NOTES TO CONDENSED FINANCIAL STATEMENTS
THREE MONTHS ENDED JUNE 30, 2019 AND 2018 (UNAUDITED)
A.
BASIS OF PRESENTATION AND 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, 2018.
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 June
30, 2019 and the results of its operations for the nine and three
months then ended. The condensed balance sheet as of September 30,
2018 is derived from the September 30, 2018 audited financial
statements. Significant accounting policies have been consistently
applied in the interim financial statements. The results of
operations for the nine and three months ended June 30, 2019 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, which are expected for the foreseeable future, 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
– The leased manufacturing facility is
recorded at total project costs incurred and is depreciated over
the 20-year useful life of the building. 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, are 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. Management
accrues Clinical Research Organization (“CRO”) expenses
and clinical trial study expenses based on services performed and
relies on the CROs to provide estimates of those costs applicable
to the completion stage of a study. Estimated accrued CRO costs are
subject to revisions as such studies progress to completion. The
Company charges revisions to estimated expense in the period in
which the facts that give rise to the revision become
known.
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 June
30, 2019 and September 30, 2018.
On
December 22, 2017, the “Tax Cuts and Jobs Act” (the
“Tax Act"), was signed into law by the President of the
United States (U.S.). The Tax Act includes significant changes to
corporate taxation, including reduction of the U.S. corporate tax
rate from 35% to 21%, effective January 1, 2018, limitation of the
tax deduction for interest expense to 30% of earnings (except for
certain small businesses), limitation of the deduction for net
operating losses to 80% of current year taxable income and
elimination of net operating loss carrybacks. The Company has
accounted for the income tax effects of the Act in applying FASB
ASC 740 to the current reporting period. Because the Company
records a valuation allowance for its entire deferred income tax
asset, there was no impact to the amounts reported in the
Company’s financial statements resulting from the Tax
Act.
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
considering all the rights and obligations of each instrument. The
derivative liabilities are re-measured at fair value at the end of
each interim period.
Deferred
Rent
– Certain of the
Company’s operating leases provide for minimum annual
payments that adjust over the life of the lease. The
aggregate minimum annual payments are expensed on a straight-line
basis over the minimum lease term. The Company recognizes a
deferred rent liability for rent escalations when the amount of
straight-line rent exceeds the lease payments, and reduces the
deferred rent liability when the lease payments exceed the
straight-line rent expense. For tenant improvement allowances
and rent holidays, the Company records a deferred rent liability
and amortizes the deferred rent over the lease term as a reduction
to rent expense.
Leases –
Leases are categorized as either
operating or capital leases at inception. Operating lease costs are
recognized on a straight-line basis over the term of the lease. An
asset and a corresponding liability for the capital lease
obligation are established for the cost of capital leases. The
capital lease obligation is amortized over the life of the lease.
For build-to-suit leases, the Company establishes an asset and
liability for the estimated construction costs incurred to the
extent that it is involved in the construction of structural
improvements or takes construction risk prior to the commencement
of the lease. Upon occupancy of facilities under build-to-suit
leases, the Company assesses whether these arrangements qualify for
sales recognition under the sale-leaseback accounting guidance. If
a lease does not meet the criteria to qualify for a sale-leaseback
transaction, the established asset and liability remain on the
Company's balance sheet.
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 an 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.
Forfeitures are accounted for when they occur. The expected term of
options represents the period 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 June 2018, the Financial Accounting Standards
Board ("FASB") issued ASU 2018-07,
Compensation—Stock
Compensation (Topic 718
),
(“ASU 2018-7”), which expands the scope of Topic 718 to
include share-based payment transactions for acquiring goods and
services from nonemployees. An entity should apply the requirements
of Topic 718 to nonemployee awards except for specific guidance on
inputs to an option pricing model and the attribution of cost.
