CASI Pharmaceuticals, Inc (DE) - Quarter Report: 2011 September (Form 10-Q)

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

Large accelerated filer ¨

Accelerated filer ¨

Non-accelerated filer ¨

Smaller reporting company þ

Class		Outstanding at November 8, 2011
Common Stock $.01 Par Value		12,237,644

 

		PAGE
PART I. FINANCIAL INFORMATION		4
Item 1 — Consolidated Financial Statements		4
Consolidated Balance Sheets as of September 30, 2011 (unaudited) and December 31, 2010		4
Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2011 and 2010 (unaudited)		5
Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2011 and 2010 (unaudited)		6
Notes to Consolidated Financial Statements (unaudited)		7
Item 2 — Management’s Discussion and Analysis of Financial Condition and Results of Operations		13
Item 3 — Quantitative and Qualitative Disclosures  About Market Risk		23
Item 4 — Controls and Procedures		23
Part II.  OTHER INFORMATION		25
Item 1 — Legal Proceedings		25
Item 1A – Risk Factors		25
Item 2 — Unregistered Sales of Equity Securities and Use of Proceeds		26
Item 3 — Defaults upon Senior Securities		26
Item 4 — Removed and Reserved		26
Item 5 — Other Information		26
Item 6 — Exhibits		26
SIGNATURES		27

 

 

  

 

 

 

		September 30, 2011				December 31, 2010
		(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents		$	1,986,165			$	4,885,972
Short-term investments			-				25,816
Accounts receivable, net of allowance for doubtful accounts of $26,073 and $72,145 at September 30, 2011 and December 31, 2010, respectively			-				2,750,447
Prepaid expenses and other			224,169				265,683
Total current assets			2,210,334				7,927,918
Property and equipment, net			28,822				104,729
Other assets			4,584				4,584
Total assets		$	2,243,740			$	8,037,231
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable		$	491,939			$	1,351,004
Accrued liabilities			268,355				595,341
Current portion of loan payable			-				757,471
Total current liabilities			760,294				2,703,816
Commitments and contingencies
Stockholders' equity :			-				-
Convertible preferred stock, $1.00 par  value;
5,000,000 shares authorized and 3,350,000 shares issued and outstanding at September 30, 2011 and December 31, 2010 (liquidation value - $33,500,000 at September 30, 2011 and December 31, 2010)			3,350,000				3,350,000
Common stock, $.01 par value:
170,000,000 shares authorized at September 30, 2011 and December 31, 2010: 12,237,644 and 11,517,566 shares issued and outstanding at September 30, 2011 and December 31, 2010, respectively			122,376				115,176
Additional paid-in capital			385,835,858				384,130,011
Treasury stock, at cost:  79,545 shares held at September 30, 2011 and December 31, 2010			(8,034,244	)			(8,034,244	)
Accumulated deficit			(379,790,544	)			(374,227,528	)
Total stockholders' equity			1,483,446				5,333,415
Total liabilities and stockholders' equity		$	2,243,740			$	8,037,231

 

 

		Three Months Ended								Nine Months Ended
		September 30,  2011				September 30,  2010				September 30, 2011				September 30, 2010
Revenues:
Royalties		$	-			$	-			$	8,852			$	-
Other			-				-				-				-
		$	-			$	-			$	8,852			$	-
Costs and expenses:
Research and development			703,456				1,291,721				3,051,437				3,146,802
General and administrative			556,601				691,623				2,529,604				2,513,527
Acquired In-Process R&D			-				-				-				3,000,000
			1,260,057				1,983,344				5,581,041				8,660,329
Interest expense			-				(106,784	)			-				(496,482	)
Other income (expense)			(48,320	)			(5,183	)			9,173				(9,230	)
Net Loss			(1,308,377	)			(2,095,311	)			(5,563,016	)			(9,166,041	)
Dividends on Series A convertible preferred stock			(251,250	)			(251,250	)			(753,750	)			(753,750	)
Net loss attributable to common shareholders		$	(1,559,627	)		$	(2,346,561	)		$	(6,316,766	)		$	(9,919,791	)
Net loss per share (basic and diluted)		$	(0.13	)		$	(0.24	)		$	(0.54	)		$	(1.09	)
Weighted average number of common shares outstanding (basic and diluted)			12,004,435				9,837,665				11,654,078				9,098,380

