NOTES TO CONDENSED FINANCIAL STATEMENTS
THREE MONTHS ENDED DECEMBER 31, 2016 AND 2015
(UNAUDITED)
A.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The
accompanying condensed financial statements of CEL-SCI Corporation
(the Company) are unaudited and certain information and footnote
disclosures normally included in the annual financial statements
prepared in accordance with accounting principles generally
accepted in the United States of America have been omitted pursuant
to the rules and regulations of the Securities and Exchange
Commission. While management of the Company believes that the
disclosures presented are adequate to make the information
presented not misleading, these interim condensed financial
statements should be read in conjunction with the financial
statements and notes included in the Company’s annual report
on Form 10-K for the year ended September 30, 2016.
In the
opinion of management, the accompanying unaudited condensed
financial statements contain all accruals and adjustments (each of
which is of a normal recurring nature) necessary for a fair
presentation of the Company’s financial position as of
December 31, 2016 and the results of its operations for the three
months then ended. The condensed balance sheet as of September 30,
2016 is derived from the September 30, 2016 audited financial
statements. Significant accounting policies have been consistently
applied in the interim financial statements and the annual
financial statements. The results of operations for the three
months ended December 31, 2016 and 2015 are not necessarily
indicative of the results to be expected for the entire
year.
The
financial statements have been prepared assuming that the Company
will continue as a going concern, but due to recurring losses from
operations and future liquidity needs, there is substantial doubt
about the Company’s ability to continue as a going concern.
The financial statements do not include any adjustments that might
result from the outcome of this uncertainty. Refer to discussion in
Note B.
Summary of Significant Accounting Policies:
Research and Office Equipment and Leasehold
Improvements
- Research and office equipment is recorded at
cost and depreciated using the straight-line method over estimated
useful lives of five to seven years. Leasehold improvements are
depreciated over the shorter of the estimated useful life of the
asset or the term of the lease. Repairs and maintenance which do
not extend the life of the asset are expensed when incurred. The
fixed assets are reviewed on a quarterly basis to determine if any
of the assets are impaired.
Patents
- Patent expenditures are
capitalized and amortized using the straight-line method over the
shorter of the expected useful life or the legal life of the patent
(17 years). In the event changes in technology or other
circumstances impair the value or life of the patent, appropriate
adjustment in the asset value and period of amortization is made.
An impairment loss is recognized when estimated future undiscounted
cash flows expected to result from the use of the asset, and from
its disposition, is less than the carrying value of the asset. The
amount of the impairment loss would be the difference between the
estimated fair value of the asset and its carrying
value.
Research and Development Costs
-
Research and development costs are expensed as
incurred.
Income Taxes
- The Company uses the
asset and liability method of accounting for income taxes. Under
the asset and liability method, deferred tax assets and liabilities
are recognized for future tax consequences attributable to
differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases and
operating and tax loss carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply
to taxable income in the years in which those temporary differences
are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date. The Company
records a valuation allowance to reduce the deferred tax assets to
the amount that is more likely than not to be recognized.
A full valuation
allowance was recorded against the deferred tax assets as of
December 31, 2016 and September 30, 2016.
Derivative Instruments
– The Company has entered into
financing arrangements that consist of freestanding derivative
instruments that contain embedded derivative features. The Company
accounts for these arrangements in accordance with
Accounting Standards Codification (
ASC) 815, “Accounting for Derivative
Instruments and Hedging Activities.”
In accordance
with accounting principles generally accepted in the United States
(U.S. GAAP), derivative instruments and hybrid instruments are
recognized as either assets or liabilities in the balance sheet and
are measured at fair value with gains or losses recognized in
earnings or other comprehensive income depending on the nature of
the derivative or hybrid instruments. The Company determines the
fair value of derivative instruments and hybrid instruments based
on available market data using appropriate valuation models, giving
consideration to all of the rights and obligations of each
instrument. The derivative liabilities are remeasured at fair value
at the end of each interim period as long as they are
outstanding.
Deferred Rent (Asset)
–
Consideration paid,
including deposits, related to operating leases is recorded as a
deferred rent asset and amortized as rent expense over the lease
term. Interest on the deferred rent is calculated at 3% on the
funds deposited on the manufacturing facility and is included in
deferred rent. This interest income will be used to offset future
rent.
Stock-Based Compensation
–
Compensation cost for all stock-based awards is measured at fair
value as of the grant date in accordance with the provisions of ASC
718 “Compensation – Stock Compensation.” The fair
value of stock options is calculated using the Black-Scholes option
pricing model. The Black-Scholes model requires various judgmental
assumptions including volatility and expected option life. The
stock-based compensation cost is recognized on the straight line
allocation method as expense over the requisite service or vesting
period.
