CASI Pharmaceuticals, Inc (DE) - Quarter Report: 2019 June (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

For the quarterly period ended June 30, 2019

For the transition period from ___________ to _____________.

Commission file number 0-20713

CASI PHARMACEUTICALS, INC.

(Exact name of registrant as specified in its charter)

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 every Interactive Data File required to be submitted 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 such files).

YES x    NO ¨

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

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

YES ¨    NO x

Securities registered pursuant to Section 12(b) of the Act:

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

CASI PHARMACEUTICALS, INC.

Table of Contents

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

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

Forward-looking statements are subject to numerous assumptions, risks and uncertainties, which change over time. Forward-looking statements speak only as of the date they are made, and no duty to update forward-looking statements is assumed. Actual results could differ materially from those currently anticipated due to a number of factors, including: the difficulty of executing our business strategy in China;  our lack of experience in manufacturing products and uncertainty about our resources and capabilities to do so on a clinical or commercial scale; risks relating to the commercialization, if any, of our products and proposed products (such as marketing, safety, regulatory, patent, product liability, supply, competition and other risks); our inability to predict when or if our product candidates will be approved for marketing by the FDA, China National Medical Products Administration, or other regulatory authorities; our inability to enter into strategic partnerships for the development, commercialization, manufacturing and distribution of our proposed product candidates or future candidates; the volatility in the market price of our common stock; risks relating to the need for additional capital and the uncertainty of securing additional funding on favorable terms; risks associated with CID-103, CNCT19, and our product candidates; risks associated with CID-103, CNCT19, and our other early-stage products under development; risks that results in preclinical and early clinical models are not necessarily indicative of later clinical results; uncertainties relating to preclinical and clinical trials, including delays to the commencement of such trials; our ability to protect our intellectual property rights; the lack of success in the clinical development of any of our products; and our dependence on third parties. 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.

Unaudited Condensed Consolidated Balance Sheets

See accompanying condensed notes.

CASI Pharmaceuticals, Inc.

Unaudited Condensed Consolidated Statements of Operations and Comprehensive Loss

CASI Pharmaceuticals, Inc.

Unaudited Condensed Consolidated Statements of Stockholders’ Equity

See accompanying condensed notes.

CASI Pharmaceuticals, Inc.

Unaudited Condensed Consolidated Statements of Cash Flows

See accompanying condensed notes.

CASI Pharmaceuticals, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

1.            Basis of Presentation

CASI Pharmaceuticals, Inc. (“CASI” or the “Company”) (Nasdaq: CASI) is a U.S. biopharmaceutical company focused on developing and commercializing innovative therapeutics and pharmaceutical products in China, U.S., and throughout the world. The Company is focused on acquiring, licensing, developing and commercializing products in hematology oncology as well as other therapeutic areas of unmet medical need. The Company intends to execute its plan to become a leading platform to launch medicines in the greater China market leveraging its China-based regulatory and commercial competencies and its global drug development expertise.

The Company’s China operations are conducted through its wholly-owned subsidiary, CASI Pharmaceuticals (Beijing) Co., Ltd. (“CASI China”), which is based in Beijing, China. CASI China has established China operations that are growing as the Company continues to further in-license or acquire products for its pipeline.

The accompanying condensed consolidated financial statements include the accounts of the Company and its subsidiaries, in which CASI, directly or indirectly, has a controlling financial interest. These subsidiaries include Miikana Therapeutics, Inc. (“Miikana”), CASI China, CASI Pharmaceuticals (Wuxi) Co., Ltd. (“CASI Wuxi”), and CASI Biopharmaceuticals (WUXI) Co., Ltd. (“CASI Biopharmaceuticals”). 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. CASI Wuxi was established on December 26, 2018 in China to develop a manufacturing capability in China in 2019. CASI Biopharmaceuticals is a wholly owned subsidiary of CASI Wuxi and was established in April 2019. The Company controls CASI Wuxi through 80% voting rights (see Note 8). Accordingly, the financial statements of CASI Wuxi have been consolidated in the Company’s consolidated financial statements since its inception. All inter-company balances and transactions have been eliminated in consolidation. The Company currently operates in one operating segment, which is the development of innovative therapeutics addressing cancer and other unmet medical needs for the global market.

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information and in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, such condensed consolidated financial statements do not include all of the information and disclosures required by U.S. generally accepted accounting principles for complete consolidated financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. The accompanying December 31, 2018 financial information was derived from the Company’s audited financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018. Operating results for the three and six month periods ended June 30, 2019 are not necessarily indicative of the results that may be expected for the year ending December 31, 2019 or any other future period. 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, 2018.

Certain line items in the prior-year unaudited condensed consolidated statement of cash flows relating to the acquired in-process research and development and inventory have been reclassified to conform to the December 31, 2018 presentation resulting in an increase in net cash used in operating activities and a decrease in net cash used in investing activities by $564,000 for the six months ended June 30, 2018. Inventory in the amount of $282,709 as of December 31, 2018, which was included in prepaid expenses and other, has been separately presented on the condensed consolidated balance sheet as of December 31, 2018.

Liquidity Risks and Management’s Plans

Since inception, the Company has incurred significant losses from operations and has incurred an accumulated deficit of $502.4 million.   The Company expects to continue to incur operating losses for the foreseeable future due to, among other factors, its continuing clinical and development activities.

Taking into consideration the cash balance as of June 30, 2019, the Company believes that it has sufficient resources to fund its operations at least through August 9, 2020. As of June 30, 2019, approximately $8.7 million of the Company’s cash balance was held by CASI China, and approximately $29.0 million was held by CASI Wuxi. The Company intends to continue to exercise tight controls over operating expenditures and will continue to pursue opportunities, as required, to raise additional capital and will also actively pursue non- or less-dilutive capital raising arrangements in China to support the Company’s dual-country approach to drug development.

