NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
March 31, 2017 (unaudited)
The accompanying condensed consolidated
financial statements include the accounts of CASI Pharmaceuticals, Inc. and its subsidiaries (“CASI” or “the
Company”), Miikana Therapeutics, Inc. (“Miikana”) and CASI Pharmaceuticals (Beijing) Co., Ltd. (“CASI China”).
The Company previously operated under a different name prior to restructuring its business in 2012 in connection with an investment led
by one of the Company’s largest stockholders. CASI China is a non-stock Chinese entity with 100% of its interest owned by
CASI. CASI China received approval for a business license from the Beijing Industry and Commercial Administration in August 2012
and has operating facilities in Beijing. All inter-company balances and transactions have been eliminated in consolidation.
The accompanying unaudited condensed
consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles for interim
financial information and in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, such
condensed consolidated financial statements do not include all of the information and disclosures required by U.S. generally accepted
accounting principles for complete consolidated financial statements. In the opinion of management, all adjustments (consisting
of normal recurring adjustments) considered necessary for a fair presentation have been included. The accompanying December 31,
2016 financial information was derived from the Company’s audited financial statements in the Annual Report on Form 10-K
for the year ended December 31, 2016. Operating results for the three month period ended March 31, 2017 are not necessarily indicative
of the results that may be expected for the year ending December 31, 2017. For further information, refer to the Company’s
audited consolidated financial statements and footnotes thereto included in its Form 10-K for the year ended December 31, 2016.
Liquidity Risks
and Management’s Plans
Since
inception, the Company has incurred significant losses from operations and
has incurred an accumulated
deficit of $443.6 million.
The Company restructured its business in 2012 in connection with an investment led
by one of the Company’s largest stockholders
,
followed by implementation of a name change
to reflect its core mission and business strategy.
The Company expects to continue to incur
operating losses for the foreseeable future due to, among other factors, its continuing clinical activities. In 2016, the Company
received $28.1 million from strategic financings (“2016 Strategic Financings”). Net proceeds of the Strategic Financings
are being used to further fund the Company’s operations, accelerate its clinical and regulatory activities, expand its product
pipeline, and support its marketing and commercial planning activities. As a result of the 2016 Strategic Financings, the Company
believes that it has sufficient resources to fund its operations for at least the twelve months subsequent to May 15, 2017. As
of March 31, 2017, approximately $5.0 million of the Company’s cash balance was held by CASI China. The Company intends to
continue to exercise tight controls over operating expenditures and will continue to pursue opportunities, as required, to raise
additional capital and will also actively pursue non- or less-dilutive capital raising arrangements in China to support the Company’s
dual-country approach to drug development.
The Company has certain
product rights and perpetual exclusive licenses from Spectrum Pharmaceuticals, Inc. and certain of its affiliates (together referred
to as “Spectrum”) to develop and commercialize the following commercial oncology drugs and drug candidates in the greater
China region (which includes China, Taiwan, Hong Kong and Macau) (the “Territories”):
|
·
|
MARQIBO
®
(vinCRIStine sulfate LIPOSOME injection) (“Marqibo”);
|
|
·
|
ZEVALIN
®
(ibritumomab tiuxetan) (“Zevalin”); and
|
|
·
|
EVOMELA
®
(melphalan) for Injection (“Evomela”).
|
CASI
is responsible for developing and commercializing these three drugs in the Territories, including the submission of import drug
registration applications and conducting confirmatory clinical trials as needed.
The Company is in various
stages of the regulatory and development process to obtain marketing approval for MARQIBO
®
, ZEVALIN
®
and EVOMELA
®
in its territorial region, with ZEVALIN
®
commercially available in Hong Kong. In January
2016, the China Food and Drug Administration (CFDA) accepted for review the Company’s import drug registration application
for MARQIBO
®
and currently is in the quality testing phase of the regulatory process. On March 10, 2016, Spectrum
received notification from the U.S. Food and Drug Administration (FDA) of the grant of approval of its New Drug Application (NDA)
for EVOMELA
®
primarily for use as a high-dose conditioning treatment prior to hematopoietic progenitor (stem)
cell transplantation in patients with multiple myeloma. In December 2016, the CFDA accepted for review the Company’s import
drug registration application for EVOMELA
®
which currently is in the quality testing phase of the regulatory process.
