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
.
|
ITEM 1.
|
CONSOLIDATED FINANCIAL STATEMENTS
|
CASI Pharmaceuticals, Inc.
Condensed Consolidated Balance Sheets
|
|
June 30, 2017
|
|
|
December 31, 2016
|
|
ASSETS
|
|
(Unaudited)
|
|
|
(Note 1)
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
23,360,529
|
|
|
$
|
27,092,928
|
|
Prepaid expenses and other
|
|
|
250,905
|
|
|
|
355,891
|
|
Total current assets
|
|
|
23,611,434
|
|
|
|
27,448,819
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
|
448,477
|
|
|
|
229,591
|
|
Other assets
|
|
|
72,601
|
|
|
|
34,485
|
|
Total assets
|
|
$
|
24,132,512
|
|
|
$
|
27,712,895
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
1,183,271
|
|
|
$
|
1,064,626
|
|
Accrued liabilities
|
|
|
309,828
|
|
|
|
250,950
|
|
Note payable, net of discount
|
|
|
1,495,016
|
|
|
|
-
|
|
Total current liabilities
|
|
|
2,988,115
|
|
|
|
1,315,576
|
|
|
|
|
|
|
|
|
|
|
Note payable, net of discount
|
|
|
-
|
|
|
|
1,491,278
|
|
Contingent rights derivative liability
|
|
|
4,118,821
|
|
|
|
4,122,266
|
|
Total liabilities
|
|
|
7,106,936
|
|
|
|
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 June 30, 2017 and December 31, 2016
|
|
|
-
|
|
|
|
-
|
|
Common stock, $.01 par value:
|
|
|
|
|
|
|
|
|
170,000,000 shares authorized; 60,276,119 shares issued
|
|
|
|
|
|
|
|
|
at June 30, 2017 and December 31, 2016
|
|
|
602,760
|
|
|
|
602,760
|
|
Additional paid-in capital
|
|
|
470,497,651
|
|
|
|
470,147,086
|
|
Treasury stock, at cost: 79,545 shares held
|
|
|
(8,034,244
|
)
|
|
|
(8,034,244
|
)
|
Accumulated deficit
|
|
|
(446,040,591
|
)
|
|
|
(441,931,827
|
)
|
Total stockholders’ equity
|
|
|
17,025,576
|
|
|
|
20,783,775
|
|
Total liabilities and stockholders’ equity
|
|
$
|
24,132,512
|
|
|
$
|
27,712,895
|
|
See accompanying condensed notes.
CASI Pharmaceuticals, Inc.
Condensed Consolidated Statements of Operations
(Unaudited)
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30, 2017
|
|
|
June 30, 2016
|
|
|
June 30, 2017
|
|
|
June 30, 2016
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Product sales
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
1,727,407
|
|
|
|
1,362,676
|
|
|
|
2,776,694
|
|
|
|
2,381,433
|
|
General and administrative
|
|
|
691,422
|
|
|
|
1,914,802
|
|
|
|
1,335,585
|
|
|
|
2,679,877
|
|
|
|
|
2,418,829
|
|
|
|
3,277,478
|
|
|
|
4,112,279
|
|
|
|
5,061,310
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest (income) expense, net
|
|
|
72
|
|
|
|
8,758
|
|
|
|
(70
|
)
|
|
|
17,526
|
|
Change in fair value of contingent rights
|
|
|
(10,319
|
)
|
|
|
5,634
|
|
|
|
(3,445
|
)
|
|
|
7,400
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(2,408,582
|
)
|
|
$
|
(3,291,870
|
)
|
|
$
|
(4,108,764
|
)
|
|
$
|
(5,086,236
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share (basic and diluted)
|
|
$
|
(0.04
|
)
|
|
$
|
(0.08
|
)
|
|
$
|
(0.07
|
)
|
|
$
|
(0.12
|
)
|
Weighted average number of common shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
outstanding (basic and diluted)
|
|
|
60,196,574
|
|
|
|
42,906,781
|
|
|
|
60,196,574
|
|
|
|
41,556,911
|
|
See accompanying condensed notes.
CASI Pharmaceuticals, Inc.