2.            New License and Investment Agreements

Black Belt Therapeutics Limited:

In April 2019, the Company entered into a license agreement with Black Belt Therapeutics Limited (“Black Belt”) for exclusive worldwide rights to the investigational anti-CD38 monoclonal antibody (Mab) TSK011010. TSK011010 is at the IND/IMPD submission stage of development, with Phase 1 trials targeted to start in early 2020. CASI is responsible for all development and commercialization activities of the TSK011010. Under the terms of the agreement, CASI obtained global rights to TSK011010 for an upfront payment of 5 million euros ($5,657,500) as well as certain milestone and royalty payments. Because TSK011010 underlying the acquired rights has not reached technological feasibility and have no alternative uses, the Company expensed 5 million euros as acquired in-process research and development in the accompanying condensed consolidated statement of operations and comprehensive loss.

The Company also invested 2 million euros ($2,249,600), representing 15% shareholding, as an equity investment in Black Belt TX Ltd, a newly established company of Black Belt focusing on novel immuno-oncology targets (see Note 4).

Juventas Cell Therapy:

Juventas Cell Therapy Ltd. (“Juventas”) is a China-based domestic company located in Tianjin City, China engaged in cell therapy. The company’s lead product, CNCT19, devolved from the CD19 CAR-T, is used to treat cancer patients with acute lymphoblastic leukemia and relapsed non-Hodgkin lymphoma. Through its commercial collaboration with CASI, Juventas targets to be the first domestic company to launch a CD19 CAR-T in China.

In June 2019, the Company entered into a license agreement for exclusive worldwide license and commercialization rights to an autologous anti-CD19 T-cell therapy product (CNCT19) from Juventas. Juventas will continue to develop CNCT19 with CASI’s participation on the steering committee. CASI will be responsible for payment of certain future development milestones and sales royalties. All contingent payments will be recognized when the subsequent milestones are probable to be met.

CASI Biopharmaceuticals also invested RMB 80 million (approximately $11.6 million), representing 16.3% shareholding, as an equity investment in Juventas (see Note 4).

3.            New Accounting Pronouncements

Recently Adopted Pronouncements

Effective January 1, 2019, the Company adopted Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”) 2016-02, Leases (“Topic 842”). The guidance amends the accounting requirements for leases and requires lessees to recognize assets and liabilities related to long-term leases on the balance sheets and expands disclosure requirements regarding leasing arrangements. The guidance is effective for reporting periods beginning after December 15, 2018 and early adoption is permitted. The guidance must be adopted on a modified retrospective basis and provides for certain practical expedients. The Company adopted this guidance effective January 1, 2019 using the following practical expedients:

Additionally, the Company made ongoing accounting policy elections whereby it (i) does not recognize Right-of-use (“ROU”) assets or lease liabilities for short-term leases (those with original terms of 12-months or less) and (ii) combines lease and non-lease components for facilities leases, which primarily relate to ancillary expenses such as common area maintenance charges and management fees of operating leases.

Upon adoption of the new guidance on January 1, 2019, the Company recorded right of use assets of approximately $3.0 million and recognized lease liabilities of approximately $3.2 million; there was no cumulative effect impact to accumulated deficit as of January 1, 2019. No adjustments were made to prior comparative periods.

In August 2018, the FASB issued ASU 2018-15, Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. The new guidance requires a customer in a cloud computing arrangement (i.e., hosting arrangement) that is a service contract to follow the internal-use software guidance in ASC 350-40 to determine which implementation costs to capitalize as assets or expense as incurred. Capitalized implementation costs related to a hosting arrangement that is a service contract will be amortized over the term of the hosting arrangement, beginning when the module or component of the hosting arrangement is ready for its intended use. The update is effective for calendar-year public business entities in 2020. For all other calendar-year entities, it is effective for annual periods beginning in 2021 and interim periods in 2022. Early adoption is permitted. The Company early adopted this guidance effective January 1, 2019. The net impact to the financial statements was approximately $140,000 of capitalized cost.

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

4.            Investment in Equity Securities, at fair value and long-term investments

The Company has an equity investment in the common stock of a publicly traded company. The fair value of this security was measured using its quoted market price, a Level 1 input as of June 30, 2019 and December 31, 2018 (see Note 13). The following table summarizes the Company’s investment as of June 30, 2019:

Unrealized losses on the Company’s equity investment for the six months ended June 30, 2019 and 2018 were $195,542 and $11,325, respectively, and are recognized as change in fair value of investment in equity securities in the accompanying condensed consolidated statements of operations and comprehensive loss.

In April 2019, in conjunction with its license agreement entered into with Black Belt, the Company made a 2 million euro ($2,249,600) equity investment in a newly established, privately held UK Company (see Note 2).

In June 2019, in conjunction with its license agreement entered into with Juventas, a subsidiary of the Company made an RMB 80 million ($11,648,160) equity investment in Juventas, a privately held, China-based company (see Note 2).

As the Company does not have significant influence over operating and financial policies of Black Belt TX Ltd and Juventas, and the equity interests do not have readily determinable fair value, the investments in Black Belt TX Ltd and Juventas are stated at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment. The Company did not record any adjustments or impairments during the quarter ended June 30, 2019.

5.            Inventories

Inventories consist of EVOMELA finished goods and raw materials to be used in production of ANDAs and are stated at the lower of cost or net realizable value. Cost is determined using a first-in, first-out method.

The carrying value of finished goods inventory was approximately $490,000 and raw materials was approximately $180,000 as of June 30, 2019 and the carry value of raw materials was approximately $280,000 as of December 31, 2018, which are included in “Inventories” in the accompanying condensed consolidated balance sheets.

6.            Leases

As discussed in Note 3, effective January 1, 2019, the Company adopted Topic 842. At the inception of a contract, the Company determines if the arrangement is, or contains, a lease. ROU assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent its obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. Rent expense is recognized on a straight-line basis over the lease term.

The Company has made certain accounting policy elections whereby it (i) does not recognize ROU assets or lease liabilities for short-term leases (those with original terms of 12-months or less) and (ii) combines lease and non-lease components for facilities leases, which primarily relate to ancillary expenses such as common area maintenance charges and management fees of its operating leases. Operating lease ROU assets are included in other assets (noncurrent) and operating lease liabilities (see below) are included in accrued liabilities and other liabilities (noncurrent) in the condensed consolidated balance sheets as of June 30, 2019. As of June 30, 2019, the Company did not have any finance leases.