 

 

		NINE MONTHS ENDED SEPTEMBER 30,
		2011				2010
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss		$	(5,563,016	)		$	(9,166,041	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization			33,587				55,449
Write-off of in-process R&D			-				3,000,000
Stock-based compensation expense			565,948				250,311
Net gain on disposal of assets			(8,180	)			-
Realized gain on sale of short-term investment			(993	)			-
Non-cash interest			-				45,095
Investment impairment loss			-				9,230
Changes in operating assets and liabilities:
Accounts receivable			2,750,447				3,286,858
Prepaid expenses and other			41,515				(93,468	)
Accounts payable			(859,065	)			(618,105	)
Accrued liabilities			(326,986	)			(462,005	)
Net cash used in operating activities			(3,366,743	)			(3,692,676	)
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of assets			56,500				-
Proceeds from sale of short-term investment			26,809				-
Purchases of furniture and equipment			(6,001	)			(3,595	)
Net cash  provided (used in) by investing activities			77,308				(3,595	)
CASH FLOWS FROM FINANCING ACTIVITIES
Stock issuance costs			(164,964	)			(991,404	)
Repayment of loan			(757,471	)			(6,330,709	)
Net proceeds from sale of common stock or exercise of options and warrants			1,312,063				13,094,064
Net cash provided by financing activities			389,628				5,771,951
Net (decrease) increase in cash and cash equivalents			(2,899,807	)			2,075,680
Cash and cash equivalents at beginning of period			4,885,972				6,312,182
Cash and cash equivalents at end of period		$	1,986,165			$	8,387,862
Supplemental disclosure of cash flow information:
Cash paid during the period for interest		$	7,145			$	451,378
Non-cash investing activity:
Stock issued in connection with milestone payment related to acquisition of Miikana		$	-			$	3,000,000

See accompanying notes.

 

 

1.	Basis of Presentation

 

2.	Short-Term Investments

 

 

		Available-for-Sale Securities
		Amortized				Gross Unrealized				Gross Realized				Estimated Fair Value (Net Carrying
		Cost				Gains				Losses				Amount)
Equity Securities		$	125,000			$	-			$	(99,184	)		$	25,816
Total		$	125,000			$	-			$	(99,184	)		$	25,816

 

 

3.	Fair Value Measurement

·

Level 1 – Inputs are unadjusted quoted prices in active markets for identical assets or liabilities that we have the ability to access at the measurement date.

·

Level 2 – Inputs are quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted pries that are observable for the asset or liability (i.e., interest rates, yield curves, etc.), and inputs that are derived principally from or corroborated by observable market data by correlation or other means (market corroborated inputs).

·

Level 3 – Unobservable inputs that reflect our own assumptions, based on the best information available, including our own data.

						Fair Value Measurements at September 30, 2011
		Total Carrying Value at				Quoted prices in active markets				Significant other observable inputs				Significant unobservable inputs
		September 30, 2011				(Level 1)				(Level 2)				(Level 3)
Cash equivalents		$	105,868			$	105,868			$	—			$	—

 

 

						Fair Value Measurements at December 31, 2010
		Total Carrying Value at				Quoted prices in active markets				Significant other observable inputs				Significant unobservable inputs
		December 31, 2010				(Level 1)				(Level 2)				(Level 3)
Cash equivalents		$	1,105,868			$	105,868			$	—			$	—
Available for sale securities*			25,816				25,816				—				—

*  Realized losses related to available for sale securities are included in operations, as disclosed in Footnote 2.

4.	Stockholders’ Equity

 

5.	Share-Based Compensation

 

 

		NINE MONTH PERIOD ENDED SEPTEMBER 30,
		2011				2010
Research and development		$	114,257			$	28,993
General and administrative			451,691				221,318
Share-based compensation expense		$	565,948			$	250,311
Net share-based compensation expense, per common share:
Basic and diluted		$	0.05			$	0.03

 

 

 

		NINE MONTH PERIOD ENDED SEPTEMBER 30,
		2011				2010
Expected volatility			94.09	%			97.50	%
Risk-free interest rate			2.04	%			2.38	%
Expected term of option		5.49 years				5 years
Forfeiture rate*			5.00	%			5.00	%
Expected dividend yield			0.00	%			0.00	%

 

 

 

 

 

 

6.	Income Taxes

 

 

   

 

Additional funds raised by issuing equity securities may result in dilution to existing shareholders.  If we fail to obtain additional capital by the second quarter of fiscal 2012, or enter into collaboration agreements with development partners to finance our clinical trials, we will be required to delay or stop further clinical activity on our ENMD-2076 program.