Condensed Consolidated Statements of Cash
Flows
(Unaudited)
|
|
Six Months Ended
|
|
|
|
June
30, 2017
|
|
|
June
30, 2016
|
|
CASH FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(4,108,764
|
)
|
|
$
|
(5,086,236
|
)
|
Adjustments to reconcile net loss to net cash
|
|
|
|
|
|
|
|
|
used in operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
37,918
|
|
|
|
32,497
|
|
Gain on disposal of assets
|
|
|
-
|
|
|
|
(13,263
|
)
|
Stock-based compensation expense
|
|
|
350,565
|
|
|
|
1,976,736
|
|
Non-cash interest
|
|
|
3,738
|
|
|
|
14,010
|
|
Change in fair value of contingent rights
|
|
|
(3,445
|
)
|
|
|
7,400
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Prepaid expenses and other
|
|
|
66,870
|
|
|
|
211,714
|
|
Accounts payable
|
|
|
118,645
|
|
|
|
61,728
|
|
Accrued liabilities
|
|
|
58,878
|
|
|
|
(8,638
|
)
|
Net cash used in operating activities
|
|
|
(3,475,595
|
)
|
|
|
(2,804,052
|
)
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
|
Proceeds from sale of furniture and equipment
|
|
|
-
|
|
|
|
158,446
|
|
Purchases of furniture and equipment
|
|
|
(256,804
|
)
|
|
|
(127,612
|
)
|
Net cash (used in) provided by investing activities
|
|
|
(256,804
|
)
|
|
|
30,834
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
Stock issuance costs
|
|
|
-
|
|
|
|
(66,318
|
)
|
Proceeds from sale of common stock
|
|
|
-
|
|
|
|
16,242,889
|
|
Net cash provided by financing activities
|
|
|
-
|
|
|
|
16,176,571
|
|
|
|
|
|
|
|
|
|
|
Net (decrease) increase in cash and cash equivalents
|
|
|
(3,732,399
|
)
|
|
|
13,403,353
|
|
Cash and cash equivalents at beginning of period
|
|
|
27,092,928
|
|
|
|
5,131,114
|
|
Cash and cash equivalents at end of period
|
|
$
|
23,360,529
|
|
|
$
|
18,534,467
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-cash financing activity:
|
|
|
|
|
|
|
|
|
Partial settlement of contingent rights derivative
|
|
$
|
-
|
|
|
$
|
3,044,346
|
|
See accompanying condensed notes.
CASI PHARMACEUTICALS,
INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
June 30, 2017 (unaudited)
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 six month periods ended June 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 $446.0 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”). Net proceeds of the Strategic Financings are being used to further fund the
Company’s operations, accelerate its clinical and regulatory activities, expand its product pipeline, and support its marketing
and commercial planning activities. As a result of the 2016 Strategic Financings, the Company believes that it has sufficient resources
to fund its operations for at least the twelve months subsequent to August 14, 2017. As of June 30, 2017, approximately $4.3 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.
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”):
|
·
|
MARQIBO
®
(vinCRIStine sulfate LIPOSOME injection) (“Marqibo”);
|
|
·
|
ZEVALIN
®
(ibritumomab tiuxetan) (“Zevalin”); and
|
|
·
|
EVOMELA
®
(melphalan) for Injection (“Evomela”).
|
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 MARQIBO
®
, ZEVALIN
®
and EVOMELA
®
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
®
which currently is in the quality testing phase of the regulatory process.
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 six months ended June 30, 2017
and 2016, the Company recognized $3,738 and $14,010 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.
|
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 June 30, 2017 and December
31, 2016 by level within the fair value hierarchy:
|
|
As of June 30, 2017
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities - Contingent Rights
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
4,118,821
|
|
|
$
|
4,118,821
|
|
|
|
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
|
|
|
(3,445
|
)
|
Balance at June 30, 2017
|
|
$
|
4,118,821
|
|
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 six months ended June 30,
2017 and 2016.
|
5.
|
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 June 30, 2017, there are 9,747,004 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 225,000 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 June 30, 2017, 4,850,358 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 six months ended June 30, 2016, $10,100 was expensed for share awards with
performance conditions that became probable during that period. There was no expense recorded for share awards with performance
conditions during the six months ended June 30, 2017.
The Company’s
net loss for the six months ended June 30, 2017 and 2016 includes non-cash compensation expense of $350,565 and $1,976,736, 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:
|
|
SIX MONTH PERIOD ENDED
JUNE 30,
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
|
2016
|
|
Research and development
|
|
$
|
171,326
|
|
|
$
|
517,536
|
|
General and administrative
|
|
|
179,239
|
|
|
|
1,459,200
|
|
Share-based compensation expense
|
|
$
|
350,565
|
|
|
$
|
1,976,736
|
|
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 six-month periods ended June 30, 2017 and 2016:
|
|
SIX MONTH PERIOD ENDED
JUNE 30,
|
|
|
|
|
|
|
|
2017
|
|
2016
|
Expected volatility
|
|
78.34%
|
|
83.09%
|
Risk-free interest rate
|
|
1.82%
|
|
1.32%
|
Expected term of option
|
|
5.66 years
|
|
5.42 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 six-month period ended June 30, 2016, forfeitures were estimated at 3%.
