UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 (Mark One)
            QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended March 31, 2020
OR
         TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from _______________ to ______________.
 
Commission File Number 001-11889
CEL-SCI CORPORATION
 
Colorado
 
84-0916344
 State or other jurisdiction incorporation
 
 (IRS) Employer Identification Number
 
 8229 Boone Boulevard, Suite 802
 Vienna, Virginia 22182
 Address of principal executive offices
 (703) 506-9460
 Registrant's telephone number, including area code
 
Securities registered pursuant to Section 12(b) of the Act:
 
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock
CVM
NYSE American
 
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) had been subject to such filing requirements for the past 90 days.
Yes            No
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes No
 
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check One):
 
Large accelerated filer
Accelerated filer
Non-accelerated filer
Smaller reporting company
 
 
Emerging growth company
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
 
Indicate by check mark whether the Registrant is a shell company (as defined in Exchange Act Rule 12b-2 of the Exchange Act).
Yes            No
 
Class of Stock
No. Shares Outstanding
Date
Common
37,633,894
May 5, 2020
 

 
 
 
TABLE OF CONTENTS
 
PART I FINANCIAL INFORMATION
 
Item 1.
 
Page
 
 
 
 
Condensed Balance Sheets at March 31, 2020 and September 30, 2019 (unaudited)
3
 
 
 
 
Condensed Statements of Operations for the six months ended March 31, 2020 and 2019 (unaudited)
4
 
 
 
 
Condensed Statements of Operations for the three months ended March 31, 2020 and 2019 (unaudited)
5
 
 
 
 
Condensed Statement of Stockholders’ Equity for the six months ended March 31, 2020 and 2019 (unaudited)
6
 
 
 
 
Condensed Statements of Cash Flows for the six months ended March 31, 2020 and 2019 (unaudited)
7
 
 
 
 
Notes to Condensed Financial Statements (unaudited)
9
 
 
 
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
22
 
 
 
Item 3.
Quantitative and Qualitative Disclosures about Market Risks
25
 
 
 
Item 4.
Controls and Procedures
25
 
 
 
PART II
 
 
 
 
 
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
27
 
 
 
Item 6.
Exhibits
27
 
 
 
 
Signatures
28
 
 
 
 
2
 
 
CEL-SCI CORPORATION
CONDENSED BALANCE SHEETS
(UNAUDITED)
 
 
 
MARCH 31,
 
 
SEPTEMBER 30,
 
ASSETS
 
2020
 
 
2019
 
 
 
 
 
 
 
 
Current Assets:
 
 
 
 
 
 
     Cash and cash equivalents
 $14,329,870 
 $8,444,774 
     Receivables
  62,289 
  62,765 
     Prepaid expenses
  565,246 
  524,953 
     Supplies used for R&D and manufacturing
  849,548 
  782,363 
 
    
    
Total current assets
  15,806,953 
  9,814,855 
 
    
    
Finance lease right of use assets
  12,741,195 
  - 
Operating lease right of use assets
  899,508 
  - 
Property and equipment, net
  3,286,273 
  15,825,636 
Patent costs, net
  312,380 
  311,586 
Deposits
  1,670,917 
  1,670,917 
 
    
    
Total Assets
 $34,717,226 
 $27,622,994 
 
    
    
LIABILITIES AND STOCKHOLDERS' EQUITY
    
    
 
    
    
Current Liabilities:
    
    
  Accounts payable
 $1,139,914 
 $1,586,478 
  Accrued expenses
  316,866 
  34,432 
  Due to employees
  675,408 
  709,442 
  Derivative instruments, current portion
  2,156,857 
  674,442 
  Lease liabilities, current portion
  977,264 
  - 
  Other current liabilities
  5,000 
  14,956 
 
    
    
  Total current liabilities
  5,271,309 
  3,019,750 
 
    
    
  Derivative instruments, net of current portion
  4,067,436 
  5,813,868 
  Finance lease obligations, net of current portion
  12,232,493 
  13,508,156 
  Operating lease obligations, net of current portion
  812,479 
  - 
  Other liabilities
  125,000 
  147,553 
 
    
    
Total liabilities
  22,508,717 
  22,489,327 
 
    
    
Commitments and Contingencies
    
    
 
    
    
STOCKHOLDERS' EQUITY
    
    
  Preferred stock, $.01 par value-200,000 shares authorized;
    
    
    -0- shares issued and outstanding
  - 
  - 
  Common stock, $.01 par value - 600,000,000 shares authorized;
    
    
    37,336,411 and 35,231,776 shares issued and outstanding
    
    
    at March 31, 2020 and September 30, 2019, respectively
  373,365 
  352,318 
  Additional paid-in capital
  379,943,932 
  358,507,603 
  Accumulated deficit
  (368,108,788)
  (353,726,254)
 
    
    
Total stockholders' equity
  12,208,509 
  5,133,667 
 
    
    
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
 $34,717,226 
 $27,622,994 
 
    
    
 
See notes to condensed financial statements.
 