 

-

Going Concern - A fundamental principle of the preparation of financial statements in accordance with GAAP is the assumption that an entity will continue in existence as a going concern, which contemplates continuity of operations and the realization of assets and settlement of liabilities occurring in the ordinary course of business.  This principle is applicable to all entities except for entities in liquidation or entities for which liquidation appears imminent.  In accordance with this requirement, our policy is to prepare our consolidated financial statements on a going concern basis unless we intend to liquidate or have no other alternative but to liquidate.  As a result of our operational losses and the potential that we may be unable to meet our cash requirements for the next twelve months, there is substantial doubt about our ability to continue as a going concern.  While we have prepared our consolidated financial statements on a going concern basis, if we do not receive additional funding, our ability to continue as a going concern may be impacted.  Our consolidated financial statements included in this Quarterly Report on Form 10-Q do not reflect any adjustments that might specifically result from the outcome of this uncertainty.

-

Revenue Recognition - We recognize revenue in accordance with the provisions of authoritative guidance issued, whereby revenue is not recognized until it is realized or realizable and earned.  Revenue is recognized when all of the following criteria are met:  persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the price to the buyer is fixed and determinable and collectibility is reasonably assured.

-

Royalty Revenue – Royalties from licenses are based on third-party sales and recorded as earned in accordance with contract terms, when third-party results are reliably measured and collectibility is reasonably assured. We expect that the majority of our 2011 revenues will be from royalties on the sale of Thalomid®, which we will recognize when earned. In 2004, certain provisions of a purchase agreement dated June 14, 2001 by and between Bioventure Investments kft (“Bioventure”) and the Company were satisfied and, as a result, beginning in 2005 we became entitled to share in the royalty payments received by Royalty Pharma Finance Trust, successor to Bioventure, on annual Thalomid® sales above a certain threshold.  Based on the licensing agreement royalty formula, annual royalty sharing commences when net royalties received by Royalty Pharma exceeds $15,375,000, which equates to approximately $225 million in Thalomid® annual sales.

-

The Company is also eligible to receive royalties from Oxford Biomedica, PLC based on a portion of the net sales of products developed for the treatment of ophthalmic (eye) diseases based in part on Endostatin.  We received our first royalty in the amount of $368,000 under this agreement in 2009, a portion of which was paid to Children’s Medical Center Corporation under the Company’s original Endostatin license agreement with Children’s.  We did not receive any additional payment from Oxford Biomedica, PLC in 2010.  We do not expect to receive additional payments from Oxford Biomedica, PLC in 2011.

 

-

Royalty payments, if any, are recorded as revenue when received and/or when collectibility is reasonably assured.

-

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

-

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

-

Stock-Based Compensation – All share-based payment transactions are recognized in the financial statements at their fair values.  Using the straight-line expense attribution method over the requisite service period, which is generally the option vesting term of three years, share-based compensation expense recognized for the nine months ended September 30, 2011 and 2010 totaled approximately $566,000 and $250,000, respectively.

 

 

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

-

the length of time required to enroll suitable patient subjects.

 

-

Outside Services – In the three-month period ended September 30, 2011, we expended $4,000 on outside service activities versus $29,000 in the same 2010 period.  For the nine-month period ended September 30, 2011 outside services are $51,000 compared to $40,000 for the same 2010 period.  The increase in 2011 as compared to 2010 reflects an increase in outsourced services related to the development of ENMD-2076.

-

Clinical Trial Costs – Clinical trial costs, which include clinical site fees, monitoring costs and data management costs, decreased to $159,000 in the three months ended September 30, 2011 from $665,000 in the three-month period ended September 30, 2010.  The decrease during this period relates to fewer patients on trial during the 2011 period and increased costs during the 2010 period due to patient enrollment in the Phase 2 trials in 2010.  Clinical trial costs for the nine-month period ended September 30, 2011 decreased to $934,000 from $1,131,000 for the comparable 2010 period.  The decrease relates primarily to the timing of clinical trials as fewer patients were enrolled as of September 30, 2011 compared to the 2010 period.