The weighted average
fair value of stock options granted during the six-month periods ended June 30, 2017 and 2016 were $0.77 and $0.75, respectively.
A summary of the Company’s
stock option plans and of changes in options outstanding under the plans for the six months ended June 30, 2017 is as follows:
|
|
Number of
Options
|
|
|
Weighted
Average
Exercise
Price
|
|
Outstanding at January 1, 2017
|
|
|
9,535,306
|
|
|
$
|
1.57
|
|
Granted
|
|
|
1,199,500
|
|
|
$
|
1.15
|
|
Exercised
|
|
|
-
|
|
|
$
|
-
|
|
Expired
|
|
|
(987,802
|
)
|
|
$
|
1.64
|
|
Forfeited
|
|
|
-
|
|
|
$
|
-
|
|
Outstanding at June 30, 2017
|
|
|
9,747,004
|
|
|
$
|
1.51
|
|
Vested and expected to vest at June 30, 2017
|
|
|
9,693,592
|
|
|
$
|
1.51
|
|
Exercisable at June 30, 2017
|
|
|
7,966,610
|
|
|
$
|
1.60
|
|
There were no option
exercises during the six months ended June 30, 2017 or 2016.
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 six months
ended June 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 June 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.
|
7.
|
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 six months ended June 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. Approximately $20,900 was payable to Crown Bio as of June 30, 2017. The research and
development expense recognized for the services provided for the three months ended June 30, 2016 was $24,935. There were no research
and development services provided by Crown Bio for the three months ended June 30, 2017.
|
8.
|
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 is currently evaluating the impact, if any, that the pronouncement will have 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 pipeline
features (1) our lead proprietary drug candidate, ENMD-2076, in multiple Phase 2 clinical trials, (2)
MARQIBO
®
, ZEVALIN
®
and EVOMELA
®
, all FDA approved drugs in-licensed from
Spectrum for China regional rights, and currently in various stages in the regulatory process for market approval in China,
and (3) proprietary early-stage candidates in preclinical development. 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
ENMD-2076, our current development is focused on niche and orphan indications. 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.
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 $446.0
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”). Net
proceeds of the Strategic Financings are being used to further fund the Company’s operations, accelerate its clinical and
regulatory activities, expand its product pipeline, and support its marketing and commercial planning activities. As a result of
the 2016 Strategic Financings, the Company believes that it has sufficient resources to fund its operations for at least the twelve
months subsequent to August 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.
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:
|
-
|
Revenue Recognition
- We recognize revenue in accordance with the provisions of authoritative
guidance issued, whereby revenue is not recognized until it is realized or realizable and earned. Revenue is recognized when all
of the following criteria are met: persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered,
the price to the buyer is fixed and determinable and collectibility is reasonably assured.
|
|
-
|
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 six
months ended June 30, 2016, $10,100 was expensed for share awards with performance conditions that became probable during that
period. For the six months ended June 30, 2017, no expense has been recorded for share awards with performance conditions. 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 six months ended June 30, 2017 and
2016 totaled approximately $351,000 and $1,977,000, 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.
|
-
|
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 June 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 Six Months Ended June
30, 2017 and June 30, 2016.
Revenues and Cost
of Product Sales
. There were no revenues recorded for the three or six months ended June 30, 2017 and June 30, 2016.
Research and Development
Expenses.
Our research and development expenses for the three and six months ended June 30, 2017 totaled approximately $1,727,000
and $2,777,000, respectively. Research and development expenses for the corresponding 2016 periods were $1,363,000 and $2,381,000,
respectively. Included in our R&D expenses for the three-month period ended June 30, 2017 are direct project costs of $282,000
for ENMD-2076, $725,000 for drugs in-licensed from Spectrum, and $325,000 for preclinical development activities in China. The
2016 research and development expenses for the comparable period included $420,000 for ENMD-2076, $201,000 for drugs in-licensed
from Spectrum, and $194,000 for preclinical development activities in China. Research and development expenses totaling $2,777,000
for the six-month period ended June 30, 2017 included direct project costs of $556,000 related to ENMD-2076, $913,000 for drugs
in-licensed from Spectrum, and $567,000 for preclinical development activities in China. The 2016 research and development expenses
for the comparable period totaled $2,381,000 and included $817,000 for ENMD-2076, $310,000 for drugs in-licensed from Spectrum,
and $356,000 for preclinical development activities in China. The overall increase in research and development costs in the three
and six month periods ended June 30, 2017, as compared to same periods in 2016, primarily reflects higher costs associated with
the quality testing phase of the regulatory review of MARQIBO
®
and EVOMELA
®
in 2017.