Equity
instruments issued to non-employees are accounted for in accordance
with ASC 505-50, “Equity-Based Payments to Non
Employees.” Accordingly, compensation is recognized when
goods or services are received and is measured using the
Black-Scholes valuation model. The Black-Scholes model requires
various judgmental assumptions regarding the fair value of the
equity instruments at the measurement date and the expected life of
the options.
The
Company has Incentive Stock Option Plans, Non-Qualified Stock
Option Plans, a Stock Compensation Plan, Stock Bonus Plans and an
Incentive Stock Bonus Plan. In some cases, these Plans are
collectively referred to as the "Plans". All Plans have been
approved by the stockholders.
The
Company’s stock options are not transferable, and the actual
value of the stock options that an employee may realize, if any,
will depend on the excess of the market price on the date of
exercise over the exercise price. The Company has based its
assumption for stock price volatility on the variance of daily
closing prices of the Company’s stock. The risk-free interest
rate assumption was based on the U.S. Treasury rate at date of the
grant with term equal to the expected life of the option.
Historical data was used to estimate option exercise and employee
termination within the valuation model. The expected term of
options represents the period of time that options granted are
expected to be outstanding and has been determined based on an
analysis of historical exercise behavior. If any of the assumptions
used in the Black-Scholes model change significantly, stock-based
compensation expense for new awards may differ materially in the
future from that recorded in the current period.
Vesting
of restricted stock granted under the Incentive Stock Bonus Plan is
subject to service, performance and market conditions and meets the
classification of equity awards. These awards were measured at
market value on the grant-dates for issuances where the attainment
of performance criteria is likely and at fair value on the
grant-dates, using a Monte Carlo simulation for issuances where the
attainment of performance criteria is uncertain. The total
compensation cost will be expensed over the estimated requisite
service period.
New Accounting Pronouncements
In
February 2016, the FASB issued ASU 2016-02, Leases, which will
require most leases (with the exception of leases with terms of
less than one year) to be recognized on the balance sheet as an
asset and a lease liability. Leases will be classified as an
operating lease or a financing lease. Operating leases are expensed
using the straight-line method whereas financing leases will be
treated similarly to a capital lease under the current standard.
The new standard will be effective for annual and interim periods,
within those fiscal years, beginning after December 15, 2018, but
early adoption is permitted. The new standard must be presented
using the modified retrospective method beginning with the earliest
comparative period presented. The Company is currently evaluating
the effect of the new standard on its financial statements and
related disclosures.
B.
OPERATIONS AND FINANCING
The
Company has incurred significant costs since its inception in
connection with the acquisition of certain patented and unpatented
proprietary technology and know-how relating to the human
immunological defense system, patent applications, research and
development, administrative costs, construction of laboratory
facilities, and clinical trials. The Company has funded such
costs with proceeds from loans and the public and private sale of
its common stock. The Company will be required to raise
additional capital or find additional long-term financing in order
to continue with its research efforts. Currently, the partial
clinical hold has had a significant impact on the Company’s
market capital, and as such, may impact the Company’s ability
to attract new capital. To date, the Company has not generated any
revenue from product sales. The ability of the Company to
complete the necessary clinical trials and obtain US Food &
Drug Administration (FDA) approval for the sale of products to be
developed on a commercial basis is uncertain. Ultimately, the
Company must complete the development of its products, obtain the
appropriate regulatory approvals and obtain sufficient revenues to
support its cost structure.
The
Company is currently running a large multi-national Phase 3
clinical trial for head and neck cancer with its partners TEVA
Pharmaceuticals and Orient Europharma. During the three months
ended December 31, 2016, the Company raised approximately $3.7
million net proceeds from a public offering. To finance the study
beyond the next twelve months, the Company plans to raise
additional capital in the form of corporate partnerships, debt
and/or equity financings. The Company believes that it will be able
to obtain additional financing because it has done so consistently
in the past and because Multikine is a product in the Phase 3
clinical trial stage. However, there can be no assurance that the
Company will be successful in raising additional funds on a timely
basis or that the funds will be available to the Company on
acceptable terms or at all. If the Company does not raise the
necessary amounts of money, it will either have to slow or delay
the Phase 3 clinical trial or even significantly curtail its
operations until such time as it is able to raise the required
funding. The Phase 3 study is currently on partial clinical hold by
the FDA. The financial statements have been prepared assuming that
the Company will continue as a going concern, but due to recurring
losses from operations and future liquidity needs, there is
substantial doubt about the Company’s ability to continue as
a going concern. The financial statements do not include any
adjustments that might result from the outcome of this
uncertainty.
