CASI Pharmaceuticals, Inc (DE) - Quarter Report: 2003 June (Form 10-Q)

FORM 10-Q

SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20459

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

     For the quarterly period ended June 30, 2003

     o 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

ENTREMED, INC.
(Exact name of registrant as specified in its charter)

9640 Medical Center Drive
Rockville, Maryland
(Address of principal executive offices)

20850
(Zip code)

(240) 864-2600
(Registrant’s telephone number, including area code)

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 is an accelerated filer (as defined in Rule 12b-2 of the Act). YES      X      NO          

As of August 7, 2003, 31,648,141 shares of the Company’s common stock, $.01 par value, were outstanding.

ENTREMED, INC.

Table of Contents

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This report contains and incorporates by reference certain forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended. These statements may be identified by forward-looking words such as “may,” “will,” “expect,” “anticipate” or similar words. These forward-looking statements include, among others, statements regarding the timing of our clinical trials and the expected increases in our expenses.

Our forward-looking statements are based on information available to us today, and we will not update these statements. Our actual results may differ significantly from those discussed in our forward-looking statements due to, among other factors, our history of operating losses and anticipation of future losses; the value of our common stock; our ability to satisfy our obligations under existing collaborations and to enter into new collaborations; uncertainties relating to our technological approach; uncertainty of our product candidate development; our need for additional capital and uncertainty of additional funding; our dependence on collaborators and licensees; intense competition and rapid technological change in the biopharmaceutical industry; uncertainties relating to our patent and proprietary rights; uncertainties relating to clinical trials, government regulation and uncertainties of obtaining regulatory approval on a timely basis or at all; our dependence on key personnel, research collaborators and scientific advisors; uncertainties relating to health care reform measures and third-party reimbursement; risks associated with product liability; and other factors discussed in our other filings with the Securities and Exchange Commission.

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EntreMed, Inc.
Consolidated Balance Sheets

The accompanying notes are an integral part of the consolidated financial statements.

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EntreMed, Inc.
Consolidated Statements of Operations
(Unaudited)

     See accompanying notes.

     The accompanying notes are an integral part of the consolidated financial statements.

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EntreMed, Inc.
Consolidated Statements of Cash Flows
(Unaudited)

The accompanying notes are an integral part of the unconsolidated financial statements.

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ENTREMED, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2003 (unaudited)

     Our accompanying 2003 unaudited consolidated financial information includes the accounts of our 85% owned subsidiary, Cytokine Sciences, Inc. versus the 2002 information which reflects both Cytokine and our previously consolidated subsidiary MaxCyte, Inc. MaxCyte was formed in July 1998 as a wholly owned subsidiary and on April 1, 2000 was capitalized with $40,000 in cash including $1,000 from a MaxCyte officer. All intercompany balances and transactions have been eliminated in consolidation.

     The accompanying unaudited consolidated financial statements have been prepared in accordance with 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 generally accepted accounting principles for complete financial statements. In the opinion of our management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the six-month period ended June 30, 2003 are not necessarily indicative of the results that may be expected for the year ending December 31, 2003. For further information, refer to our audited consolidated financial statements and footnotes thereto included in our Form 10-K for the year ended December 31, 2002.

     In January 2003, the Financial Accounting Standards Board issued Interpretation No. 46, Consolidation of Variable Interest Entities (“FIN 46”). FIN 46 clarifies the application of Accounting Research Bulletin No. 51, Consolidated Financial Statements, to certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. FIN 46 applies immediately to variable interest entities created after January 31, 2003. The Company is currently in the process of evaluating what impact, if any, FIN 46 will have on its financial condition, results of operations or liquidity.

     The Board of Directors of both EntreMed and MaxCyte adopted a plan to recapitalize MaxCyte. As a result of the recapitalization, the Company no longer controls and no longer consolidates MaxCyte effective the first quarter of 2003; EntreMed now owns 45% of MaxCyte. The investment in MaxCyte is accounted for using the equity method. The reduction of EntreMed’s ownership in MaxCyte resulted in a change in EntreMed’s basis in MaxCyte. The change from fully consolidating MaxCyte to reflecting the investment in MaxCyte on the equity method resulted in a $4.6 million credit to additional paid-in capital.

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     Short-term investments consist of corporate debt securities, all of which mature within one year. We classify these investments as available for sale. Such securities are stated at market value. The unrealized gains and losses are nominal as of June 30, 2003. Realized gains and losses and declines in value judged to be other than temporary on securities available for sale, if any, are included in operations. The cost of securities sold is calculated using the specific identification method. As of June 30, 2003, the cost of the investment was $6,829,009. Realized gains have been insignificant.

