  ¨      NO   x

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the most recent practicable date.

 

Class   Outstanding at November 6, 2017
Common Stock $.01 Par Value   65,066,564

 

 

 

 

 

 

CASI PHARMACEUTICALS, INC.

Table of Contents

 

    PAGE
PART I. FINANCIAL INFORMATION  
     
Item 1 — Consolidated Financial Statements  
     
Condensed Consolidated Balance Sheets as of September 30, 2017 (unaudited) and December 31, 2016 4
   
Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2017 and 2016 (unaudited) 5
   
Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2017 and 2016 (unaudited) 6
   
Notes to Condensed Consolidated Financial Statements (unaudited) 7
     
Item 2 — Management’s Discussion and Analysis of Financial Condition and Results of Operations 13
     
Item 3 — Quantitative and Qualitative Disclosures About Market Risk 20
     
Item 4 — Controls and Procedures 21
     
Part II.  OTHER INFORMATION  
     
Item 1 — Legal Proceedings 21
     
Item 1A — Risk Factors 21
     
Item 2 — Unregistered Sales of Equity Securities and Use of Proceeds 21
     
Item 3 — Defaults Upon Senior Securities 21
     
Item 4 — Removed and Reserved 21
     
Item 5 — Other Information 21
     
Item 6 — Exhibits 22
     
EXHIBIT INDEX 23
   
SIGNATURES 24

 

2

 

 

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

This report contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements also may be included in other statements that we make. All statements that are not descriptions of historical facts are forward-looking statements. These statements can generally be identified by the use of forward-looking terminology such as “believes,” “expects,” “intends,” “may,” “will,” “should,” or “anticipates” or similar terminology. These forward-looking statements include, among others, statements regarding the timing of our clinical trials, our cash position and future expenses, and our future revenues.

 

Our forward-looking statements are based on information available to us today, and we will not update these statements.

 

Actual results could differ materially from those currently anticipated due to a number of factors, including: the risk that we may be unable to continue as a going concern as a result of our inability to raise sufficient capital for our operational needs; the possibility that we may be delisted from trading on the Nasdaq Capital Market; the volatility in the market price of our common stock; risks relating to interests of our largest stockholders that differ from our other stockholders; the risk of substantial dilution of existing stockholders in future stock issuances; the difficulty of executing our business strategy in China; our inability to predict when or if our product candidates will be approved for marketing by the China Food and Drug Administration authorities; our inability to enter into strategic partnerships for the development, commercialization, manufacturing and distribution of our proposed product candidates or future candidates; risks relating to the need for additional capital and the uncertainty of securing additional funding on favorable terms; risks associated with our product candidates; risks associated with any early-stage products under development; the risk that results in preclinical and early clinical models are not necessarily indicative of later clinical results; uncertainties relating to preclinical and clinical trials, including delays to the commencement of such trials; the lack of success in the clinical development of any of our products; dependence on third parties; and risks relating to the commercialization, if any, of our proposed products (such as marketing, safety, regulatory, patent, product liability, supply, competition and other risks). Such factors, among others, could have a material adverse effect upon our business, results of operations and financial condition. We caution readers not to place undue reliance on any forward-looking statements, which only speak as of the date made. Additional information about the factors and risks that could affect our business, financial condition and results of operations, are contained in our filings with the U.S. Securities and Exchange Commission (“SEC”), which are available at www.sec.gov .

 

3

 

 

PART I. FINANCIAL INFORMATION

 

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS

 

CASI Pharmaceuticals, Inc.

Condensed Consolidated Balance Sheets

 

    September 30, 2017     December 31, 2016  
    (Unaudited)     (Note 1)  
ASSETS                
Current assets:                
Cash and cash equivalents   $ 21,640,068     $ 27,092,928  
Prepaid expenses and other     441,818       355,891  
Total current assets     22,081,886       27,448,819  
                 
Property and equipment, net     566,020       229,591  
Other assets     68,244       34,485  
Total assets   $ 22,716,150     $ 27,712,895  
                 
LIABILITIES AND STOCKHOLDERS’ EQUITY                
Current liabilities:                
Accounts payable   $ 1,203,965     $ 1,064,626  
Accrued liabilities     302,644       250,950  
Note payable, net of discount     1,496,885       -  
Total current liabilities     3,003,494       1,315,576  
                 
Note payable, net of discount     -       1,491,278  
Contingent rights derivative liability     4,134,931       4,122,266  
Total liabilities     7,138,425       6,929,120  
                 
Commitments and contingencies                
                 
Stockholders’ equity:                
Convertible preferred stock, $1.00 par value; 5,000,000 shares authorized and 0 shares issued and outstanding at September 30, 2017 and December 31, 2016     -       -  
Common stock, $.01 par value: 170,000,000 shares authorized; 60,276,119 shares issued at September 30, 2017 and December 31, 2016     602,760       602,760  
Additional paid-in capital     470,663,323       470,147,086  
Treasury stock, at cost:  79,545 shares held     (8,034,244 )     (8,034,244 )
Accumulated deficit     (447,654,114 )     (441,931,827 )

Total stockholders’ equity

    15,577,725       20,783,775  
Total liabilities and stockholders’ equity   $ 22,716,150     $ 27,712,895  

 

See accompanying condensed notes.

 

4

 

 

CASI Pharmaceuticals, Inc.

Condensed Consolidated Statements of Operations

(Unaudited)

 

    Three Months Ended     Nine Months Ended  
    September 30,
2017 		    September 30,
2016 		    September 30,
2017 		    September 30,
2016 		 
Revenues:                                
Product sales   $ -     $ -     $ -     $ -  
                                 
Costs and expenses:                                
Research and development     970,989       1,013,929       3,747,683       3,395,362  
General and administrative     625,878       676,927       1,961,463       3,356,804  
      1,596,867       1,690,856       5,709,146       6,752,166  
                                 
Interest expense, net     546       5,614       476       23,140  
Change in fair value of contingent rights     16,110       (2,978 )     12,665       4,422  
                                 
Net loss   $ (1,613,523 )   $ (1,693,492 )   $ (5,722,287 )   $ (6,779,728 )
                                 
Net loss per share (basic and diluted)   $ (0.03 )   $ (0.03 )   $ (0.10 )   $ (0.15 )
Weighted average number of common shares outstanding (basic and diluted)     60,196,574       49,227,983       60,196,574       44,132,599  

 

See accompanying condensed notes.

 

5

 

 

CASI Pharmaceuticals, Inc.