As part of the license
arrangements with Spectrum (see Note 2), the Company issued to Spectrum a $1.5 million 0.5% secured promissory note originally
due March 17, 2016 which was subsequently amended and extended to March 17, 2018. All other terms remain the same. The promissory
note was recorded initially at its fair value, giving rise to a discount of approximately $136,000; the promissory note is presented
as note payable, net of discount in the accompanying condensed consolidated balance sheets. For the three months ended March 31,
2017 and 2016, the Company recognized $1,869 and $7,005 of non-cash interest expense, respectively, related to the amortization
of the debt discount, using the effective interest rate method.
|
4.
|
Fair Value Measurements
|
Fair value is the price
that would be received from the sale of an asset or paid to transfer a liability assuming an orderly transaction in the most advantageous
market at the measurement date. U.S. GAAP establishes a hierarchical disclosure framework which prioritizes and ranks the level
of observability of inputs used in measuring fair value. These tiers include:
|
·
|
Level 1, defined as observable inputs such as quoted prices in active markets for identical assets;
|
|
·
|
Level 2, defined as observable inputs other than Level 1 prices such as quoted prices for similar
assets; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable
market data for substantially the full term of the assets or liabilities; and
|
|
·
|
Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring
an entity to develop its own assumptions.
|
An asset’s or
liability’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair
value measurement. At each reporting period, the Company performs a detailed analysis of its assets and liabilities that are measured
at fair value. All assets and liabilities for which the fair value measurement is based on significant unobservable inputs or instruments
which trade infrequently and therefore have little or no price transparency are classified as Level 3.
The inputs used in
measuring the fair value of cash and cash equivalents are considered to be Level 1 in accordance with the three-tier fair value
hierarchy. The fair values are based on period-end statements supplied by the various banks and brokers that held the majority
of the Company’s funds. The fair value of short-term financial instruments (primarily accounts receivable, prepaid expenses,
accounts payable, accrued expenses, and other current assets and liabilities) approximates their carrying values because of their
short-term nature.
Financial Assets
and Liabilities Measured at Fair Value on a Recurring Basis:
As partial consideration
for the acquisition from Spectrum, the Company issued certain contingent rights (“Contingent Rights”) to purchase additional
shares of its common stock, which Contingent Rights expire upon the occurrence of certain events. The Contingent Rights issued
to Spectrum in connection with the license arrangements (see Note 2) are considered derivative liabilities and were recorded initially
at their estimated fair value, and are marked to market each reporting period until settlement. The fair value of the Contingent
Rights was measured using Level 3 unobservable inputs; the unobservable inputs include estimates of the Company’s future
capital requirements, and the timing, probability, size and characteristics of those capital raises, among other inputs. Generally,
if the estimates of the size and probability of the Company’s future capital requirements increase, the fair value of the
Contingent Rights will also increase.
The following table
presents the Company’s financial liabilities accounted for at fair value on a recurring basis as of March 31, 2017 and December
31, 2016 by level within the fair value hierarchy:
|
|
As of March 31, 2017
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities - Contingent Rights
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
4,129,140
|
|
|
$
|
4,129,140
|
|
|
|
As of December 31, 2016
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities - Contingent Rights
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
4,122,266
|
|
|
$
|
4,122,266
|
|
The following table
presents the changes in the Company’s financial liabilities accounted for at fair value on a recurring basis using Level
3 unobservable inputs:
December 31, 2016
|
|
$
|
4,122,266
|
|
Change in fair value of Contingent Rights
|
|
|
6,874
|
|
Balance at March 31, 2017
|
|
$
|
4,129,140
|
|
Financial Assets
and Liabilities Measured at Fair Value on a Non-Recurring Basis:
The promissory note
issued to Spectrum in connection with the license arrangements (see Notes 2 and 3) was initially recorded at its fair value using
Level 3 unobservable inputs including primarily the Company’s estimated incremental borrowing rate as provided by a commercial
lending institution.
Non-Financial Assets
and Liabilities Measured at Fair Value on a Recurring Basis:
The Company does not
have any non-financial assets and liabilities that are measured at fair value on a recurring basis.
Non-Financial Assets
and Liabilities Measured at Fair Value on a Non-Recurring Basis:
The Company measures
its long-lived assets, including property and equipment, at fair value on a non-recurring basis. These assets are recognized at
fair value when they are deemed to be impaired. No such fair value impairment was recognized for the three months ended March 31,
2017 and 2016.
|
5.
|
Share-Based Compensation
|
The Company has adopted
incentive and nonqualified stock option plans for executive, scientific and administrative personnel of the Company as well as
outside directors and consultants.
As of March 31, 2017, there are 9,443,455 shares issuable under options
previously granted and currently outstanding, with exercise prices ranging from $0.86 to $17.38. In 2017, the Company awarded options
to employees, covering up to 15,000 shares, in which vesting is subject to achievement of certain performance milestones. Options
granted under the plans generally vest over periods varying from immediately to one to three years, are not transferable and generally
expire ten years from the date of grant. As of March 31, 2017, 2,174,358 shares remained available for grant under the Company’s
2011 Long-Term Incentive Plan.
The Company records
compensation expense associated with stock options and other equity-based compensation in accordance with provisions of authoritative
guidance. Compensation costs are recognized over the requisite service period, which is generally the option vesting term of up
to three years.