     In accordance with Statement of Financial Accounting Standards (“SFAS”) No. 148, Accounting for Stock-Based Compensation – Transition and Disclosure (SFAS 148), the effect on net loss and net loss per share if the Company had applied the fair value recognition provisions of SFAS No. 123, Accounting for Stock-Based Compensation (“SFAS No. 123”) to stock-based employee compensation is as follows:

     The effect of applying SFAS No. 123 on the three and six month periods ended June 30, 2003 and 2002 pro forma net loss and net loss per share as stated above is not necessarily representative of the effects on reported net loss for future years, due to, among other things, (1) the vesting period of the stock options and (2) the fair value of additional stock options in future years.

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     With respect to a previously-reported outstanding liability for manufacturing costs, Chiron Corporation filed a complaint against the Company on April 11, 2003 in Alameda County (California) Superior Court, seeking to recover $2,862,388 for manufacturing services related to our product candidates pursuant to the Additional Manufacturing Services Agreement between Chiron and the Company dated June 5, 2002. The Company has settled dispute with Chiron and the complaint was dismissed on May 15, 2003.

     On April 28, 2003, we completed the sale of 4.1 million shares of common stock to institutional investors for $10.25 million in gross proceeds. In connection with the sale, we issued warrants to purchase an additional 1.025 million shares at an exercise price of $3.375 per share. The shares and warrants were offered through a prospectus supplement to our effective shelf registration statement.

     On May 20, 2003, we completed the sale of 3.0 million shares of common stock to institutional investors for $9.0 million in gross proceeds. The shares were offered through a prospectus supplement to our effective shelf registration statement

     The Company incurred offering costs of approximately $2.2 million and issued warrants to purchase 71,000 shares of common stock to the placement agent.

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

OVERVIEW

     Since our inception in September 1991, we have devoted substantially all of our efforts and resources to sponsoring and conducting research and development on our own behalf and through collaborations. Through June 30, 2003, all of our revenues have been generated from license fees, research and development funding, royalty payments, the sale of royalty rights, the sale of our interest in a licensing agreement and certain research grants. We have not generated any revenue from direct product sales. We anticipate our primary revenue sources for the next few years to include research grants and collaboration payments under current or future arrangements. The timing and amounts of such revenues, if any, will likely fluctuate and depend upon the achievement of specified research and development milestones. Results of operations for any period may be unrelated to the results of operations for any other period.

CRITICAL ACCOUNTING POLICIES AND THE USE OF ESTIMATES

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

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RESULTS OF OPERATIONS

For the Three and Six Months Ended June 30, 2002 and June 30, 2003.

     Revenues. Revenues decreased slightly in the three month period ending June 30, 2003 to approximately $286,000 from $309,000 in the comparable 2002 period. For the six month period ending June 30, 2003, revenues increased 117% to approximately $800,000 from $370,000 for the 2002 six month period. The increase results primarily from a grant received to support our Endostatin Phase II clinical trial in patients with neuroendocrine tumors and contract revenues resulting from performance as a subcontractor under an NIH sponsored Malaria Vaccine program.

     Research and Development Expenses. From inception through June 30, 2003 we have incurred research and development expenses of approximately $214,551,000. Included in this amount are the expenses related to our three clinical product candidates, Panzem®, Endostatin and Angiostatin. At June 30, 2003 the accumulated expenses for each of these development projects are $20,524,000, $70,732,000 and $35,080,000 respectively. Project expenses for Panzem® of $2,709,000, Endostatin of $539,000 and Angiostatin of $404,000 are reflected in our 2003 R&D expenses for the six month period ending June 30, 2003 of $6,550,000. Research and Development expenses for the comparable 2002 period were $18,171,000. The decrease reflects the refocus and elimination of some research and development programs and the associated shift in emphasis from the protein product candidates

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towards our small molecule programs including Panzem®. Project costs for Panzem®, Endostatin and Angiostatin were $1,992,000, $4,286,000 and $3,684,000 respectively for the six month period ending June 30, 2002. In addition to the accumulated expenses attributable to our three clinical product candidates, we had sponsored several research programs at Children’s Hospital, Boston in an aggregate of $18,050,000 and we had recorded approximately $5,931,000 in research and development costs incurred by our previously consolidated subsidiary MaxCyte. Reflected in our research and development expenses are sponsored research payments to Children’s Hospital of $1,000,000 in the period ended June 30, 2002. We have not made any sponsored research payments to Children’s Hospital in the six month period ending June 30, 2003 and have no obligation to make future sponsored research payments to Children’s Hospital. MaxCyte’s research and development costs for the six month period ending June 30, 2002 were $1,124,000. The balance of our accumulated research and development expenses are attributable to discovery research and preclinical development of additional product candidates and costs associated with the management of research and development operations and facilities.