All of the Company’s existing leases as of June 30, 2019 are classified as operating leases. As of June 30, 2019, the Company has four material operating leases for facilities and office equipment with remaining terms expiring from 2021 through 2022 and a weighted average remaining lease term of 2.49 years. The Company has fair value renewal options for many of the Company’s existing leases, none of which have considered reasonably certain of being exercised or included in the minimum lease term. Discount rates used in the calculation of the lease liability is 5.4%. The discount rates reflect the estimated incremental borrowing rate, which includes an assessment of the credit rating to determine the rate that the Company would have to pay to borrow, on a collateralized basis for a similar term, an amount equal to the lease payments in a similar economic environment.

Rent expense for the six months ended June 30, 2019 consisted of approximately $611,000 of total operating lease cost. There was no variable lease costs or sublease income for the six months ended June 30, 2019.

The impact of Topic 842 on the June 30, 2019 condensed consolidated balance sheet was as follows:

Supplemental cash flow information related to leases was as follows:

A maturity analysis of our operating leases as of June 30, 2019 follows:

Future undiscounted cash flows:

In 2018 the Company entered into a lease on behalf of CASI Wuxi. As of June 30, 2019, the underlying asset of the lease has not been made available for use by the Company. The minimum lease payments for this lease, totaling approximately $3,789,000, beginning in November 2019 and expiring in 2024, are not included in the above table.

As previously disclosed in the consolidated financial statements for the year ended December 31, 2018 and under the previous lease standard (Topic 840), future minimum annual lease payments for the years subsequent to December 31, 2018 and in aggregate are as follows:

Rental expense for the year ended December 31, 2018 was approximately $916,000.

7.            Intangible Assets

Intangible assets include ANDAs that were acquired as part of 2018 asset acquisitions and include for previously marketed generic products and capitalized cost related to a cloud computing arrangement (CCA). These intangible assets were originally recorded at relative estimated fair values based on the purchase price for the asset acquisitions and are stated net of accumulated amortization.

The ANDAs are being amortized over their estimated useful lives of 13 years, using the straight-line method. Management reviews finite-lived intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable, in a manner similar to that for property and equipment. Loss on disposal of $48,391 related to the withdrawal of ANDAs was recognized in the three months ended March 31, 2019 and classified as research and development expenses. The cloud computing arrangement is being amortized over its useful life of 5 years.

Net definite-lived intangible assets at June 30, 2019, excluding the withdrawn ANDAs discussed above consists of the following:

Expected future amortization expense is as follows as of June 30, 2019:

8.            Redeemable Noncontrolling Interest

As discussed in Note 1, on December 26, 2018, the Company, together with Wuxi Jintou Huicun Investment Enterprise, a limited partnership organized under Chinese law (“Wuxi LP”) established CASI Wuxi to build and operate a manufacturing facility in the Wuxi Huishan Economic Development Zone in Jiangsu Province, China. The Company holds 80% of the equity interests in CASI Wuxi and will invest, over time, $80 million in CASI Wuxi. The Company’s investment will consist of (i) $21 million in cash (paid in February 2019), (ii) a transfer of selected ANDAs valued at $30 million (transferred in May 2019), and (iii) an additional $29 million cash payment within three years from the date of establishment of CASI Wuxi. Wuxi LP holds 20% of the equity interest in CASI Wuxi through its investment in RMB of $20 million in cash (paid in March 2019). As the transfer of ANDAs valued at $30 million was to the Company’s consolidated subsidiary (CASI Wuxi), the Company recognized the transfer of the ANDAs at their carrying value and did not recognize a gain on the transfer.

Pursuant to the investment contract between the Company and Wuxi LP and Articles of Association of CASI Wuxi, the Company has the call option to purchase the 20% equity interest in CASI Wuxi held by Wuxi LP at any time within 5 years from the date of establishment of CASI Wuxi (i.e. up to December 26, 2023). Wuxi LP has the put option to require the Company to redeem the 20% equity interest in CASI Wuxi at any time after December 26, 2023. The redemption value under both the Company’s embedded put option and Wuxi LP’s embedded call option is equal to $20 million plus interest at the bank loan interest rate issued by the People's Bank of China for the period beginning with the initial capital contribution by Wuxi LP to the date of redemption. In addition, Wuxi LP has the put option to require the Company to redeem the 20% equity interest in CASI Wuxi at $20 million upon the occurrence of any of the following conditions: (i) the Company fails to fulfill its investment obligation to CASI Wuxi; (ii) CASI Wuxi suffers serious losses, discontinued operation, dissolution, goes into process of bankruptcy liquidation; or (iii) the Company substantially violates the investment contract and Articles of Association of CASI Wuxi.

The investment of Wuxi LP in CASI Wuxi is treated as redeemable noncontrolling interest and is classified outside of permanent equity on the consolidated balance sheets because (1) the noncontrolling interest is not mandatorily redeemable financial instruments, and (2) it is redeemable at the option of the holder, or upon the occurrence of an event that is not solely within the control of the Company. The Company initially recorded the redeemable noncontrolling interest at its fair value of $20 million. The carrying amount of the redeemable noncontrolling interest is subsequently recorded at the greater of the amount of (1) the initial carrying amount, increased or decreased for the redeemable noncontrolling interest’s share of net income or loss in CASI Wuxi or (2) the redemption value, assuming the noncontrolling interest is redeemable at the balance sheet date. Accretion of the carrying amount of redeemable noncontrolling interests to the redemption value is recorded in additional paid-in capital.

Changes in redeemable noncontrolling interest during the three and six month periods ended June 30, 2019 are as follows:

9.           Stockholders’ Equity

Stock purchase warrants activity for the six months ended June 30, 2019 is as follows:

All outstanding warrants are equity classified.

10.         Net Loss Per Share

Net loss per share (basic and diluted) was computed by dividing net loss attributable to common stockholders, considering the accretions to redemption value of the redeemable noncontrolling interest, by the weighted average number of shares of common stock outstanding. Outstanding stock options and warrants totaling 29,900,340 and 28,476,069 as of June 30, 2019 and 2018, respectively, were anti-dilutive and, therefore, were not included in the computation of weighted average shares used in computing diluted loss per share.