Under current GAAP, non-employee share-based payment awards are
measured at the fair value of the consideration received or the
fair value of the equity instruments issued, whichever can be more
reliably measured. Under ASU 2018-07, non-employee share-based
payments would be measured at the grant-date fair value of the
equity instruments an entity is obligated to issue when the good
has been delivered or the service has been rendered and any other
conditions necessary to earn the right to benefit from the
instruments have been satisfied. Under current GAAP, the
measurement date for equity classified non-employee share-based
payment awards is the earlier of the date at which a commitment for
performance by the counterparty is reached or the date at which the
counterparty’s performance is complete. Under ASU 2018-07,
equity-classified nonemployee share-based payment awards are
measured at the grant date. The definition of the term
grant date
is amended to generally state the date
at which a
grantor
and a
grantee
reach a mutual understanding of the key terms and
conditions of a share-based payment award. The amendments in this
Update are effective for public business entities for fiscal years
beginning after December 15, 2018, including interim periods within
that fiscal year. Early adoption is permitted, but no earlier than
an entity’s adoption date of Topic 606. An entity should only
remeasure liability-classified awards that have not been settled by
the date of adoption and equity classified awards for which a
measurement date has not been established through a
cumulative-effect adjustment to retained earnings as of the
beginning of the fiscal year of adoption. Upon transition, the
entity is required to measure these non-employee awards at fair
value as of the adoption date. The entity must not remeasure awards
that are completed. The Company is currently evaluating the impact
the adoption of the standard will have on the Company’s
financial position and results of operations.
In February 2016, the FASB issued
ASU
2016-02,
Leases
, which will require most leases (except 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.
As
permitted by the guidance, the Company has an option to retain the
original lease classification and historical accounting for initial
direct costs for leases existing prior to the adoption date.
Furthermore, the Company will not have to reassess contracts
entered into prior to the adoption date for the existence of a
lease. The Company also has an option not to restate prior periods
for the impact of the adoption of the new standard and may instead
recognize a cumulative-effect adjustment to beginning retained
earnings as of October 1, 2019 for any prior period income
statement effects identified. The Company is evaluating the effect
that adoption of this new standard will have on the Company’s
financial statements and related disclosures.
The
Company has considered all other recently issued accounting
pronouncements and does not believe the adoption of such
pronouncements will have a material impact on its financial
statements.
B.
OPERATIONS AND FINANCING
The
Company has incurred significant costs since its inception for 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 to continue with its
research efforts. The ability to raise capital may be
dependent upon market conditions that are outside the control of
the Company. The ability of the Company to complete the necessary
clinical trials and obtain 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 taking cost-cutting
initiatives, as well as exploring other sources of funding, to
finance operations over the next 12 months. The Company believes
that there is a high likelihood that it will continue to receive
funds from warrant exercises similar to the way it has received
funds during the past 12 months. However, there can be no assurance
that the Company will be able to raise sufficient capital to
support its operations.
The
Company is currently in the final stages of its large
multi-national Phase 3 clinical trial for head and neck cancer with
its partners TEVA Pharmaceuticals and Orient Europharma. To finance
the study beyond the next twelve months, the Company plans to raise
additional capital in the form of corporate partnerships, debt
issuances 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. 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 may have to curtail its operations
until it can raise the required funding.
The
financial statements have been prepared assuming the Company will
continue as a going concern, but due to the Company’s
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 incurred expenses of approximately $54.7 million as of
June 30, 2019 on direct costs for the Phase 3 clinical trial. The
Company estimates it will incur additional expenses of
approximately $5.6 million for the remainder of the Phase 3
clinical trial. 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 may
be affected by the rate of death accumulation in the study, foreign
currency exchange rates, and many other factors, some of which
cannot be foreseen today. It is therefore possible that the cost of
the Phase 3 clinical trial will be higher than currently
estimated.
Nine
hundred twenty-eight (928) head and neck cancer patients have been
enrolled and have completed treatment in the Phase 3 study. The
study end point is a 10% increase in overall survival of patients
between the two main comparator groups in favor of the group
receiving the Multikine treatment regimen. The determination if the
study end point has been met will occur when there are a total of
298 deaths in those two groups.
