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, 2014

 

¨

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

 

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 7, 2014
Common Stock $.01 Par Value		32,445,811

 

 

CASI PHARMACEUTICALS, INC.

Table of Contents

 

PART I.  FINANCIAL INFORMATION		PAGE
Item 1 --  Consolidated Financial Statements
Consolidated Balance Sheets as of September 30, 2014 (unaudited) and December 31, 2013		4
Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2014 and 2013 (unaudited)		5
Consolidated Statements of Cash Flows for the  Nine Months Ended September 30, 2014 and 2013 (unaudited)		6
Notes to Consolidated Financial Statements (unaudited)		7
Item 2 --	Management’s Discussion and Analysis of Financial Condition and Results of Operations	14
Item 3 --	Quantitative and Qualitative Disclosures About Market Risk	23
Item 4 --	Controls and Procedures	23
Part II.  OTHER INFORMATION
Item 1 --	Legal Proceedings	24
Item 1A --	Risk Factors	24
Item 2 --	Unregistered Sales of Equity Securities and Use of Proceeds	35
Item 3 --	Defaults upon Senior Securities	35
Item 4 --	Removed and Reserved	35
Item 5 --	Other Information	35
Item 6 --	Exhibits	36
SIGNATURES		37

 

 

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

This report contains certain forward-looking statements within the meaning of Section 27A of the Securities Exchange 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; the difficulty of executing our business strategy in China; 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 models are not necessarily indicative of 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; risks relating to the commercialization, if any, of our proposed products (such as marketing, safety, regulatory, patent, product liability, supply, competition and other risks); risks relating to interests of our largest stockholders that differ from our other stockholders; and the risk of substantial dilution of existing stockholders in future stock issuances. 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.

 

 

PART I. FINANCIAL INFORMATION

 

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS

 

CASI Pharmaceuticals, Inc.

Consolidated Balance Sheets

 

		September 30, 2014				December 31, 2013
ASSETS		(Unaudited)				(Note 2)
Current assets:
Cash and cash equivalents		$	11,817,324			$	15,131,671
Prepaid expenses and other			336,382				279,773
Total current assets			12,153,706				15,411,444
Property and equipment, net			230,564				78,142
Other assets			26,011				17,965
Total assets		$	12,410,281			$	15,507,551
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable		$	600,239			$	402,456
Accrued liabilities			163,922				162,710
Total current liabilities			764,161				565,166
Note payable, net of discount			1,367,365				-
Contingent rights derivative liability			9,441,080				-
Total liabilities			11,572,606				565,166
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, 2014 and December 31, 2013			-				-
Common stock, $.01 par value:
170,000,000 shares authorized at September 30, 2014 and December 31, 2013; 32,525,356 shares and 27,119,974 shares issued at September 30, 2014
and December 31, 2013, respectively			325,251				271,198
Additional paid-in capital			432,221,907				421,775,039
Treasury stock, at cost:  79,545 shares held at September 30, 2014 and
December 31, 2013			(8,034,244	)			(8,034,244	)
Accumulated deficit			(423,675,239	)			(399,069,608	)
Total stockholders' equity			837,675				14,942,385
Total liabilities and stockholders' equity		$	12,410,281			$	15,507,551

 

See accompanying notes.

 

 

CASI Pharmaceuticals, Inc.

Consolidated Statements of Operations

(Unaudited)

 

		Three Months Ended								Nine Months Ended
		September 30,  2014				September 30,  2013				September 30, 2014				September 30, 2013
Revenues:
Royalties		$	-			$	-			$	-			$	-
Costs and expenses:
Research and development			697,001				779,953				1,981,468				2,079,341
General and administrative			1,150,164				662,621				2,933,456				2,351,793
Acquired in-process research and development			19,681,711				-				19,681,711				-
			21,528,876				1,442,574				24,596,635				4,431,134
Interest (income) expense, net			2,927				(408	)			2,415				(1,241	)
Change in fair value of contingent rights			6,581				-				6,581				-
Net loss		$	(21,538,384	)		$	(1,442,166	)		$	(24,605,631	)		$	(4,429,893	)
Net loss per share (basic and diluted)		$	(0.77	)		$	(0.05	)		$	(0.90	)		$	(0.17	)
Weighted average number of common shares
outstanding (basic and diluted)			27,804,223				27,031,734				27,297,828				25,817,642

 

See accompanying notes.

 

 

CASI Pharmaceuticals, Inc.

Consolidated Statements of Cash Flows

(Unaudited)

 

		Nine Months Ended September 30,
		2014				2013
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss		$	(24,605,631	)		$	(4,429,893	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization			32,713				12,900
Stock-based compensation expense			1,852,310				1,554,422
Acquired in-process research and development			19,681,711				-
Change in fair value of contingent rights			6,581				-
Non-cash interest			3,272				-
Changes in operating assets and liabilities:
Accounts receivable			-				669,310
Prepaid expenses and other			(64,655	)			(127,127	)
Accounts payable			197,783				(152,601	)
Payable to related party			-				(86,683	)
Accrued liabilities			1,212				(2,067	)
Net cash used in operating activities			(2,894,704	)			(2,561,739	)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of furniture and equipment			(185,135	)			(16,926	)
Cash paid for acquired in-process research and development			(234,508	)			-
Net cash used in investing activities			(419,643	)			(16,926	)
CASH FLOWS FROM FINANCING ACTIVITIES
Stock issuance costs			-				(448,402	)
Net proceeds from sale of common stock or exercise of options and warrants			-				10,849,524
Net cash provided by financing activities			-				10,401,122
Net (decrease) increase in cash and cash equivalents			(3,314,347	)			7,822,457
Cash and cash equivalents at beginning of period			15,131,671				8,049,237
Cash and cash equivalents at end of period		$	11,817,324			$	15,871,694
Supplemental disclosure of cash flow information:
Non-cash investing and financing activities:
Warrant issued to placement agent		$	-			$	115,150
Common stock issued in connection with acquired in-process research and development		$	8,648,611			$	-
Promissory note, net of discount, issued in connection with acquired in-process research and development		$	1,364,093			$	-
Contingent rights issued in connection with acquired in-process research and development		$	9,434,499			$	-

 

See accompanying notes.

 

CASI PHARMACEUTICALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2014 (unaudited)

 

1.

Company Name Change

 

On June 12, 2014, the stockholders of EntreMed, Inc. approved changing the Company’s name from EntreMed, Inc. to CASI Pharmaceuticals, Inc., which became effective on June 16, 2014.

 

2.

Basis of Presentation

 

The accompanying 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”). 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 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 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 accruals) considered necessary for a fair presentation have been included. The accompanying December 31, 2013 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, 2013. Operating results for the three and nine month periods ended September 30, 2014 are not necessarily indicative of the results that may be expected for the year ending December 31, 2014. 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, 2013.

 

Liquidity Risks and Management’s Plans

 

Since inception, the Company has incurred significant losses from operations and has incurred an accumulated deficit of $423.7 million.  The Company expects to continue to incur operating losses for the foreseeable future due to, among other factors, its continuing clinical activities. On March 14, 2013 (the “2013 Financing”), the Company closed on the sale of 4,495,828 shares of common stock and 2,247,912 warrants to certain investors for approximately $10.8 million (see Note 6). As a result of this transaction, along with on-going cost containment measures, the Company believes that it has sufficient resources to fund its operations for at least the twelve months subsequent to September 30, 2014. The Company will 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.

 

 

Reclassifications

 

Certain prior period amounts were reclassified to conform to the current period presentation. 

 

3.

License Arrangements and Acquisition of In-Process Research and Development

 

In September 2014, the Company acquired 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 China, Taiwan, Hong Kong and Macau (the “Territories”):

 

·

Captisol-Enabled™ (propylene glycol-free) melphalan (“CE Melphalan”);

·

ZEVALIN® (ibritumomab tiuxetan) (“Zevalin”); and

·

MARQIBO® (vinCRIStine sulfate LIPOSOME injection) (“Marqibo”).