 
 
3
 
 
 
CEL-SCI CORPORATION
 
 
CONDENSED STATEMENTS OF OPERATIONS
 
 
SIX MONTHS ENDED MARCH 31, 2020 and 2019
 
 
(UNAUDITED)
 
 
 
 
2020
 
 
2019
 
 
 
 
 
 
 
 
Grant income
 $334,232 
 $277,183 
 
    
    
Operating Expenses:
    
    
  Research and development
  8,598,960 
  6,304,260 
  General and administrative
  5,197,418 
  3,313,985 
Total operating expenses
  13,796,378 
  9,618,245 
 
    
    
Operating loss
  (13,462,146)
  (9,341,062)
 
    
    
Other income
  36,896 
  36,127 
(Loss)/gain on derivative instruments
  (2,282,518)
  4,589,135 
Other non-operating gains
  1,725,180 
  421,353 
Interest expense, net
  (504,190)
  (907,332)
Net loss
  (14,486,778)
  (5,201,779)
 
    
    
Modification of warrants
  (21,734)
  - 
 
    
    
Net loss available to common shareholders
 $(14,508,512)
 $(5,201,779)
 
    
    
 
    
    
Net loss per common share
    
    
      BASIC
 $(0.41)
 $(0.18)
      DILUTED
 $(0.41)
 $(0.19)
 
    
    
Weighted average common shares outstanding
    
    
      BASIC
  35,621,711 
  28,543,417 
      DILUTED
  35,621,711 
  28,548,818 
 
    
    
 
See notes to condensed financial statements.
 
 
 
4
 
 
 
CEL-SCI CORPORATION
 
 
CONDENSED STATEMENTS OF OPERATIONS
 
 
THREE MONTHS ENDED MARCH 31, 2020 and 2019
 
 
(UNAUDITED)
 
 
 
 
2020
 
 
2019
 
 
 
 
 
 
 
 
Grant income
 $298,726 
 $150,769 
 
    
    
Operating Expenses:
    
    
  Research and development
  4,402,347 
  2,832,546 
  General and administrative
  2,558,522 
  1,624,823 
Total operating expenses
  6,960,869 
  4,457,369 
 
    
    
Operating loss
  (6,662,143)
  (4,306,600)
 
    
    
Other income
  18,448 
  18,216 
Loss on derivative instruments
  (3,049,027)
  (967,171)
Other non-operating gains (losses)
  934,511 
  (730,823)
Interest expense, net
  (253,407)
  (461,303)
Net loss
  (9,011,618)
  (6,447,681)
 
    
    
Modification of warrants
  (21,734)
  - 
 
    
    
Net loss available to common shareholders
 $(9,033,352)
 $(6,447,681)
 
    
    
 
    
    
Net loss per common share
    
    
      BASIC
 $(0.25)
 $(0.22)
      DILUTED
 $(0.25)
 $(0.22)
 
    
    
Weighted average common shares outstanding
    
    
      BASIC
  36,165,050 
  29,113,910 
      DILUTED
  36,165,050 
  29,113,910 
 
    
    
 
See notes to condensed financial statements.
 
 
 
5
 
 
 
CEL-SCI CORPORATION
 
 
STATEMENTS OF STOCKHOLDERS' EQUITY
 
 
(UNAUDITED)
 
 
 
 
 
 
 
 
 
 
Additional
 
 
 
 
 
 
 
 
 
Common
 
 
Stock
 
 
Paid-In
 
 
Accumulated
 
 
 
 
 
 
 Shares
 
 
Amount
 
 
Capital
 
 
Deficit
 
 
Total
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
BALANCES AT OCTOBER 1, 2019
  35,231,776 
 $352,318 
 $358,507,603 
 $(353,726,254)
 $5,133,667 
 
    
    
    
    
    
Adoption of new accounting standard
    
    
    
  104,244 
  104,244 
Issuance of common stock
  606,395 
  6,064 
  5,043,939 
  - 
  5,050,003 
Warrant exercises
  132,900 
  1,329 
  295,772 
  - 
  297,101 
Equity based compensation - employees
  - 
  - 
  1,800,225 
  - 
  1,800,225 
401(k) contributions paid in common stock
  4,474 
  45 
  40,892 
  - 
  40,937 
Stock issued to nonemployees for service
  15,819 
  158 
  84,289 
  - 
  84,447 
Purchase of stock by officer
  3,725 
  37 
  24,963 
  - 
  25,000 
Share issuance costs
  - 
  - 
  (92,150)
  - 
  (92,150)
Net loss
  - 
  - 
  - 
  (5,475,160)
  (5,475,160)
 
    
    
    
    
    
BALANCES AT DECEMBER 31, 2019
  35,995,089 
  359,951 
  365,705,533 
  (359,097,170)
  6,968,314 
 
    
    
    
    
    
Proceeds from the sale of common stock
  721,459 
  7,215 
  7,860,414 
  - 
  7,867,629 
Warrant exercises
  562,100 
  5,621 
  4,313,085 
  - 
  4,318,706 
Equity based compensation - employees
  - 
  - 
  1,780,979 
  - 
  1,780,979 
401(k) contributions paid in common stock
  3,376 
  34 
  38,925 
  - 
  38,959 
Stock issued to nonemployees for service
  17,120 
  171 
  234,853 
  - 
  235,024 
Purchase of stock by officers and directors
  16,787 
  168 
  159,822 
  - 
  159,990 
Option exercises
  20,480 
  205 
  49,693 
  - 
  49,898 
Share issuance costs
  - 
  - 
  (199,372)
  - 
  (199,372)
Net loss
  - 
  - 
    
  (9,011,618)
  (9,011,618)
 
    
    
    
    
    
BALANCES AT MARCH 31, 2020
  37,336,411 
 $373,365 
 $379,943,932 
 $(368,108,788)
 $12,208,509 
 
 
 
 
 
 
 
 
 
 
Additional
 
 
 
 
 
 
 
 
 
Common
 
 
Stock
 
 
Paid-In
 
 
Accumulated
 
 
 
 
 
 
 Shares
 
 
Amount
 
 
Capital
 
 
Deficit
 
 
Total
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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 service
  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 service
  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 
Share 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 
 
See notes to condensed financial statements.
 