The
changes in stockholders’ equity during the nine months ended
June 30, 2019 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCES
AT OCTOBER 1, 2018
|
28,034,487
|
$
280,346
|
$
331,312,184
|
$
(331,591,614
)
|
$
916
|
|
Warrant
exercises
|
298,682
|
2,987
|
646,766
|
-
|
649,753
|
|
401(k)
contributions paid in common stock
|
12,279
|
123
|
35,118
|
-
|
35,241
|
|
|
|
|
|
|
|
|
Stock
issued to nonemployees for services
|
62,784
|
628
|
201,752
|
-
|
202,380
|
|
Shares returned for
settlement of clinical research costs
|
(564,905
)
|
(5,649
)
|
5,649
|
-
|
-
|
|
Equity
based compensation - employees
|
-
|
-
|
573,660
|
-
|
573,660
|
|
Net
income
|
-
|
-
|
-
|
1,245,902
|
1,245,902
|
|
|
|
|
|
|
|
|
BALANCES
AT DECEMBER 31, 2018
|
27,843,327
|
278,435
|
332,775,129
|
(330,345,712
)
|
2,707,852
|
|
|
|
|
|
|
|
|
Warrant
exercises
|
1,523,933
|
15,239
|
2,640,395
|
-
|
2,655,634
|
|
401(k)
contributions paid in common stock
|
10,419
|
104
|
36,779
|
-
|
36,883
|
|
Stock
issued to nonemployees for services
|
77,449
|
774
|
224,855
|
-
|
225,629
|
|
Equity
based compensation - employees
|
(3,500
)
|
(35
)
|
530,865
|
-
|
530,830
|
|
Shares issued for
settlement of clinical research costs
|
500,000
|
5,000
|
1,285,000
|
-
|
1,290,000
|
|
Stock issuance
costs
|
-
|
-
|
(43,625
)
|
-
|
(43,625
)
|
|
Net
loss
|
-
|
-
|
-
|
(6,447,681
)
|
(6,447,681
)
|
|
|
|
|
|
|
|
|
BALANCES
AT MARCH 31, 2019
|
29,951,628
|
299,517
|
337,449,398
|
(336,793,393
)
|
955,522
|
|
|
|
|
|
|
|
|
Warrant
exercises
|
4,014,109
|
40,141
|
10,212,680
|
-
|
10,252,821
|
|
401(k)
contributions paid in common stock
|
4,339
|
43
|
36,318
|
-
|
36,361
|
|
Stock
issued to nonemployees for services
|
20,825
|
208
|
140,062
|
-
|
140,270
|
|
Equity
based compensation - employees
|
(4,000
)
|
(40
)
|
1,521,861
|
-
|
1,521,821
|
|
Option
exercises
|
42,770
|
428
|
96,862
|
-
|
97,290
|
|
Purchase of stock
by officers and directors
|
37,243
|
372
|
234,625
|
-
|
234,997
|
|
Stock issuance
costs
|
-
|
-
|
(8,010
)
|
-
|
(8,010
)
|
|
Net
loss
|
-
|
-
|
-
|
(12,084,768
)
|
(12,084,768
)
|
|
BALANCES
AT JUNE 30, 2019
|
34,066,914
|
$
340,669
|
$
349,683,796
|
$
(348,878,161
)
|
$
1,146,304
|
The
changes in stockholders’ deficit during the nine months ended
June 30, 2018 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCES
AT OCTOBER 1, 2017
|
11,903,133
|
$
119,031
|
$
296,298,401
|
$
(299,754,409
)
|
$
(3,336,977
)
|
|
|
|
|
|
|
|
|
Sale
of common stock
|
1,289,478
|
12,895
|
2,437,105
|
-
|
2,450,000
|
|
401(k)
contributions paid in common stock
|
18,984
|
190
|
35,690
|
-
|
35,880
|
|
Stock
issued to nonemployees for services
|
13,705
|
137
|
25,270
|
-
|
25,407
|
|
Equity
based compensation - employees
|
-
|
-
|
1,448,098
|
-
|
1,448,098
|
|
Warrants
issued with notes payable
|
-
|
-
|
656,382
|
-
|
656,382
|
|
Conversion
of notes payable to common stock
|
32,751
|
328
|
74,672
|
-
|
75,000
|
|
Net
loss
|
-
|
-
|
-
|
(6,187,830
)
|
(6,187,830
)
|
|
BALANCES
AT DECEMBER 31, 2017
|
13,258,051
|
132,581
|
300,975,618
|
(305,942,239
)
|
(4,834,040
)
|
|
|
|
|
|
|
|
|
Sale
of common stock
|
2,501,145
|
25,011
|
4,652,130
|
-
|