 

CE Melphalan is currently in Phase III clinical trials in the U.S. (with an NDA submission planned by Spectrum for later in 2014), whereas Zevalin and Marqibo are currently marketed in the U.S. 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 consideration for the acquisition, the Company issued a total 5,405,382 shares of its common stock, a $1.5 million 0.5% secured promissory note due in March 2016, and certain contingent rights (“Contingent Rights”) to purchase additional shares of its common stock or Series A Preferred Stock. The Company accounted for the acquisition of the product rights and licenses as an “asset acquisition” and, accordingly, recorded the acquired product rights and licenses at their estimated fair values based on the fair value of the consideration exchanged (including transaction costs) of approximately $19.7 million. Because the products underlying the acquired product rights and licenses have not reached technological feasibility and have no alternative uses, they are considered “in-process research and development” costs; as such, the Company expensed the total purchase price at the acquisition date as acquired in-process research and development in the accompanying consolidated statements of operations.

 

The fair value of the common stock issued was based on the closing market price of the Company’s common stock on the acquisition date. The fair value of the promissory note was measured using Level 3 unobservable inputs including primarily the Company’s estimated incremental borrowing rate as provided by a commercial lending institution.

 

The Contingent Rights provide Spectrum with the option to acquire, at a strike price of par value, a variable number of additional shares of common stock (or other equity-linked securities) that allows Spectrum to maintain its fully-diluted ownership percentage for a certain time period and under certain terms and conditions. Based on the terms and conditions of the Contingent Rights, the Company has determined that the Contingent Rights are a derivative financial instrument that is not indexed to its common stock and therefore is required to be accounted for at fair value, initially and on a recurring basis. The fair value of the Contingent Rights was measured using Level 3 unobservable inputs, as determined by an independent valuation expert; 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. The total estimated fair value of the Contingent Rights was $9,434,499 at the acquisition date and was $9,441,080 as of September 30, 2014; the change in fair value is reflected as change in fair value of contingent rights in the accompanying consolidated statements of operations.

 

 

4.

Note Payable

 

As part of the license arrangements with Spectrum (see Note 3), the Company issued to Spectrum a $1.5 million 0.5% secured promissory note due in March 2016. 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 consolidated balance sheets. For the three and nine months ended September 30, 2014, the Company recognized approximately $3,300 of non-cash interest expense related to the amortization of the debt discount, using the effective interest rate method.

 

5.

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 market 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, accrued expenses, and other current assets and liabilities) approximate their carrying values because of their short-term nature.

 

 

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

 

The Contingent Rights issued to Spectrum in connection with the license arrangements (see Note 3) 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, as determined by an independent valuation expert; 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, 2014 (none at December 31, 2013) by level within the fair value hierarchy:

 

		As of September 30, 2014
		Level 1				Level 2				Level 3				Total
Liabilities - Contingent Rights		$	-			$	-			$	9,441,080			$	9,441,080

 

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, 2013		$	-
Issuance of Contingent Rights			9,434,499
Change in fair value of Contingent Rights			6,581
Balance at September 30, 2014		$	9,441,080

 

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 Note 4) 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 in the three and nine months ended September 30, 2014 and 2013.

 

 

6.

Stockholders’ Equity

 

As described in Note 2 and in connection with the 2013 Financing, on March 1, 2013, the Company entered into a definitive agreement with certain investors (collectively, the “2013 Investors”) for a financing in the aggregate amount of approximately $10.8 million.  In connection with the 2013 Financing, the Company entered into a Securities Purchase Agreement with the 2013 Investors pursuant to which the Company agreed to sell in a transaction registered under the Securities Act of 1933, as amended, 4,495,828 shares of the Company’s common stock and warrants to purchase up to an aggregate of 2,247,912 shares of common stock (the “2013 Warrants”).  The 2013 Warrants cover a number of shares of common stock equal to 50% of the number of shares purchased by each 2013 Investor.  The 2013 Warrants have an exercise price of $2.91 per share and became exercisable on September 4, 2013 and expire on September 4, 2016. The fair value of the 2013 Warrants issued is $3,574,180, calculated using the Black-Scholes-Merton valuation model value of $1.59 with an expected and contractual life of 3.5 years, an assumed volatility of 102.3%, and a risk-free interest rate of 0.40%. The Company completed the closings on the 2013 Financing on March 14, 2013 and received net proceeds of approximately $10.3 million.

 

In connection with the 2013 Financing, the Company also issued a warrant to its placement agent to purchase up to 61,250 shares of common stock at an exercise price of $3.00 per share of common stock (the “Agent’s Warrant”). The Agent’s Warrant became exercisable on September 4, 2013 and will expire on October 9, 2017. The fair value of the Agent’s Warrant issued is $115,150, calculated using the Black-Scholes-Merton valuation model value of $1.88 with an expected and contractual life of 4.6 years, an assumed volatility of 111.9%, and a risk-free interest rate of 0.85%.

 

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 2014, the Company’s shareholders approved an amendment to the 2011 Long-Term Incentive Plan, increasing the number of shares reserved for issuance from 4,230,000 to 5,730,000 shares of common stock to be available for grants and awards. As of September 30, 2014, there are 4,567,876 shares issuable under options previously granted and currently outstanding, with exercise prices ranging from $1.59 to $34.10. In 2014, the Company awarded options to two officers and two board members, covering up to 400,000 shares, in which vesting is subject to achievement of certain performance milestone conditions. In 2012, the Company awarded options to two officers, a portion of which is subject to certain performance conditions and market conditions. 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, 2014, 1,605,876 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. On September 17, 2014, the vesting of all of the performance condition options became probable as a result of the Spectrum transaction discussed in Note 3. Therefore, for the three months ended September 30, 2014, non-cash compensation expense of $686,600 has been recorded for share awards with performance conditions.

 

 

The Company’s net loss for the nine months ended September 30, 2014 and 2013 includes non-cash compensation expense of $1,852,310 and $1,554,422, 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,
		2014				2013
Research and development		$	572,842			$	587,186
General and administrative			1,279,468				967,236
Share-based compensation expense		$	1,852,310			$	1,554,422
Net share-based compensation expense, per common share:
Basic and diluted		$	0.07			$	0.06

 

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, 2014 and 2013:

 

		NINE MONTH PERIOD ENDED SEPTEMBER 30,
		2014				2013
Expected volatility			102.41	%			105.37	%
Risk-free interest rate			1.78	%			1.01	%
Expected term of option			5.63 years				5.76 years
Forfeiture rate*			3.00	%			5.00	%
Expected dividend yield			0.00	%			0.00	%

 

* - Authoritative guidance requires 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 periods ended September 30, 2014 and 2013, forfeitures were estimated at 3% and 5%, respectively.

 

The weighted average fair value of stock options granted during the nine-month periods ended September 30, 2014 and 2013 was $1.44 and $1.43, 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, 2014 is as follows:

 

		Number of Options				Weighted Average Exercise Price
Outstanding at January 1, 2014			3,586,394			$	2.69
Granted			1,090,000			$	1.83
Exercised			-			$	-
Expired			104,976			$	6.21
Forfeited			3,542			$	1.94
Outstanding at September 30, 2014			4,567,876			$	2.40
Vested and expected to vest at September 30, 2014			4,528,970			$	2.41
Exercisable at September 30, 2014			3,270,995			$	2.64

 

Cash received from option exercises under all share-based payment arrangements for the three and nine months ended September 30, 2013 was $0 and $7,190, respectively. There were no option exercises during the three or nine months ended September 30, 2014.

 

8.

Income Taxes

 

At December 31, 2013, the Company had a $3.0 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, 2013.

 

During the nine months ended September 30, 2014, 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 January 1, 2014; no changes in settled tax years have occurred through September 30, 2014. 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.

New Accounting Pronouncements

 

In August 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standard Update (ASU) 2014-15, Presentation of Financial Statements – Going Concern. The new standard requires management to evaluate on a regular basis whether any conditions or events have arisen that could raise substantial doubt about the entity’s ability to continue as a going concern. The guidance 1) provides a definition for the term “substantial doubt,” 2) requires an evaluation every reporting period, interim periods included, 3) provides principles for considering the mitigating effect of management’s plans to alleviate the substantial doubt, 4) requires certain disclosures if the substantial doubt is alleviated as a result of management’s plans, 5) requires an express statement, as well as other disclosures, if the substantial doubt is not alleviated, and 6) requires an assessment period of one year from the date the financial statements are issued.  The standard is effective for the Company’s reporting year beginning January 1, 2017 and early adoption is not permitted. The Company is currently evaluating the impact, if any, that this new accounting pronouncement will have on its financial statements.