Since
the Company launched its Phase 3 clinical trial for Multikine, the
Company has spent approximately $36.0 million as of December 31,
2016 on direct costs for the Phase 3 clinical trial. The
total remaining cash cost of the clinical trial is estimated to be
approximately $13.5 million. It should be noted that this
estimate is based only on the information currently available in
the Company’s contracts with the Clinical Research
Organizations responsible for managing the Phase 3 clinical trial
and does not include other related costs, e.g. the manufacturing of
the drug. This number can be affected by the speed of
enrollment, foreign currency exchange rates and many other factors,
some of which cannot be foreseen. The Company has filed an
amendment to the original Phase 3 protocol for it head and neck
cancer study with the FDA to allow for this expansion in patient
enrollment. Should the FDA allow the amended protocol filed with
them to proceed, the remaining cost of the Phase 3 clinical trial
will be higher. It is therefore possible that the cost of the Phase
3 clinical trial will be higher than currently
estimated.
As of
December 31, 2016, the Phase 3 clinical trial for Multikine was on
a partial clinical hold.
If the
partial clinical hold is not lifted, the Phase 3 study will not be
able to be completed to its prespecified endpoints in a timely
manner, if at all, and, if the Phase 3 study cannot be completed to
its prespecified endpoints, the study would not be able to be used
as the pivotal study supporting a marketing application in the
United States, and at least one entirely new Phase 3 pivotal study
would need to be conducted to provide the pivotal study supporting
a marketing application in the United States. Even if the partial
clinical hold is lifted, if it is not lifted in a timely fashion,
the nature and duration of the partial clinical hold could
irreparably harm the data from the Phase 3 study such that it may
no longer be able to be used as the pivotal study supporting a
marketing application in the United States. Even if the partial
clinical hold is lifted in a timely fashion, it remains possible
that the regulatory authorities could determine that the Phase 3
study is not sufficient to be used as a single pivotal study
supporting a marketing application in the United
States.
Stock
options, stock bonuses and compensation granted by the Company as
of December 31, 2016 are as follows:
|
Name of
Plan
|
Total Shares Reserved Under Plans
|
Shares Reserved for Outstanding
Options
|
Shares Issued
|
Remaining Options/Shares Under
Plans
|
|
|
|
|
|
|
|
Incentive Stock
Options Plans
|
3,460,000
|
1,648,966
|
N/A
|
1,511,334
|
|
Non-Qualified Stock
Option Plans
|
9,680,000
|
6,563,284
|
N/A
|
2,389,098
|
|
Stock Bonus
Plans
|
5,594,000
|
N/A
|
4,003,926
|
1,589,247
|
|
Stock Compensation
Plan
|
3,350,000
|
N/A
|
2,087,257
|
1,229,692
|
|
Incentive Stock
Bonus Plan
|
16,000,000
|
N/A
|
15,600,000
|
400,000
|
Stock
options, stock bonuses and compensation granted by the Company as
of September 30, 2016 are as follows:
|
Name of
Plan
|
Total Shares Reserved Under Plans
|
Shares Reserved for Outstanding
Options
|
Shares Issued
|
Remaining Options/Shares Under
Plans
|
|
|
|
|
|
|
|
Incentive Stock
Option Plans
|
3,460,000
|
1,648,966
|
N/A
|
1,511,334
|
|
Non-Qualified Stock
Option Plans
|
9,680,000
|
6,940,321
|
N/A
|
2,059,261
|
|
Bonus
Plans
|
5,594,000
|
N/A
|
3,161,211
|
2,431,962
|
|
Stock Compensation
Plan
|
3,350,000
|
N/A
|
1,985,037
|
1,331,912
|
|
Incentive Stock
Bonus Plan
|
16,000,000
|
N/A
|
15,600,000
|
400,000
|
Stock option
activity
:
|
|
Three Months Ended December 31,
|
|
|
2016
|
2015
|
|
Granted
|
-
|
-
|
|
Expired
|
377,037
|
-
|
|
Forfeited
|
-
|
22,966
|
Stock-Based Compensation Expense
|
|
Three months Ended December 31,
|
|
|
2016
|
2015
|
|
Employees
|
$
312,375
|
$
427,910
|
|
Non-employees
|
$
78,553
|
$
329,195
|
Employee
compensation expense includes the expense related to options issued
or vested and restricted stock. Non-employee expense includes the
expense related to options and stock issued to consultants expensed
over the period of their service contracts.