4,677,141
|
|
401(k)
contributions paid in common stock
|
25,901
|
259
|
36,261
|
-
|
36,520
|
|
Stock
issued to nonemployees for services
|
124,082
|
1,241
|
227,254
|
-
|
228,495
|
|
Equity
based compensation - employees
|
-
|
-
|
279,817
|
-
|
279,817
|
|
Conversion
of notes payable to common stock
|
55,373
|
554
|
108,746
|
-
|
109,300
|
|
Shares
issued for settlement of clinical research costs
|
660,000
|
6,600
|
1,240,800
|
-
|
1,247,400
|
|
Stock
issuance cost
|
-
|
-
|
(94,773
)
|
-
|
(94,773
)
|
|
Net
loss
|
-
|
-
|
-
|
(4,708,135
)
|
(4,708,135
)
|
|
BALANCES
AT MARCH 31, 2018
|
16,624,552
|
166,246
|
307,425,853
|
(310,650,374
)
|
(3,058,275
)
|
|
|
|
|
|
|
|
|
Warrant
exercises
|
1,117,644
|
11,177
|
2,906,619
|
-
|
2,917,796
|
|
401(k)
contributions paid in common stock
|
39,862
|
399
|
36,274
|
-
|
36,673
|
|
Stock
issued to nonemployees for services
|
81,604
|
816
|
208,387
|
-
|
209,203
|
|
Equity
based compensation - employees
|
-
|
-
|
465,487
|
-
|
465,487
|
|
Conversion
of notes payable and interest to common stock
|
1,106,806
|
11,068
|
2,179,648
|
-
|
2,190,716
|
|
Shares
issued for settlement of clinical research costs
|
600,000
|
6,000
|
1,704,000
|
-
|
1,710,000
|
|
Warrants
issued with notes payable
|
-
|
-
|
291,234
|
-
|
291,234
|
|
Net
loss
|
-
|
-
|
-
|
(6,014,568
)
|
(6,014,568
)
|
|
BALANCES
AT JUNE 30, 2018
|
19,570,468
|
$
195,706
|
$
315,217,502
|
$
(316,664,942
)
|
$
(1,251,734
)
|
Underlying share
information for equity compensation plans as of June 30, 2019 is as
follows:
|
Name of
Plan
|
Total Shares
Reserved Under Plans
|
Shares Reserved
for Outstanding Options
|
|
Remaining
Options/Shares
Under
Plans
|
|
|
|
|
|
|
|
Incentive Stock
Options Plans
|
138,400
|
99,962
|
N/A
|
385
|
|
Non-Qualified Stock
Option Plans
|
6,387,200
|
6,193,237
|
N/A
|
115,156
|
|
Stock Bonus
Plans
|
783,760
|
N/A
|
327,267
|
456,460
|
|
Stock Compensation
Plan
|
634,000
|
N/A
|
122,221
|
493,369
|
|
Incentive Stock
Bonus Plan
|
640,000
|
N/A
|
616,500
|
23,500
|
Underlying share
information for equity compensation plans as of September 30, 2018
is as follows:
|
Name of
Plan
|
Total Shares
Reserved Under Plans
|
Shares Reserved
for Outstanding Options
|
|
Remaining
Options/Shares Under Plans
|
|
|
|
|
|
|
|
Incentive Stock
Option Plans
|
138,400
|
123,558
|
N/A
|
385
|
|
Non-Qualified Stock
Option Plans
|
3,387,200
|
3,036,569
|
N/A
|
309,526
|
|
Stock Bonus
Plans
|
783,760
|
N/A
|
297,230
|
486,497
|
|
Stock Compensation
Plan
|
134,000
|
N/A
|
118,590
|
15,410
|
|
Incentive Stock
Bonus Plan
|
640,000
|
N/A
|
624,000
|
16,000
|
Stock option
activity
:
|
|
Nine Months
Ended June 30,
|
|
|
|
|
|
Granted
|
3,268,862
|
1,858,108
|
|
Exercised
|
42,770
|
-
|
|
Expired
|
29,322
|
26,395
|
|
Forfeited
|
63,698
|
1,393
|
|
|
Three Months
Ended June 30,
|
|
|
|
|
|
Granted
|
3,268,362
|
1,847,808
|
|
Exercised
|
42,770
|
-
|
|
Expired
|
26,922
|
2,016
|
|
Forfeited
|
39,505
|
-
|
During
the quarter ended June 30, 2019, the Company adopted the 2019 Stock
Compensation Plan, which authorized the issuance of up to 500,000
shares of common stock to officers, directors, employees and
consultants.