 

 

In May 2014, the FASB issued Accounting Standards Update 2014-09, Revenue from Contracts with Customers which provides guidance for revenue recognition for contracts, superseding the previous revenue recognition requirements, along with most existing industry-specific guidance. The guidance requires an entity to review contracts in five steps: 1) identify the contract, 2) identify performance obligations, 3) determine the transaction price, 4) allocate the transaction price, and 5) recognize revenue. The new standard will result in enhanced disclosures regarding the nature, amount, timing and uncertainty of revenue arising from contracts with customers. The standard is effective for the Company’s reporting year beginning January 1, 2017 and early adoption is not permitted. The Company is currently evaluating the impact, if any, that this new accounting pronouncement will have on its financial statements.

 

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

 

OVERVIEW

 

We are a biopharmaceutical company dedicated to the acquisition, development and commercialization of innovative therapeutics addressing cancer and other unmet medical needs for the global market with a commercial focus on China. Our mission is to become an integrated biopharmaceutical company with significant market share in China, while establishing partnerships for global development and commercialization. Part of our strategy is to leverage our expertise and resources in North America and China to bring safer, more effective, and/or easier-to-use drugs to patients and to develop them more cost-effectively using our unique dual development approach.

 

We will continue to seek to expand our pipeline by (i) acquiring additional drug candidates through in-license and acquisitions, and (ii) exploring internal development of drug candidates focused on clinically proven targets. In September 2014, we acquired from Spectrum exclusive rights in China (including Taiwan, Hong Kong and Macau) to three in-licensed oncology products, including ZEVALIN^® (ibritumomab tiuxetan) approved in the U.S. for advanced non-Hodgkin’s lymphoma, MARQIBO^® (vinCRIStine sulfate LIPOSOME injection) approved in the U.S. for advanced adult Ph- acute lymphoblastic leukemia (ALL), as well as Captisol Enabled^™ melphalan (CE melphalan), which will be the subject of a New Drug Application expected to be filed with U.S. Food and Drug Administration (FDA) by Spectrum in 2014. We have initiated the development and regulatory process to obtain marketing approval for these products in our territorial region.

 

ZEVALIN^® injection for intravenous use is a CD20-directed radiotherapeutic antibody. It is indicated for the treatment of patients with relapsed or refractory, low-grade or follicular B-cell non-Hodgkin’s lymphoma (NHL). ZEVALIN^® is also indicated for the treatment of patients with previously untreated follicular non-Hodgkin’s Lymphoma who achieve a partial or complete response to first-line chemotherapy. ZEVALIN^® therapeutic regimen consists of two components: rituximab, and Yttrium-90 (Y-90) radiolabeled ZEVALIN^® for therapy. ZEVALIN^® builds on the combined effect of a targeted biologic monoclonal antibody augmented with the therapeutic effects of a beta-emitting radioisotope. Since ZEVALIN^® is already approved in the U.S. and marketed by Spectrum, we expect that gaining approval from local regulatory authorities for commercialization in greater China will require a shorter timeframe compared to clinical-stage drugs.

 

 

Marqibo^® is a novel, sphingomyelin/cholesterol liposome-encapsulated, formulation of vincristine sulfate, a microtubule inhibitor. Marqibo^® is approved by the FDA for the treatment of adult patients with Philadelphia chromosome-negative (Ph-) acute lymphoblastic leukemia (ALL) in second or greater relapse or whose disease has progressed following two or more anti-leukemia therapies. Since MARQIBO^® is already approved in the U.S. and marketed by Spectrum, we expect that gaining approval from local regulatory authorities for commercialization in greater China will require a shorter timeframe compared to clinical-stage drugs.

 

CE melphalan is a new intravenous formulation of melphalan being investigated by our licensor in the multiple myeloma transplant setting. The formulation avoids the use of propylene glycol, which is used as a co-solvent in the current formulation of melphalan and has been reported to cause renal and cardiac side-effects that limit the ability to deliver higher quantities of intended therapeutic compounds. The use of Captisol technology to reformulate melphalan is anticipated to allow for longer administration durations and slower infusion rates, potentially enabling clinicians to avoid reductions and safely achieve a higher dose intensity of pre-transplant chemotherapy. CE-Melphalan is expected to be the subject of a New Drug Application, which we expect will be filed by Spectrum in 2014. We intend to submit our import drug registration application for CE melphalan in greater China after its approval by the FDA in the U.S.

 

Our pipeline also includes our proprietary ENMD-2076. ENMD-2076 is an orally-active, Aurora A/angiogenic kinase inhibitor with a unique kinase selectivity profile and multiple mechanisms of action that has shown anti-angiogenic and anti-proliferative properties in multiple preclinical and clinical cancer studies. ENMD-2076 has been shown to inhibit a distinct profile of angiogenic tyrosine kinase targets in addition to the Aurora A kinase. Aurora kinases are key regulators of mitosis (cell division), and are often over-expressed in human cancers. ENMD-2076 also targets the VEGFR, Flt-3 and FGFR3 kinases, which have been shown to play important roles in the pathology of several cancers.

 

ENMD-2076 has shown promising activity in a completed Phase I clinical trial in various different solid tumor cancers including ovarian, breast, liver, renal and sarcoma, as well as in leukemia, and multiple myeloma, and has also completed a Phase II clinical trial in advanced ovarian cancer. We are currently conducting multiple Phase II studies of ENMD-2076 in triple-negative breast cancer (TNBC), advanced/metastatic soft tissue sarcoma (STS), and in advanced ovarian clear cell carcinomas (OCCC) in North America. CASI received the China Food and Drug Administration’s (CFDA) clinical trial application (CTA) approval to start a TNBC trial in China and currently is in the process of initiating the trial in multiple centers in China. The clinical trials in China will supplement our ongoing Phase II TNBC trial currently underway at the University of Colorado and Indiana University. In June 2013, we filed a new drug global clinical trial application with the CFDA to expand our Phase 2 clinical trial of ENMD-2076 in advanced/metastatic sarcoma. In November 2014, the Company received CFDA’s clinical trial application (CTA) approval to start an advanced/metastatic trial in China and currently is in the planning and discussion stage. The CFDA’s approval of our application allows us to conduct clinical trials in China and supplement our ongoing Phase 2 advanced/metastatic sarcoma trial currently underway at Princess Margaret Hospital.

 

In January 2014, we filed a new drug global clinical trial application with the CFDA to expand our Phase 2 clinical trial of ENMD-2076 in advanced ovarian clear cell carcinoma. The CFDA has accepted our application package, and we are working with the CFDA to move the process forward towards approval. The CFDA’s approval of our application would allow us to conduct clinical trials in China and supplement our ongoing Phase 2 ovarian clear cell carcinoma trial currently underway at Princess Margaret Hospital.

 

 

In September 2014, CASI has also filed an investigational new drug application (IND) with the FDA to conduct a Phase II trial in advanced fibrolamellar carcinoma (FLC). We currently are in the planning and discussion stage.

 

ENMD-2076 has received orphan drug designation from the FDA for the treatment of ovarian cancer, multiple myeloma, acute myeloid leukemia and hepatocellular carcinoma (HCC).

 

Our pipeline also includes 2ME2 (2-methoxyestradial) currently under reformulation development for autoimmune disorders. 2ME2 is an orally active compound that has antiproliferative, antiangiogenic and anti-inflammatory properties. The inhibition of angiogenesis is an important approach to the treatment of both cancer and autoimmune diseases such as rheumatoid arthritis. 2ME2 has potential as a single agent in rheumatoid arthritis based on its antiangiogenic, anti-inflammatory, and anti-osteoclastic (bone resorption) properties. 2ME2 has also demonstrated positive preclinical results for multiple sclerosis.

 

We intend to advance clinical development of our drugs and drug candidates, and 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 doing business in China through its wholly-owned Chinese 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 for development and commercialization in the Chinese market.

 

Since inception, we have incurred significant losses from operations and have incurred an accumulated deficit of $423.7 million.  We expect to continue to incur operating losses for the foreseeable future due to, among other factors, our continuing clinical activities. We expect our current available cash and cash equivalents to meet our cash requirements for at least the next twelve months. We will 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 candidate 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.

 

 

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:

 

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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.

 

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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.