Condensed Consolidated Statements of Cash Flows

(Unaudited)

 

    Nine Months Ended  
    September 30, 2017     September 30, 2016  
CASH FLOWS FROM OPERATING ACTIVITIES                
Net loss   $ (5,722,287 )   $ (6,779,728 )
Adjustments to reconcile net loss to net cash used in operating activities:                
Depreciation and amortization     69,420       47,963  
Gain on disposal of assets     -       (12,461 )
Stock-based compensation expense     516,237       2,201,401  
Non-cash interest     5,607       21,015  
Change in fair value of contingent rights     12,665       4,422  
Changes in operating assets and liabilities:                
Prepaid expenses and other     (119,686 )     40,840  
Accounts payable     139,339       34,793  
Accrued liabilities     51,694       (7,486 )
Net cash used in operating activities     (5,047,011 )     (4,449,241 )
                 
CASH FLOWS FROM INVESTING ACTIVITIES                
Proceeds from sale of furniture and equipment     -       158,446  
Purchases of furniture and equipment     (405,849 )     (159,244 )
Net cash used in investing activities     (405,849 )     (798 )
                 
CASH FLOWS FROM FINANCING ACTIVITIES                
Stock issuance costs     -       (72,087 )
Proceeds from sale of common stock     -       17,254,341  
Proceeds from sale of common stock to be issued     -       6,274,000  
Net cash provided by financing activities     -       23,456,254  
                 
Net (decrease) increase in cash and cash equivalents     (5,452,860 )     19,006,215  
Cash and cash equivalents at beginning of period     27,092,928       5,131,114  
Cash and cash equivalents at end of period   $ 21,640,068     $ 24,137,329  
                 
Supplemental disclosure of cash flow information:                
                 
Non-cash financing activity:                
Partial settlement of contingent rights derivative   $ -     $ 3,232,502  

 

See accompanying condensed notes.

 

6

 

 

CASI PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2017 (unaudited)

 

1. Basis of Presentation

 

The accompanying condensed consolidated financial statements include the accounts of CASI Pharmaceuticals, Inc. and its subsidiaries (“CASI” or “the Company”), Miikana Therapeutics, Inc. (“Miikana”) and CASI Pharmaceuticals (Beijing) Co., Ltd. (“CASI China”). The Company previously operated under a different name prior to restructuring its business in 2012 in connection with an investment led by one of the Company’s largest stockholders. CASI China is a non-stock Chinese entity with 100% of its interest owned by CASI. CASI China received approval for a business license from the Beijing Industry and Commercial Administration in August 2012 and has operating facilities in Beijing. All inter-company balances and transactions have been eliminated in consolidation.

 

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information and in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, such condensed consolidated financial statements do not include all of the information and disclosures required by U.S. generally accepted accounting principles for complete consolidated financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. The accompanying December 31, 2016 financial information was derived from the Company’s audited financial statements in the Annual Report on Form 10-K for the year ended December 31, 2016. Operating results for the three and nine month periods ended September 30, 2017 are not necessarily indicative of the results that may be expected for the year ending December 31, 2017. For further information, refer to the Company’s audited consolidated financial statements and footnotes thereto included in its Form 10-K for the year ended December 31, 2016.

 

Liquidity Risks and Management’s Plans

 

Since inception, the Company has incurred significant losses from operations and has incurred an accumulated deficit of approximately $447.7 million.   The Company restructured its business in 2012 in connection with an investment led by one of the Company’s largest stockholders , followed by implementation of a name change to reflect its core mission and business strategy. The Company expects to continue to incur operating losses for the foreseeable future due to, among other factors, its continuing clinical activities. In 2016, the Company received $28.1 million from strategic financings (“2016 Strategic Financings”). In October 2017, the Company entered into securities purchase agreements for an approximately $23.8 million strategic financing. The Company held its initial closing on October 17, 2017 and second closing on October 23, 2017 and received approximately $14.6 million (collectively, the “Closings”) (see Note 5). The Company expects to close on the remaining $9.2 million (“Final Closing”) during November 2017. Net proceeds will be used to support the Company’s business development activities, advance the development of the Company’s pipeline, and for other general corporate purposes. As a result of the Closings and the 2016 Strategic Financings, the Company believes that it has sufficient resources to fund its operations for at least the twelve months subsequent to November 14, 2017. As of September 30, 2017, approximately $3.8 million of the Company’s cash balance was held by CASI China. The Company intends to continue to exercise tight controls over operating expenditures and will continue to pursue opportunities, as required, to raise additional capital and will also actively pursue non- or less-dilutive capital raising arrangements in China to support the Company’s dual-country approach to drug development.

 

7

 

 

2. License Arrangements

 

The Company has certain product rights and perpetual exclusive licenses from Spectrum Pharmaceuticals, Inc. and certain of its affiliates (together referred to as “Spectrum”) to develop and commercialize the following commercial oncology drugs and drug candidates in the greater China region (which includes China, Taiwan, Hong Kong and Macau) (the “Territories”):

 

· EVOMELA ® (melphalan) for Injection (“Evomela”);
· MARQIBO ® (vinCRIStine sulfate LIPOSOME injection) (“Marqibo”); and
· ZEVALIN ® (ibritumomab tiuxetan) (“Zevalin”).

 

CASI is responsible for developing and commercializing these three drugs in the Territories, including the submission of import drug registration applications and conducting confirmatory clinical trials as needed.

 

The Company is in various stages of the regulatory and development process to obtain marketing approval for EVOMELA ® , MARQIBO ® , and ZEVALIN ® in its territorial region, with ZEVALIN ® commercially available in Hong Kong. In January 2016, the China Food and Drug Administration (CFDA) accepted for review the Company’s import drug registration application for MARQIBO ® and currently is in the quality testing phase of the regulatory process. On March 10, 2016, Spectrum received notification from the U.S. Food and Drug Administration (FDA) of the grant of approval of its New Drug Application (NDA) for EVOMELA ®  primarily for use as a high-dose conditioning treatment prior to hematopoietic progenitor (stem) cell transplantation in patients with multiple myeloma. In December 2016, the CFDA accepted for review the Company’s import drug registration application for EVOMELA ® and in 2017 has granted priority review of the import drug registration clinical trial application (CTA), which currently is in the quality testing phase of the regulatory process. The CFDA filing and review of CASI’s ZEVALIN ® import drug CTA is in process. The ZEVALIN ® antibody kit and the radioactive Yttrium-90 component of the CTA require separate submissions to the CFDA, of which the first part is currently under review and the latter part is in the submission process.

 

3. Note Payable

 

As part of the license arrangements with Spectrum (see Note 2), the Company issued to Spectrum a $1.5 million 0.5% secured promissory note originally due March 17, 2016 which was subsequently amended and extended to March 17, 2018. All other terms remain the same. The promissory note was recorded initially at its fair value, giving rise to a discount of approximately $136,000; the promissory note is presented as note payable, net of discount in the accompanying condensed consolidated balance sheets. For the nine months ended September 30, 2017 and 2016, the Company recognized $5,607 and $21,015 of non-cash interest expense, respectively, related to the amortization of the debt discount, using the effective interest rate method.