  

-

Contract Manufacturing Costs - The costs of manufacturing the material used in clinical trials for our product candidates is reflected in contract manufacturing. These costs include bulk manufacturing, encapsulation and fill and finish services, product release costs and storage fees. Contract manufacturing costs for the three months ended September 30, 2011 decreased by $30,000 compared to the same period in 2010.  For the nine-month period ended September 30, 2011, manufacturing costs increased to $226,000 from $189,000 for the comparable 2010 period.  The increase reflects the encapsulation costs for ENMD-2076 that were incurred in the early part of 2011, plus a credit received in 2010 reflecting a reduction in the scope of previously contracted compatibility, formulation development and GMP manufacture of ENMD-2076.

-

Personnel Costs — Personnel costs increased to $304,000 in the three-month period ended September 30, 2011 from $297,000 in the corresponding 2010 period. For the nine-month period, personnel costs increased in 2011 to $1,018,000 from $957,000 for the corresponding 2010 period.  The increase is attributable to the $85,000 increase in non-cash stock-based compensation expense primarily related to stock options granted in 2011.

 

-

Also reflected in our 2011 research and development expenses for the three-month period ended September 30, 2011 are patent costs of $134,000 and facility and related expenses of $43,000.  In the corresponding 2010 period, these expenses totaled $133,000 and $50,000, respectively.  For the nine-month period ended September 30, 2011, patent costs were $440,000 and facility and related expenses were $145,000.  In the corresponding 2010 period, these expenses totaled $330,000 and $158,000, respectively. Patent costs during the three and nine months ended September 30, 2011 increased primarily due to higher costs associated with the execution of our intellectual property strategy,  including maintaining our patent portfolio and expanding our patent protection internationally.

 

 

Interest Expense.  Our term loan from General Electric Capital Corporation, pursuant to a transaction in September 2007, was fully paid on January 3, 2011, and accordingly there was no interest expense recorded for the three and nine month periods ended September 30, 2011.   Interest expense for the three and nine month periods ended September 30, 2010 was approximately $107,000 and $496,000, respectively (including $9,545 and $45,095 of non-cash interest, respectively).
 

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 2011 and the foreseeable future before we commercialize any products.  Assuming expenses are consistent with the trends of the previous quarter, we expect our current available cash and cash equivalents to meet our cash requirements into the second quarter of fiscal 2012.    If we fail to obtain additional capital by the second quarter of fiscal 2012, or enter into collaboration agreements with development partners to finance our clinical trials, we will be required to delay or stop further clinical activity on our ENMD-2076 program. Having additional financing beyond our current resources will help us plan for the next clinical trial or other milestone for ENMD-2076.

·

selling additional equity securities;

·

out-licensing product candidates to one or more corporate partners;

·

monetizing our remaining Thalomid® royalty payment stream;

·

completing an outright sale of non-priority assets; and/or

·

engaging in one or more strategic transactions.

On June 28, 2011, we entered into a standby equity distribution agreement (the “SEDA”), with YA Global Master SPV Ltd. (“YA Global”), a fund managed by Yorkville Advisors, LLC (“Yorkville”).  Under the SEDA, the Company has the option, at its sole discretion, to sell, from time to time, up to $7.5 million of common stock to YA Global during the three-year term of the SEDA, and YA Global is obligated to purchase such shares.  Concurrent with the signing of the SEDA, we agreed to sell shares to YA Global and received gross proceeds of $1.1 million on June 29, 2011.  Between June 29 and August 5, 2011, we issued an aggregate of 600,412 shares to YA Global in settlement of the initial $1.1 million drawdown.  The number of shares issued each week, and the purchase price for such shares, in settlement of the initial $1.1 million drawdown were determined in accordance with the SEDA.