11.         Stock-Based Compensation

In June 2019, the Company’s stockholders approved an amendment to the 2011 Long-Term Incentive Plan, increasing the number of shares of common stock reserved for issuance from 20,230,000 to 25,230,000 to be available for grants and awards.

As of June 30, 2019, a total of 11,708,053 shares remained available for grant under the Company’s 2011 Long-Term Incentive Plan.

The Company’s net loss for the six months ended June 30, 2019 and 2018 includes $3,309,408 and $1,812,219, respectively, of non-cash compensation expense 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:

Compensation expense related to stock options is recognized over the requisite service period, which is generally the option vesting term of up to five years. Awards with performance conditions are expensed when it is probable that the performance condition will be achieved. For the six months ended June 30, 2019, approximately $42,800 was expensed for share awards with performance conditions that became probable during that period. For the six months ended June 30, 2018, approximately $15,500 was expensed for share awards with performance conditions that became probable during that period.

The Company uses the Black-Scholes-Merton valuation model to estimate the fair value of service based and performance-based 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. These assumptions include the risk- free rate of interest, expected dividend yield, expected volatility, and the expected life of the award. Following are the weighted-average assumptions used in valuing the stock options granted to employees during the six-month periods ended June 30, 2019 and 2018:

The weighted average fair value of stock options granted during the six-month periods ended June 30, 2019 and 2018 were $2.20 and $4.53, respectively.

A summary of the Company's stock option plans and of changes in options outstanding under the plans during the six-month period ended June 30, 2019 is as follows:

Cash received from option exercises under all share-based payment arrangements for the six months ended June 30, 2019 and 2018 was $38,302 and $176,833, respectively.

During the quarter ended June 30, 2019, the 4 million shares of a performance-based option award to the Company’s Chairman and CEO was cancelled, which was accompanied by a concurrent grant of replacement award. The replacement grant of stock options was approved by the Company’s stockholders at the 2019 Annual Meeting on June 20, 2019. Under the terms of the grant, he received a stock option covering 4 million shares of common stock, at an exercise price of $2.85, vesting at the earlier of (i) the completion of a transformative event by the Company as determined in the discretion of the Compensation Committee and (ii) the second anniversary of the date of his appointment as CEO on April 2, 2019.

12.         Income Taxes

At December 31, 2018, 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, 2018.

During the six months ended June 30, 2019, there were no material changes to the measurement of unrecognized tax benefits in various taxing jurisdictions. The Company recognizes interest and penalties related to uncertain tax positions as a component of income tax expense.

The tax returns for all years in the Company’s major tax jurisdictions are not settled as of June 30, 2019. 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.

13.         Fair Value Measurements

The majority of the Company’s financial instruments (consisting principally of cash and cash equivalents, accounts payable and accrued liabilities) are carried at cost which approximates their fair values due to the short-term nature of the instruments. The Company’s investment in equity securities is carried at fair value (see Note 4). The Company’s note payable is carried at amortized cost which approximates fair value due to its classification as a short-term note payable.

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: 

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

The Company evaluates financial assets and liabilities subject to fair value measurements on a recurring basis to determine the appropriate level at which to classify them each reporting period. This determination requires the Company to make subjective judgments as to the significance of inputs used in determining fair value and where such inputs lie within the hierarchy.

The Company has an equity investment in the common stock of publicly traded company. The Company’s investment in this equity security is carried at its estimated fair value, with changes in fair value reported in the consolidated statement of operations and comprehensive loss each reporting period (see Note 4). The fair value of the common stock is based on quoted market price for the investee’s common stock, a Level 1 input.

The following tables presents the Company’s financial assets and liabilities accounted for at fair value on a recurring basis as of June 30, 2019 and December 31, 2018, by level within the fair value hierarchy:

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

The Company has no financial assets and liabilities that are measured at fair value on a non-recurring basis.

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

The Company has no 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 has no non-financial assets and liabilities that are measured at fair value on a non-recurring basis.

14.          Related Party Transactions

In June 2019, CASI Pharmaceuticals, Inc. entered into a license agreement for exclusive worldwide license and commercialization rights to CNCT19 from Juventas (see Note 2). Transactions with Juventas are considered to be related party transactions as the Company’s CEO and Chairman is the chairman and one of the founding shareholders of Juventas. A committee of independent directors of CASI negotiated the terms of the investment and license agreements and recommended that the board of directors approve the transaction. The Company’s CEO did not participate in the committee’s deliberations or the board of directors’ approval of the transaction.

There were no other material transactions entered into with Juventas during the six months ended June 30, 2019 and 2018.

The Company has supply agreements with Spectrum Pharmaceuticals, Inc. (“Spectrum”) for the purchase of EVOMELA, ZEVALIN, and MARQIBO in China for quality testing purposes to support CASI’s application for import drug registration and for commercialization purposes. The former CEO of Spectrum is also a member of CASI’s Board, and Spectrum is a greater than 10% shareholder of the Company.

In 2018, the Company entered into commercial purchase obligation commitments for EVOMELA from Spectrum totaling approximately $9.2 million. As of June 30, 2019, the Company paid $7.625 million as a deposit for these commitments to purchase of EVOMELA. The Company received the first shipment of EVOMELA of approximately $480,000 in June 2019. The Company has also incurred estimated expenses of approximately $263,000 related to other material costs associated with EVOMELA. There were no other materials purchased from Spectrum during the six months ended June 30, 2019 or 2018.

The advance payments made to Spectrum are included in the prepaid expenses and other in the accompanying condensed consolidated balance sheets, of which $7.625 million was recorded as of June 30, 2019 and $4.6 million recorded as of December 31, 2018. As of June 30, 2019, and December 31, 2018, the Company included accrued expenses payable to Spectrum of $743,000 and $0 respectively in the accompanying condensed consolidated balance sheets.