 

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Stock-Based Compensation – All share-based payment transactions are recognized in the 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 three months ended September 30, 2014, non-cash compensation expense of $686,600 has been recorded for share awards with performance conditions that became probable during the 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 in the nine months ended September 30, 2014 and 2013 totaled $1,852,310 and $1,554,422, respectively.

 

The determination of fair value of stock-based payment awards on the date of grant using the Black-Scholes or binomial 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 within the in accordance with the hierarchy established by U.S. GAAP.  During the three months ended September 30, 2014, we measured the Contingent Rights and our promissory note issued to Spectrum at fair value at the date of issuance, and at September 30, 2014 we remeasured the Contingent Rights at fair value and will continue to do so at every balance sheet date until settlement.  In measuring the fair value of both financial instruments 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, 2014 and September 30, 2013.

 

Revenues. There were no revenues recorded during the three and nine months ended September 30, 2014 or September 30, 2013. We become entitled to share in the royalty payments received by Royalty Pharma Finance Trust on annual Thalomid^® sales when Royalty Pharma Finance Trust receives more than $15,375,000 in royalties, pursuant to a 2001 agreement with Royalty Pharma. Thalomid^® is distributed and sold by Celgene Corporation and/or its affiliates, and thus, we have no control over sales of Thalomid^® or the amount, if any, of royalty payments we will receive. Based on the previous year and the recent trend, we expect annual sales of Thalomid^® in 2014 to remain at a level below the threshold amount to trigger a royalty payment to the Company. As a result we do not expect to earn any royalty revenue in 2014 or in any subsequent year.

 

Research and Development Expenses. Our research and development expenses for the three and nine months ended September 30, 2014 totaled approximately $697,000 and $1,981,000, respectively. Research and development expenses for the corresponding 2013 periods were $780,000 and $2,079,000, respectively. Included in our R&D expenses totaling $697,000 for the three-month period ended September 30, 2014 are direct project costs of $199,000 for ENMD-2076, and $108,000 for our formulation development initiative that we began in late 2013 in China. The 2013 research and development expenses for the comparable period included $526,000 for ENMD-2076. Research and development expenses totaling $1,981,000 for the nine-month period ended September 30, 2014 include direct project costs of $798,000 related to ENMD-2076 and $301,000 for our new formulation development initiative. The 2013 research and development expenses for the comparable period included $1,157,000 for ENMD-2076. The overall decrease in research and development costs in the three-month and nine-month periods ended September 30, 2014, as compared to same periods in 2013, reflects higher clinical trial costs in 2013 due to our crossover bioavailability and food effect study of ENMD-2076 during the 2013 period, offset by increased costs associated with our research and development operations in China during 2014 and an increase in non-cash stock-based compensation expense.

 

At September 30, 2014, and, since acquired, accumulated direct project expenses for ENMD-2076 totaled $24,232,000, and for our new formulation development projects, accumulated project expenses totaled $366,000. Our research and development expenses also include non-cash stock-based compensation totaling $573,000 for the nine months ended September 30, 2014 and $587,000 for the corresponding 2013 period. The balance of our research and development expenditures includes facility costs and other departmental overhead, and expenditures related to the non-clinical support of our programs.

 

 

We expect the majority of our research and development expenses in 2014 to be devoted to the development of our ENMD-2076 program, advancement of our new formulation development projects in China, as well as the submission of import drug registration applications to regulatory authorities in China for the drugs in-licensed from Spectrum. We expect our expenses in for the remainder of 2014 to increase based on our clinical development plan. We will continue to conduct research on ENMD-2076 in order to comply with stipulations made by the FDA, as well as to increase understanding of the mechanism of action and toxicity parameters of ENMD-2076 and its metabolites.  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:

 

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the number of patients that ultimately participate in the trial;

 

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

 

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the number of clinical sites included in the trials; and

 

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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 decreased to $697,000 during the three months ended September 30, 2014 from $780,000 for the corresponding period in 2013. Research and development expenses decreased to $1,981,000 during the nine months ended September 30, 2014 from $2,079,000 for the corresponding period in 2013. The fluctuations in research and development expenditures during the three and nine months ended September 30, 2014 were specifically impacted by the following:

 

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Outside Services – In the three-month period ended September 30, 2014, we expended $25,000 on outside service activities versus $6,000 in the same 2013 period. For the nine-month period ended September 30, 2014 outside services are $57,000 compared to $40,000 for the same 2013 period. The increase in 2014 as compared to 2013 for the three and nine month periods reflect costs associated with regulatory consulting services in the U.S. during 2014 periods.

 

 

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Clinical Trial Costs – Clinical trial costs, which include clinical site fees, monitoring costs and data management costs, decreased to $45,000 in the three months ended September 30, 2014 from $353,000 in the three-month period ended September 30, 2013. Clinical trial costs for the nine-month period ended September 30, 2014 decreased to $129,000 from $557,000 for the comparable 2013 period. This decrease relates to costs associated with enrolling patients in Phase 2 clinical trials for TNBC during the 2013 period and costs associated with clinical research organization costs related to our crossover bioavailability and food effect study of ENMD-2076 during the 2013 period.

 

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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, 2014 decreased to $24,000 from $34,000 during the same period in 2013 as a result of the timing of manufacturing costs incurred in China. For the nine-month period ended September 30, 2014, manufacturing costs increased to $202,000 from $158,000 for the comparable 2013 period. The increase primarily reflects manufacturing costs incurred during the second quarter of 2014 in the U.S. related to the production of new formulated capsules of ENMD-2076.

 

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Personnel Costs – Personnel costs increased to $509,000 in the three-month period ended September 30, 2014 from $251,000 in the corresponding 2013 period. This variance is attributed to an increase in non-cash stock-based compensation expense totaling $176,000 during the 2014 period, and increased salary and benefit costs associated with new employees in China during the 2014 period. For the nine-month period, personnel costs increased in 2014 to $1,181,000 from $1,006,000 for the corresponding 2013 period. This variance is attributed to increased salary and benefit costs associated with new employees in China during the 2014 period.

 

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Also reflected in our 2014 research and development expenses for the three-month period ended September 30, 2014 are outsourced consultant costs of $30,000 and facility and related expenses of $54,000. In the corresponding 2013 period, these expenses totaled $70,000 and $30,000, respectively. For the nine-month period ended September 30, 2014, outsourced consultant costs were $135,000 and facility and related expenses were $152,000. In the corresponding 2013 period, these expenses totaled $125,000 and $76,000, respectively. The variance in outsourced consultant costs reflect the timing of clinical trial management, including site visits, and regulatory activities. The increase in expenses in facilities and related expenses in 2014 resulted from leased laboratory space in China.

 

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

 

General and administrative expenses increased to $1,150,000 in the three-month period ended September 30, 2014 from $663,000 in the corresponding 2013 period. The increase in the third quarter of 2014, compared to the 2013 period, is primarily related to an increase in stock-based compensation expense of $423,000 due mainly to the vesting of performance based options during the 2014 period, and an increase in outside professional fees associated with business development, investor relations and corporate name change activities during the 2014 period. For the nine-month period, general and administrative expenses increased in 2014 to $2,933,000 from $2,352,000 for the corresponding 2013 period. The increase in the 2014 period, compared to the 2013 period is primarily related to an increase in stock-based compensation expense of $312,000 associated with the vesting of performance based options, and higher costs for outside professional fees associated with business development, investor relations and corporate name change activities during 2014.

 

 

In-process R&D. In September 2014, we acquired certain product rights and perpetual exclusive licenses from Spectrum to develop and commercialize the three commercial oncology drugs and drug candidates in China, Taiwan, Hong Kong and Macau. As consideration for the acquisition, we issued a total 5,405,382 shares of our common stock, a $1.5 million 0.5% secured promissory note due in March 2016, and certain contingent rights (“Contingent Rights”) to purchase additional shares of its common stock. We accounted for the acquisition of the product rights and licenses as an “asset acquisition” and, accordingly, recorded the acquired product rights and licenses at their estimate fair values based on the fair value of the consideration exchanged (including transaction costs) of approximately $19.7 million. Because the products underlying the acquired product rights and licenses have not reached technological feasibility and have no alternative uses, they are considered “in-process research and development” costs; as such, we expensed the total purchase price at the acquisition date as acquired in-process R&D in the accompanying consolidated statements of operations.