In January 2006, we acquired Miikana Therapeutics, a private biotechnology company.  We acquired certain drug candidates in connection with the acquisition, including the lead molecule in the Aurora Kinase Program, ENMD-2076, which advanced into clinical development in 2008.  ENMD-2076 is a kinase inhibitor with activity towards Aurora A and multiple other kinases linked to promoting cancer.  Dosing of the first patient in ENMD-2076 trials triggered a milestone payment of $2 million to the former Miikana stockholders payable in stock or cash, at the Company’s discretion.  In June 2008, 233,100 shares of common stock were issued to the former Miikana stockholders as consideration for the satisfaction of the milestone payment.  Under the terms of the merger agreement, dosing of the first patient in a Phase 2 trial in April 2010 triggered an additional purchase price adjustment milestone payment of $3 million, which we paid by issuing 403,550 shares of our common stock.  Under the terms of the merger agreement, the former shareholders if Miikana may, upon the satisfaction of certain milestones primarily relating to ENMD-2076, receive up to $13 million of potential payments.  We do not expect any further milestones to be achieved in 2011.  Through the Miikana acquisition, we also acquired rights to MKC-1, a Phase 2 clinical candidate licensed from Roche by Miikana in April 2005.  Under the terms of the agreement, Roche may be entitled to receive future payments upon successful attainment of certain clinical, regulatory and commercialization milestones; however, since ENMD-2076 is the only program currently under active clinical evaluation, we do not expect to trigger any of these milestone payments during the remainder of fiscal 2011.
 

We expect that the majority, if not all, of our 2011 revenues will continue to be from royalties on the sales of Thalomid®.  Thalomid® is sold by a third-party and is subject to competition from other products and generic drugs, and we have no control over such party’s sales efforts or the resources devoted to Thalomid® sales.  In 2010 and 2009, we received royalty-sharing revenue in the amount of $3,449,000 and $4,990,000, respectively.  There can be no assurance as to future sales trends of Thalomid® and the amount of revenue we will receive and record in 2011.  Based upon the trend of declining sales over the past two years, together with recent publicly disclosed information from Celgene Corporation regarding sales of Thalomid®, we expect annual sales of Thalomid® in 2011 to continue to decrease, which will result in a reduction in our revenues in 2011.  As we continue to incur costs for the clinical investigation and development activities of ENMD-2076 during the remainder of fiscal 2011, such a reduction in our royalty revenue would have a material adverse effect on both our short-term and long-term liquidity if we are unable to obtain other financial resources to replace the anticipated decrease in Thalomid® royalty revenues.   There is no assurance that the amount of royalty-sharing revenues received for fiscal 2011 will be similar to amounts received during prior fiscal years.
 

 

ITEM 4.

CONTROLS AND PROCEDURES

 

PART II.

OTHER INFORMATION

 

 

 

 

 

 

31.1		Rule 13a-14(a) Certification of Executive Chairman
31.2		Rule 13a-14(a) Certification of Principal Accounting Officer
32.1		Section 1350 Certification of Executive Chairman
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, 2011, formatted in eXtensible Business Reporting Language (XBRL):  (i) Unaudited Consolidated Balance Sheets at September 30, 2011 and December 31, 2010, (ii) Unaudited Consolidated Statement of Operations for the Three and Nine months ended September 30, 2011 and 2010, (iii) Unaudited Consolidated Statements of Cash Flows for the Three and Nine months ended September 30, 2011 and 2010 and (iv) Notes to Unaudited Consolidated Financial Statements (tagged as blocks of text).*

 

	ENTREMED, INC.
	(Registrant)
Date: November 14, 2011	/s/ Michael M. Tarnow
	Michael M. Tarnow
	Executive Chairman
Date: November 14, 2011	/s/ Sara B. Capitelli
	Sara B. Capitelli
	Principal Accounting Officer

  

 

31.1		Rule 13a-14(a) Certification of Executive Chairman
31.2		Rule 13a-14(a) Certification of Principal Accounting Officer
32.1		Section 1350 Certification of Executive Chairman
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, 2011, formatted in eXtensible Business Reporting Language (XBRL):  (i) Unaudited Consolidated Balance Sheets at September 30, 2011 and December 31, 2010, (ii) Unaudited Consolidated Statement of Operations for the Three and Nine months ended September 30, 2011 and 2010, (iii) Unaudited Consolidated Statements of Cash Flows for the Three and Nine months ended September 30, 2011 and 2010 and (iv) Notes to Unaudited Consolidated Financial Statements (tagged as blocks of text).*