15.          Acrotech License Arrangements

The Company has certain product rights and perpetual exclusive licenses from Acrotech to develop and commercialize the following commercial oncology drugs and drug candidates in the greater China region (which includes China, Taiwan, Hong Kong and Macau) (the “Territories”):

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

In March 2016, Spectrum, the former owner of EVOMELA, ZEVALIN and MARQIBO, received notification from the U.S. Food and Drug Administration (“FDA”) of the grant of approval of its New Drug Application (NDA) for EVOMELA primarily for use as a high-dose conditioning treatment prior to hematopoietic progenitor (stem) cell transplantation in patients with multiple myeloma. In December 2016, the China National Medical Products Administration (“NMPA”) accepted for review the Company’s import drug registration application for EVOMELA and in 2017 granted priority review of the import drug registration clinical trial application (CTA). On December 3, 2018 the Company received NMPA’s approval for importation, marketing and sales in China for EVOMELA. The Company is building an internal commercial team to prepare for the commercial launch EVOMELA in 2019. The Company is also preparing for a post-marketing study.

The Company is in various stages of the regulatory and development process to obtain marketing approval for ZEVALIN and MARQIBO in its territorial region, with ZEVALIN commercially available in Hong Kong. In 2017, the NMPA accepted for review the Company’s import drug registration for ZEVALIN including both the antibody kit and the radioactive Yttrium-90 component. On February 12, 2019, the Company received NMPA’s approval of the Company’s CTA to allow for a confirmatory registration trial to evaluate the efficacy and safety of ZEVALIN. In 2016, the NMPA accepted for review the Company’s import drug registration application for MARQIBO. On March 4, 2019 the Company received NMPA’s approval of the Company’s CTA to allow for a confirmatory registration trial to evaluate the efficacy and safety of MARQIBO. The Company intends to advance both of these products.

16.          Commitments

In 2018, the Company entered into purchase obligation commitments for EVOMELA from Spectrum for approximately $9.2 million (see Note 14). The Company expects all of the EVOMELA product to be delivered in 2019 (of which $480,000 was delivered in June 2019). As of June 30, 2019, the Company paid approximately $7.6 million of cumulative deposits for the purchase of EVOMELA ($4.6 million as of December 31, 2018). The deposits made to Spectrum are included in the prepaid expense and other in the accompanying condensed consolidated balance sheets.

In 2018, the Company committed to invest $80 million in CASI Wuxi, of which $21 million in cash was invested in February 2019 and ANDAs with a fair value of $37 million were transferred in May 2019 (see Note 8).

In conjunction with both the Black Belt and Juventus agreements entered into during the three months ended June 30, 2019 (see Note 2), the Company is responsible for certain milestone and royalty payments. As of June 30, 2019, no milestones have been achieved.

17.         Subsequent Event

On July 19, 2019, the Company entered into an Open Market Sale Agreement ^SM with Jefferies LLC (the “Open Market Agreement”). Pursuant to the terms of the Open Market Agreement, the Company may sell from time to time, at its option, shares of the Company’s common stock, through Jefferies LLC (“Jefferies”), as sales agent, with an aggregate sales price of up to $30,000,000.

Any sales of shares pursuant to the Open Market Agreement will be made under the Company’s effective “shelf” registration statement on Form S-3 (File No. 333-222046) which became effective on December 22, 2017 and the related prospectus supplement and the accompanying prospectus, as filed with the SEC on July 19, 2019.

On July 19, 2019, the Company entered into an amendment (the “Amendment”) to its Common Stock Sales Agreement with H.C. Wainwright & Co., LLC dated February 23, 2018 (the “Original Agreement”). Pursuant to the terms of the Amendment, the maximum amount that may be sold under the Original Agreement has been reduced to $20 million. The Amendment also harmonizes certain provisions of the Original Agreement with the Open Market Agreement with Jefferies and waives any breach of the terms, covenants, or conditions of the Original Agreement, if any, arising from the Company entering into the Open Market Agreement with Jefferies.

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

OVERVIEW 

We are a U.S. biopharmaceutical company focused on developing and commercializing innovative therapeutics and high quality pharmaceutical products in China, U.S., and throughout the world. We are focused on acquiring, licensing, developing and commercializing products in hematology oncology as well as other therapeutic areas of unmet medical need. We intend to execute our plan to become a leader by launching medicines in the greater China market leveraging our China-based regulatory and commercial competencies and our global drug development expertise. Our operations in China are conducted through our wholly-owned subsidiary, CASI Pharmaceuticals (Beijing) Co., Ltd. (“CASI China”), which is located in Beijing, China.

Our product pipeline features the following: (1) an autologous anti-CD19 T-cell therapy product (CNCT19) being developed for the treatment of B-ALL and NHL; (2) CID-103, an anti-CD38 monoclonal antibody being developed for the treatment of multiple myeloma and other CD38 positive hematological cancers; (3) three U.S. Food and Drug Administration (“FDA”) approved hematology oncology drugs in-licensed from Acrotech Biopharma LLC and its affiliates (“Acrotech”) for which we have exclusive rights to the greater China market, consisting of Melphalan Hydrochloride for Injection (EVOMELA^®), Ibritumomab Tiuxetan (ZEVALIN^®) and Vincristine Sulfate Liposome Injection (MARQIBO^®), and (4) a portfolio of FDA-approved and pending abbreviated new drug applications (“ANDAs”), including entecavir and tenofovir disoproxil fumarate (TDF) indicated for the treatment of hepatitis B virus. We intend to prioritize a select subset of the ANDAs for product registration and commercialization in China.

We believe our product mix reflects a risk-balanced approach between products in various stages of development, between products that are branded and non-branded, and between products that are proprietary and generic. We intend to continue building a significant product pipeline of high quality pharmaceuticals, as well as innovative drug candidates for commercialization in China and for the rest of the world. For in-licensed products, we use a market-oriented approach to identify pharmaceutical candidates that we believe have the potential for gaining widespread market acceptance, either globally or in China, and for which development can be accelerated under our drug development strategy. For our FDA-approved ANDAs, we intend to select and commercialize certain niche products from the portfolio that complement our therapeutic focus areas and which offer unique market and cost-effective manufacturing opportunities in China and/or in the U.S.