Warrants and Non-employee Options
The
following chart presents the outstanding warrants and non-employee
options, listed by expiration date at December 31,
2016:
|
Warrant
|
Issue
Date
|
Shares Issuable upon Exercise of
Warrant
|
Exercise Price
|
Expiration
Date
|
Reference
|
|
|
|
|
|
|
|
|
Series
P
|
2/10/12
|
590,001
|
$
4.50
|
3/6/17
|
|
|
Series
DD
|
12/8/16
|
34,024,000
|
$
0.18
|
6/8/17
|
1
|
|
Series
EE
|
12/8/16
|
34,024,000
|
$
0.18
|
9/8/17
|
1
|
|
Series
N
|
8/18/08
|
2,844,627
|
$
0.53
|
8/18/17
|
|
|
Series
U
|
4/17/14
|
445,514
|
$
1.75
|
10/17/17
|
1
|
|
Series
S
|
10/11/13
-10/24/14
|
25,928,010
|
$
1.25
|
10/11/18
|
1
|
|
Series
V
|
5/28/15
|
20,253,164
|
$
0.79
|
5/28/20
|
1
|
|
Series
W
|
10/28/15
|
17,223,248
|
$
0.67
|
10/28/20
|
1
|
|
Series
X
|
1/13/16
|
3,000,000
|
$
0.37
|
1/13/21
|
|
|
Series
Y
|
2/15/16
|
650,000
|
$
0.48
|
2/15/21
|
|
|
Series
Z
|
5/23/16
|
6,600,000
|
$
0.55
|
11/23/21
|
1
|
|
Series
ZZ
|
5/23/16
|
500,000
|
$
0.55
|
5/18/21
|
1
|
|
Series
BB
|
8/26/16
|
400,000
|
$
0.55
|
8/22/21
|
1
|
|
Series
FF
|
12/8/16
|
1,701,200
|
$
0.16
|
12/1/21
|
1
|
|
Series
CC
|
12/8/16
|
17,012,000
|
$
0.20
|
12/8/21
|
1
|
|
Series
AA
|
8/26/16
|
5,000,000
|
$
0.55
|
2/22/22
|
1
|
|
Consultants
|
3/6/12-
7/1/16
|
575,000
|
$
0.37- $3.50
|
3/5/17-
6/30/19
|
2
|
1.
Derivative Liabilities
The
table below presents the warrant liabilities and their respective
balances at the balance sheet dates:
|
|
December 31, 2016
|
September 30, 2016
|
|
Series S
warrants
|
$
490,040
|
$
3,111,361
|
|
Series U
warrants
|
-
|
-
|
|
Series V
warrants
|
202,532
|
1,620,253
|
|
Series W
warrants
|
132,254
|
1,799,858
|
|
Series Z
warrants
|
101,817
|
970,604
|
|
Series ZZ
warrants
|
6,725
|
70,609
|
|
Series AA
warrants
|
84,092
|
763,661
|
|
Series BB
warrants
|
5,916
|
58,588
|
|
Series CC
warrants
|
455,931
|
-
|
|
Series DD
warrants
|
72,353
|
-
|
|
Series EE
warrants
|
176,804
|
-
|
|
Series FF
warrants
|
54,242
|
-
|
|
|
|
|
|
Total warrant
liabilities
|
$
1,782,706
|
$
8,394,934
|
The
table below presents the gains on the warrant liabilities for the
three months ended December 31:
|
|
2016
|
2015
|
|
Series S
warrants
|
$
2,621,321
|
$
2,826,153
|
|
Series U
warrants
|
-
|
31,186
|
|
Series V
warrants
|
1,417,721
|
3,240,506
|
|
Series W
warrants
|
1,667,604
|
2,025,115
|
|
Series Z
warrants
|
868,787
|
-
|
|
Series ZZ
warrants
|
63,884
|
-
|
|
Series AA
warrants
|
679,569
|
-
|
|
Series BB
warrants
|
52,672
|
-
|
|
Series CC
warrants
|
604,492
|
-
|
|
Series DD
warrants
|
370,919
|
-
|
|
Series EE
warrants
|
514,603
|
-
|
|
Series FF
warrants
|
66,740
|
-
|
|
|
|
|
|
Net gain on warrant
liabilities
|
$
8,928,312
|
$
8,122,960
|
The
Company reviews all outstanding warrants in accordance with the
requirements of ASC 815. This topic provides that an entity should
use a two-step approach to evaluate whether an equity-linked
financial instrument (or embedded feature) is indexed to its own
stock, including evaluating the instrument’s contingent
exercise and settlement provisions. The warrant agreements provide
for adjustments to the exercise price for certain dilutive events.