 
6
 
 
 
CEL-SCI CORPORATION
 
 
CONDENSED STATEMENTS OF CASH FLOWS
 
 
SIX MONTHS ENDED MARCH 31, 2020 and 2019
 
 
(UNAUDITED)
 
 
 
 
2020
 
 
2019
 
 
 
 
 
 
 
 
Net loss
 $(14,486,778)
 $(5,201,779)
  Adjustments to reconcile net loss to
    
    
    net cash used in operating activities:
    
    
      Depreciation and amortization
  951,831 
  316,083 
 Share-based payments for services
  347,227 
  511,424 
      Equity based compensation
  3,581,204 
  1,104,490 
      Common stock contributed to 401(k) plan
  79,896 
  72,124 
      Shares issued for settlement of clinical research costs
  - 
  1,290,000 
      Loss (Gain) on derivative instruments
  2,282,518 
  (4,589,135)
      Capitalized lease interest
  - 
  64,432 
      (Increase)/decrease in assets:
    
    
      Receivables
  476 
  (4,579)
      Prepaid expenses
  96,951 
  (74,741)
      Supplies used for R&D and manufacturing
  (67,185)
  (115,774)
      Increase/(decrease) in liabilities:
    
    
      Accounts payable
  (765,872)
  (1,489,234)
      Accrued expenses
  20,110 
  82,580 
      Due to employees
  (34,034)
  245,074 
      Other liabilities
  3,438 
  (1,057)
 
    
    
Net cash used in operating activities
  (7,990,218)
  (7,790,092)
 
    
    
CASH FLOWS FROM INVESTING ACTIVITIES:
    
    
      Purchases of property and equipment
  (752,797)
  (160,920)
      Expenditures for patent costs
  (13,996)
  (67,661)
 
    
    
Net cash used in investing activities
  (766,793)
  (228,581)
 
    
    
CASH FLOWS FROM FINANCING ACTIVITIES:
    
    
     Proceeds from issuance of common stock
  12,917,632 
  - 
     Payments of stock issuance costs
  (190,553)
  (80,224)
     Proceeds from the purchase of stock by officers and directors
  184,990 
  - 
     Proceeds from exercises of warrants
  2,069,272 
  3,305,387 
     Proceeds from exercises of options
  49,898 
  - 
     Payments on obligations under finance lease
  (389,132)
  (2,521)
 
    
    
Net cash provided by financing activities
  14,642,107 
  3,222,642 
 
    
    
 NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
  5,885,096 
  (4,796,031)
 
    
    
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD
  8,444,774 
  10,310,044 
 
    
    
CASH AND CASH EQUIVALENTS, END OF PERIOD
 $14,329,870 
 $5,514,013 
 
    
    
 
See notes to condensed financial statements.
 
 
 
7
 
 
 
CEL-SCI CORPORATION
 
 
CONDENSED STATEMENTS OF CASH FLOWS
 
 
SIX MONTHS ENDED MARCH 31, 2020 and 2019
 
 
 
 
 
 
 
 
 
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
 
 
 
 
 
 
 
 
 
 
 
 
 
2020
 
 
2019
 
Property and equipment included in current liabilities
 $318,984 
 $- 
Capitalizable patent costs included in current liabilities
 $13,465 
 $- 
Right of use asset acquired and liability incurred
 $13,712 
 $- 
Finance lease obligation included in accounts payable
 $983 
 $428 
Prepaid consulting services paid with issuance of common stock
 $137,244 
 $83,415 
Accrued consulting services to be paid with common stock
 $165,000 
 $- 
Fair value of warrant liabilities on date of exercise
 $2,546,535 
 $- 
Stock issuance costs included in current liabilities
 $116,549 
 $10,000 
 
    
    
 
    
    
  Cash paid for interest
 $585,748 
 $902,091 
 
    
    
 
 
 
 
 
8
 
 
CEL-SCI CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
SIX MONTHS ENDED MARCH 31, 2020 AND 2019 (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 (U.S. GAAP) 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/A for the year ended September 30, 2019.
 
In the opinion of management, the accompanying unaudited condensed financial statements contain all adjustments necessary for a fair presentation of the Company’s financial position as of March 31, 2020 and the results of its operations for the six months then ended. The condensed balance sheet as of September 30, 2019 is derived from the September 30, 2019 audited financial statements. On October 1, 2019, the Company adopted Accounting Standards Update (ASU) No. 2016-02 , “Leases” and its related amendments (collectively referred to as Topic 842 and codified as Accounting Standards Codification 842, or ASC 842) using the modified retrospective transition approach. In accordance with this adoption method, results for the reporting period ended March 31, 2020 are presented under the new standard, while prior period results continue to be reported under the previous standard. All other significant accounting policies have been consistently applied in the interim financial statements and the annual financial statements. The results of operations for the six and three months ended March 31, 2020 and 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 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. 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.
 