At June 30, 2017, and,
since acquired, accumulated direct project expenses for ENMD-2076 totaled $28,211,000, $1,189,000 for drugs in-licensed from Spectrum,
and for preclinical development activities in China, accumulated project expenses totaled $2,613,000. Our research and development
expenses also include non-cash stock-based compensation totaling $104,000 and $171,000 for the three and six months ended June
30, 2017, respectively, and $343,000 and $518,000 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 the development of our ENMD-2076 program, our early-stage candidates
in preclinical development, and advancing our in-licensed products towards market approval in China. 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:
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.
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 increased to $1,727,000 during the three-months ended June 30, 2017 from $1,363,000 for the corresponding period in 2016.
Research and development expenses increased to $2,777,000 during the six months ended June 30, 2017 from $2,381,000 for the corresponding
period in 2016. The fluctuations in research and development expenditures during the three and six months ended June 30, 2017 were
specifically impacted by the following:
|
-
|
Outside Services – In the three-month period ended
June 30, 2017, we expended $34,000 on outside service activities versus $37,000 in the same 2016 period. For the six month period
ended June 30, 2017 outside services were $232,000 compared to $117,000 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 $158,000 in the three months ended June 30, 2017 from $289,000 in the three month
period ended June 30, 2016. Clinical trial costs for the six month period ended June 30, 2017 decreased to $324,000 from $559,000
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 June 30, 2017
increased to $613,000 from $153,000 during the same period in 2016. For the six month period ended June 30, 2017, manufacturing
costs increased to $625,000 from $172,000 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 $605,000 in the three-month period ended June
30, 2017 from $595,000 in the corresponding 2016 period. For the six-month period ended June 30, 2017, personnel costs decreased
in 2017 to $992,000 from $1,072,000 for the corresponding 2016 period. This variance is attributed to a decrease in non-cash stock-based
compensation expense totaling $346,000 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 June
30, 2017 are outsourced consultant costs of $46,000 and facility and related expenses of $118,000. In the corresponding 2016 period,
these expenses totaled $79,000 and $78,000, respectively. For the six month period ended June 30, 2017, outsourced consultant costs
were $141,000 and facility and related expenses were $221,000. In the corresponding 2016 period, these expenses totaled $160,000
and $178,000, 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.
|
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 $691,000 in the three-month period ended June 30, 2017 from $1,915,000 in the corresponding 2016 period.
The decrease in the second quarter of 2017, compared to the 2016 period, is primarily related to a decrease in stock-based compensation
expense of $1,172,000 largely related to stock options awarded in connection with the closings of the Company’s strategic
financing in 2016. For the six-month period ended June 30, 2017, general and administrative expenses decreased in 2017 to $1,336,000
from $2,680,000 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 $1,280,000 primarily related to stock options awarded in connection with the
closings of the Company’s strategic financing in 2016.
Interest (income)
expense, net
. Interest expense, net for three months ended June 30, 2017 and 2016 was $72 and $8,758, 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 $3,672 and $122, respectively. Interest (income) expense, net for
the six months ended June 30, 2017 and 2016 was $(70) and $17,526, respectively. This includes interest on our note payable of
$3,750 for both periods; non-cash interest of $3,738 and $14,010, respectively, representing the amortization of the debt discount;
offset by interest income of $7,558 and $234, 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 six months ended June 30, 2017 was $(10,319) and $(3,445),
respectively. The change in fair value of the Contingent Rights for the three and six months ended June 30, 2016 was $5,634 and
$7,400, 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 August 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 the clinical development of ENMD-2076 and new
product candidates, if any. We intend to explore one or more of the following alternatives to raise additional capital:
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selling additional equity securities;
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out-licensing product candidates to one or more corporate
partners;
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completing an outright sale of non-priority assets;
and/or
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engaging in one or more strategic transactions.
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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 Phase 2 plans for ENMD-2076 or plans for other product candidates,
if any.
At June 30, 2017, we
had cash of $23,360,529 with working capital of $20,623,319. As of June 30, 2017, approximately $4.3 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. Net proceeds of the Strategic Financings are being
used to further fund the Company’s operations, accelerate its clinical and regulatory activities, expand its product pipeline,
and support its marketing and commercial planning activities.
INFLATION AND INTEREST RATE CHANGES
Management does not
believe that our working capital needs are sensitive to inflation and changes in interest rates.