Employee stock
based 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.
Stock based compensation expense is included in general and
administrative expenses on the statements of
operations.
Non-employee stock
based compensation expense includes the value of shares and options
issued under consulting arrangements. At June 30, 2019 and
September 30, 2018, approximately $88,000 and $207,000,
respectively, are included in prepaid expenses.
Warrants and Non-Employee Options
The
following chart represents the warrants and non-employee options
outstanding at June 30, 2019:
|
|
|
|
Shares Issuable upon Exercise
of Warrants
|
|
Expiration Date
|
|
Series
N
|
|
8/18/2008
|
85,339
|
$
3.00
|
2/18/2020
|
|
Series
V
|
|
5/28/2015
|
810,127
|
$
19.75
|
5/28/2020
|
|
Series
UU
|
|
6/11/2018
|
163,544
|
$
2.80
|
6/11/2020
|
|
Series
W
|
|
10/28/2015
|
688,930
|
$
16.75
|
10/28/2020
|
|
Series
X
|
|
1/13/2016
|
120,000
|
$
9.25
|
1/13/2021
|
|
Series
Y
|
|
2/15/2016
|
26,000
|
$
12.00
|
2/15/2021
|
|
Series
ZZ
|
|
5/23/2016
|
20,000
|
$
13.75
|
5/18/2021
|
|
Series
BB
|
|
8/26/2016
|
16,000
|
$
13.75
|
8/22/2021
|
|
Series
Z
|
|
5/23/2016
|
264,000
|
$
13.75
|
11/23/2021
|
|
Series
FF
|
|
12/8/2016
|
68,048
|
$
3.91
|
12/1/2021
|
|
Series
CC
|
|
12/8/2016
|
611,463
|
$
5.00
|
12/8/2021
|
|
Series
HH
|
|
2/23/2017
|
6,500
|
$
3.13
|
2/16/2022
|
|
Series
AA
|
|
8/26/2016
|
200,000
|
$
13.75
|
2/22/2022
|
|
Series
JJ
|
|
3/14/2017
|
9,450
|
$
3.13
|
3/8/2022
|
|
Series
LL
|
|
4/30/2017
|
26,398
|
$
3.59
|
4/30/2022
|
|
Series
MM
|
|
6/22/2017
|
893,491
|
$
1.86
|
6/22/2022
|
|
Series
NN
|
|
7/24/2017
|
473,798
|
$
2.52
|
7/24/2022
|
|
Series
OO
|
|
7/31/2017
|
60,000
|
$
2.52
|
7/31/2022
|
|
Series
II
|
|
3/14/2017
|
95,000
|
$
3.00
|
9/14/2022
|
|
Series
RR
|
|
10/30/2017
|
495,326
|
$
1.65
|
10/30/2022
|
|
Series
SS
|
|
12/19/2017
|
514,476
|
$
2.09
|
12/18/2022
|
|
Series
TT
|
|
2/5/2018
|
760,758
|
$
2.24
|
2/5/2023
|
|
Series
PP
|
|
8/28/2017
|
112,500
|
$
2.30
|
2/28/2023
|
|
Series
WW
|
|
7/2/2018
|
1,950
|
$
1.63
|
6/28/2023
|
|
Series
VV
|
|
7/2/2018
|
90,000
|
$
1.75
|
1/2/2024
|
|
Consultants
|
|
7/28/17
|
10,000
|
$
2.18
|
7/27/2027
|
1.