 
9
 
 
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 March 31, 2020 and September 30, 2019.
 
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 ASC 815, “Accounting for Derivative Instruments and Hedging Activities.” In accordance with ASC 815, 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.
 
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.
 
The Company has Incentive Stock Option Plans, Non-Qualified Stock Option Plans, Stock Compensation Plans, 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.
 
Newly Adopted Accounting Pronouncements
 
Effective October 1, 2019, the Company adopted ASC 842. ASC 842 requires that lessees recognize right-of-use assets and lease liabilities that are measured at the present value of the future lease payments at the lease commencement date. Subsequent measurement, including the presentation of expenses and cash flows, depends on the classification of the lease as either a finance lease or an operating lease. The Company elected the optional transition method that allows for a cumulative-effect adjustment in the period of adoption and did not restate prior periods. The Company also elected the transition package of three practical expedients which eliminates the requirements to reassess prior conclusions about lease identification, lease classification and initial direct costs. Further, the Company elected a short-term lease exception policy permitting the option to not apply the recognition requirements of this standard to short-term leases (i.e., leases with terms of 12 months or less) and an accounting policy to account for lease and non-lease components as a single component. The Company’s lease portfolio includes both finance and operating leases. The impact of adopting ASC 842 was to increase long term assets by approximately $1.0 million, decrease total liabilities by approximately $0.9 million and record a cumulative effect adjustment of approximately $0.1 million to opening accumulated deficit.
 
 
10
 
 
In June 2018, the Financial Accounting Standards Board ("FASB") issued ASU 2018-07, Compensation—Stock Compensation (Topic 718), which expands the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees, and thus, the accounting for share-based payments to non-employees will be substantially aligned. The Company adopted ASU 2018-07 as of October 1, 2019 with no impact on its financial statements and related disclosures.
 
New Accounting Pronouncements
 
In August 2018, the FASB issued ASU 2018-13, “Fair Value Measurement - Disclosure Framework (Topic 820)” (“ASU 2018-13”). The updated guidance improves the disclosure requirements on fair value measurements. The updated guidance becomes effective for the Company on October 1, 2021. Early adoption is permitted for any removed or modified disclosures. The Company is currently assessing the timing and impact of adopting the updated provisions.
 
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
 
On January 30, 2020, the World Health Organization (“WHO”) announced a global health emergency because of a new strain of coronavirus originating in Wuhan, China (the “COVID-19 outbreak”) and the risks to the international community as the virus spreads globally beyond its point of origin. In March 2020, because of the rapid increase in exposure globally, the WHO classified the COVID-19 outbreak as a pandemic. The full impact of the COVID-19 outbreak continues to evolve as of the date of this report. As such, it is uncertain as to the full magnitude that the pandemic will have on the Company’s financial condition, liquidity, and future results of operations. Management is actively monitoring the impact of the global situation on its financial condition, liquidity, operations, suppliers, industry, and workforce. Given the daily evolution of the COVID-19 outbreak and the global responses to curb its spread, the Company is not able to estimate the effects of the COVID-19 outbreak on its results of operations, financial condition, or liquidity for fiscal year 2020.  Although the Company cannot estimate the length or gravity of the impact of the COVID-19 outbreak, if the pandemic continues, it may have an adverse effect on the Company’s results of future operations, financial position, and liquidity in fiscal year 2020.
 
On March 27, 2020, the United States enacted the Coronavirus Aid, Relief and Economic Security Act (CARES Act).  The Cares Act is an emergency economic stimulus package that includes spending and tax breaks to strengthen the United States economy and fund a nationwide effort to curtail the effect of COVID-19.  While the CARES Act provides sweeping tax changes in response to the COVID-19 pandemic, some of the more significant provisions which are expected to impact the Company’s financial statements include removal of certain limitations on utilization of net operating losses, increasing the loss carryback period for certain losses to five years, and increasing the ability to deduct interest expense, as well as amending certain provisions of the previously enacted Tax Cuts and Jobs Act.  The Company does not expect the enactment of the CARES Act to have a material impact to its financial position, results of operations or cash flows.
 
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 there is a high likelihood that it will continue to receive funds from private and public offerings and warrant conversions similar to the way it has substantially funded operations for the past 12 months. However, there can be no assurance that the Company will be able to raise sufficient capital to support its operations.
 
 
11
 
 
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, warrant exercises, 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 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 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.
 
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 is met will occur when there are a total of 298 deaths in those two groups. On May 4, 2020, we announced the threshold of 298 deaths (events) was reached.
 
C.
STOCKHOLDERS’ EQUITY
 
Proceeds from the Sale of Common Stock
 
In March 2020, the Company sold 630,500 shares of common stock at a public offering price of $12.22 per share and received aggregate net proceeds of approximately $7.1 million. Under the terms of the Underwriting Agreement the Company granted the Underwriters a 45-day option to purchase up to an additional 94,575 shares of common stock solely to cover over-allotments. The underwriter fully exercised this option in May 2020 resulting in additional net proceeds to the Company of approximately $1.1 million.
 