Under the provisions of ASC 815, the warrants are not considered
indexed to the Company’s stock because future equity
offerings or sales of the Company’s stock are not an input to
the fair value of a “fixed-for-fixed” option on equity
shares, and equity classification is therefore
precluded.
In
accordance with ASC 815, derivative liabilities must be measured at
fair value upon issuance and re-valued at the end of each reporting
period through expiration. Any change in fair value between the
respective reporting dates is recognized as a gain or
loss.
Issuance of additional Warrants
On December 8, 2016, the Company sold 34,024,000
shares of common stock and warrants to purchase common stock at a
price of $0.125 in a public offering. The warrants consist of
17,012,000 Series CC warrants to purchase 17,012,000 shares of
common stock, 34,024,000 Series DD warrants to purchase 34,024,000
shares of common stock and 34,024,000 Series EE warrants to
purchase 34,024,000 shares of common stock. The Series CC warrants
are immediately exercisable, expire in five-years from the offering
date and have an exercise price of $0.20 per share. The Series DD
warrants are immediately exercisable, expire in six-months from the
offering date and have an exercise price of $0.18 per share. The
Series EE warrants are immediately exercisable, expire in
nine-months from the offering date and have an exercise price of
$0.18 per share. In addition, the Company issued 1,701,200 Series
FF warrants to purchase 1,701,200 shares of common stock to the
placement agent. The FF warrants are exercisable at any time on or
after June 8, 2017 and expire on December 1, 2021 and have an
exercise price $0.15625. The net proceeds from this
offering was approximately $3.7 million.
The
fair value of the Series CC, DD, EE and FF warrants of
approximately $2.3 million on the date of issuance was recorded as
a warrant liability.
Expiration of Warrants
On
December 6, 2016, 2,625,000 Series R warrants, with an exercise
price of $4.00, expired. The fair value of the Series R warrants
was $0 on the date of expiration.
On
December 22, 2015, 1,200,000 Series Q warrants, with an exercise
price of $5.00, expired. The fair value of the Series Q warrants
was $0 on the date of expiration.
2.
Options and shares issued to Consultants
The
Company typically enters into consulting arrangements in exchange
for common stock or stock options. During the three months ended
December 31, 2016, the Company issued 372,492 shares of common
stock, of which 270,000 were restricted shares. The common stock
was issued with stock prices ranging between $0.09 and $0.29 per
share. During the three months ended December 31, 2015, the Company
issued 442,492 shares of common stock, of which 340,000 were
restricted shares. The common stock was issued with stock prices
ranging between $0.41 and $0.72 per share. Additionally, during the
three months ended December 31, 2015, the Company issued a
consultant 150,000 options to purchase common stock at $0.60 per
share and a fair value of $0.30 per share. The aggregate values of
the issuances of restricted common stock and common stock options
are recorded as prepaid expenses and are charged to general and
administrative expenses over the periods of service.
During
the three months ended December 31, 2016 and 2015, the Company
recorded total expense of approximately $79,000 and $329,000,
respectively, relating to these consulting agreements. At December
31, 2016 and September 30, 2016, approximately $30,000 and $48,000,
respectively, are included in prepaid expenses. As of December 31,
2016, the Company had 575,000 options outstanding, which were
issued to consultants as payment for services. Of these 575,000
outstanding options, 475,000 were vested, all of which were issued
from the Non-Qualified Stock Option plans.
D.
FAIR VALUE MEASUREMENTS
In
accordance with ASC 820-10,
“Fair Value Measurements,”
the Company determines fair value as the price that would be
received to sell an asset or paid to transfer a liability in an
orderly transaction between market participants at the measurement
date. The Company generally applies the income approach to
determine fair value. This method uses valuation techniques to
convert future amounts to a single present amount. The measurement
is based on the value indicated by current market expectations with
respect to those future amounts.
ASC
820-10 establishes a fair value hierarchy that prioritizes the
inputs used to measure fair value. The hierarchy gives the highest
priority to active markets for identical assets and liabilities
(Level 1 measurement) and the lowest priority to unobservable
inputs (Level 3 measurement). The Company classifies fair value
balances based on the observability of those inputs. The three
levels of the fair value hierarchy are as follows:
●
Level 1 –
Observable inputs such as quoted prices in active markets for
identical assets or liabilities
●
Level 2 –
Inputs other than quoted prices that are observable for the asset
or liability, either directly or indirectly. These include quoted
prices for similar assets or liabilities in active markets, quoted
prices for identical or similar assets or liabilities in markets
that are not active and amounts derived from valuation models where
all significant inputs are observable in active
markets
●
Level 3 –
Unobservable inputs that reflect management’s
assumptions
For
disclosure purposes, assets and liabilities are classified in their
entirety in the fair value hierarchy level based on the lowest
level of input that is significant to the overall fair value
measurement. The Company’s assessment of the significance of
a particular input to the fair value measurement requires judgment
and may affect the placement within the fair value hierarchy
levels.