Derivative Liabilities
The
table below presents the fair value of the warrant liabilities at
the balance sheet dates:
|
|
|
|
|
Series S
warrants
|
$
-
|
$
33
|
|
Series V
warrants
|
1,249,835
|
770,436
|
|
Series W
warrants
|
2,131,237
|
999,081
|
|
Series Z
warrants
|
1,172,626
|
487,767
|
|
Series ZZ
warrants
|
72,185
|
34,215
|
|
Series AA
warrants
|
963,990
|
380,474
|
|
Series BB
warrants
|
64,256
|
28,456
|
|
Series CC
warrants
|
3,699,989
|
1,779,724
|
|
Series DD
warrants
|
-
|
1,249,287
|
|
Series EE
warrants
|
-
|
1,249,287
|
|
Series FF
warrants
|
433,091
|
188,921
|
|
Series GG
warrants
|
-
|
607,228
|
|
Series HH
warrants
|
44,050
|
58,816
|
|
Series II
warrants
|
660,020
|
660,135
|
|
Series JJ
warrants
|
64,252
|
88,642
|
|
Series KK
warrants
|
-
|
656,930
|
|
Series LL
warrants
|
177,299
|
77,632
|
|
Total warrant
liabilities
|
$
10,732,830
|
$
9,317,064
|
The
table below presents the gains/(losses) on the warrant liabilities
for the nine months ended June 30:
|
|
|
|
|
Series S
warrants
|
$
33
|
$
(756,261
)
|
|
Series V
warrants
|
(479,399
)
|
22,842
|
|
Series W
warrants
|
(1,132,156
)
|
18,478
|
|
Series Z
warrants
|
(684,859
)
|
34,682
|
|
Series ZZ
warrants
|
(37,970
)
|
2,103
|
|
Series AA
warrants
|
(583,516
)
|
28,337
|
|
Series BB
warrants
|
(35,800
)
|
1,988
|
|
Series CC
warrants
|
(2,007,287
)
|
181,244
|
|
Series DD
warrants
|
1,249,287
|
5,492
|
|
Series EE
warrants
|
1,249,287
|
5,492
|
|
Series FF
warrants
|
(244,170
)
|
23,119
|
|
Series GG
warrants
|
195,228
|
170,131
|
|
Series HH
warrants
|
(22,859
)
|
7,962
|
|
Series II
warrants
|
(593,960
)
|
250,578
|
|
Series JJ
warrants
|
(32,954
)
|
11,970
|
|
Series KK
warrants
|
(55,622
)
|
169,808
|
|
Series LL
warrants
|
(99,667
)
|
10,002
|
|
Net (loss) gain on
warrant liabilities
|
$
(3,316,384
)
|
$
187,967
|
The
table below presents the gains/(losses) on the warrant liabilities
for the three months ended June 30:
|
|
|
|
|
Series S
warrants
|
$
-
|
$
(768,188
)
|
|
Series V
warrants
|
(974,251
)
|
26,389
|
|
Series W
warrants
|
(1,748,184
)
|
42,609
|
|
Series Z
warrants
|
(799,690
)
|
26,587
|
|
Series ZZ
warrants
|
(50,608
)
|
1,914
|
|
Series AA
warrants
|
(676,784
)
|
19,661
|
|
Series BB
warrants
|
(43,536
)
|
1,695
|
|
Series CC
warrants
|
(2,346,985
)
|
139,325
|
|
Series DD
warrants
|
-
|
36
|
|
Series EE
warrants
|
-
|
36
|
|
Series FF
warrants
|
(278,773
)
|
15,818
|
|
Series GG
warrants
|
88,478
|
132,712
|
|
Series HH
warrants
|
(33,501
)
|
5,279
|
|
Series II
warrants
|
(709,303
)
|
199,970
|
|
Series JJ
warrants
|
(48,880
)
|
7,960
|
|
Series KK
warrants
|
(169,089
)
|
132,884
|
|
Series LL
warrants
|
(114,413
)
|
6,695
|
|
Net loss on warrant
liabilities
|
$
(7,905,519
)
|
$
(8,618
)
|
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.
Expiration of Derivative Liabilities
On
December 10, 2018, 1,360,960 Series DD and 1,360,960 Series EE
warrants, with an exercise price of $4.50, expired. The expiration
dates of these warrants had been previously extended and such
modifications were reflected in the fair value measurements of the
warrants on the dates of modification.
On
October 11, 2018, 327,729 Series S warrants, with an exercise price
of $31.25, expired. The exercise price of these warrants had been
previously repriced under temporarily revised terms. During the
quarter ended June 30, 2018 and under the revised terms, 709,391
previously outstanding warrants were exercised for total proceeds
of approximately $1.2 million,
Securities
Purchase Agreements
The
Company has entered into several Securities Purchase Agreements
(SPAs) with Ergomed plc, one of its Clinical Research Organizations
responsible for managing the Phase 3 clinical trial, to facilitate
a partial payment of amounts due Ergomed. Under the Agreements, the
Company issued Ergomed shares of common stock as a forbearance fee
in exchange for Ergomed’s agreement to provisionally forbear
collection of the payables in an amount equal to the net proceeds
from the sales of the shares issued to Ergomed. Upon issuance, the
Company expenses the full value of the shares as Other
Non-Operating Gain/Loss and subsequently offsets the expense as
amounts are realized through the sale by Ergomed and reduces
accounts payable to Ergomed. Any amounts received from the sale of
the shares in excess of the payables will be applied towards the
satisfaction of any future amounts owed.