In December 2019, the Company sold 606,395 shares of common stock at a public offering price of $9.07 per share and received aggregate net proceeds of approximately $5.0 million. In January 2020, the underwriters of that offering fully exercised the option to purchase 90,959 additional shares of common stock at the public offering price of $9.07 per share for aggregate net proceeds to the Company of approximately $0.8 million.
 
Equity Compensation
 
Underlying share information for equity compensation plans as of March 31, 2020 is 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
  138,400 
  89,895 
  N/A 
  213 
Non-Qualified Stock Option Plans
  6,387,200 
  6,108,173 
  N/A 
  131,146 
Stock Bonus Plans
  783,760 
  N/A 
  339,076 
  444,651 
Stock Compensation Plans
  634,000 
  N/A 
  150,695 
  464,895 
Incentive Stock Bonus Plan
  640,000 
  N/A 
  616,500 
  23,500 
 
 
12
 
 
Underlying share information for equity compensation plans as of September 30, 2019 is 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
  138,400 
  89,895 
  N/A 
  213 
Non-Qualified Stock Option Plans
  6,387,200 
  6,128,321 
  N/A 
  112,166 
Stock Bonus Plans
  783,760 
  N/A 
  331,226 
  452,501 
Stock Compensation Plans
  634,000 
  N/A 
  130,183 
  485,407 
Incentive Stock Bonus Plan
  640,000 
  N/A 
  616,500 
  23,500 
 
Stock option activity:
 
 
Six Months Ended March 31,
 
 
 
2020
 
 
2019
 
Options granted
  2,500 
  500 
Options exercised
  20,480 
  - 
Options forfeited
  1,000 
  24,193 
Options expired
  1,168 
  2,400 
 
 
 
Three Months Ended March 31,
 
 
 
2020
 
 
2019
 
Options granted
  1,500 
  - 
Options exercised
  20,480 
  - 
Options forfeited
  1,000 
  24,193 
Options expired
  1,132 
  - 
 
 
Stock-Based Compensation Expense
 
 
Six months Ended March 31,
 
 
 
2020
 
 
2019
 
Employees
 $3,581,204 
 $1,104,490 
Non-employees
 $347,227 
 $511,424 
 
 
 
Three months Ended March 31,
 
 
 
2020
 
 
2019
 
Employees
 $1,780,979 
 $530,830 
Non-employees
 $191,487 
 $272,520 
 
Employee compensation expense includes the expense related to options issued or vested and restricted stock granted. Non-employee expense includes the expense related to options and stock issued to consultants expensed over the period of their service contracts.
 
 
13
 
 
Warrants and Non-Employee Options
 
The following chart represents the warrants and non-employee options outstanding at March 31, 2020:
 
Warrant/Options
 
Issue Date
 
Shares Issuable upon Exercise
of Warrants/ Options
 
 
Exercise Price
 
Expiration Date
 
Reference
 
Series N
 
8/18/2008
  85,339 
 $3.00 
2/18/2021
  2 
Series V
 
5/28/2015
  810,127 
 $19.75 
5/28/2020
  1 
Series UU
 
6/11/2018
  154,810 
 $2.80 
6/11/2020
  * 
Series W
 
10/28/2015
  688,930 
 $16.75 
10/28/2020
  1 
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
  1 
Series BB
 
8/26/2016
  16,000 
 $13.75 
8/22/2021
  1 
Series Z
 
5/23/2016
  264,000 
 $13.75 
11/23/2021
  1 
Series CC
 
12/8/2016
  153,643 
 $5.00 
12/8/2021
  1 
Series HH
 
2/23/2017
  200 
 $3.13 
2/16/2022
  1 
Series AA
 
8/26/2016
  200,000 
 $13.75 
2/22/2022
  1 
Series MM
 
6/22/2017
  893,491 
 $1.86 
6/22/2022
  * 
Series NN
 
7/24/2017
  375,545 
 $2.52 
7/24/2022
  2 
Series OO
 
7/31/2017
  10,000 
 $2.52 
7/31/2022
  2 
Series RR
 
10/30/2017
  457,116 
 $1.65 
10/30/2022
  * 
Series SS
 
12/19/2017
  365,538 
 $2.09 
12/18/2022
  2 
Series TT
 
2/5/2018
  381,564 
 $2.24 
2/5/2023
  2 
Series VV
 
7/2/2018
  55,000 
 $1.75 
1/2/2024
  2 
Consultants
 
7/28/17
  10,000 
 $2.18 
7/27/2027
  * 
 
* No current period changes to these warrants and non-employee options
 
1.
Warrant Liabilities
 
The table below presents the fair value of the warrant liabilities at the balance sheet dates:
 
 
 
March 31,
2020
 
 
September 30,
2019
 
Series V warrants
 $595,981 
 $674,442 
Series W warrants
  1,560,876 
  1,193,507 
Series Z warrants
  1,421,421 
  1,109,545 
Series ZZ warrants
  82,223 
  77,638 
Series AA warrants
  1,243,531 
  916,908 
Series BB warrants
  70,994 
  63,966 
Series CC warrants
  1,247,399 
  1,710,898 
Series FF warrants
  - 
  446,185 
Series HH warrants
  1,868 
  45,657 
Series JJ warrants
  - 
  66,599 
Series LL warrants
  - 
  182,965 
Total warrant liabilities
 $6,224,293 
 $6,488,310 
 