 

4. Fair Value Measurements

 

Fair value is the price that would be received from the sale of an asset or paid to transfer a liability assuming an orderly transaction in the most advantageous market at the measurement date. U.S. GAAP establishes a hierarchical disclosure framework which prioritizes and ranks the level of observability of inputs used in measuring fair value. These tiers include:

 

· Level 1, defined as observable inputs such as quoted prices in active markets for identical assets;
· Level 2, defined as observable inputs other than Level 1 prices such as quoted prices for similar assets; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; and
· Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions.

 

8

 

 

An asset’s or liability’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. At each reporting period, the Company performs a detailed analysis of its assets and liabilities that are measured at fair value. All assets and liabilities for which the fair value measurement is based on significant unobservable inputs or instruments which trade infrequently and therefore have little or no price transparency are classified as Level 3.

 

The inputs used in measuring the fair value of cash and cash equivalents are considered to be Level 1 in accordance with the three-tier fair value hierarchy. The fair values are based on period-end statements supplied by the various banks and brokers that held the majority of the Company’s funds. The fair value of short-term financial instruments (primarily accounts receivable, prepaid expenses, accounts payable, and other current assets and liabilities) approximates their carrying values because of their short-term nature.

 

Financial Assets and Liabilities Measured at Fair Value on a Recurring Basis:

 

As partial consideration for the acquisition from Spectrum, the Company issued certain contingent rights (“Contingent Rights”) to purchase additional shares of its common stock, which Contingent Rights expire upon the occurrence of certain events. The Contingent Rights issued to Spectrum in connection with the license arrangements (see Note 2) are considered derivative liabilities and were recorded initially at their estimated fair value, and are marked to market each reporting period until settlement. The fair value of the Contingent Rights was measured using Level 3 unobservable inputs; the unobservable inputs include estimates of the Company’s future capital requirements, and the timing, probability, size and characteristics of those capital raises, among other inputs. Generally, if the estimates of the size and probability of the Company’s future capital requirements increase, the fair value of the Contingent Rights will also increase.

 

The following table presents the Company’s financial liabilities accounted for at fair value on a recurring basis as of September 30, 2017 and December 31, 2016 by level within the fair value hierarchy:

 

    As of September 30, 2017  
    Level 1     Level 2     Level 3     Total  
                         
Liabilities - Contingent Rights   $ -     $ -     $ 4,134,931     $ 4,134,931  
                         
    As of December 31, 2016  
    Level 1     Level 2     Level 3     Total  
                         
Liabilities - Contingent Rights   $ -     $ -     $ 4,122,266     $ 4,122,266  

 

The following table presents the changes in the Company’s financial liabilities accounted for at fair value on a recurring basis using Level 3 unobservable inputs:

 

December 31, 2016   $ 4,122,266  
Change in fair value of Contingent Rights     12,665  
Balance at September 30, 2017   $ 4,134,931  

 

As a result of the Closings (see Note 5), the Company has recorded a reduction to the Contingent Rights derivative liability and an increase to additional paid-in capital of $2,762,979 in October 2017 which will be reflected in the Company’s December 31, 2017 consolidated financial statements.

 

9

 

 

Financial Assets and Liabilities Measured at Fair Value on a Non-Recurring Basis:

 

The promissory note issued to Spectrum in connection with the license arrangements (see Notes 2 and 3) was initially recorded at its fair value using Level 3 unobservable inputs including primarily the Company’s estimated incremental borrowing rate as provided by a commercial lending institution.

 

Non-Financial Assets and Liabilities Measured at Fair Value on a Recurring Basis:

 

The Company does not have any non-financial assets and liabilities that are measured at fair value on a recurring basis.

 

Non-Financial Assets and Liabilities Measured at Fair Value on a Non-Recurring Basis:

 

The Company measures its long-lived assets, including property and equipment, at fair value on a non-recurring basis. These assets are recognized at fair value when they are deemed to be impaired. No such fair value impairment was recognized for the nine months ended September 30, 2017 and 2016.

 

5. Stockholders’ Equity

 

Securities Purchase Agreements

 

On October 13, 2017, the Company entered into securities purchase agreements (the “Securities Purchase Agreements”) with certain institutional investors, accredited investors and current stockholders (collectively, the “Purchasers”) pursuant to which the Company agreed to sell 7,951,865 shares of its common stock and warrants exercisable for up to 1,590,373 shares of its common stock (exclusive of the Agent Warrants described below) in a registered direct offering (the “Offering”) for gross proceeds of $23,855,595. The shares and warrants are being sold together, consisting of one share of common stock and a warrant to purchase 0.20 shares of common stock for each share of common stock purchased, at a combined offering price of $3.00. The warrants will be exercisable beginning on April 17, 2018 and will expire on April 17, 2020. The warrants have an exercise price of $3.75 per share.

 

The Company held its initial closing on October 17, 2017 and second closing on October 23, 2017 (collectively, the “Closings”) and received approximately $14.6 million and yielded approximately $14.3 million after offering expenses. The Closings resulted in the issuance of 4,869,990 shares of common stock. The Company expects to close on the remaining $9.2 million in November 2017, subject to satisfaction of customary closing conditions.

 

In connection with the Offering, the Company issued to its placement agent or its designees warrants to purchase 48,133 shares of common stock at an exercise price of $3.75 per share of common stock (the “Agent Warrants”), representing the number of warrants equal to an aggregate of 4% of the number of shares sold to investors placed by the placement agent in the Offering, excluding investments made by certain China-focused investors that were placed by the Company. The Agent Warrants will become exercisable on April 17, 2018 and will expire on April 17, 2019.

 

6. Net Loss Per Share

 

Net loss per share (basic and diluted) was computed by dividing net loss attributable to common shareholders by the weighted average number of shares of common stock outstanding. Outstanding stock options and warrants totaling 12,242,004 and 4,686,760 as of September 30, 2017, respectively, were anti-dilutive and, therefore, were not included in the computation of weighted average shares used in computing diluted loss per share.