The
table below sets forth the assets and liabilities measured at fair
value on a recurring basis, by input level, in the condensed
balance sheet at December 31, 2016:
|
|
Quoted Prices in Active Markets for Identical Assets
or Liabilities (Level 1)
|
Significant Other Observable Inputs (Level
2)
|
Significant Unobservable Inputs (Level
3)
|
Total
|
|
|
|
|
|
|
|
Derivative
instruments
|
$
490,040
|
$
-
|
$
1,292,666
|
$
1,782,706
|
The
table below sets forth the assets and liabilities measured at fair
value on a recurring basis, by input level, in the condensed
balance sheet at September 30, 2016:
|
|
Quoted Prices in Active Markets for Identical Assets
or Liabilities (Level 1)
|
Significant Other Observable Inputs (Level
2)
|
Significant Unobservable Inputs (Level
3)
|
Total
|
|
|
|
|
|
|
|
Derivative
instruments
|
$
3,111,361
|
$
-
|
$
5,283,573
|
$
8,394,934
|
The
following sets forth the reconciliation of beginning and ending
balances related to fair value measurements using significant
unobservable inputs (Level 3) for the three months ended December
31, 2016 and the year ended September 30, 2016:
|
|
(3 months ended)
|
(12 months ended)
|
|
|
December 31, 2016
|
September 30, 2016
|
|
|
|
|
|
Beginning
balance
|
$
5,283,573
|
$
6,323,032
|
|
Issuances
|
2,316,084
|
8,722,073
|
|
Realized and
unrealized gains
|
(6,306,991
)
|
(9,761,532
)
|
|
Ending
balance
|
$
1,292,666
|
$
5,283,573
|
|
|
|
|
The
fair values of the Company’s derivative instruments disclosed
above under Level 3 are primarily derived from valuation models
where significant inputs such as historical price and volatility of
the Company’s stock, as well as U.S. Treasury Bill rates, are
observable in active markets.
E.
RELATED PARTY TRANSACTIONS
Effective August
31, 2016, Maximilian de Clara, the Company’s then President
and a director, resigned for health reasons. In payment for past
services, the Company agreed to issue Mr. de Clara 650,000 shares
of restricted stock; 325,000 shares upon his resignation and
325,000 on August 31, 2017. At December 31, 2016 and September 30,
2016, the fair value accrued for unissued shares was approximately
$22,000 and $101,000, respectively.
On
January 13, 2016, the de Clara Trust demanded payment on a note
payable, of which the balance, including accrued and unpaid
interest, was approximately $1.1 million. The de Clara Trust was
established by Maximilian de Clara, the Company’s former
President and a director. The Company’s Chief Executive
Officer, Geert Kersten, is the trustee and a beneficiary. When the
de Clara Trust demanded payment on the note, the Company sold
3,000,000 shares of its common stock and 3,000,000 Series X
warrants to the de Clara Trust for approximately $1.1 million. Each
warrant allows the de Clara Trust to purchase one share of the
Company's common stock at a price of $0.37 per share at any time on
or before January 13, 2021.
During
the three months ended December 31, 2016 and 2015, the Company paid
approximately $0 and $33,000, respectively, in interest expense to
Mr. de Clara.
F.
COMMITMENTS AND CONTINGENCIES
Clinical Research Agreements
In
March 2013, the Company entered into an agreement with Aptiv
Solutions, Inc. (which was subsequently acquired by ICON Inc.) to
provide certain clinical research services in accordance with a
master service agreement. The Company will reimburse ICON for costs
incurred. The agreement required the Company to make $600,000 in
advance payments which are being credited against future invoices
in $150,000 annual increments through December 2017. As of December
31, 2016, the total balance advanced is $150,000, which is
classified as a current asset.
In April 2013, the Company entered into a
co-development and revenue sharing agreement with Ergomed. Under
the agreement, Ergomed will contribute up to $10 million towards
the study in the form of offering discounted clinical services in
exchange for a single digit percentage of milestone and royalty
payments, up to a specific maximum amount
. In October 2015,
the Company entered into a second
co-development and revenue sharing agreement with
Ergomed
for an additional $2 million, for a total of $12
million. The Company accounted for the co-development and revenue
sharing agreement in accordance with ASC 808 “Collaborative
Arrangements”. The Company determined the payments to Ergomed
are within the scope of ASC 730 “Research and
Development.” Therefore, the Company records the discount on
the clinical services as a credit to research and development
expense on its Statements of Operations. Since the Company entered
into the co-development and revenue sharing agreement with Ergomed,
it has incurred research and development expenses of approximately
$20.4 million related to Ergomed’s services. This amount is
net of Ergomed’s discount of approximately $6.6 million.