 
14
 
 
The table below presents the gains/(losses) on the warrant liabilities for the six months ended March 31:
 
 
 
 2020
 
 
 2019
 
Series S warrants
 $- 
 $33 
Series V warrants
  78,461 
  494,852 
Series W warrants
  (367,369)
  616,028 
Series Z warrants
  (311,876)
  114,831 
Series ZZ warrants
  (4,585)
  12,638 
Series AA warrants
  (326,623)
  93,268 
Series BB warrants
  (7,028)
  7,736 
Series CC warrants
  (826,277)
  339,698 
Series DD warrants
  - 
  1,249,287 
Series EE warrants
  - 
  1,249,287 
Series FF warrants
  (319,706)
  34,603 
Series GG warrants
  - 
  106,750 
Series HH warrants
  (34,457)
  10,642 
Series II warrants
  - 
  115,343 
Series JJ warrants
  (64,992)
  15,926 
Series KK warrants
  - 
  113,467 
Series LL warrants
  (98,066)
  14,746 
Net (loss)/gain on warrant liabilities
 $(2,282,518)
 $4,589,135 
 
The table below presents the losses on the warrant liabilities for the three months ended March 31:
 
 
 
 2020
 
 
 2019
 
Series V warrants
 $(476,570)
 $(61,480)
Series W warrants
  (518,743)
  (10,822)
Series Z warrants
  (322,425)
  (89,290)
Series ZZ warrants
  (19,432)
  (1,685)
Series AA warrants
  (391,601)
  (63,951)
Series BB warrants
  (6,597)
  (4,374)
Series CC warrants
  (803,596)
  (325,908)
Series FF warrants
  (312,517)
  (34,459)
Series GG warrants
  - 
  (106,032)
Series HH warrants
  (34,375)
  (10,309)
Series II warrants
  - 
  (115,246)
Series JJ warrants
  (64,862)
  (15,536)
Series KK warrants
  - 
  (114,628)
Series LL warrants
  (98,309)
  (13,451)
Net loss on warrant liabilities
 $(3,049,027)
 $(967,171)
  
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.
 
 
15
 
 
Changes in Warrant 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.
 
On October 11, 2018, 327,729 Series S warrants, with an exercise price of $31.25 expired.
 
Exercise of Warrant Liabilities
 
The following warrants recorded as liabilities were exercised during the periods ended March 31, 2020.
 
 
 
Three Months
 
 
Six Months
 
Warrants
 
Warrants Exercised
 
 
Exercise Price
 
 
Proceeds
 
 
Warrants Exercised
 
 
Exercise Price
 
 
Proceeds
 
Series CC
  123,820 
 $5.00 
 $619,100 
  123,820 
 $5.00 
 $619,100 
Series FF
  68,048 
 $3.91 
  265,812 
  68,048 
 $3.91 
  265,812 
Series HH
  6,300 
 $3.13 
  19,687 
  6,300 
 $3.13 
  19,687 
Series JJ
  9,450 
 $3.13 
  29,531 
  9,450 
 $3.13 
  29,531 
Series LL
  26,398 
 $3.59 
  94,867 
  26,398 
 $3.59 
  94,867 
 
  234,016 
    
 $1,028,997 
  234,016 
    
 $1,028,997 
 
No warrants recorded as liabilities were exercised during the six and three months ended March 31, 2019.
 
2.
Equity Warrants
 
Changes in Equity Warrants
 
On January 23, 2020, the expiration date of the Series N warrants was extended to February 18, 2021. The incremental cost of this extension was approximately $22,000, which was recorded as a deemed dividend in the financial statements for the six and three months ended March 31, 2020. The Series N warrants are held by the de Clara Trust, of which the Company’s CEO, Geert Kersten, is a beneficiary.
 
Exercise of Equity Warrants
 
The following warrants recorded as equity were exercised during the periods ended March 31, 2020.
 
 
 
Three Months
 
 
Six Months
 
Warrants
 
Warrants Exercised
 
 
Exercise Price
 
 
  Proceeds
 
 
Warrants Exercised
 
 
Exercise Price
 
 
  Proceeds
 
Series NN
  98,253 
 $2.52 
 $247,598 
  98,253 
 $2.52 
 $247,598 
Series OO
  30,000 
 $2.52 
  75,600 
  40,000 
 $2.52 
  100,800 
Series SS
  94,474 
 $2.09 
  197,451 
  117,106 
 $2.09 
  244,752 
Series TT
  77,857 
 $2.24 
  174,400 
  178,125 
 $2.24 
  399,000 
Series VV
  27,500 
 $1.75 
  48,125 
  27,500 
 $1.75 
  48,125 
 
  328,084 
    
 $743,174 
  460,984 
    
 $1,040,275 
 
The following warrants recorded as equity were exercised during the periods ended March 31, 2019.
 