 

10

 

 

7. Share-Based Compensation

 

The Company has adopted incentive and nonqualified stock option plans for executive, scientific and administrative personnel of the Company as well as outside directors and consultants. In June 2017, the Company’s shareholders approved an amendment to the 2011 Long-Term Incentive Plan, increasing the number of shares reserved for issuance from 11,230,000 to 14,230,000 shares of common stock to be available for grants and awards. As of September 30, 2017, there are 12,242,004 shares issuable under options previously granted and currently outstanding, with exercise prices ranging from $0.86 to $13.75. In 2017, the Company awarded options to employees, covering up to 2,725,000 shares, in which vesting is subject to achievement of certain performance milestones. Options granted under the plans generally vest over periods varying from immediately to one to three years, are not transferable and generally expire ten years from the date of grant. As of September 30, 2017, 2,355,358 shares remained available for grant under the Company’s 2011 Long-Term Incentive Plan.

 

The Company records compensation expense associated with stock options and other equity-based compensation in accordance with provisions of authoritative guidance. Compensation costs are recognized over the requisite service period, which is generally the option vesting term of up to three years. Awards with performance conditions will be expensed if it is probable that the performance condition will be achieved. For the nine months ended September 30, 2017 and 2016, $30,500 and $10,100, respectively was expensed for share awards with performance conditions that became probable during that period.

 

The Company’s net loss for the nine months ended September 30, 2017 and 2016 includes non-cash compensation expense of $516,237 and $2,201,401, respectively, related to the Company’s share-based compensation awards. The compensation expense related to the Company’s share-based compensation arrangements is recorded as components of general and administrative expense and research and development expense, as follows:

 

    Nine Month Period Ended
September 30 , 		 
    2017     2016  
Research and development   $ 225,342     $ 578,626  
General and administrative     290,895       1,622,775  
Share-based compensation expense   $ 516,237     $ 2,201,401  
Net share-based compensation expense, per common share:                
Basic and diluted   $ 0.01     $ 0.05  

 

The Company uses the Black-Scholes-Merton valuation model to estimate the fair value of stock options granted to employees. Option valuation models, including Black-Scholes-Merton, require the input of highly subjective assumptions, and changes in the assumptions used can materially affect the grant date fair value of an award.

 

Following are the weighted-average assumptions used in valuing the stock options granted during the nine-month periods ended September 30, 2017 and 2016:

 

    Nine Month Period Ended
September 30, 		 
    2017     2016  
Expected volatility     78.92 %     83.03 %
Risk-free interest rate     1.97 %     1.31 %
Expected term of option     6.34 years       5.41 years  
Forfeiture rate     -       3.00 %*
Expected dividend yield     0.00 %     0.00 %

 

* - In 2016, authoritative guidance required forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. During the nine-month period ended September 30, 2016, forfeitures were estimated at 3%.

 

11

 

 

The weighted average fair value of stock options granted during the nine-month periods ended September 30, 2017 and 2016 were $0.73 and $0.75, respectively.

 

A summary of the Company’s stock option plans and of changes in options outstanding under the plans for the nine months ended September 30, 2017 is as follows:

 

    Number of
Options 		    Weighted
Average
Exercise
Price 		 
Outstanding at January 1, 2017     9,535,306     $ 1.57  
Granted     3,699,500     $ 1.04  
Exercised     -     $ -  
Expired     (992,802 )   $ 1.64  
Forfeited     -     $ -  
Outstanding at September 30, 2017     12,242,004     $ 1.41  
Exercisable at September 30, 2017     8,330,511     $ 1.59  

 

There were no option exercises during the nine months ended September 30, 2017 or 2016.

 

8. Income Taxes

 

At December 31, 2016, the Company had a $3.1 million unrecognized tax benefit. The Company recorded a full valuation allowance on the net deferred tax asset recognized in the consolidated financial statements as of December 31, 2016.

 

During the nine months ended September 30, 2017, there were no material changes to the measurement of unrecognized tax benefits in various taxing jurisdictions. The Company recognizes interest and penalties related to uncertain tax positions as a component of income tax expense.

 

The tax returns for all years in the Company’s major tax jurisdictions are not settled as of September 30, 2017. Due to the existence of tax attribute carryforwards (which are currently offset by a full valuation allowance), the Company treats all years’ tax positions as unsettled due to the taxing authorities’ ability to modify these attributes.

 

9. Related Party Transactions

 

In April and June 2017, under supply agreements with Spectrum, the Company received shipments of EVOMELA ® and MARQIBO ® , respectively, in China for quality testing purposes to support CASI’s application for import drug registration. The CEO of Spectrum is also a board member of CASI. The total cost of the materials was approximately $477,000 which is included in research and development expense for the nine months ended September 30, 2017.

 

The Company utilizes the services of Crown Biosciences, Inc. (“Crown Bio”) to perform certain research and development testing. The CEO of Crown Bio is also a board member of CASI. All amounts payable to Crown Bio for services provided have been paid as of September 30, 2017. The research and development expense recognized for the services provided for the nine months ended September 30, 2016 was $28,648. There were no research and development services provided by Crown Bio for the nine months ended September 30, 2017.

 

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10. New Accounting Pronouncements

 

The Company has implemented all new accounting pronouncements that are in effect and that may impact the Company’s condensed consolidated financial statements.

 

In January 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ ASU”) 2016-01, Financial Instruments–Overall: Recognition and Measurement of Financial Assets and Financial Liabilities . The accounting standard primarily affects the accounting for equity investments, financial liabilities under the fair value option, and the presentation and disclosure requirements for financial instruments.  In addition, it includes a clarification related to the valuation allowance assessment when recognizing deferred tax assets resulting from unrealized losses on available-for-sale debt securities. The accounting guidance is effective for annual reporting periods (including interim periods within those periods) beginning after December 15, 2017. Early adoption is permitted for the provision to record fair value changes for financial liabilities under the fair value option resulting from instrument-specific credit risk in other comprehensive income. The Company does not expect that the adoption of ASU 2016-01 will have a material impact on the consolidated financial statements.

 

In February 2016, the FASB issued ASU 2016-02,  Leases (Topic 842) . ASU 2016-02 supersedes existing lease guidance, including Accounting Standards Codification (ASC) 840 -  Leases . Among other things, the new standard requires recognition of a right-of-use asset and liability for future lease payments for contracts that meet the definition of a lease. This ASU is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Earlier application is permitted. The standard must be applied using a modified retrospective approach. The Company is currently evaluating the effect that the adoption of this ASU will have on its consolidated financial statements.

 

In May 2017, the FASB issued ASU 2017-09,  Compensation-Stock Compensation (Topic 718) Scope of Modification Accounting.  ASU 2017-09 provides clarification on when modification accounting should be used for changes to the terms or conditions of a share-based payment award. This ASU does not change the accounting for modifications but clarifies that modification accounting guidance should only be applied if there is a change to the value, vesting conditions, or award classification and would not be required if the changes are considered non-substantive. The Company is evaluating the impact of ASU 2017-09 .

 

There are no other recently issued accounting pronouncements that are expected to have a material effect on the Company’s financial position, results of operations or cash flows.