During the three months ended December 31, 2016 and 2015, the
Company recorded, net of Ergomed’s discount, approximately
$1.3 million and $2.0 million, respectively, as research and
development expense related to Ergomed’s
services.
In
October 2013, the Company entered into two co-development and
profit sharing agreements with Ergomed. One agreement
supports the Phase 1 study being conducted at the University of
California, San Francisco, or UCSF, for the development of
Multikine as a potential treatment for peri-anal warts in HIV/HPV
co-infected men and women. The Phase 1 study originally
started after the Company signed a cooperative research and
development agreement with the U.S. Naval Medical Center, San
Diego. In August 2016, the U.S. Navy discontinued this Phase 1
study because of difficulties in enrolling patients. The other
agreement focuses on the development of Multikine as a potential
treatment for cervical dysplasia in HIV/HPV co-infected women.
Ergomed will assume up to $3 million in clinical and regulatory
costs for each study.
The
Company is currently involved in a pending arbitration proceeding,
CEL-SCI Corporation v. inVentiv Health Clinical, LLC (f/k/a
PharmaNet LLC) and PharmaNet GmbH (f/k/a PharmaNet AG).
T
he Company initiated the proceedings
against inVentiv Health Clinical, LLC, or inVentiv, the former
third-party CRO, and are seeking payment for damages related to
inVentiv’s prior involvement in the Phase 3 clinical trial of
Multikine. The arbitration claim, initiated under the Commercial
Rules of the American Arbitration Association, alleges (i) breach
of contract, (ii) fraud in the inducement, and (iii) common law
fraud. Currently, the Company is seeking at least $50 million in
damages in its amended statement of claim.
In an
amended statement of claim, the Company asserted the claims set
forth above as well as an additional claim for professional
malpractice. The arbitrator subsequently granted
inVentiv’s motion to dismiss the professional malpractice
claim based on the “economic loss doctrine” which,
under New Jersey law, is a legal doctrine that, under certain
circumstances, prohibits bringing a negligence-based claim
alongside a claim for breach of contract. The arbitrator
denied the remainder of inVentiv’s motion, which had sought
to dismiss certain other aspects of the amended statement of
claim. In particular, the arbitrator rejected
inVentiv’s argument that several aspects of the amended
statement of claim were beyond the arbitrator’s
jurisdiction.
In
connection with the pending arbitration proceedings, inVentiv has
asserted counterclaims against the Company for (i) breach of
contract, seeking at least $2 million in damages for services
allegedly performed by inVentiv; (ii) breach of contract, seeking
at least $1 million in damages for the alleged use of
inVentiv’s name in connection with publications and
promotions in violation of the parties’ contract; (iii)
opportunistic breach, restitution and unjust enrichment, seeking at
least $20 million in disgorgement of alleged unjust profits
allegedly made by the Company as a result of the purported breaches
referenced in subsection (ii); and (iv) defamation, seeking at
least $1 million in damages for allegedly defamatory statements
made about inVentiv. The Company believes inVentiv’s
counterclaims are meritless
and
intends to vigorously defend against them. However, if such defense
is unsuccessful, and inVentiv successfully asserts any of its
counterclaims, such an adverse determination could have a material
adverse effect on the Company’s business, results, financial
condition and liquidity.
In
October 2015 the Company signed an arbitration funding agreement
with a company established by Lake Whillans Litigation Finance,
LLC, a firm specializing in funding litigation expenses. Pursuant
to the agreement, an affiliate of Lake Whillans provides the
Company with up to $5 million in funding for litigation expenses to
support its arbitration claims against inVentiv. The funding is
available to the Company to fund the expenses of the ongoing
arbitration and will only be repaid if the Company receives
proceeds from the arbitration. During the three months ended
December 31, 2015, the Company recognized a gain of approximately
$1.1 million on the derecognition of legal fees to record the
transfer of the liability that existed prior to the execution of
the financing agreement from the Company to Lake Whillans. The gain
on derecognition of legal fees is recorded as a reduction of
general and administration expenses on the Statement of Operations.
All related legal fees are directly billed to and paid by Lake
Whillans. As part of the agreement with Lake Whillans, the law firm
agreed to cap its fees and expenses for the arbitration at $5
million.
The
arbitration hearing on the merits began on September 26,
2016.