Awards with
performance conditions
will be expensed
if it is probable that the
performance condition
will be achieved. For the three months ended
March 31, 2016, $3,870 was expensed for share awards with performance conditions that became probable during that period. There
was no expense recorded for share awards with performance conditions during the three months ended March 31, 2017.
The Company’s
net loss for the three months ended March 31, 2017 and 2016 includes non-cash compensation expense of $156,250 and $372,103, respectively,
related to the Company’s share-based compensation awards. The compensation expense related to the Company’s share-based
compensation arrangements is recorded as components of general and administrative expense and research and development expense,
as follows:
|
|
THREE MONTH PERIOD
ENDED MARCH 31,
|
|
|
|
2017
|
|
|
2016
|
|
Research and development
|
|
$
|
67,198
|
|
|
$
|
174,925
|
|
General and administrative
|
|
|
89,052
|
|
|
|
197,178
|
|
Share-based compensation expense
|
|
$
|
156,250
|
|
|
$
|
372,103
|
|
Net share-based compensation expense, per common share:
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
$
|
0.003
|
|
|
$
|
0.01
|
|
The Company uses the
Black-Scholes-Merton valuation model to estimate the fair value of stock options granted to employees. Option valuation models,
including Black-Scholes-Merton, require the input of highly subjective assumptions, and changes in the assumptions used can materially
affect the grant date fair value of an award.
Following are the weighted-average
assumptions used in valuing the stock options granted during the three-month periods ended March 31, 2017 and 2016:
|
|
THREE MONTH PERIOD
ENDED MARCH 31,
|
|
|
|
2017
|
|
|
2016
|
|
Expected volatility
|
|
|
81.07
|
%
|
|
|
84.13
|
%
|
Risk-free interest rate
|
|
|
2.03
|
%
|
|
|
1.39
|
%
|
Expected term of option
|
|
|
5.81 years
|
|
|
|
5.84 years
|
|
Forfeiture rate
|
|
|
-
|
|
|
|
3.00
|
%*
|
Expected dividend yield
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
* - In 2016,
authoritative guidance required forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods
if actual forfeitures differ from those estimates. During the three-month period ended March 31, 2016, forfeitures were estimated
at 3%.
The weighted average
fair value of stock options granted during the three-month periods ended March 31, 2017 and 2016 were $1.04 and $0.61, respectively.
A summary of the Company’s
stock option plans and of changes in options outstanding under the plans for the three months ended March 31, 2017 is as follows:
|
|
Number of
Options
|
|
|
Weighted
Average
Exercise
Price
|
|
Outstanding at January 1, 2017
|
|
|
9,535,306
|
|
|
$
|
1.57
|
|
Granted
|
|
|
139,500
|
|
|
$
|
1.50
|
|
Exercised
|
|
|
-
|
|
|
$
|
-
|
|
Expired
|
|
|
(231,351
|
)
|
|
$
|
1.49
|
|
Forfeited
|
|
|
-
|
|
|
$
|
-
|
|
Outstanding at March 31, 2017
|
|
|
9,443,455
|
|
|
$
|
1.58
|
|
Vested and expected to vest at March 31, 2017
|
|
|
8,783,424
|
|
|
$
|
1.61
|
|
Exercisable at March 31, 2017
|
|
|
7,844,742
|
|
|
$
|
1.65
|
|
There were no option
exercises during the three months ended March 31, 2017 or 2016.
At December 31, 2016,
the Company had a $3.1 million unrecognized tax benefit. The Company recorded a full valuation allowance on the net deferred tax
asset recognized in the consolidated financial statements as of December 31, 2016.
During the three months
ended March 31, 2017, there were no material changes to the measurement of unrecognized tax benefits in various taxing jurisdictions.
The Company recognizes interest and penalties related to uncertain tax positions as a component of income tax expense.
The tax returns for
all years in the Company’s major tax jurisdictions are not settled as March 31, 2017. Due to the existence of tax attribute
carryforwards (which are currently offset by a full valuation allowance), the Company treats all years’ tax positions as
unsettled due to the taxing authorities’ ability to modify these attributes.
|
7.
|
Related Party Transactions
|
The Company utilizes
the services of Crown Biosciences, Inc. (“Crown Bio”) to perform certain research and development testing. The CEO
of Crown Bio is also a board member of CASI. Approximately $20,900 was payable to Crown Bio as of March 31, 2017. The research
and development expense recognized for the services provided for the three months ended March 31, 2016 was $8,360. There were no
research and development services provided by Crown Bio for the three months ended March 31, 2017.
|
8.
|
New Accounting Pronouncements
|
The Company has implemented
all new accounting pronouncements that are in effect and that may impact the Company’s condensed consolidated financial statements.