 

ITEM 2.     MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

 

OVERVIEW

 

We are a U.S. based, late-stage biopharmaceutical company focused on the acquisition, development and commercialization of innovative therapeutics addressing cancer and other unmet medical needs for the global market, with a focus on commercialization in China. We intend to execute our plan to become a leading fully-integrated pharmaceutical company with a substantial commercial business in China. We are headquartered in Rockville, Maryland with established China operations that are growing as we continue to further in-license products for our pipeline.

 

Our product pipeline features (1) EVOMELA ® , MARQIBO ® and ZEVALIN ® , all U.S. Food and Drug Administration (FDA) approved drugs in-licensed from Spectrum Pharmaceuticals, Inc. for China regional rights, and currently in various stages in the regulatory and clinical process for market approval in China, (2) CASI-001 and CASI-002, proprietary preclinical candidates in immune-oncology, and (3) our proprietary drug candidate, ENMD-2076, ongoing in one Phase 2 clinical study.

 

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Our China rights to EVOMELA ® (melphalan) for Injection, MARQIBO ® (vinCRIStine sulfate LIPOSOME injection) and ZEVALIN ® (ibritumomab tiuxetan) were previously licensed from our partner Spectrum Pharmaceuticals, Inc. Based on the U.S. FDA’s approval of these three licensed products, we are pursuing the Import Drug registration path for approval in China.

 

We believe our pipeline reflects a risk-balanced approach between products in various stages of development, and between products that we develop ourselves and those that we develop with our partners for the China regional market. We intend to continue building a significant product pipeline of innovative drug candidates that we will commercialize in China and collaborate with partners for the rest of the world. For in-licensed products, the Company uses a market-oriented approach to identify pharmaceutical candidates that we believe have the potential for gaining widespread market acceptance, either globally or in China, and for which development can be accelerated under the Company’s drug development strategy. For ENMD-2076, our current development is focused on niche and orphan indications.

 

Our primary research and development focus is on oncology therapeutics. Our strategy is to develop innovative drugs that are potential first-in-class or market-leading compounds for treatment of cancer. The implementation of our plans will include leveraging our resources in both the United States and China. In order to capitalize on the drug development and capital resources available in China, the Company is conducting business in China through its wholly-owned China-based subsidiary that will execute the China portion of the Company’s drug development strategy, including conducting clinical trials in China, pursuing local funding opportunities and strategic collaborations, and implementing the Company’s plan to build a leading commercial business in China.

 

Since inception, the Company has incurred significant losses from operations and has incurred an accumulated deficit of $447.7 million.   The Company restructured its business in 2012 in connection with an investment led by one of the Company’s largest stockholders, followed by implementation of a name change to reflect its core mission and business strategy.    The Company expects to continue to incur operating losses for the foreseeable future due to, among other factors, its continuing clinical activities. In 2016, the Company received $28.1 million from strategic financings (“2016 Strategic Financings”). In October 2017, the Company entered into securities purchase agreements for an approximately $23.8 million strategic financing. The Company held its initial closing on October 17, 2017 and second closing on October 23, 2017 and received approximately $14.6 million (collectively, the “Closings”). The Company expects to close on the remaining $9.2 million (“Final Closing”) during November 2017. Net proceeds will be used to support the Company’s business development activities, advance the development of the Company’s pipeline, and for other general corporate purposes. As a result of the Closings and the 2016 Strategic Financings, the Company believes that it has sufficient resources to fund its operations for at least the twelve months subsequent to November 14, 2017. We intend to continue to exercise tight controls over operating expenditures. In developing drug candidates, we intend to use and leverage resources available to us in both the United States and China. We intend to pursue additional financing opportunities as well as opportunities to raise capital through forms of non- or less- dilutive arrangements, such as partnerships and collaborations with organizations that have capabilities and/or products that are complementary to our capabilities and products in order to continue the development of our product candidates that we intend to pursue to commercialization. However, there can be no assurance that adequate additional financing under such arrangements will be available to us on terms that we deem acceptable, if at all.

 

Additional funds raised by issuing equity securities may result in dilution to existing stockholders.

 

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CRITICAL ACCOUNTING POLICIES AND THE USE OF ESTIMATES

 

The preparation of our financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in our consolidated financial statements and accompanying notes. Actual results could differ materially from those estimates. Our critical accounting policies, including the items in our financial statements requiring significant estimates and judgments, are as follows:

 

- Research and Development - Research and development expenses consist primarily of compensation and other expenses related to research and development personnel, research collaborations, costs associated with preclinical testing and clinical trials of our product candidates, including the costs of manufacturing drug substance and drug product, regulatory maintenance costs, and facilities expenses. Research and development costs are expensed as incurred.

 

- Expenses for Clinical Trials - Expenses for clinical trials are incurred from planning through patient enrollment to reporting of the data. We estimate expenses incurred for clinical trials that are in process based on patient enrollment and based on clinical data collection and management. Costs that are associated with patient enrollment are recognized as each patient in the clinical trial completes the enrollment process. Estimated clinical trial costs related to enrollment can vary based on numerous factors, including expected number of patients in trials, the number of patients that do not complete participation in a trial, and when a patient drops out of a trial. Costs that are based on clinical data collection and management are recognized in the reporting period in which services are provided. In the event of early termination of a clinical trial, we accrue an amount based on estimates of the remaining non-cancelable obligations associated with winding down the clinical trial.

 

- Stock-Based Compensation - All share-based payment transactions are recognized in the consolidated financial statements at their fair values. Compensation expense associated with service, performance, market condition-based stock options and other equity-based compensation is recorded in accordance with provisions of authoritative guidance. The fair value of awards whose fair values are calculated using the Black-Scholes option pricing model is generally being amortized on a straight-line basis over the requisite service period and is recognized based on the proportionate amount of the requisite service period that has been rendered during each reporting period. The fair value of awards with market conditions, which are valued using a binomial model, is being amortized based upon the estimated derived service period. Share-based awards granted to employees with a performance condition are measured based on the probable outcome of that performance condition during the requisite service period. Such an award with a performance condition will be expensed if it is probable that a performance condition will be achieved. For the nine months ended September 30, 2017 and 2016, $30,500 and $10,100, respectively was expensed for share awards with performance conditions that became probable during that period. Using the straight-line expense attribution method over the requisite service period, which is generally the option vesting term ranging from immediately to one to three years, share-based compensation expense recognized for the nine months ended September 30, 2017 and 2016 totaled approximately $516,000 and $2,201,000, respectively.