 

Interest expense, net. Interest expense, net for nine-month period ended September 30, 2014 was $2,415. This includes $267 accrued interest on our note payable; non-cash interest of $3,272 representing the amortization of the debt discount; offset by interest income of $1,124. Interest income for the nine-months ended September 30, 2013 was $1,241. There was no interest expense for the nine-months ended September 30, 2013.

 

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, 2014 was $6,581.

 

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 2014 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 September 30, 2014.

 

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.

 

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 shareholders 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 September 30, 2014, we had cash of $11,817,324 with working capital of $11,389,545.

 

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 on the total fair market value of our portfolio as of September 30, 2014.

 

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, 2014 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.

 

 

Management’s assessment of the effectiveness of internal control over financial reporting is expressed at the level of reasonable assurance because a control system, no matter how well designed and operated, can provide only reasonable, but not absolute, assurance that the control system’s objectives will be met.

 

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, 2014 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, except as 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 information under “Special Note Regarding Forward-Looking Statements” included in this report and the risk factors set forth below:

 

Risks Relating to our Financial Position and Need for Additional Capital

 

We Have a History of Losses and Anticipate Future Losses and May Never Become Profitable on a Sustained Basis

 

To date, we have been engaged primarily in research and development activities. Although in the past we have received limited revenues on royalties from the sales of pharmaceuticals, license fees and research and development funding from a former collaborator and limited revenues from certain research grants, we have not derived significant revenues from operations.

 

We have experienced losses in each year since inception. Through December 31, 2013, we had an accumulated deficit of approximately $399 million. We will seek to raise capital to continue our operations and although we have been successfully funded to date through the sales of our equity securities and through limited royalty payments, there is no assurance that our capital-raising efforts will be able to attract the funding needed to sustain our operations. If we are unable to obtain additional funding for operations, we may not be able to continue operations as proposed, requiring us to modify our business plan, curtail various aspects of our operations or cease operations. In any such event, investors may lose a portion or all of their investment.

 

 

Losses have continued since December 31, 2013 and we have an accumulated deficit of $423.7 million as of September 30, 2014. We expect that our ongoing clinical and corporate activities will result in operating losses for the foreseeable future before we commercialize any products, if ever. In addition, to the extent we rely on others to develop and commercialize our products, our ability to achieve profitability will depend upon the success of these other parties. To support our research and development of certain product candidates, we may seek and rely on cooperative agreements from governmental and other organizations as a source of support. If a cooperative agreement were to be reduced to any substantial extent, it may impair our ability to continue our research and development efforts. Even if we do achieve profitability, we may be unable to sustain or increase it.

 

Our Common Stock May be Delisted From The NASDAQ Capital Market, Which Could Negatively Impact the Price of Our Common Stock and Our Ability to Access the Capital Markets

 

If we are not able to comply with the listing standards of the Nasdaq Capital Market, our common stock will be delisted from Nasdaq and an associated decrease in liquidity in the market for our common stock will occur. In addition, the delisting of our common stock could materially adversely affect our access to the capital markets, and any limitation on liquidity or reduction in the price of our common stock could materially adversely affect our ability to raise capital on terms acceptable to us or at all. Delisting from The NASDAQ Capital Market could also result in other negative implications, including the potential loss of confidence by our research partners and suppliers, the loss of institutional investor interest and fewer business development opportunities.

 

We May Engage in Strategic and Other Corporate Transactions, Which Could Negatively Affect Our Financial Condition and Prospects

 

We may consider strategic and other corporate transactions as opportunities present themselves. There are risks associated with such activities. These risks include, among others, incorrectly assessing the quality of a prospective strategic partner, encountering greater than anticipated costs in integration, being unable to profitably deploy assets acquired in the transaction, such as drug candidates, possible dilution to our stockholders, and the loss of key employees due to changes in management. Further, strategic transactions may place additional constraints on our resources by diverting the attention of our management from our business operations. To the extent we issue securities in connection with additional transactions, these transactions and related issuances may have a dilutive effect on earnings per share and our ownership. Our financial condition and prospects after an acquisition depend in part on our ability to successfully integrate the operations of the acquired business or technologies. We may be unable to integrate operations successfully or to achieve expected cost savings. Any cost savings which are realized may be offset by losses in revenues or other charges to earnings.

 

The Current Capital and Credit Market Conditions May Adversely Affect the Company’s Access to Capital, Cost of Capital, and Ability to Execute its Business Plan as Scheduled

 

Access to capital markets is critical to our ability to operate. Traditionally, biopharmaceutical companies (such as we) have funded their research and development expenditures through raising capital in the equity markets. Declines and uncertainties in these markets over the past few years have severely restricted raising new capital in amounts sufficient to conduct our ENMD-2076 program and have affected our ability to continue to expand or fund research and development efforts with our other product candidates. We require significant capital for research and development for our product candidates and clinical trials. In recent years, the general economic and capital market conditions in the United States have deteriorated significantly and have adversely affected our access to capital and increased the cost of capital, and there is no certainty that a recovery in the capital and credit markets, enabling us to raise capital in an amount to sufficiently fund our short-term and long-term plans, will occur in 2014. If these economic conditions continue or become worse, our future cost of equity or debt capital and access to the capital markets could be adversely affected. In addition, our inability to access the capital markets on favorable terms because of our low stock price, or upon our delisting from the NASDAQ Capital Market if we fail to satisfy a listing requirement, could affect our ability to execute our business plan as scheduled. Moreover, we rely and intend to rely on third parties, including our clinical research organizations, third party manufacturers, and certain other important vendors and consultants. As a result of the current volatile and unpredictable global economic situation, there may be a disruption or delay in the performance of our third-party contractors and suppliers. If such third parties are unable to adequately satisfy their contractual commitments to us in a timely manner, our business could be adversely affected.

 

 

We Do Not Have Any Active Revenue Streams and We Are Uncertain Whether Additional Funding Will Be Available For Our Future Capital Needs and Commitments. If We Cannot Raise Additional Funding, or Access the Capital Markets, We May Be Unable to Complete Development of Our Product Candidates

 

We will require substantial funds in addition to our existing working capital to develop our product candidates and otherwise to meet our business objectives. We have never generated sufficient revenue during any period since our inception to cover our expenses and have spent, and expect to continue to spend, substantial funds to continue our clinical development programs. Any one of the following factors, among others, could cause us to require additional funds or otherwise cause our cash requirements in the future to increase materially:

 

·

progress of our clinical trials or correlative studies;

 

·

results of clinical trials;

 

·

changes in or terminations of our relationships with strategic partners;

 

·

changes in the focus, direction, or costs of our research and development programs;

 

·

competitive and technological advances;

 

·

establishment of marketing and sales capabilities;

 

·

manufacturing;

 

·

the regulatory approval process; or

 

·

product launch.

 

At September 30, 2014, we had cash of approximately $11,817,000. We currently have no commitments or arrangements for any new additional financing. We may continue to seek additional capital through public or private financing or collaborative agreements in 2014 and beyond. Our operations require significant amounts of cash. We may be required to seek additional capital for the future growth and development of our business. We can give no assurance as to the availability of such additional capital or, if available, whether it would be on terms acceptable to us. In addition, we may continue to seek capital through the public or private sale of securities, if market conditions are favorable for doing so. If we are successful in raising additional funds through the issuance of equity securities, stockholders will likely experience substantial dilution. If we are not successful in obtaining sufficient capital because we are unable to access the capital markets on favorable terms, it could reduce our research and development efforts, curtail significantly our development of ENMD-2076 and materially adversely affect our future growth, results of operations and financial results.

 

 

Risks Relating to Our Business

 

We Plan To Conduct Development And Operations In China, Which Exposes Us To Risks Inherent In Doing Business In China

 

We expect to continue to conduct clinical development related activities in China in 2014. To be successful in China we will need to: establish clinical trials; attract and retain qualified personnel to operate our Chinese subsidiary; and attract and retain research and development employees. We cannot assure you that we will be able to do any of these. Employee turnover in China is high due to the intensely competitive and fluid market for skilled labor. Operations in China are subject to greater political, legal and economic risks than our operations in other countries. In particular, the political, legal and economic climate in China, both nationally and regionally, is fluid and unpredictable. Our ability to operate in China may be adversely affected by changes in Chinese laws and regulations such as those related to, among other things, taxation, import and export tariffs, environmental regulations, land use rights, intellectual property, employee benefits and other matters. In addition, we may not obtain or retain the requisite legal permits to operate in China, and costs or operational limitations may be imposed in connection with obtaining and complying with such permits. Any one of the factors cited above, or a combination of them, could result in unanticipated costs, which could materially and adversely affect our business and planned operations and development in China.