In May 2014, the Financial
Accounting Standards Board (“FASB”) issued Accounting Standards Update (“
ASU”)
2014-09,
Revenue from Contracts with Customers,
which provides guidance for revenue recognition for contracts,
superseding the previous revenue recognition requirements, along with most existing industry-specific guidance. The guidance requires
an entity to review contracts in five steps: 1) identify the contract, 2) identify performance obligations, 3) determine the transaction
price, 4) allocate the transaction price, and 5) recognize revenue. The new standard will result in enhanced disclosures regarding
the nature, amount, timing and uncertainty of revenue arising from contracts with customers.
In July
2015, the FASB delayed the effective date of this standard by one year. The new standard will be effective for the Company’s
reporting year beginning on January 1, 2018, and early adoption of the standard as of
January 1, 2017 is permitted. In March
2016, the FASB issued an accounting standard update to clarify the implementation guidance on principal versus agent considerations.
In April 2016, the FASB issued an accounting standard update to clarify the identification of performance obligations and the licensing
implementation guidance, while retaining the related principles for those areas. In May 2016, the FASB issued an accounting
standard update to clarify guidance in certain areas and add some practical expedients to the guidance. The amendments in
these 2016 updates do not change the core principle of the previously issued guidance in May 2014. The Company does not expect
that the adoption of ASU 2014-09 will have a material impact on its consolidated financial statements.
In November 2015,
the FASB issued ASU No. 2015-17,
Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes
.
To
simplify presentation, the new guidance requires that all deferred tax assets and liabilities, along with any related valuation
allowance, be classified as noncurrent on the balance sheet
.
The
accounting standard is effective for public business entities for annual reporting periods (including interim reporting periods
within those periods) beginning after December 15, 2016. Early adoption is permitted. The adoption of this pronouncement did not
have a material impact on the Company’s consolidated financial statements.
In January 2016, the
FASB issued ASU No. 2016-01,
Financial Instruments–Overall: Recognition and Measurement of Financial Assets and Financial
Liabilities
.
The accounting standard primarily affects the accounting for equity investments, financial
liabilities under the fair value option, and the presentation and disclosure requirements for financial instruments. In addition,
it includes a clarification related to the valuation allowance assessment when recognizing deferred tax assets resulting from unrealized
losses on available-for-sale debt securities. The accounting guidance is effective for annual reporting periods (including interim
periods within those periods) beginning after December 15, 2017. Early adoption is permitted for the provision to record fair value
changes for financial liabilities under the fair value option resulting from instrument-specific credit risk in other comprehensive
income. The Company is currently evaluating the impact, if any, that the pronouncement will have on the consolidated financial
statements.
In
February 2016, the FASB issued ASU No. 2016-02,
Leases (Topic 842)
. ASU 2016-02 supersedes existing lease guidance,
including Accounting Standards Codification (ASC) 840 -
Leases
. Among other things, the new standard requires recognition
of a right-of-use asset and liability for future lease payments for contracts that meet the definition of a lease.
This
ASU is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years.
Earlier application is permitted.
The standard must be applied using a modified retrospective approach.
The Company is currently evaluating the effect that the adoption of this ASU will have on its consolidated financial statements.
In March 2016, the
FASB issued ASU No. 2016-09,
Compensation-Stock Compensation.
ASU 2016-09
simplifies several
aspects of the accounting for employee share-based payment transactions, including the accounting for income taxes, forfeitures,
and statutory tax withholding requirements, as well as classification in the statement of cash flows. The standard is effective
for annual reporting periods beginning after December 15, 2016, including interim periods within those annual reporting periods.
The adoption of ASU 2016-09 did not have a material impact on the Company’s consolidated financial statements.
In August 2016, the
FASB issued Accounting Standards Update No. 2016-15,
Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts
and Cash Payments
(ASU 2016-15). ASU 2016-15 clarifies how companies present and classify certain cash receipts and
cash payments in the statement of cash flows where diversity in practice exists. ASU 2016-15 is effective for fiscal
years beginning after December 15, 2017, including interim periods within those fiscal years and earlier adoption is permitted.
The Company does not expect that the adoption of ASU 2016-15 will have a material impact on its consolidated financial statements.
In January 2017, the
FASB issued ASU 2017-01
, Clarifying the Definition of a Business
, with the objective of adding guidance to assist entities
with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The amendments
in this update provide new guidance to determine when an integrated set of assets and activities (collectively referred to as a
“set”) is not a business. The new guidance requires that when substantially all of the fair value of the gross assets
acquired (or disposed of) is concentrated in a single identifiable asset or a group of similar identifiable assets, the set is
not a business. The new guidance reduces the number of transactions that need to be further evaluated. The new standard, as amended,
will be effective for the Company prospectively for interim and annual reporting periods beginning on January 1, 2018, with early
application permitted. The Company believes that the evaluation of whether transactions should be accounted for as acquisitions
(or dispositions) of assets or businesses will be simplified under the new standard.