We believe the China operations offer a significant market and growth potential due to the extraordinary increase in demand for high quality medicine coupled with regulatory reforms in China that make it easier for global pharmaceutical companies to introduce new pharmaceutical products into the country. We will continue to in-license clinical-stage and late-stage drug candidates, and leverage our cross-border operations and expertise, and hope to be the partner of choice to provide access to the China market. We expect the implementation of our plans will include leveraging our resources and expertise in both the U.S. and China so that we can maximize development and clinical strategies concurrently under U.S. FDA and China National Medical Products Administration (“NMPA”) regulatory regimes.

In order to capitalize on the drug development and capital resources available in China, we are doing business in China through our wholly-owned China-based subsidiary that will execute the China portion of our drug development strategy, including conducting clinical trials in China, pursuing local funding opportunities and strategic collaborations, and implementing our commercial launches. In December 2018, we received NMPA approval of Melphalan Hydrochloride For Injection (EVOMELA), for:

We intend to begin commercializing this drug through CASI China beginning in 2019 using EVOMELA supplied through our licensor, Spectrum Pharmaceuticals, Inc. and its suppliers. Melphalan Hydrochloride for Injection (EVOMELA^®) (as well as Ibritumomab Tiuxetan (ZEVALIN^®) and Vincristine Sulfate Liposome Injection (MARQIBO^®) was transferred from Spectrum to Acrotech in March 2019, accordingly, all future needs will be sourced from Acrotech and its suppliers, or other approved alternative suppliers.

We have assembled an internal commercial team to prepare for the launch of our first commercial product, Melphalan Hydrochloride for Injection (EVOMELA) in 2019. As part of the strategy to support our future clinical and commercial manufacturing needs and to manage our supply chain for certain products, on December 26, 2018, we established CASI Pharmaceuticals (Wuxi) Co., Ltd. (“CASI Wuxi”) in China to construct a cGMP manufacturing facility in Wuxi, China. The site is currently in the design and engineering phase with construction expected to begin in 2020. Through CASI China, we will focus on the China market devoting more resources and investment going forward.

Since inception, the Company has incurred significant losses from operations and has incurred an accumulated deficit of $502.4 million.   The Company expects to continue to incur operating losses for the foreseeable future due to, among other factors, its continuing clinical and development activities.

Taking into consideration the cash balance as of June 30, 2019, the Company believes that it has sufficient resources to fund its operations at least through August 9, 2020. As of June 30, 2019, approximately $8.7 million of the Company’s cash balance was held by CASI China, and approximately $29.0 million was held by CASI Wuxi. The Company intends to continue to exercise tight controls over operating expenditures and will continue to pursue opportunities, as required, to raise additional capital and will also actively pursue non- or less-dilutive capital raising arrangements in China to support the Company’s dual-country approach to drug development.

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

RESULTS OF OPERATIONS

Six Months Ended June 30, 2019 Compared with Six Months Ended June 30, 2018

Operating Items

Revenues and Cost of Product Sales

There were no revenues recorded for the six months ended June 30, 2019 and 2018.

Research and Development Expenses

Research and development (R&D) 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, facilities expenses, and amortization expense of acquired ANDAs.

Research and development expenses for the six months ended June 30, 2019 were $5.6 million, compared with $3.4 million for the six months ended June 30, 2018. The increase in R&D expenses primarily reflects higher regulatory costs associated with our ANDAs in 2019, consulting and manufacturing related services, as well as an increase in personnel costs due to growth in the number of employees.

Included in our research and development expenses for the six month period ended June 30, 2019 are direct project costs of $2.8 million related to our ANDAs acquired in 2018, $596,000 for drugs in-licensed from Spectrum, and $747,000 for preclinical development activities primarily in China. Research and development expenses for the six month period ended June 30, 2018 included direct project costs of $829,000 related to our ANDAs acquired in January 2018, $316,000 for drugs in-licensed from Spectrum, and $886,000 for preclinical development activities primarily 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, investor relations and facilities.

General and administrative expenses for the six months ended June 30, 2019 were $12.7 million, compared with $5.3 million for the six months ended June 30, 2018. The increase was related to a combination of factors primarily related to the Company’s growth in China. These factors include an increase in salary, benefits and recruitment expense and facilities costs due to increases in head count to prepare for the anticipated launch of the Company’s first commercial product (EVOMELA), professional services fees (including audit and legal services), and an increase in non-cash stock compensation expense largely attributed to stock options issued to the President of CASI China and other employees.

Acquired in-process Research and Development

Acquired in-process R&D expenses for the six months ended June 30, 2019 were $5.8 million, compared with $0.7 million for the six months ended June 30, 2018. The six months ended June 30, 2019 amount included the acquired Black Belt license and the six months ended June 30, 2018 expense included certain amounts associated with the acquired ANDAs in January 2018.

Non-Operating Items

Interest income, net

Interest income, net for the six months ended June 30, 2019 was $369,000 compared with $20,000 for the six months ended June 30, 2018. The increase in interest income is mainly due to higher cash balances and cash management strategies implemented by the Company during 2019.

Change in fair value of investment in equity securities

The change in fair value of investment in equity securities for the six months ended June 30, 2019 and 2018 was $195,542 and $11,325, respectively. The changes represent unrealized losses on the Company’s equity investment securities.

Foreign exchange gains

Foreign exchange gains for the six months ended June 30, 2019 was $551,000 compared with $0 for the six months ended June 30, 2018. The foreign exchange gains recorded in the condensed consolidated financial statements are primarily due to USD denominated cash accounts that are held by held by our Chinese subsidiaries.

Three Months Ended June 30, 2019 Compared with Three Months Ended June 30, 2018

Operating Items

Revenues and Cost of Product Sales

There were no revenues recorded for the three months ended June 30, 2019 and 2018.

Research and Development Expenses

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, facilities expenses, and amortization expense of acquired ANDAs.

Research and development expenses for the three months ended June 30, 2019 were $3.0 million, compared with $1.7 million for the three months ended June 30, 2018. The increase in R&D expenses primarily reflects higher regulatory costs associated with our ANDAs in 2019, consulting and manufacturing related services, as well as an increase in personnel costs due to growth in the number of employees.