 

We May Not Be Able To Successfully Identify And Acquire New Product Candidates

 

Our growth strategy relies on our in-license of new product candidates from third parties. Our pipeline will be dependent upon the availability of suitable acquisition candidates at favorable prices and upon advantageous terms and conditions. Even if such opportunities are present, we may not be able to successfully identify appropriate acquisition candidates. Moreover, other companies, many of which may have substantially greater financial resources are competing with us for the right to acquire such product candidates.

 

If a product candidate is identified, the third parties with whom we seek to cooperate may not select us as a potential partner or we may not be able to enter into arrangements on commercially reasonable terms or at all. Furthermore, the negotiation and completion of collaborative and license arrangements could cause significant diversion of management’s time and resources and potential disruption of our ongoing business.

 

Development of Our Products is Uncertain

 

ENMD-2076 is in Phase 2 development and our other product candidates were in the early stage of clinical development and require significant, time-consuming and costly research and development, testing and regulatory clearances. In developing our products, we are subject to risks of failure that are inherent in the development of these product candidates. For example, it is possible that any or all of our proposed products will be ineffective or toxic, or otherwise will fail to receive necessary FDA and CFDA clearances. There is a risk that the proposed products will be uneconomical to manufacture or market or will not achieve market acceptance. There is also a risk that third parties may hold proprietary rights that preclude us from marketing our proposed products or that others will market a superior or equivalent product. Further, our research and development activities might never result in commercially viable products.

 

 

A number of companies in the pharmaceutical and biotechnology industries have suffered significant setbacks in advanced clinical trials even after promising results in earlier trials. Since ENMD-2076 is our primary product candidate any significant clinical setback or an unfavorable outcome in our Phase 2 trials for ENMD-2076 may require us to delay, reduce the scope of, or eliminate this program and could have a material adverse effect on our company and the value of our common stock.

 

Once a clinical trial has begun, it may be delayed, suspended or terminated due to a number of factors, including:

 

·

ongoing discussions with regulatory authorities regarding the scope or design of our clinical trials or requests by them for supplemental information with respect to our clinical trial results;

·

failure to conduct clinical trials in accordance with regulatory requirements;

·

lower than anticipated retention rate of patients in clinical trials;

·

serious adverse events or side effects experienced by participants; and

·

insufficient supply or deficient quality of product candidates or other materials necessary for the conduct of our clinical trials.

 

Many of these factors may also ultimately lead to denial of regulatory approval of a product candidate. If we experience delays, suspensions or terminations in a clinical trial, the commercial prospects for the related product candidate will be harmed, and our ability to generate product revenues will be delayed.

 

Although product candidates may demonstrate promising results in early clinical (human) trials and preclinical (animal) studies, they may not prove to be effective in subsequent clinical trials. For example, testing on animals may occur under different conditions than testing in humans and therefore the results of animal studies may not accurately predict human experience. Likewise, early clinical studies may not be predictive of eventual safety or effectiveness results in larger-scale pivotal clinical trials. Our clinical development primary focus is on ENMD-2076, and as such we do not expect to internally pursue clinical investigation of our other product candidates.

 

There are many regulatory steps that must be taken before any of these product candidates will be eligible for regulatory approval and subsequent sale, including the completion of preclinical and clinical trials. We do not expect that our product candidates will be commercially available for several years, if ever.

 

 

We May Not Be Able to Commercialize Our Drugs or Drug Candidates in China

 

We have exclusive licenses to develop and commercialize MARQIBO® (vinCRIStine sulfate LIPOSOME injection), Captisol-Enabled™ (propylene glycol-free) melphalan (CE melphalan) and ZEVALIN® (ibritumomab tiuxetan) in Greater China. Our success in commercializing these drugs may be inhibited by a number of factors, including:

 

·

our inability to obtain regulatory approvals;

 

·

our inability to recruit, train and retain adequate numbers of effective sales and marketing personnel;

 

·

the inability of sales personnel to obtain access to or educate physicians on the benefits of our products;

 

·

the lack of complementary products to be offered by sales personnel, which may put us at a competitive disadvantage relative to companies with more extensive product lines; and

 

·

unforeseen costs and expenses associated with creating an independent sales and marketing organization.

 

 

If we decide to rely on third parties to sell, market and distribute our product candidates, we may not be successful in entering into arrangements with such third parties or may be unable to do so on terms that are favorable to us. In addition, our product revenues and our profitability, if any, may be lower if we rely on third parties for these functions than if we were to market, sell and distribute any products that we develop ourselves. We likely will have little control over such third parties, and any of them may fail to devote the necessary resources and attention to sell and market our products effectively. If we do not establish sales, marketing and distribution capabilities successfully, either on our own or in collaboration with third parties, we will not be successful in commercializing our product candidates, which would adversely affect our business and financial condition.

 

Developments By Competitors May Render Our Products Obsolete

 

If competitors were to develop superior drug candidates, our products could be rendered noncompetitive or obsolete, resulting in a material adverse effect to our business. Developments in the biotechnology and pharmaceutical industries are expected to continue at a rapid pace. Success depends upon achieving and maintaining a competitive position in the development of products and technologies. Competition from other biotechnology and pharmaceutical companies can be intense. Many competitors have substantially greater research and development capabilities, marketing, financial and managerial resources and experience in the industry. Even if a competitor creates a product that is not superior, we may not be able to compete.

 

We Must Show the Safety and Efficacy of Our Product Candidates Through Clinical Trials, the Results of Which are Uncertain

 

Before obtaining regulatory approvals for the commercial sale of our products, we must demonstrate, through preclinical studies (animal testing) and clinical trials (human testing), that our proposed products are safe and effective for use in each target indication. Testing of our product candidates will be required, and failure can occur at any stage of testing. Clinical trials may not demonstrate sufficient safety and efficacy to obtain the required regulatory approvals or result in marketable products. The failure to adequately demonstrate the safety and efficacy of a product under development could delay or prevent regulatory approval of the potential product.

 

 

Clinical trials for the product candidates we are developing may be delayed by many factors, including that potential patients for testing are limited in number. The failure of any clinical trials to meet applicable regulatory standards could cause such trials to be delayed or terminated, which could further delay the commercialization of any of our product candidates. Newly emerging safety risks observed in animal or human studies also can result in delays of ongoing or proposed clinical trials. Any such delays will increase our product development costs. If such delays are significant, they could negatively affect our financial results and the commercial prospects for our products.

 

The Independent Clinical Investigators and Contract Research Organizations That We Rely Upon to Assist in the Conduct of Our Clinical Trials May Not Be Diligent, Careful or Timely, and May Make Mistakes, in the Conduct of Our Trials

 

We depend on independent clinical investigators and contract research organizations, or CROs, to assist in the conduct of our clinical trials under their agreements with us. The investigators are not our employees, and we cannot control the amount or timing of resources that they devote to our programs. If independent investigators fail to devote sufficient time and resources to our drug development programs, or if their performance is substandard, it could delay the approval of our FDA applications and our introduction of new drugs. The CROs we contract with to assist with the execution of our clinical trials play a significant role in the conduct of the trials and the subsequent collection and analysis of data. Failure of the CROs to meet their obligations could adversely affect clinical development of our products.

 

The Success of Our Business Depends Upon the Members of Our Senior Management Team, Our Clinical Development Expertise in Both U.S. and China, and Our Ability to Continue to Attract and Retain Qualified Clinical, Technical and Business Personnel

 

We are dependent on the principal members of our senior management team and clinical development team for our business success. The loss of any of these people could impede the achievement of our development and business objectives. We do not carry key man life insurance on the lives of any of our key personnel. There is intense competition for human resources, including management, in the scientific fields in which we operate and there can be no assurance that we will be able to attract and retain qualified personnel necessary for the successful development of ENMD-2076 and any new product candidates, and any expansion into areas and activities requiring additional expertise. In addition, there can be no assurance that such personnel or resources will be available when needed. In addition, we rely on a significant number of consultants to assist us in formulating our clinical strategy and other business activities. All of our consultants may have commitments to, or advisory or consulting agreements with, other entities that may limit their availability to us.