     The amounts of expenditures that will be necessary to execute our business plan are subject to numerous uncertainties, which may adversely affect our liquidity and capital resources. As of June 30, 2003, three of our proprietary product candidates, Panzem®, Endostatin and Angiostatin, were in the Phase II stage of clinical trials. Completion of clinical trials 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:

     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:

     We test our potential product candidates in numerous pre-clinical 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 product candidates or for certain indications in order to focus our resources on more promising product candidates or indications.

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     An important element of our business strategy is to pursue the research and development of a range of product candidates for a variety of oncology and non-oncology indications. This allows us to diversify the risks associated with our research and development expenditures. As a result, we believe our future capital requirements and our future financial success are not substantially dependent on any one product candidate. To the extent we are unable to maintain a broad range of product candidates, our dependence on the success of one or a few product candidates would increase.

     Our proprietary product candidates also have not yet achieved FDA 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, the FDA must conclude that our clinical data establish safety and efficacy. Historically, the results from pre-clinical 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.

     Furthermore, our business strategy includes the option of entering into collaborative arrangements with third parties to complete the development and commercialization of our products. 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. 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 pre-clinical testing and clinical trials of our product candidates, including the costs of manufacturing the product candidates, patent costs and facilities expenses. Research and development expenses for the three month periods ending June 30 decreased to $3,919,000 in 2003 from $7,312,000 for the comparable period in 2002. Research and development expenses for the six month periods ending June 30 decreased to $6,550,000 in 2003 from the 2002 amount of $18,171,000. The decrease in overall research and development costs reflects the shift in emphasis from the protein product candidates towards our small molecule programs including Panzem®. Components of the decrease are broad based including the elimination of some programs and are associated with the following:

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     General and administrative expenses for the three month period ending June 30, decreased from $4,238,000 in 2002 to $1,674,000 in 2003. For the six month period 2003 expenses decreased to $3,302,000 from $8,029,000 in the comparable 2002 period. The 2003 period decrease reflects our reduced head count and significantly lower legal expenses as a result of the settlement of the Abbott and BMT litigations in 2002. In the 2002 six month period we also recorded costs of $1,569,000 associated with our Bristol Myers-Squibb stock repurchase obligation.

     Interest expense. In December 2002 we made the final payment on a promissory note secured by the majority of our equipment and therefore we did not record any interest expense during the three and six month periods ending June 30, 2003. For the three and six month periods ending June 30, 2002 interest expense totaled approximately $103,000 and $198,000, respectively. The majority of these amounts reflect the accrual of interest relating to MaxCyte’s issuance of convertible promissory notes in 2001 and 2002.

     Investment income. Investment income decreased by 61% in 2003 to $102,000 from $264,000 as a result of continued low investment yields and lower balances in interest bearing cash accounts during the six month period ending June 30, 2003 versus the comparable period in 2002.

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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 for 2003 and the foreseeable future before we commercialize any products. In addition, under the terms of certain licensing agreements, we must be diligent in bringing potential products to market and may be required to make future milestone payments of up to $2,685,000. If we fail to comply with the milestones or fail to make any required milestone payment, we could face the termination of the relevant license agreement.

     To accomplish our business plans, we will be required to continue to conduct substantial development activities for all of our proposed products. Based on our assessment of our current capital resources and the actions discussed below, and in the absence of additional financing, we believe that we will have adequate resources to fund operations into 2005. Our estimate may change, however, based on our decisions with respect to future clinical trials related to Panzem®, developments in our business and our success in executing our current business plan.

     At June 30, 2003, we had cash and short-term investments of approximately $24,705,000 with working capital of approximately $22,306,000. Based on our current plans, expenditures on development activities are expected to approximate $16,000,000, net of operating revenues, in 2003. In addition, our results of operations will also reflect additional restructuring charges of approximately $1,000,000 relating to other organizational changes as we complete our transition to small molecule programs We may consider other uses of our capital including acquisition of additional intellectual property and other investments in technology, including additional investments in our minority owned subsidiary.

     We intend to continue to pursue strategic relationships to provide resources for the further development of our product candidates. There can be no assurance, however, that these discussions will result in relationships or additional funding. 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 likely will experience substantial dilution, or the equity securities may have rights, preferences or privileges senior to those of the holders of our common stock. If we raise funds through the issuance of debt securities, those securities would have rights, preferences and privileges senior to those of our common stock.