 
 
Three Months
 
 
Six Months
 
Warrants
 
Warrants Exercised
 
 
Exercise Price
 
 
Proceeds
 
 
Warrants Exercised
 
 
Exercise Price
 
 
Proceeds
 
Series PP
  - 
  - 
  - 
  60,000 
 $2.30 
 $138,000 
Series SS
  13,158 
 $2.09 
 $27,500 
  165,790 
 $2.09 
  346,501 
Series TT
  - 
  - 
  - 
  86,050 
 $2.24 
  192,752 
Series VV
  1,385,000 
 $1.75 
  2,423,750 
  1,385,000 
 $1.75 
  2,423,750 
Series WW
  125,775 
 $1.63 
  204,384 
  125,775 
 $1.63 
  204,384 
 
  1,523,933 
    
 $2,655,635 
  1,822,615 
    
 $3,305,387 
 
 
16
 
 
3. 
Options and Shares Issued to Consultants
 
During the six months ended March 31, 2020 and 2019, the Company issued 32,939 and 140,233 shares, respectively, of restricted common stock to consultants for services. The weighted average grant date fair value of the shares issued to consultants was $9.44 and $3.04 during the six months ended March 31, 2020 and 2019, respectively. During the three months ended March 31, 2020 and 2019, the Company issued 17,120 and 77,449 shares of restricted common stock to consultants for services. The weighted average grant date fair value of the shares issued to consultants was $11.53 and $2.89, respectively, during the three months ended March 31, 2020 and 2019. 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 six months ended March 31, 2020 and 2019, the Company recorded total expense of approximately $347,000 and $511,000, respectively, relating to these consulting agreements. At March 31, 2020 and September 30, 2019, approximately $367,000 and $230,000, respectively, are included in prepaid expenses. At March 31, 2020, the Company has accrued $165,000 for shares to be issued. As of March 31, 2020, 10,000 options issued to consultants remained outstanding, all of which were issued from the Non-Qualified Stock Option plans and are fully vested.
 
4. 
Securities Purchase Agreements
 
The Company has entered into Securities Purchase Agreements (SPA) with Ergomed plc, one of the Company’s Clinical Research Organizations responsible for managing the Company’s Phase 3 clinical trial, to facilitate payment of amounts due Ergomed. Under the Agreements, the Company issued Ergomed shares of common stock and the net proceeds from the sales of those shares would reduce outstanding amounts due 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.
 
On January 9, 2019, the Company entered into an SPA under which it issued Ergomed 500,000 restricted shares of the Company’s common stock valued at approximately $1.3 million. No other shares were issued under the SPA during the periods presented.
 
The following table summarizes the Other Non-Operating Gains (Loss) for the six and three months ended March 31, 2020 and 2019 relating to these agreements:
 
 
 
Six Months Ended
 
 
Three Months Ended
 
 
 
3/31/2020
 
 
3/31/2019
 
 
3/31/2020
 
 
3/31/2019
 
Amount realized through the resale of shares
 $1,720,680 
 $1,711,353 
 $934,511 
 $559,177 
Fair value of shares upon issuance
  - 
  1,290,000 
  - 
  1,290,000 
Other non-operating gain (loss)
 $1,720,680 
 $421,353 
 $934,511 
 $(730,823)
 
On August 15, 2019, the Company entered into an SPA under which it issued Ergomed 250,000 restricted shares of the Company’s common stock. As of March 31, 2020, Ergomed held 20,250 shares for resale.
 
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.
 
 
17
 
 
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 an 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 March 31, 2020:
 
 
 
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
 $- 
 $- 
 $6,224,293 
 $6,224,293 
 
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, 2019:
 
 
 
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
 $- 
 $- 
 $6,488,310 
 $6,488,310 
  
The following sets forth the reconciliation of beginning and ending balances related to fair value measurements using significant unobservable inputs (Level 3) for the six months ended March 31, 2020 and the year ended September 30, 2019:
 
 
 
Six months ended
 
 
Twelve months ended
 
 
 
March 31, 2020
 
 
September 30, 2019
 
 
 
 
 
 
 
 
Beginning balance
 $6,488,310 
 $9,317,031 
Issuances
  - 
  - 
Exercises
  (2,546,535)
  (3,589,357)
Realized and unrealized losses
  2,282,518 
  760,636 
Ending balance
 $6,224,293 
 $6,488,310 
 
 
18
 
 
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 six months ended March 31, 2020, officers and directors of the Company purchased 20,512 shares of restricted common stock at an aggregate fair market value of approximately $185,000. This include 16,787 shares purchased during the three months ended March 31, 2020 with an aggregate fair market value of approximately $160,000.
 
On January 23, 2020, the expiration date of the Series N warrants was extended to February 18, 2021. The incremental cost of this extension was approximately $22,000, which was recorded as a deemed dividend in the financial statements for the six and three months ended March 31, 2020. The Series N warrants are held by the de Clara Trust, of which the Company’s CEO, Geert Kersten, is a beneficiary.
 
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 $32.5 million for Ergomed’s services. This amount is net of Ergomed’s discount of approximately $11 million. During the six months ended March 31, 2020 and 2019, the Company recorded, net of Ergomed’s discount, approximately $1.6 million and $1.5 million, respectively, as research and development expense related to Ergomed’s services. During the three months ended March 31, 2020 and 2019, the Company recorded, net of Ergomed’s discount, approximately $0.8 million and $0.7 million, respectively, as research and development expense related to Ergomed’s services.
 