 

We May Need New Collaborative Partners to Further Develop and Commercialize Products, and if We Enter Into Such Arrangements, We May Give Up Control Over the Development and Approval Process and Decrease our Potential Revenue

 

We plan to develop and commercialize our product candidates both with and without corporate alliances and partners. Nonetheless, we intend to explore opportunities for new corporate alliances and partners to help us develop, commercialize and market our product candidates. We expect to grant to our partners certain rights to commercialize any products developed under these agreements, and we may rely on our partners to conduct research and development efforts and clinical trials on, obtain regulatory approvals for, and manufacture and market any products licensed to them. Each individual partner will seek to control the amount and timing of resources devoted to these activities generally. We anticipate obtaining revenues from our strategic partners under such relationships in the form of research and development payments and payments upon achievement of certain milestones. Since we generally expect to obtain a royalty for sales or a percentage of profits of products licensed to third parties, our revenues may be less than if we retained all commercialization rights and marketed products directly. In addition, there is a risk that our corporate partners will pursue alternative technologies or develop competitive products as a means for developing treatments for the diseases targeted by our programs.

 

 

We may not be successful in establishing any collaborative arrangements. Even if we do establish such collaborations, we may not successfully commercialize any products under or derive any revenues from these arrangements. There is a risk that we will be unable to manage simultaneous collaborations, if any, successfully. With respect to existing and potential future strategic alliances and collaborative arrangements, we will depend on the expertise and dedication of sufficient resources by these outside parties to develop, manufacture, or market products. If a strategic alliance or collaborative partner fails to develop or commercialize a product to which it has rights, we may not recognize any revenues on that particular product.

 

We Have No Current Manufacturing or Marketing Capacity and Rely on Only One Supplier For Some of Our Products

 

We do not expect to manufacture or market products in the near term, but we may try to do so in certain cases. We do not currently have the capacity to manufacture or market products and we have limited experience in these activities. The manufacturing processes for all of the small molecules we are developing have not yet been tested at commercial levels, and it may not be possible to manufacture these materials in a cost-effective manner. If we elect to perform these functions, we will be required to either develop these capacities, or contract with others to perform some or all of these tasks. We may be dependent to a significant extent on corporate partners, licensees, or other entities for manufacturing and marketing of products. If we engage directly in manufacturing or marketing, we will require substantial additional funds and personnel and will be required to comply with extensive regulations. We may be unable to develop or contract for these capacities when required to do so in connection with our business.

 

We depend on our third-party manufacturers to perform their obligations effectively and on a timely basis. These third parties may not meet their obligations and any such non-performance may delay clinical development or submission of products for regulatory approval, or otherwise impair our competitive position. Any significant problem experienced by one of our suppliers could result in a delay or interruption in the supply of materials to us until such supplier resolves the problem or an alternative source of supply is located. Any delay or interruption would likely lead to a delay or interruption of manufacturing operations, which could negatively affect our operations. Although we have identified alternative suppliers for our product candidates, we have not entered into contractual or other arrangements with them. If we needed to use an alternate supplier for any product, we would experience delays while we negotiated an agreement with them for the manufacture of such product. In addition, we may be unable to negotiate manufacturing terms with a new supplier as favorable as the terms we have with our current suppliers.

 

 

Problems with any manufacturing processes could result in product defects, which could require us to delay shipment of products or recall products previously shipped. In addition, any prolonged interruption in the operations of the manufacturing facilities of one of our sole-source suppliers could result in the cancellation of shipments. A number of factors could cause interruptions, including equipment malfunctions or failures, or damage to a facility due to natural disasters or otherwise. Because our manufacturing processes are or are expected to be highly complex and subject to a lengthy regulatory approval process, alternative qualified production capacity may not be available on a timely basis or at all. Difficulties or delays in our manufacturing could increase our costs and damage our reputation.

 

The manufacture of pharmaceutical products can be an expensive, time consuming, and complex process. Manufacturers often encounter difficulties in scaling-up production of new products, including quality control and assurance and shortages of personnel. Delays in formulation and scale-up to commercial quantities could result in additional expense and delays in our clinical trials, regulatory submissions, and commercialization.

 

Failure of Manufacturing Facilities Producing Our Product Candidates to Maintain Regulatory Approval Could Delay or Otherwise Hinder Our Ability to Market Our Product Candidates

 

Any manufacturer of our product candidates will be subject to applicable Good Manufacturing Practices (GMP) prescribed by the FDA or other rules and regulations prescribed by the CFDA and other foreign regulatory authorities. We and any of our collaborators may be unable to enter into or maintain relationships either domestically or abroad with manufacturers whose facilities and procedures comply or will continue to comply with GMP and who are able to produce our small molecules in accordance with applicable regulatory standards. Failure by a manufacturer of our products to comply with GMP could result in significant time delays or our inability to obtain marketing approval or, should we have market approval, for such approval to continue. Changes in our manufacturers could require new product testing and facility compliance inspections. In the United States, failure to comply with GMP or other applicable legal requirements can lead to federal seizure of violated products, injunctive actions brought by the federal government, inability to export product, and potential criminal and civil liability on the part of a company and its officers and employees.

 

We Depend on Patents and Other Proprietary Rights, Some of Which are Uncertain

 

Our success will depend in part on our ability to obtain and maintain patents for ENMD-2076 and our other products, in the United States, China and elsewhere. The patent position of biotechnology and pharmaceutical companies in general is highly uncertain and involves complex legal and factual questions. Risks that relate to patenting our products include the following:

 

·

our failure to obtain additional patents;

 

·

challenge, invalidation, or circumvention of patents already issued to us;

 

·

failure of the rights granted under our patents to provide sufficient protection;

 

·

independent development of similar products by third parties; or

 

·

ability of third parties to design around patents issued to our collaborators or us.

 

 

Our potential products may conflict with composition, method, and use of patents that have been or may be granted to competitors, universities or others. As the biotechnology industry expands and more patents are issued, the risk increases that our potential products may give rise to claims that may infringe the patents of others. Such other persons could bring legal actions against us claiming damages and seeking to enjoin clinical testing, manufacturing and marketing of the affected products. Any such litigation could result in substantial cost to us and diversion of effort by our management and technical personnel. If any of these actions are successful, in addition to any potential liability for damages, we could be required to obtain a license in order to continue to manufacture or market the affected products. We may not prevail in any action and any license required under any needed patent might not be made available on acceptable terms, if at all.

 

We also rely on trade secret protection for our confidential and proprietary information. However, trade secrets are difficult to protect and others may independently develop substantially equivalent proprietary information and techniques and gain access to our trade secrets and disclose our technology. We may be unable to meaningfully protect our rights to unpatented trade secrets. We require our employees to complete confidentiality training that specifically addresses trade secrets. All employees, consultants, and advisors are required to execute a confidentiality agreement when beginning an employment or a consulting relationship with us. The agreements generally provide that all trade secrets and inventions conceived by the individual and all confidential information developed or made known to the individual during the term of the relationship automatically become our exclusive property. Employees and consultants must keep such information confidential and may not disclose such information to third parties except in specified circumstances. However, these agreements may not provide meaningful protection for our proprietary information in the event of unauthorized use or disclosure of such information.

 

To the extent that consultants, key employees, or other third parties apply technological information independently developed by them or by others to our proposed projects, disputes may arise as to the proprietary rights to such information. Any such disputes may not be resolved in our favor. Certain of our consultants are employed by or have consulting agreements with other companies and any inventions discovered by them generally will not become our property.

 

Our Potential Products Are Subject to Government Regulatory Requirements and an Extensive Approval Process

 

Our research, development, preclinical and clinical trials, manufacturing, and marketing of our product candidates are subject to an extensive regulatory approval process by the FDA, the CFDA in China and other regulatory agencies. The process of obtaining FDA, CFDA and other required regulatory approvals for drug and biologic products, including required preclinical and clinical testing, is time consuming and expensive. Even after spending time and money, we may not receive regulatory approvals for clinical testing or for the manufacturing or marketing of any products. Our collaborators or we may encounter significant delays or costs in the effort to secure necessary approvals or licenses. Even if we obtain regulatory clearance for a product, that product will be subject to continuing review.  Later discovery of previously unknown defects or failure to comply with the applicable regulatory requirements may result in restrictions on a product’s marketing or withdrawal of the product from the market, as well as possible civil or criminal penalties.