 

The determination of fair value of stock-based payment awards on the date of grant using the Black-Scholes valuation model is affected by our stock price, as well as the input of other subjective assumptions. These assumptions include, but are not limited to, the expected forfeiture rate and expected term of stock options and our expected stock price volatility over the term of the awards. Changes in the assumptions can materially affect the fair value estimates.

 

Any future changes to our share-based compensation strategy or programs would likely affect the amount of compensation expense recognized.

 

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- Fair Value Measurements - At each reporting period, we perform a detailed analysis of our assets and liabilities that are measured at fair value. All assets and liabilities for which the fair value measurement is based on significant unobservable inputs or instruments which trade infrequently and therefore have little or no price transparency are classified as Level 3 in accordance with the hierarchy established by U.S. GAAP.  As of September 30, 2017, we remeasured the Contingent Rights and will continue to do so at every balance sheet date and upon partial settlements until completely settled.  In measuring the fair value of the financial instrument we used Level 3 unobservable inputs, including such inputs as our estimated borrowing rate and our future capital requirements, and the timing, probability, size and characteristics of those capital raises, among other inputs.

 

RESULTS OF OPERATIONS

 

For the Three and Nine Months Ended September 30, 2017 and September 30, 2016.

 

Revenues and Cost of Product Sales . There were no revenues recorded for the three or nine months ended September 30, 2017 and September 30, 2016.

 

Research and Development Expenses. Our research and development expenses for the three and nine months ended September 30, 2017 totaled approximately $971,000 and $3,748,000, respectively. Research and development expenses for the corresponding 2016 periods were $1,014,000 and $3,395,000, respectively. Included in our R&D expenses for the three-month period ended September 30, 2017 are direct project costs of $148,000 for ENMD-2076, $188,000 for drugs in-licensed from Spectrum, and $279,000 for preclinical development activities in China. The 2016 research and development expenses for the comparable period included $452,000 for ENMD-2076, $65,000 for drugs in-licensed from Spectrum, and $229,000 for preclinical development activities in China. Research and development expenses totaling $3,748,000 for the nine-month period ended September 30, 2017 included direct project costs of $697,000 related to ENMD-2076, $1,100,000 for drugs in-licensed from Spectrum, and $837,000 for preclinical development activities in China. The 2016 research and development expenses for the comparable period totaled $3,395,000 and included $1,269,000 for ENMD-2076, $375,000 for drugs in-licensed from Spectrum, and $585,000 for preclinical development activities in China. The decrease in research and development costs in the three month period ended September 30, 2017, as compared to the same period in 2016, primarily reflects lower costs for the FLC trial due to the timing of patient enrollment, offset by increased costs associated with our China operations. The overall increase in research and development costs in the nine month period ended September 30, 2017, as compared to same period in 2016, primarily reflects higher costs associated with the quality testing phase of the regulatory review of MARQIBO ® and EVOMELA ® in 2017.

 

At September 30, 2017, and, since acquired, accumulated direct project expenses for ENMD-2076 totaled $28,352,000, $2,033,000 for drugs in-licensed from Spectrum, and for preclinical development activities in China, accumulated project expenses totaled $2,892,000. Our research and development expenses also include non-cash stock-based compensation totaling $54,000 and $225,000 for the three and nine months ended September 30, 2017, respectively, and $61,000 and $579,000 for the corresponding 2016 periods, respectively. The balance of our research and development expenditures includes facility costs and other departmental overhead, regulatory expenses associated with import drug registration applications in China for the drugs in-licensed from Spectrum, and expenditures related to the non-clinical support of our programs.

 

We expect the majority of our research and development expenses in 2017 to be devoted to advancing our in-licensed products towards market approval in China, our early-stage candidates in preclinical development, and the development of our ENMD-2076 program. We expect our expenses in 2017 to increase based on our clinical development plan. Completion of clinical development may take several years or more, but the length of time generally varies substantially according to the type, complexity, novelty and intended use of a product candidate.

 

We estimate that clinical trials of the type we generally conduct are typically completed over the following timelines:

 

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Global FDA Trial:

 

CLINICAL PHASE   ESTIMATED
COMPLETION
PERIOD
Phase 1   1-2 Years
Phase 2   2-3 Years
Phase 3   2-4 Years

 

Local CFDA Trial:

 

CLINICAL PHASE   ESTIMATED
COMPLETION
PERIOD
Phase 1   1 Year
Phase 2   2 Years
Phase 3   2-3 Years

 

The duration and the cost of clinical trials may vary significantly over the life of a project as a result of differences arising during the clinical trial protocol, including, among others, the following:

 

- the number of patients that ultimately participate in the trial;

 

- the duration of patient follow-up that seems appropriate in view of the results;

 

- the number of clinical sites included in the trials; and

 

- the length of time required to enroll suitable patient subjects.

 

We test our potential product candidates in numerous preclinical studies to identify indications for which they may be product candidates. We may conduct multiple clinical trials to cover a variety of indications for each product candidate. As we obtain results from trials, we may elect to discontinue clinical trials for certain indications in order to focus our resources on more promising indications.

 

Our proprietary product candidates have also not yet achieved regulatory approval, which is required before we can market them as therapeutic products. In order to proceed to subsequent clinical trial stages and to ultimately achieve regulatory approval, regulatory agencies must conclude that our clinical data establish safety and efficacy. Historically, the results from preclinical testing and early clinical trials have often not been predictive of results obtained in later clinical trials. A number of new drugs and biologics have shown promising results in clinical trials, but subsequently failed to establish sufficient safety and efficacy data to obtain necessary regulatory approvals.

 

Our business strategy includes being opportunistic with collaborative arrangements with third parties to complete the development and commercialization of our product candidates. In the event that third parties take over the clinical trial process for one of our product candidates, the estimated completion date would largely be under the control of that third party rather than us. We cannot forecast with any degree of certainty which proprietary products or indications, if any, will be subject to future collaborative arrangements, in whole or in part, and how such arrangements would affect our capital requirements.

 

As a result of the uncertainties discussed above, among others, we are unable to estimate the duration and completion costs of our research and development projects. Our inability to complete our research and development projects in a timely manner or our failure to enter into collaborative agreements, when appropriate, could significantly increase our capital requirements and could adversely impact our liquidity. These uncertainties could force us to seek additional, external sources of financing from time to time in order to continue with our business strategy. There can be no assurance that we will be able to successfully access external sources of financing in the future. Our inability to raise additional capital, or to do so on terms reasonably acceptable to us, would jeopardize the future success of our business.