Included in our research and development expenses for the three-month period ended June 30, 2019 are direct project costs of $1.3 million related to our ANDAs acquired in 2018, $331,000 for drugs in-licensed from Spectrum, and $424,000 for preclinical development activities primarily in China. Research and development expenses for the three-month period ended June 30, 2018 included direct project costs of $388,000 related to our ANDAs acquired in January 2018, $174,000 for drugs in-licensed from Spectrum, and $388,000 for preclinical development activities primarily 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, investor relations and facilities.

General and administrative expenses for the three months ended June 30, 2019 were $7.0 million, compared with $4.0 million for the three months ended June 30, 2018. The increase was related to a combination of factors primarily related to the Company’s growth in China. These factors include an increase in salary, benefits and recruitment expense and facilities costs due to increases in head count to prepare for the anticipated launch of the Company’s first commercial product (EVOMELA), professional services fees (including audit and legal services), and an increase in non-cash stock compensation expense largely attributed to stock options issued to the President of CASI China and other employees.

Acquired in-process Research and Development

Acquired in-process R&D expenses for the three months ended June 30, 2019 were $5.8 million, compared with $0 million for the three months ended June 30, 2018. The increase of $5.8 million is due to the acquired Black Belt license in April 2019.

Non-Operating Items

Interest income, net

Interest income, net for the three months ended June 30, 2019 was $320,000, compared with $13,000 for the three months ended June 30, 2018. The increase in interest income is mainly due to higher cash balances and cash management strategies implemented by the Company during 2019.

Change in fair value of investment in equity securities

The change in fair value of investment in equity securities for the three months ended June 30, 2019 and 2018 was $240,931 and $101,038, respectively. The changes representing unrealized losses on the Company’s equity investment securities.

Foreign exchange gains

Foreign exchange gains for the three months ended June 30, 2019 was $480,000, compared with $0 for the three months ended June 30, 2018. The foreign exchange gains recorded on the financial statements is primarily due to USD denominated cash accounts that are held by our Chinese subsidiaries.

Research and Development Discussion

We expect the majority of our research and development expenses for the remainder of 2019 to be devoted to advancing our in-licensed products towards market approval in China, the technology transfer activities and regulatory support associated with our ANDA portfolio, and our early-stage candidates in preclinical development. We expect our expenses for the remainder of 2019 to increase based on our commercial and clinical development plan. Completion of clinical development may take several years or more, but the length of time generally varies substantially according to the type, complexity, novelty and intended use of a product candidate.

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

Global FDA Trial:

Local NMPA Trial:

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 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.

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 2019 and the foreseeable future before we commercialize any products and penetrate significant markets such as China. Based on our current plans, we expect our current available cash and cash equivalents to meet our cash requirements for at least through August 9, 2020.

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 commercialization efforts, expansion of our operations, research and development, and for the acquisition of new product candidates, if any. We intend to explore one or more of the following alternatives to raise additional capital:

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

There can be no assurance that adequate additional financing under such arrangements will be available to us on terms that we deem acceptable, if at all. If additional funds are raised by issuing equity securities, dilution to existing stockholders may result, or the equity securities may have rights, preferences, or privileges senior to those of the holders of our common stock. If we fail to obtain additional capital when needed, we may be required to delay or scale back our commercialization efforts, our advancement of the Spectrum products, and the ANDA products, or plans for other product candidates, if any.

At June 30, 2019, we had cash and cash equivalents of approximately $70.3 million, with working capital of approximately $74.4 million. As of June 30, 2019, approximately $8.7 million of the Company’s cash balance was held by the Company’s wholly-owned subsidiary in China and approximately $29.0 million was held by CASI Wuxi.

FINANCING ACTIVITIES

“Shelf” Registration Statement

We have an effective shelf registration statement, which allows us to sell debt or equity securities in one or more offerings up to a total public offering price of $100 million. We believe that this shelf registration statement currently provides us additional flexibility with regard to potential financings that we may undertake when market conditions permit or our financial condition may require.

Sales Agreements

On February 23, 2018, the Company entered into a Common Stock Sales Agreement (the “Sales Agreement”) with H.C. Wainwright & Co., LLC (“HCW”). Pursuant to the terms of the Sales Agreement, the Company may sell from time to time, at its option, shares of the Company’s common stock, through HCW, as sales agent. On July 19, 2019, the Company entered into an amendment to the Sales Agreement reducing the maximum amount that may be sold under the Sales Agreement to $20 million.

Any sales of shares pursuant to the Sales Agreement will be made under the Company’s effective “shelf” registration statement on Form S-3 (File No. 333-222046) which became effective on December 22, 2017 (the “Registration Statement”) and the related prospectus supplement and the accompanying prospectus, as filed with the SEC on February 23, 2018.

In 2018, the Company issued 143,248 shares under the Sales Agreement resulting in net proceeds to the Company of approximately $475,000. As of June 30, 2019, approximately $19.5 million remained available under the Sales Agreement.

On July 19, 2019, the Company entered into an Open Market Sale Agreement^SM with Jefferies LLC (the “Open Market Agreement”). Pursuant to the terms of the Open Market Agreement, the Company may elect to sell from time to time, at its option, up to $30 million in shares of the Company’s common stock, through Jefferies LLC, as sales agent.

Any sales of shares pursuant to the Open Market Agreement will be made under the Company’s Registration Statement and the related prospectus supplement and the accompanying prospectus, as filed with the SEC on July 19, 2019.

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. and China interest rates. In this regard, changes in the U.S. and China interest rates affect the interest earned on our cash and cash equivalents. Due to the short-term nature of our cash and cash equivalent holdings, a 10% movement in market interest rates would not materially impact the total fair market value of our portfolio as of June 30, 2019.

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 Chief Financial 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 June 30, 2019 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 Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

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

Changes in Internal Control Over Financial Reporting

During the first quarter of 2019, we implemented a new financial system that is designed to improve the efficiency and effectiveness of our operational and financial accounting processes. This implementation is expected to continue through 2019. Consistent with any process change that we implement, the design of the internal controls has and will continue to be evaluated for effectiveness as part of our overall assessment of the effectiveness of our disclosure controls and procedures. We expect that the implementation of this system will improve our internal controls over financial reporting.