 

 

Potential Products May Subject Us to Product Liability for Which Insurance May Not Be Available

 

The use of our potential products in clinical trials and the marketing of any pharmaceutical products may expose us to product liability claims. We have obtained a level of liability insurance coverage that we believe is adequate in scope and coverage for our current stage of development. However, our present insurance coverage may not be adequate to protect us from liabilities we might incur. In addition, our existing coverage will not be adequate as we further develop products and, in the future, adequate insurance coverage and indemnification by collaborative partners may not be available in sufficient amounts or at a reasonable cost. If a product liability claim or series of claims are brought against us for uninsured liabilities, or in excess of our insurance coverage, the payment of such liabilities could have a negative effect on our business and financial condition.

 

Risks Relating to Our Common Stock

 

The Market Price of Our Common Stock May Be Highly Volatile or May Decline Regardless of Our Operating Performance

 

Our common stock price has fluctuated from year-to-year and quarter-to-quarter and will likely continue to be volatile. During 2014, our stock price has ranged from $1.55 to $2.17. We expect that the trading price of our common stock is likely to be highly volatile in response to factors that are beyond our control. The valuations of many biotechnology companies without consistent product revenues and earnings are extraordinarily high based on conventional valuation standards, such as price to earnings and price to sales ratios. These trading prices and valuations may not be sustained. In the future, our operating results in a particular period may not meet the expectations of any securities analysts whose attention we may attract, or those of our investors, which may result in a decline in the market price of our common stock. Any negative change in the public’s perception of the prospects of biotechnology companies could depress our stock price regardless of our results of operations. These factors may materially and adversely affect the market price of our common stock.

 

IDG and Spectrum Are Our Largest Holders Of Common Stock And May Have Different Interests Than Our Other Stockholders

 

IDG-Accel China and its affiliated entities (collectively, “IDG”) hold approximately 16.80% of the outstanding shares of our common stock (excluding the shares issuable under the warrants held by IDG). Spectrum Pharmaceuticals, Inc., a Delaware corporation and its affiliate, Spectrum Pharmaceuticals Cayman, L.P., an Exempted Limited Partnership organized under the laws of the Cayman Islands (together “Spectrum”) hold approximately 16.66% of the outstanding shares of our common stock. IDG and Spectrum are each permitted to have one representative on the Board of Directors and may have interests that are different from the interests of our other stockholders. We cannot assure that IDG and Spectrum will not seek to influence our business in a manner that is contrary to our goals or strategies or the interests of our other stockholders. In addition, the significant concentration of ownership in our common stock may adversely affect the trading price for our common stock because investors often perceive disadvantages in owning stock in companies with significant stockholders. IDG and Spectrum, if they acted together, could significantly influence all matters requiring approval by our stockholders, including the election of directors and the approval of mergers or other business combination transactions. IDG and Spectrum together may be able to determine all matters requiring stockholder approval.

 

 

Subsequent Resales Of Shares Of Our Common Stock In The Public Market May Cause The Market Price Of Our Common Stock To Fall

 

The market value of our common stock could decline as a result of sales by investors from time to time, or perceptions that such sales may occur, of a substantial amount of the shares of common stock held by them.

 

Issuances of Additional Shares of Our Common Stock May Cause Substantial Dilution of Existing Stockholders

 

Spectrum has a contingent right to purchase shares of our common stock at par value ($0.01 per share) in order to maintain its post-investment equity ownership percentage as of September 17, 2014, which was 16.66%, if we issue securities (subject to a limited exception for certain equity compensation grants) in the future. This right expires upon the earliest of (1) the date on which we have raised, in the aggregate, $50 million in net proceeds through capital raising activities or (2) September 17, 2019 (subject to extension for certain outstanding derivative securities). The future exercise of this contingent purchase right will subject our existing stockholders to immediate dilution of their ownership interests. We may also issue additional shares of common stock or other securities that are convertible into or exercisable for common stock in connection with future acquisitions, future sales of our securities for capital raising purposes, future strategic relationships, or for other business purposes. The future issuance of any additional shares of our common stock may create downward pressure on the trading price of our common stock. There can be no assurance that we will not be required to issue additional shares, warrants or other convertible securities in the future in conjunction with any capital raising efforts, including at a price (or exercise prices) below the price at which shares of our common stock are then traded.

 

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.

 

 

ITEM 6. EXHIBITS

 

4.1		Certificate of Designation of Series A Preferred Stock (incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed on September 19, 2014)
4.2		Secured Promissory Note, dated as of September 17, 2014, issued to Talon Therapeutics, Inc. (incorporated by reference to Exhibit 4.2 to the Company’s Current Report on Form 8-K filed on September 19, 2014)
10.1		Investment Agreement, dated as of September 17, 2014, by and between the Company and Spectrum Pharmaceuticals, Inc. (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on September 19, 2014)
10.2		Investment Agreement, dated as of September 17, 2014, by and between the Company and Spectrum Pharmaceuticals Cayman, L.P. (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on September 19, 2014)
10.3†		License Agreement, dated as of September 17, 2014, by and between the Company and Spectrum Pharmaceuticals, Inc. (filed herewith)
10.4†		License Agreement, dated as of September 17, 2014, by and between the Company and Spectrum Pharmaceuticals Cayman, L.P. (filed herewith)
10.5†		License Agreement, dated as of September 17, 2014, by and between the Company and Talon Therapeutics, Inc. (filed herewith)
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, 2014, formatted in eXtensible Business Reporting Language (XBRL):  (i) Unaudited Consolidated Balance Sheets at September 30, 2014 and December 31, 2013, (ii) Unaudited Consolidated Statements of Operations for the Three and Nine months ended September 30, 2014 and 2013, (iii) Unaudited Consolidated Statements of Cash Flows for the Nine months ended September 30, 2014 and 2013 and (iv) Notes to Unaudited Consolidated Financial Statements.*

 

* Filed Herewith

 

† Portions of this exhibit (indicated by asterisks) have been omitted pursuant to a request for confidential treatment submitted to the SEC.

 

 

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, 2014	/s/ Ken K. Ren
	Ken K. Ren
	Chief Executive Officer
Date: November 14, 2014	/s/ Sara B. Capitelli
	Sara B. Capitelli
	Principal Accounting Officer

 

 

EXHIBIT INDEX

 

4.1		Certificate of Designation of Series A Preferred Stock (incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed on September 19, 2014)
4.2		Secured Promissory Note, dated as of September 17, 2014, issued to Talon Therapeutics, Inc. (incorporated by reference to Exhibit 4.2 to the Company’s Current Report on Form 8-K filed on September 19, 2014)
10.1		Investment Agreement, dated as of September 17, 2014, by and between the Company and Spectrum Pharmaceuticals, Inc. (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on September 19, 2014)
10.2		Investment Agreement, dated as of September 17, 2014, by and between the Company and Spectrum Pharmaceuticals Cayman, L.P. (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on September 19, 2014)
10.3†		License Agreement, dated as of September 17, 2014, by and between the Company and Spectrum Pharmaceuticals, Inc. (filed herewith)
10.4†		License Agreement, dated as of September 17, 2014, by and between the Company and Spectrum Pharmaceuticals Cayman, L.P. (filed herewith)
10.5†		License Agreement, dated as of September 17, 2014, by and between the Company and Talon Therapeutics, Inc. (filed herewith)
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, 2014, formatted in eXtensible Business Reporting Language (XBRL):  (i) Unaudited Consolidated Balance Sheets at September 30, 2014 and December 31, 2013, (ii) Unaudited Consolidated Statements of Operations for the Three and Nine months ended September 30, 2014 and 2013, (iii) Unaudited Consolidated Statements of Cash Flows for the Nine months ended September 30, 2014 and 2013 and (iv) Notes to Unaudited Consolidated Financial Statements.*

    

* Filed Herewith

 

† Portions of this exhibit (indicated by asterisks) have been omitted pursuant to a request for confidential treatment submitted to the SEC.