 

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Research and development expenses consist primarily of compensation and other expenses related to research and development personnel, research collaborations, costs associated with internal and contract preclinical testing and clinical trials of our product candidates, including the costs of manufacturing drug substance and drug product, regulatory maintenance costs, and facilities expenses. Overall research and development expenses decreased to $971,000 during the three months ended September 30, 2017 from $1,014,000 for the corresponding period in 2016. Research and development expenses increased to $3,748,000 during the nine months ended September 30, 2017 from $3,395,000 for the corresponding period in 2016. The fluctuations in research and development expenditures during the three and nine months ended September 30, 2017 were specifically impacted by the following:

 

- Outside Services – In the three-month period ended September 30, 2017, we expended $82,000 on outside service activities versus $58,000 in the same 2016 period. For the nine month period ended September 30, 2017, outside services were $314,000 compared to $175,000 for the same 2016 period. The increase in 2017 as compared to 2016 reflects regulatory costs associated with the import drug registration applications in China for the drugs in-licensed from Spectrum.

 

- Clinical Trial Costs – Clinical trial costs, which include clinical site fees, monitoring costs and data management costs, decreased to $50,000 in the three months ended September 30, 2017 from $340,000 in the three month period ended September 30, 2016. Clinical trial costs for the nine month period ended September 30, 2017 decreased to $375,000 from $899,000 for the comparable 2016 period. The decrease for both periods primarily relates to higher enrollment patient costs and clinical trial management costs associated with our Phase 2 clinical trial in advanced fibrolamellar carcinoma (FLC) during the 2016 period.

 

- Contract Manufacturing Costs – The costs of manufacturing the material used in clinical trials for our product candidates is reflected in contract manufacturing. These costs include bulk manufacturing, encapsulation and fill and finish services, product release costs and storage fees. Contract manufacturing costs for the three months ended September 30, 2017 decreased to $(4,000) from $24,000 during the same period in 2016. For the nine month period ended September 30, 2017, manufacturing costs increased to $620,000 from $196,000 for the comparable 2016 period. The increase primarily reflects costs associated with the purchase of EVOMELA ® in China for quality testing purposes to support CASI’s application for import drug registration in 2017.

 

- Personnel Costs – Personnel costs increased to $591,000 in the three-month period ended September 30, 2017 from $367,000 in the corresponding 2016 period. For the nine-month period ended September 30, 2017, personnel costs increased in 2017 to $1,583,000 from $1,439,000 for the corresponding 2016 period. This variance is attributed to a decrease in non-cash stock-based compensation expense totaling $354,000 during the 2017 period, offset by increased salary and benefit costs associated with employees in China and a new Chief Medical Officer in the U.S. in 2017.

 

- Also reflected in our 2017 research and development expenses for the three-month period ended September 30, 2017 are outsourced consultant costs of $36,000 and facility and related expenses of $125,000. In the corresponding 2016 period, these expenses totaled $71,000 and $73,000, respectively. For the nine month period ended September 30, 2017, outsourced consultant costs were $177,000 and facility and related expenses were $347,000. In the corresponding 2016 period, these expenses totaled $231,000 and $251,000, respectively. The variance in outsourced consultant costs reflect the timing of clinical trial management and evaluation and regulatory activities. The increase in facilities and related expenses for both periods is due to new leased lab space in China in 2017.

 

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General and Administrative Expenses. General and administrative expenses include compensation and other expenses related to finance, business development and administrative personnel, professional services and facilities.

 

General and administrative expenses decreased to $626,000 in the three-month period ended September 30, 2017 from $677,000 in the corresponding 2016 period. The decrease in the third quarter of 2017, compared to the 2016 period, is primarily related to a decrease in stock-based compensation expense of $52,000. For the nine-month period ended September 30, 2017, general and administrative expenses decreased in 2017 to $1,961,000 from $3,357,000 for the corresponding 2016 period. The decrease in the 2017 period, compared to the 2016 period is primarily related to a decrease in stock-based compensation expense of $1,332,000 primarily related to stock options awarded in connection with the closings of the Company’s strategic financing in 2016.

 

Interest expense, net . Interest expense, net for three months ended September 30, 2017 and 2016 was $546 and $5,614, respectively. This includes interest on our note payable of $1,875 for both periods; non-cash interest of $1,869 and $7,005, respectively, representing the amortization of the debt discount; offset by interest income of $3,197 and $3,266, respectively. Interest expense, net for the nine months ended September 30, 2017 and 2016 was $476 and $23,140, respectively. This includes interest on our note payable of $5,625 for both periods; non-cash interest of $5,607 and $21,015, respectively, representing the amortization of the debt discount; offset by interest income of $10,756 and $3,500, respectively.

 

Change in fair value of contingent rights . The Contingent Rights issued to Spectrum in connection with the license arrangements are considered derivative liabilities and were recorded initially at their estimated fair value, and are marked to market each reporting period until settlement. The change in fair value of the Contingent Rights for the three and nine months ended September 30, 2017 was $16,110 and $12,665, respectively. The change in fair value of the Contingent Rights for the three and nine months ended September 30, 2016 was $(2,978) and $4,422, respectively.

 

LIQUIDITY AND CAPITAL RESOURCES

 

To date, we have been engaged primarily in research and development activities. As a result, we have incurred and expect to continue to incur operating losses in 2017 and the foreseeable future before we commercialize any products. Based on our current plans, we expect our current available cash and cash equivalents to meet our cash requirements for at least the twelve months subsequent to November 14, 2017.

 

We will require significant additional funding to fund operations until such time, if ever, we become profitable. We intend to augment our cash balances by pursuing other forms of capital infusion, including strategic alliances or collaborative development opportunities with organizations that have capabilities and/or products that are complementary to our capabilities and products in order to continue the development of our potential product candidates that we intend to pursue to commercialization. If we seek strategic alliances, licenses, or other alternative arrangements, such as arrangements with collaborative partners or others, to raise further financing, we may need to relinquish rights to certain of our existing product candidates, or products we would otherwise seek to develop or commercialize on our own, or to license the rights to our product candidates on terms that are not favorable to us.

 

We will continue to seek to raise additional capital to fund our research and development and advance our clinical development activities. We intend to explore one or more of the following alternatives to raise additional capital:

 

· selling additional equity securities;
· out-licensing product candidates to one or more corporate partners;

 

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· completing an outright sale of non-priority assets; and/or
· engaging in one or more strategic transactions.

 

We also will continue to manage our cash resources prudently and cost-effectively.

 

There can be no assurance that adequate additional financing under such arrangements will be available to us on terms that we deem acceptable, if at all. If additional funds are raised by issuing equity securities, dilution to existing stockholders may result, or the equity securities may have rights, preferences, or privileges senior to those of the holders of our common stock. If we fail to obtain additional capital when needed, we may be required to delay or scale back our clinical development activities.

 

At September 30, 2017, we had cash of approximately $21.6 million with working capital of approximately $19.1 million. As of September 30, 2017, approximately $3.8 million of the Company’s cash balance was held by CASI China.