On
December 31, 2018, the prior SPA expired. Pursuant to that
arrangement, Ergomed returned 564,905 unsold shares for
cancellation. The par value of those shares was reclassed from
Common Stock to Additional Paid-In Capital on the balance
sheet.
On
January 9, 2019, the Company entered into a new SPA under which it
issued Ergomed 500,000 restricted shares of the Company’s
common stock valued at approximately $1.3 million. This current SPA
expires on December 31, 2019.
During
the nine months ended June 30, 2019 and 2018, respectively, the
Company decreased Accounts Payable by approximately $3.2 million
and $2.8 million through the sale of 808,769 and 1,538,129 shares,
respectively, by Ergomed.
The
following table summarizes the Other Non-Operating Gains (Loss) for
the nine and three months ended June 30, 2019 and 2018 relating to
these agreements:
|
|
|
|
|
|
|
|
|
|
|
Amount
realized through the sale of shares
|
$
3,167,197
|
$
2,785,932
|
$
1,455,844
|
$
1,560,641
|
|
Fair
value of shares upon issuance
|
1,290,000
|
2,957,400
|
-
|
1,710,000
|
|
Other
non-operating gain (loss)
|
$
1,877,197
|
$
(171,468
)
|
$
1,455,844
|
$
( 149,359
)
|
As of
June 30, 2019, Ergomed holds 45,226 shares and may sell the shares
or return the shares to the Company for cancellation until December
31, 2019.
3.
Incentive
Stock Bonus Plan
During
the nine and three months ended June 30, 2019, respectively, 7,500
and 4,000 shares of common stock issued from the 2014 Incentive
Stock Bonus Plan were forfeited.
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 June 30, 2019:
|
|
Quoted Prices in
Active Markets for Identical Assets or Liabilities
(Level
1)
|
Significant
Other Observable Inputs
(Level
2)
|
Significant
Unobservable Inputs
(Level
3)
|
|
|
|
|
|
|
|
|
Derivative
instruments
|
$
-
|
$
-
|
$
10,732,830
|
$
10,732,830
|
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, 2018:
|
|
Quoted Prices in
Active Markets for Identical Assets or Liabilities
(Level
1)
|
Significant
Other Observable Inputs
(Level
2)
|
Significant
Unobservable Inputs
(Level
3)
|
|
|
|
|
|
|
|
|
Derivative
instruments
|
$
33
|
$
-
|
$
9,317,031
|
$
9,317,064
|
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 June 30,
2019 and the year ended September 30, 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning
balance
|
$
9,317,031
|
$
2,020,629
|
|
Issuances
|
-
|
-
|
|
Exercises
|
(1,900,618
)
|
(595,780
)
|
|
Realized and
unrealized (gains) and losses
|
3,316,417
|
7,892,182
|
|
Ending
balance
|
$
10,732,830
|
$
9,317,031
|
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
During
the quarter ended June 30, 2019, the Company received security
purchase agreements from five officers and directors of the Company
for the purchase of 30,612 restricted shares of the Company’s
common stock. The shares were sold at the aggregate fair market
value on the closing date of approximately $210,000. Also during
the current quarter, the Company’s CEO purchased 6,631 shares
of restricted common stock for $25,000.
F.
COMMITMENTS AND CONTINGENCIES
Clinical Research
Agreements
Under co-development and revenue sharing
agreements with Ergomed, Ergomed agreed to contribute up to $12
million towards the Company’s Phase 3 Clinical Trial in the
form of discounted clinical services in exchange for a single digit
percentage of milestone and royalty payments, up to a specific
maximum amount
. The Company accounted for the co-development
and revenue sharing agreements 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 inception of the agreement with Ergomed, the Company has
incurred research and development expenses of approximately $30.3
million for Ergomed’s services. This amount is net of
Ergomed’s discount of approximately $10.2 million. During the
nine months ended June 30, 2019 and 2018, the Company recorded, net
of Ergomed’s discount, approximately $2.2 million and $2.4
million, respectively, as research and development expense related
to Ergomed’s services. During the three months ended June 30,
2019 and 2018, the Company recorded, net of Ergomed’s
discount, approximately $0.7 million and $0.8 million,
respectively, as research and development expense related to
Ergomed’s services.