The table below sets forth our contractual obligations at June 30, 2003.

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     The $1.49 million Contract Manufacturing obligation set forth above reflects a manufacturing agreement entered into in 2002. We expect delivery of the materials for which the obligation is owed during the 4th quarter. We have no other outstanding purchase obligations.

     On October 31, 2002 we were notified by the Nasdaq Listing Qualifications Department that EntreMed’s common stock was subject to delisting from the Nasdaq National Market because it was not in compliance with Marketplace Rule 4450(b)(1)(A), which requires that our common stock have a market value of listed securities of $50 million. We subsequently requested an appeal hearing before a Nasdaq Listing Qualifications Panel. At the hearing, held in December 2002, we presented a plan for EntreMed to return to compliance and remain in compliance with the continued listing standards for the Nasdaq National Market.

     In February 2003 we received a determination from the Nasdaq Listing Qualifications Panel to continue the listing of EntreMed’s securities on the Nasdaq National Market. As part of the determination, EntreMed was required to file its Form 10-K for the fiscal year ended December 31, 2002 and Form 10-Q for the quarter ended March 31, 2003 with the SEC and Nasdaq evidencing shareholders’ equity of at least $10,000,000 on or before March 31, 2003 and May 15, 2003, respectively.

     In May 2003 we received notification from the Nasdaq Listing Qualifications Panel that EntreMed had fully satisfied all of the conditions required for continued listing on the Nasdaq National Market.

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 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 June 30, 2003.

ITEM 4. DISCLOSURE CONTROLS AND PROCEDURES

     Under the supervision and with the participation of the Company’s President and Chief Operating Officer, and Chief Financial Officer, and Corporate Secretary (its principal executive officer and principal financial officer), management has evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures. Based on that evaluation, the President and Chief Operating Officer, and Chief Financial Officer, and Corporate Secretary have concluded that these disclosure controls and procedures are effective as of June 30, 2003. There were no significant changes in our internal control over financial reporting during the quarter ended June 30, 2003 that have materially affected, or are reasonably likely to materially affect, the internal control over financial reporting.

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This information as set forth in Note 6 of “Notes to Consolidated Financial Statements” appearing in Item 1 of Part I of this report is incorporated herein by reference.

                In addition, EntreMed is 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.

Recent Sales of Unregistered Securities

                    In April 2003 and May 2003, we issued warrants to purchase 71,000 shares of common stock to the placement agents in conjunction with our previously reported sales of common stock and warrants to certain institutional investors. The warrants were issued pursuant to Section 4(2) of the Securities Exchange Act of 1934 as a transaction not involving a public offering.

Not applicable.

                (a) The Company’s annual meeting of stockholders was held on June 18, 2003 (“Annual Meeting”).

                (b) Not applicable.

                (c) At the Annual Meeting, the stockholders considered and approved the following proposals:

                (i) Election of Directors. The following sets forth the nominees who were elected Directors of the Company for the term expiring in the year indicated as well as the number of votes case for, against, or withheld:

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                (ii) Approve an amendment to the Company’s 2001 Long-Term Incentive Plan increasing from 3,250,000 to 4,250,000 the number shares of Common Stock reserved for issuance thereunder. This proposal received 38,336,731 votes in favor, 571,657 votes against and 137,914 abstentions.

                (iii) Ratification of Appointment of Ernst & Young LLP. At the Annual Meeting, stockholders approved and ratified the selection of Ernst & Young LLP as the independent auditors. The proposal received 38,947,389 votes in favor, 69,833 votes against and 59,080 abstentions.

                (iv) As we have previously disclosed, Celgene Corporation has the right to one vote for each share of Common Stock into which its 3,350,000 shares of Convertible Preferred Stock are convertible, currently 16,750,000 shares. In other words, Celgene was allowed to vote at the Annual Meeting as if it owned 16,750,000 shares of our Common Stock. The “votes for” numbers above include Celgene’s votes.

Not applicable.

                  (a) Exhibits

(b) Reports on Form 8-K

      On May 21, 2003 and April 24, 2003, the Company filed a Form 8-K to announce the sale of common stock and/or warrants to certain institutional investors.

Through its website at www.entremed.com, the Company makes available, free of charge, its annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K, and all amendments thereto, as soon as reasonably practicable after such reports are filed with or furnished to the Securities and Exchange Commission.

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SIGNATURES

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

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