 

FINANCING ACTIVITIES

 

As discussed above, in 2016 the Company received $28.1 million from the 2016 Strategic Financings. Additionally, as discussed above, on October 13, 2017, the Company entered into Securities Purchase Agreements with certain institutional investors, accredited investors and current stockholders pursuant to which the Company agreed to sell 7,951,865 shares of its common stock and warrants exercisable for up to 1,590,373 shares of its common stock in a registered direct offering for gross proceeds of $23,855,595. The shares and warrants are being sold together, consisting of one share of common stock and a warrant to purchase 0.20 shares of common stock for each share of common stock purchased, at a combined offering price of $3.00. The warrants will be exercisable beginning on April 17, 2018 and will expire on April 17, 2020. The warrants have an exercise price of $3.75 per share.

 

The Company held its initial closing on October 17, 2017 and second closing on October 23, 2017 and received approximately $14.6 million and yielded approximately $14.3 million after offering expenses. The Closings resulted in the issuance of 4,869,990 shares of common stock. The Company expects to close on the remaining $9.2 million in November 2017, subject to satisfaction of customary closing conditions.

 

INFLATION AND INTEREST RATE CHANGES

 

Management does not believe that our working capital needs are sensitive to inflation and changes in interest rates.

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

The primary objective of our investment activities is to preserve our capital until it is required to fund operations while at the same time maximizing the income we receive from our investments without incurring investment market volatility risk. Our investment income is sensitive to the general level of U.S. interest rates. In this regard, changes in the U.S. interest rates affect the interest earned on our cash and cash equivalents. Due to the short-term nature of our cash and cash equivalent holdings, a 10% movement in market interest rates would not materially impact the total fair market value of our portfolio as of September 30, 2017.

 

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ITEM 4. CONTROLS AND PROCEDURES

 

Evaluation of Disclosure Controls and Procedures

 

Based on an evaluation under the supervision and with the participation of the Company’s management, the Company’s Chief Executive Officer and Principal Accounting Officer have concluded that the Company’s disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) were effective as of September 30, 2017 to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission rules and forms and (ii) accumulated and communicated to the Company’s management, including its Chief Executive Officer and Principal Accounting Officer, as appropriate to allow timely decisions regarding required disclosure.

 

We believe that a controls system, no matter how well designed and operated, cannot provide absolute assurance that the objectives of the controls system are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected.

 

Changes in Internal Control Over Financial Reporting

 

There were no changes in the Company’s internal control over financial reporting that occurred during the quarter ended September 30, 2017 that have materially affected or are reasonably likely to materially affect the Company’s internal control over financial reporting.

 

PART II.         OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

 

We are subject in the normal course of business to various legal proceedings in which claims for monetary or other damages may be asserted. Management does not believe such legal proceedings, unless otherwise disclosed herein, are material.

 

ITEM 1A. RISK FACTORS

 

For information regarding factors that could affect the Company’s results of operations, financial condition and liquidity, see the risk factors discussion set forth in Item 1A of CASI’s Annual Report on Form 10-K for the fiscal year ended December 31, 2016 and the information under “Special Note Regarding Forward-Looking Statements” included in this report. There have been no material changes to our risk factors from those disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2016.

 

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

None.

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

 

Not applicable.

 

ITEM 4. REMOVED AND RESERVED

 

ITEM 5. OTHER INFORMATION

 

Not applicable.

   

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ITEM 6. EXHIBITS

  

1.1   Engagement Letter, dated as of October 12, 2017, by and between CASI Pharmaceuticals, Inc. and H.C. Wainwright & Co., LLC (filed as Exhibit 1.1 to our Form 8-K filed on October 19, 2017 and incorporated by reference herein)
4.1   Form of Common Stock Purchase Warrant (filed as Exhibit 4.1 to our Form 8-K filed on October 19, 2017 and incorporated by reference herein)
4.2   Form of Wainwright Warrant (filed as Exhibit 4.2 to our Form 8-K filed on October 19, 2017 and incorporated by reference herein).
10.1   Form of Securities Purchase Agreement (filed as Exhibit 10.1 to our Form 8-K filed on October 19, 2017 and incorporated by reference herein).
31.1   Rule 13a-14(a) Certification of Chief Executive Officer*
31.2   Rule 13a-14(a) Certification of Principal Accounting Officer*
32.1   Section 1350 Certification of Chief Executive Officer*
32.2   Section 1350 Certification of Principal Accounting Officer*
101   The following financial information from the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2017, formatted in eXtensible Business Reporting Language (XBRL):  (in) Unaudited Condensed Consolidated Balance Sheets at September 30, 2017 and December 31, 2016, (ii) Unaudited Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2017 and 2016, (iii) Unaudited Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2017 and 2016 and (iv) Notes to Unaudited Condensed Consolidated Financial Statements.*

 

* Filed Herewith

 

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EXHIBIT INDEX

 

1.1   Engagement Letter, dated as of October 12, 2017, by and between CASI Pharmaceuticals, Inc. and H.C. Wainwright & Co., LLC (filed as Exhibit 1.1 to our Form 8-K filed on October 19, 2017 and incorporated by reference herein)
4.1   Form of Common Stock Purchase Warrant (filed as Exhibit 4.1 to our Form 8-K filed on October 19, 2017 and incorporated by reference herein)
4.2   Form of Wainwright Warrant (filed as Exhibit 4.2 to our Form 8-K filed on October 19, 2017 and incorporated by reference herein).
10.1   Form of Securities Purchase Agreement (filed as Exhibit 10.1 to our Form 8-K filed on October 19, 2017 and incorporated by reference herein).
31.1   Rule 13a-14(a) Certification of Chief Executive Officer*
31.2   Rule 13a-14(a) Certification of Principal Accounting Officer*
32.1   Section 1350 Certification of Chief Executive Officer*
32.2   Section 1350 Certification of Principal Accounting Officer*
101   The following financial information from the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2017, formatted in eXtensible Business Reporting Language (XBRL):  (in) Unaudited Condensed Consolidated Balance Sheets at September 30, 2017 and December 31, 2016, (ii) Unaudited Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2017 and 2016, (iii) Unaudited Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2017 and 2016 and (iv) Notes to Unaudited Condensed Consolidated Financial Statements.*

 

* Filed Herewith

 

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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

  CASI PHARMACEUTICALS, INC.
  (Registrant)
   
Date: November 14, 2017 /s/ Ken K. Ren
  Ken K. Ren
  Chief Executive Officer
   
Date: November 14, 2017 /s/ Sara B. Capitelli
  Sara B. Capitelli
  Principal Accounting Officer

 

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