Lease Agreements
The
Company leases a manufacturing facility near Baltimore, Maryland
(the San Tomas lease). 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 contributed approximately $9.3 million towards
the tenant-directed improvements, of which $3.2 million is being
refunded during years nine through twenty through reduced rental
payments. The landlord paid approximately $11.9 million towards the
purchase of the building, land and the tenant-directed
improvements. The Company placed the building in service in October
2008.
The
Company was deemed to be the owner of the building for accounting
purpose under the build-to-suit guidance in ASC 840-40-55. In
addition to tenant improvements the Company incurred, the Company
also recorded an asset for tenant-directed improvements and for the
costs paid by the lessor to purchase the building and to perform
improvements, as well as a corresponding liability for the landlord
costs. Upon completion of the improvements, the Company did not
meet the “sale-leaseback” criteria under ASC 840-40-25,
Accounting for Lease, Sale-Leaseback Transactions, and therefore,
treated the lease as a financing obligation. Thus, the asset and
corresponding liability were not de-recognized. As of June 30, 2019
and September 30, 2018, the leased building asset has a net book
value of approximately $15.7 and $16.1 million, respectively, and
the landlord liability has a balance of approximately $13.5 million
and $13.4 million, respectively. The leased building is being
depreciated using a straight-line method over the 20-year lease
term to a residual value. The landlord liability is being amortized
over the 20 years using the effective interest method. Lease
payments allocated to the landlord liability are accounted for as
debt service payments on that liability using the finance method of
accounting per ASC 840-40-55.
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 June 30, 2019 and September 30,
2018.
Approximate future
minimum lease payments under the San Tomas lease as of June 30,
2019 are as follows:
|
Three months ending
September 30, 2019
|
$
453,000
|
|
Year ending
September 30,
|
|
|
2020
|
1,872,000
|
|
2021
|
1,937,000
|
|
2022
|
2,004,000
|
|
2023
|
2,073,000
|
|
2024
|
2,145,000
|
|
Thereafter
|
9,540,000
|
|
Total future
minimum lease obligation
|
20,024,000
|
|
Less imputed
interest on financing obligation
|
(6,548,000
)
|
|
Net present value
of lease financing obligation
|
$
13,476,000
|
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
sublease rental income for the nine months ended June 30, 2019 and
2018 was approximately $55,000 and $53,000, respectively. The
sublease rental income for each of the three months ended June 30,
2019 and 2018 was approximately $18,000.
The
Company leases its research and development laboratory under a
60-month lease which expires 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 $13,000 per
month. As of June 30, 2019 and September 30, 2018, the Company has
recorded a deferred rent liability of approximately $14,000 and
$12,000, 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 June 30,
2019 and September 30, 2018, the Company has recorded a deferred
rent liability of approximately $9,000 and $14,000,
respectively.
As of
June 30, 2019, material contractual obligations, excluding the San
Tomas lease, consisting of non-cancelable operating lease payments
are as follows:
|
Three
months ending September 30, 2019
|
$66,000
|
|
Year
ending September 30,
|
|
|
2020
|
238,000
|
|
2021
|
163,000
|
|
2022
|
69,000
|
|
Total
|
$536,000
|
The
Company leases 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 an annual interest rate of 6.25%.
During
the nine months ended June 30, 2019 and 2018, no patent impairment
charges were recorded. For the nine and three months ended June 30,
2019, amortization of patent costs totaled approximately $72,000
and $49,000, respectively. For the nine and three months ended June
30, 2018, amortization of patent costs totaled approximately
$53,000 and $34,000, respectively. Approximate estimated future
amortization expense is as follows:
|
Three months ending
September 30, 2019
|
$
11,000
|
|
Year ending
September 30,
|
|
|
2020
|
43,000
|
|
2021
|
40,000
|
|
2022
|
36,000
|
|
2023
|
26,000
|
|
2024
|
21,000
|
|
Thereafter
|
95,000
|
|
Total
|
$
272,000
|