Other than the implementation of a new financial system noted previously, there have been no changes in our internal control over financial reporting during our most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

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

ITEM 1A. RISK FACTORS

In addition to the risk factors set forth in Part I - Item 1A - “Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2018, (the “2018 10-K”), investors should carefully consider the following risk factors. These risks should be read in conjunction with the risk factors set forth in the 2018 10-K and the other information contained in this report and our other filings with the SEC.

If we are unable to protect our intellectual property rights our business and competitive position would be harmed.

We have in-licensed worldwide rights to an investigational anti-CD38 monoclonal antibody and an anti-CD19 T-cell therapy product candidate, and we may in-license other product candidates in the future.  Our success, competitive position and future revenues with respect to these product candidates will depend, in part, on our ability to protect our intellectual property.  We will be able to protect our proprietary rights from unauthorized use by third parties only to the extent that our proprietary rights are covered by valid and enforceable patents or are effectively maintained as trade secrets. We attempt to protect our proprietary position by maintaining trade secrets and by filing U.S. and foreign patent applications related to our in-licensed technology, inventions and improvements that are important to the development of our business. Our failure to do so may adversely affect our business and competitive position.

The patent positions of biotechnology and pharmaceutical companies can be highly uncertain and involve complex legal and factual questions for which important legal principles remain unresolved. We may not be able to protect our intellectual property rights throughout the world. No consistent policy regarding the breadth of claims allowed in pharmaceutical patents has emerged to date in the United States or in many jurisdictions outside of the United States. Changes in either the patent laws or interpretations of patent laws in the United States and other countries may diminish the value of our intellectual property and therefore we cannot predict with certainty whether any patent applications that we have filed or that we may file in the future will be approved, will cover our products or product candidates or that any resulting patents will be enforced. In addition, third parties may challenge, seek to invalidate, limit the scope of or circumvent any of our patents, once they are issued. Thus, any patents that we own or license from third parties or joint venture or development partners may not provide any protection against competitors. Any patent applications that we have filed or that we may file in the future, or those we may license from third parties or joint venture or development partners, may not result in patents being issued. Moreover, disputes between our licensing or joint development partners and us may arise over license scope, or ownership, assignment, inventorship and/or rights to use or commercialize patent or other proprietary rights, which may adversely impact our ability to obtain and protect our proprietary technology and products. Also, patent rights may not provide us with adequate proprietary protection or competitive advantages against competitors with similar technologies or products.

Patent protection for our anti-CD19 T-cell therapy product candidate may not be available and may be subject to infringement claims in China and other countries.

Although we have entered into a worldwide licensing and commercialization rights agreement with Juventas Cell Therapy Ltd., a China-based domestic company, for an autologous anti-CD19 T-cell therapy product candidate, Juventas retains ownership of, and all other rights to, the intellectual property rights associated with this product candidate. As a result, we are dependent on Juventas  to ensure that its proprietary rights are covered by valid and enforceable patents or are effectively maintained as trade secrets.  Juventas has not filed patent applications covering this product candidate in China or in other countries.  Accordingly, even if we are successful in commercializing an anti-CD19 T-cell therapy in China, Juventas may be unable to obtain intellectual property rights in China or in other countries, including the United States.  As a result, we may be unable to prevent other companies from competing with us or alleging infringement by competitors. The lack of patent protection may limit our ability to sell our product and may severely and adversely affect our financial results, business and business prospects.

Third parties may initiate legal proceedings alleging that we are infringing their intellectual property rights, the outcome of which would be uncertain and could harm our business.

In addition, third parties may assert patent or other intellectual property infringement claims against us, Juventas, or our other licensors arising  from the manufacture, use and sale of our current or future product candidates in China or in any other jurisdictions we ultimately commercialize in.  The validity of our current or future patents or patent applications or those of our licensors may be challenged in litigation, interference or derivation proceedings, opposition, post grant review, inter partes review, or other similar enforcement and revocation proceedings, provoked by third parties or brought by us. Our patents could be found invalid, unenforceable, or their scope significantly reduced.

An unfavorable outcome could require us to cease using the related technology or to attempt to license rights to it from the prevailing party. Our business could be harmed if the prevailing party does not offer us a license on commercially reasonable terms. Our defense of litigation or interference proceedings may fail and, even if successful, may result in substantial costs and distract our management and other employees. In the event of a successful claim of infringement against us, we may have to pay substantial damages, including treble damages and attorneys’ fees for willful infringement, pay royalties, redesign our infringing products or obtain one or more licenses from third parties, which may be impossible or require substantial time and monetary expenditure.

We have agreed not to develop or seek to commercialize any T-cell therapy product specifically binding to CD19.

Under the terms of our license agreement with Juventas Cell Therapy Ltd., unless otherwise agreed to by Juventas or specifically permitted under the license, we have agreed not to develop or seek to commercialize any other T-cell therapy product specifically binding to CD19 during the term of the license agreement and for three years thereafter.  We also have agreed not to market or sell any such products during this period of time.  As a result, we may not be able to develop or collaborate on other similar T-cell therapy products that could lead to a  viable commercial product and could cause us to miss valuable future opportunities thus potentially severely and adversely affect our financial results, business and business prospects.

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

None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

Not applicable.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION

Not applicable.

ITEM 6. EXHIBITS

+            Certain portions of this exhibit have been omitted based upon a request for confidential treatment under 17 C.F.R. §§200.80(b)(4) and 230.406. The confidential portions of this exhibit have been omitted and are marked accordingly. The confidential portions have been filed separately with the SEC pursuant to our confidential treatment request.

**          Filed Herewith

EXHIBIT INDEX   

+            Certain portions of this exhibit have been omitted based upon a request for confidential treatment under 17 C.F.R. §§200.80(b)(4) and 230.406. The confidential portions of this exhibit have been omitted and are marked accordingly. The confidential portions have been filed separately with the SEC pursuant to our confidential treatment request.

**          Filed Herewith

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.