Lease Agreements
The
Company leases a building near Baltimore, Maryland. The building
was remodeled in accordance with the Company’s specifications
so that it can be used by the Company to manufacture Multikine for
the Company’s Phase 3 clinical trial and sales of the drug if
approved by the FDA. The lease is for a term of twenty years and
requires annual base rent to escalate each year at 3%. The Company
is required to pay all real estate and personal property taxes,
insurance premiums, maintenance expenses, repair costs and
utilities. The lease allows the Company, at its election, to extend
the lease for two ten-year periods or to purchase the building at
the end of the 20-year lease.
The
Company was required to deposit the equivalent of one year of base
rent in accordance with the lease. When the Company meets the
minimum cash balance required by the lease, the deposit will be
returned to the Company. The approximate $1.7 million deposit is
included in non-current assets at December 31, 2016 and September
30, 2016.
The
Company subleases a portion of its rental space on a month-to-month
term lease, which requires a 30 day notice for termination. The
Company receives approximately $6,000 per month in rent for the
sub-leased space.
The
Company leases its research and development laboratory under a 60
month lease which expires February 28, 2017. In September 2016, the
lease was extended through February 28, 2022. The operating lease
includes escalating rental payments. The Company is recognizing the
related rent expense on a straight line basis over the full 60
month term of the lease at the rate of approximately $11,000 per
month. As of December 31, 2016 and September 30, 2016, the Company
has recorded a deferred rent liability of approximately $1,000 and
$2,000, respectively.
The
Company leases its office headquarters under a 60 month lease which
expires June 30, 2020. The operating lease includes escalating
rental payments. The Company is recognizing the related rent
expense on a straight line basis over the full 60 month term of the
lease at the rate approximately $8,000 per month. As of December
31, 2016 and September 30, 2016, the Company has recorded a
deferred rent liability of approximately $18,000.
During
the three months ended December 31, 2016, the Company leased office
equipment under a capital lease arrangement. The term of the
capital lease is 60 months and expires on October 31, 2021. The
monthly lease payment is $505. The lease bears interest at
approximately 6.25% per annum. The Company’s previous
equipment lease expired on September 30, 2016.
During
the three months ended December 31, 2016 and 2015, no patent
impairment charges were recorded. For the three months ended
December 31, 2016 and 2015, amortization of patent costs totaled
approximately $9,000. The total estimated future amortization
expense is as follows:
|
Nine months ending
September 30, 2017
|
$
27,433
|
|
Year ending
September 30,
|
|
|
2018
|
36,379
|
|
2019
|
34,676
|
|
2020
|
31,483
|
|
2021
|
28,183
|
|
2022
|
24,380
|
|
Thereafter
|
64,733
|
|
Total
|
$
247,267
|
H.
EARNINGS PER COMMON SHARE
The
following table provides the details of the basic and diluted
earnings per-share computations:
|
|
Three Months Ended December 31,
2016
|
|
|
Net Income
|
Weighted Average Shares
|
EPS
|
|
|
|
|
|
|
Basic earnings per
share
|
$
3,536,802
|
149,860,777
|
$
0.02
|
|
Gain on derivatives
(1)
|
(1,556,754
)
|
2,256,934
|
|
|
|
|
|
|
|
Dilutive earnings
per share
|
$
1,980,048
|
152,117,711
|
$
0.01
|
(1)
Includes certain
Series CC, DD, EE and FF warrants.
|
|
Three Months Ended December 31,
2015
|
|
|
Net Income
|
Weighted Average Shares
|
EPS
|
|
|
|
|
|
|
Basic earnings per
share
|
$
2,341,813
|
109,768,502
|
$
0.02
|
|
Conversion of note
payable
|
24,841
|
1,871,283
|
|
|
|
|
|
|
|
Dilutive earnings
per share
|
$
2,366,654
|
111,639,785
|
$
0.02
|
The
gain on derivatives priced lower than the average market price
during the period is excluded from the numerator and the related
shares are excluded from the denominator in calculating diluted
loss per share.
In
accordance with the contingently issuable shares guidance of FASB
ASC Topic 260,
Earnings Per
Share
, the calculation of diluted net earnings (loss) per
share excludes the following securities because their inclusion
would have been anti-dilutive as of December 31:
|
|
2016
|
2015
|
|
|
|
|
|
Options and
Warrants
|
173,654,474
|
74,776,529
|
|
Unvested Restricted
Stock
|
15,100,000
|
15,100,000
|
|
Total
|
188,754,474
|
89,876,529
|
The
Company has evaluated subsequent events through the date these
financial statements were filed and determined there are no
subsequent events that require disclosure.