Lease Agreements
 
The Company determines whether a contract contains a lease at the inception of a contract by determining if the contract conveys the right to control the use of identified property, plant or equipment over a period of time in exchange for consideration. The Company leases certain real estate, machinery, equipment and office equipment for varying periods. Many of these leases include an option to either renew or terminate the lease. For purposes of calculating lease liabilities, these options are included in the lease term when it is reasonably certain that the Company will exercise such options. The incremental borrowing rate utilized to calculate the lease liabilities is based on the information available at commencement date, as most of the leases do not provide an implicit borrowing rate. Short-term leases, defined as leases with initial terms of 12 months or less, are not reflected on the balance sheet. Lease expense for such short-term leases is not material. For purposes of calculating lease liabilities, lease and non-lease components are combined.
 
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, which expires in October 2028.
 
 
19
 
 
Upon adoption of ASC 842 on October 1, 2019, the Company recorded a finance lease right of use asset and a finance lease liability of approximately $13.5 million. As of March 31, 2020, the net book value of the finance lease right of use asset is approximately $12.7 million and the balance of the finance lease liability is approximately $13.1 million, of which approximately $0.9 million is current. These amounts include the San Tomas lease as well as several other smaller finance leases for office equipment. The finance right of use assets are being depreciated using a straight-line method over the underlying lease terms. Total cash paid related to finance leases during the six months ended March 31, 2020 was approximately $940,000, of which approximately $586,000 was for interest. The weighted average discount rate of the Company’s finance leases is 8.8% and the weighted average time to maturity is 8.8 years.
 
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 March 31, 2020 and September 30, 2019.
 
Approximate future minimum lease payments under finance leases as of March 31, 2020 are as follows:
 
 Six months ending September 30, 2020   
 $946,000 
 Year ending September 30,
    
 2021
  1,953,000 
 2022
  2,014,000 
 2023
  2,083,000 
 2024
  2,148,000 
 2025
  2,218,000 
 Thereafter
  7,322,000 
 Total future minimum lease obligation
  18,684,000 
 Less imputed interest on finance lease obligations
  (5,585,000)
 Net present value of lease finance lease obligations
 $13,099,000 
 
The Company rents a portion of its space on a month-to-month term basis, which requires a 30-day notice for termination. On January 3, 2020, the Company notified the tenant of the sublet property of its intention to terminate the sublease effective April 30, 2020 since this space is needed to prepare the facility to produce Multikine for commercial purposes and before the Company’s Biologics License Application (BLA) can be submitted to the FDA. The rental income for each of the six months ended March 31, 2020 and 2019 was approximately $37,000 and $36,000, respectively. The sublease rental income for each of the three months ended March 31, 2020 and 2019 was approximately $18,000.
 
The Company leases two facilities under 60-month operating leases – the lease for its research and development laboratory expires February 28, 2022 and the lease for its office headquarters expires June 30, 2020. During the six months ended March 31, 2020, the Company incurred approximately $80,000 in leasehold improvements costs for the research and development lab and is reasonably certain to renew the lease through February 28, 2027. The renewal period is included in the right of use asset and liability calculations. The operating leases include escalating rental payments. The Company is recognizing the related rent expense on a straight-line basis over the full 60-month terms of the leases. Upon adoption of ASC 842 on October 1, 2019, the Company recorded an operating lease right of use asset and an operating lease liability of approximately $1.0 million. As of March 31, 2020, the net book value of the operating lease right of use asset is approximately $0.9 million and the balance of the operating lease liability is approximately $0.9 million, of which approximately $0.1 million is current. The Company incurred lease expense under operating leases of approximately $135,000 and $68,000 for the six and three months ended March 31, 2020, respectively. Total cash paid related to operating leases during the six and three months ended March 31, 2020 was approximately $132,000 and $66,000, respectively.
 
 
20
 
 
As of March 31, 2020, future minimum lease payments on operating leases are as follows:
 
Six months ending September 30, 2020
 $107,000 
Year ending September 30,
    
2021
  163,000 
2022
  168,000 
2023
  173,000 
2024
  178,000 
2025
  183,000 
 
 Thereafter
 
  269,000 
 
 Total future minimum lease obligation
 
  1,241,000 
 
 Less imputed interest on operating lease obligation
 
  (317,000)
 
 Net present value of operating lease obligation
 
 $924,000 
 
G.   PATENTS
 
During the six months ended March 31, 2020 and 2019, no patent impairment charges were recorded. For the six months ended March 31, 2020 and 2019, amortization of patent costs totaled approximately $27,000 and $23,000, respectively. For the three months ended March 31, 2020 and 2019, amortization of patent costs totaled approximately $14,000 and $11,000, respectively. Approximate estimated future amortization expense is as follows:
 
Six months ending September 30, 2020
 $26,000 
Year ending September 30,
    
2021
  50,000 
2022
  46,000 
2023
  36,000 
2024
  28,000 
2025
  25,000 
Thereafter
  101,000 
Total
 $312,000 
 
H.   LOSS PER COMMON SHARE
 
The following tables provide the details of the basic and diluted loss per-share computations: