Attached files
UNITED
STATES
SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
FORM
10-Q/A
(Amendment
No. 1)
(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
|
EXPLANATORY NOTE
This
amended 10-Q is filed to correct the manner in which the Company
accounted for the adoption of ASC 842. See Note I. Restatement, to
the accompanying financial statements, for further
information.
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
|
23
|
|
|
|
Item
3.
|
Quantitative
and Qualitative Disclosures about Market Risks
|
26
|
|
|
|
Item
4.
|
Controls
and Procedures
|
26
|
|
|
|
PART II
|
|
|
|
|
|
Item
2.
|
Unregistered
Sales of Equity Securities and Use of Proceeds
|
28
|
|
|
|
Item
6.
|
Exhibits
|
28
|
|
|
|
|
Signatures
|
29
|
2
CEL-SCI
CORPORATION
|
|||
CONDENSED
BALANCE SHEETS
|
|
RESTATED
|
|
|
MARCH
31,
|
SEPTEMBER
30,
|
ASSETS
|
2020
|
2019
|
|
(UNAUDITED)
|
|
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
|
14,670,746
|
-
|
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
|
$36,646,777
|
$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
|
(366,179,237)
|
(353,726,254)
|
|
|
|
Total
stockholders' equity
|
14,138,060
|
5,133,667
|
|
|
|
TOTAL
LIABILITIES AND STOCKHOLDERS' EQUITY
|
$36,646,777
|
$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)
|
|
RESTATED
|
|
|
2020
|
2019
|
|
|
|
Grant
income
|
$334,232
|
$277,183
|
|
|
|
Operating
Expenses:
|
|
|
Research
and development
|
8,711,360
|
6,304,260
|
General
and administrative
|
5,197,418
|
3,313,985
|
Total
operating expenses
|
13,908,778
|
9,618,245
|
|
|
|
Operating
loss
|
(13,574,546)
|
(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
|
(14,599,178)
|
(5,201,779)
|
|
|
|
Modification
of warrants
|
(21,734)
|
-
|
|
|
|
Net
loss available to common shareholders
|
$(14,620,912)
|
$(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)
|
|
RESTATED
|
|
|
2020
|
2019
|
|
|
|
Grant
income
|
$298,726
|
$150,769
|
|
|
|
Operating
Expenses:
|
|
|
Research
and development
|
4,458,547
|
2,832,546
|
General
and administrative
|
2,558,522
|
1,624,823
|
Total
operating expenses
|
7,017,069
|
4,457,369
|
|
|
|
Operating
loss
|
(6,718,343)
|
(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
|
(9,067,818)
|
(6,447,681)
|
|
|
|
Modification
of warrants
|
(21,734)
|
-
|
|
|
|
Net
loss available to common shareholders
|
$(9,089,552)
|
$(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-
RESTATED
|
|
|
|
2,146,195
|
2,146,195
|
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-
RESTATED
|
-
|
-
|
-
|
(5,531,360)
|
(5,531,360)
|
|
|
|
|
|
|
RESTATED
BALANCES DECEMBER 31, 2019
|
35,995,089
|
359,951
|
365,705,533
|
(357,111,419)
|
8,954,065
|
|
|
|
|
|
|
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 -
RESTATED
|
-
|
-
|
|
(9,067,818)
|
(9,067,818)
|
|
|
|
|
|
|
RESTATED
BALANCES AT MARCH 31, 2020
|
37,336,411
|
$373,365
|
$379,943,932
|
$(366,179,237)
|
$14,138,060
|
|
|
|
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)
|
|
RESTATED
|
|
|
2020
|
2019
|
|
|
|
Net
loss
|
$(14,599,178)
|
$(5,201,779)
|
Adjustments
to reconcile net loss to
|
|
|
net
cash used in operating activities:
|
|
|
Depreciation
and amortization
|
1,064,231
|
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:
|
|
|
|
|
|
|
RESTATED
|
|
|
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 $3.0 million,
increase total liabilities by approximately $0.9 million and record
a cumulative effect adjustment of approximately $2.1
million to opening accumulated deficit. Refer
to Note I for details regarding the restatement as a result of an
error relating to the adoption of ASC 842.
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 of
approximately $15.5 million 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
$14.7 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:
|
Six
months ended March 31,
|
Three
months ended March 31,
|
||
|
2020
|
2019
|
2020
|
2019
|
Loss per share - basic
|
|
|
|
|
Net
loss available to common shareholders - basic
|
$(14,620,912)
|
$(5,201,779)
|
$(9,089,552)
|
$(6,447,681)
|
Weighted
average shares outstanding - basic
|
35,621,711
|
28,543,417
|
36,165,050
|
29,113,910
|
Basic
loss per common share
|
$(0.41)
|
$(0.18)
|
$(0.25)
|
$(0.22)
|
|
|
|
|
|
Loss per share - diluted
|
|
|
|
|
Net
loss available to common shareholders - basic
|
$(14,620,912)
|
$(5,201,779)
|
$(9,089,552)
|
$(6,447,681)
|
Gain on derivatives (1)
|
-
|
(335,560)
|
-
|
-
|
Net
loss available to common shareholders - diluted
|
$(14,620,912)
|
$(5,537,339)
|
$(9,089,552)
|
$(6,447,681)
|
|
|
|
|
|
Weighted
average shares outstanding - basic
|
35,621,711
|
28,543,417
|
36,165,050
|
29,113,910
|
Incremental shares underlying dilutive "in the
money" warrants (1)
|
-
|
5,401
|
-
|
-
|
Weighted
average shares outstanding - diluted
|
35,621,711
|
28,548,818
|
36,165,050
|
29,113,910
|
Diluted
loss per common share
|
$(0.41)
|
$(0.19)
|
$(0.25)
|
$(0.22)
|
(1)
Includes shares issuable upon the exercise of the Series GG, II and
KK warrants for the six months ended March 31, 2019.
21
The gain on
derivatives priced lower than the average market price during the
period is excluded from the numerator and the related shares are
excluded from the denominator in calculating diluted loss per
share.
In accordance with
the contingently issuable shares guidance of FASB ASC Topic 260,
Earnings Per Share, the
calculation of diluted net earnings (loss) per share excludes the
following securities because their inclusion would have been
anti-dilutive as of March 31:
|
2020
|
2019
|
|
|
|
Options
and Warrants
|
6,452,645
|
10,576,881
|
Unvested
Restricted Stock
|
318,798
|
308,500
|
Total
|
6,771,443
|
10,885,381
|
I. RESTATEMENT
In
October 2008, the Company entered into an agreement whereby the
Company leased a building owned by a third party. The Company
accounted for the lease arrangement in accordance with the
build-to-suit guidance in ASC 840-40-55. On October 1, 2019, the
Company adopted ASC 842 using the modified retrospective transition
approach. Upon adoption of ASC 842, the Company determined the
arrangement should be accounted for as a finance
lease.
In
December 2020, the Company determined that the opening finance
right of use (ROU) asset and total stockholders’ equity
balances were understated by approximately $2.04 million as of
October 1, 2019, the date of adoption. The following is a summary
of the components of the understated balances:
●
The
unamortized value of approximately $0.6 million relating to the
issuance of warrants to the landlord should have been capitalized
and included as part of the finance ROU asset as of October 1,
2019.
●
The
unamortized value of approximately $1.4 million relating to a
payment made to the landlord at lease inception, which the Company
is recovering in the form of reduced rent, should have been
capitalized and included as part of the finance ROU asset as of
October 1, 2019.
The changes do not
impact any prior year’s financial statements but are an
adjustment to the opening finance ROU asset and accumulated deficit
balances effective October 1, 2019. As a result of the changes to
the opening finance ROU asset and accumulated deficit balances, the
accompanying financial statements for the six and three months
ended March 31, 2020 have been restated to reflect the correction
of the error. The following is a summary of the
restatement:
|
March 31,
2020
|
||
BALANCE SHEET
|
PREVIOUSLY
REPORTED
|
ADJUSTMENT
|
RESTATED
|
Finance
lease right of use assets
|
$ 12,741,195
|
$ 1,929,551
|
$ 14,670,746
|
Total
assets
|
34,717,226
|
1,929,551
|
36,646,777
|
Accumulated
deficit
|
(368,108,788)
|
1,929,551
|
(366,179,237)
|
Total
stockholders' equity
|
12,208,509
|
1,929,551
|
14,138,060
|
Total
liabilities and stockholders' equity
|
34,717,226
|
1,929,551
|
36,646,777
|
|
Six Months
Ended March 31, 2020
|
Three Months
Ended March 31, 2020
|
||||
STATEMENT OF OPERATIONS
|
PREVIOUSLY
REPORTED
|
ADJUSTMENT
|
RESTATED
|
PREVIOUSLY
REPORTED
|
ADJUSTMENT
|
RESTATED
|
Research
and development expenses
|
$ 8,598,960
|
$ 112,400
|
$ 8,711,360
|
$ 4,402,347
|
$ 56,200
|
$ 4,458,547
|
Total
operating expenses
|
13,796,378
|
112,400
|
13,908,778
|
6,960,869
|
56,200
|
7,017,069
|
Operating
loss
|
(13,462,146)
|
(112,400)
|
(13,574,546)
|
(6,662,143)
|
(56,200)
|
(6,718,343)
|
Net
loss
|
(14,486,778)
|
(112,400)
|
(14,599,178)
|
(9,011,618)
|
(56,200)
|
(9,067,818)
|
Net
loss available to common shareholders
|
(14,508,512)
|
(112,400)
|
(14,620,912)
|
(9,033,352)
|
(56,200)
|
(9,089,552)
|
|
|
|
|
|
|
|
Net
loss per share - basic and diluted
|
$ (0.41)
|
|
$ (0.41)
|
$ (0.25)
|
|
$ (0.25)
|
The
impact, as a result of the restatement, to the accompanying
Statement of Cash Flows is an increase to net loss offset by an
increase to depreciation and amortization expense of $112,400
resulting in no impact to the cash used in operating
activities.
In
addition, the cumulative effect adjustment to the opening
accumulated deficit balance in the statement of stockholders'
equity as of October 1, 2019 increased $2.0 million from $0.1
million (previously reported) to $2.1 million
(restated).
22
J.
SUBSEQUENT
EVENTS
On April 6, 2020,
the Company agreed to issue Ergomed 100,000 restricted shares of
the Company’s common stock in payment of amounts the Company
may owe Ergomed for providing services to the Company.
Under the terms of the March 2020 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 on May
4, 2020 resulting in additional net proceeds to the Company of
approximately $1.1 million.
Item
2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Liquidity and Capital
Resources
The Company’s
lead investigational therapy, Multikine® (Leukocyte
Interleukin, Injection), is cleared for a Phase 3 clinical trial in
advanced primary head and neck cancer by the regulators in
twenty-four countries around the world, including the
U.S.
Multikine
(Leukocyte Interleukin, Injection) is the full name of this
investigational therapy, which, for simplicity, is referred to in
this report as Multikine. Multikine is the trademark that the
Company has registered for this investigational therapy, and this
proprietary name is subject to FDA review under the Company’s
future anticipated regulatory submission for approval. Multikine
has not been licensed or approved by the FDA or any other
regulatory agency. Neither has its safety or efficacy been
established for any use.
The Company also
owns and is developing a pre-clinical technology called LEAPS
(Ligand Epitope Antigen Presentation System).
All the
Company’s projects are under development. Consequently, the
Company cannot predict when it will be able to generate any revenue
from the sale of any of its products.
Since inception,
the Company has financed its operations through the sale of equity
securities, convertible notes, loans and certain research grants.
The Company’s expenses will continue to exceed its revenues
as it continues the development of Multikine and brings other drug
candidates into clinical trials. Until the Company becomes
profitable, any or all of these financing vehicles or others may be
utilized to assist in funding the Company’s capital
requirements.
Capital raised by
the Company has been expended primarily for patent applications,
research and development, administrative costs, and the
construction of the Company’s manufacturing and laboratory
facilities. The Company does not anticipate realizing significant
revenues until it enters into licensing arrangements for its
technology and know-how or until it receives regulatory approval to
sell its products (which could take several years). Thus, the
Company has been dependent upon the proceeds from the sale of its
securities to meet all its liquidity and capital requirements and
anticipates having to do so in the future.
23
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. However, there can be no assurance that the Company will be
able to raise sufficient capital to support its
operations.
Since
the Company launched its Phase 3 clinical trial for Multikine, the
Company has incurred expenses of approximately $58 million as of
March 31, 2020 on direct costs for the Phase 3 clinical trial. The
Company estimates it will incur additional expenses of
approximately $3.2 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.
The Company uses
two CRO’s to manage the global Phase 3 study; ICON and
Ergomed, which are both international leaders in managing oncology
trials. As of September 2016, the study was fully enrolled with 928
patients.
Under a
co-development agreement, Ergomed agreed to contribute up to $12
million towards the study where it will perform clinical services
in exchange for a single digit percentage of milestone and royalty
payments, up to a specified maximum amount. Approximately $11
million of these credits were realized as of March 31,
2020.
During the six
months ended March 31, 2020, the Company’s cash increased by
approximately $5.9 million. Significant components of this
increase include approximately $12.9 million in net proceeds from
the sale of common stock through public offerings and approximately
$2.1 million in proceeds from the exercise of warrants and options,
offset by net cash used to fund the Company’s regular
operations, including its Phase 3 clinical trial, of approximately
$8.0 million, approximately $0.8 million of equipment and leasehold
improvement expenditures and approximately $0.4 million in lease
payments. During the six months ended March 31, 2019, the
Company’s cash decreased by approximately $4.8 million.
Significant components of this decrease include net cash used to
fund the Company’s regular operations, including its Phase 3
clinical trial, of approximately $7.8 million and approximately
$0.2 million to purchase long term assets. The decrease was offset
by net proceeds from the exercise of warrants of approximately $3.3
million.
During the six months ended March 31, 2020,
695,000 warrants were exercised at a weighted average exercise
price of $2.98 for total proceeds of approximately $2.1
million. These exercises
include 562,100 warrants exercised during three months ended March
31, 2020 for proceeds of approximately $1.8 million. During the six
months ended March 31, 2019, 1,822,615 warrants were exercised at a
weighted average exercise price of $1.81 for proceeds of
approximately $3.3 million. These exercises include 1,523,933
warrants exercised during the three months ended March 31, 2019 for
proceeds of approximately $2.7 million.
The Company has
entered into Securities Purchase Agreements with Ergomed plc, one
of the Company’s Clinical Research Organizations responsible
for managing the Company’s Phase 3 clinical trial, to
facilitate a 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 loss and subsequently
offsets the expense as amounts are realized through the sale of the
Company’s shares by Ergomed and reduces accounts payable to
Ergomed. During the six months ended March 31, 2020 and 2019, the
Company realized approximately $1.7 million through the sale by
Ergomed of 177,750 and 545,324 shares of the Company’s common
stock, respectively, and the Company reduced accounts payable to
Ergomed and credited Other operating gains by those amounts. For
more information regarding the SPAs refer to Item 4 under Note C
above.
24
Current
assets other than cash, remained constant at March 31, 2020 as
compared to September 30, 2019. Receivables consist primarily of
amounts due from the Company’s partners for reimbursed
clinical study costs related to its Phase 3 clinical trial and
amounts to be reimbursed for costs related to its Small Business
Innovation Research (SBIR) grant. Prepaid expenses at March 31,
2020 were approximately $40,000 higher than the balances at
September 30, 2019 due to the timing of payments and recognition of
related expenses.
Supplies
are purchased for use in the Company’s manufacturing and
R&D efforts and vary with the study requirements. During the
six months ended March 31, 2020, the supplies increased by
approximately $67,000 in support of the work on modifications of
the manufacturing facility 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.
Results of Operations and Financial Condition
During the six
months ended March 31, 2020, research and development expenses
increased by approximately $2.4 million, or
38%, compared to the six months ended March 31, 2019.
Major components of this increase include approximately $1.2
million of costs incurred to prepare the manufacturing facility for
the potential commercial manufacture of Multikine, $1.1 million
increase in employee stock compensation expense, $0.6
million increase in depreciation expense resulting from the
adoption of the new leasing standard and an increase in
approximately $0.2 million in other miscellaneous research and
development expenses. These increases were offset by a decrease of
approximately $0.7 million in expenses related to the
Company’s on-going Phase 3 clinical trial. During the three
months ended March 31, 2020, research and development expenses
increased by approximately $1.6 million, or 57%,
compared to the three months ended March 31, 2019. Major components
of this increase include approximately $0.6 million of costs
incurred to prepare the manufacturing facility for the potential
commercial manufacture of Multikine, $0.5 million increase in
employee stock compensation expense, $0.3 million increase in
depreciation expense resulting from adoption of the new leasing
standard and an increase in approximately $0.2 million in other
miscellaneous research and development expenses.
During the six
months ended March 31, 2020, general and administrative expenses
increased by approximately $1.9 million, or 57%, compared to the
six months ended March 31, 2019. Approximately $1.4 million of the
change relates to an increase in employee stock compensation
expense. The remaining increase consists of approximately $0.5
million in net other general and administrative account variations.
During the three months ended March 31, 2020, general and
administrative expenses increased by approximately $0.9 million, or
58%, compared to the three months ended March 31, 2019.
Approximately $0.7 million of the change relates to an increase in
employee stock compensation expense. The remaining increase
consists of approximately $0.2 million in net other general and
administrative account variations.
The approximate
$2.3 million loss on derivative instruments for the six months
ended March 31, 2020 varies significantly from the approximate $4.6
million gain on derivative instruments for the six months ended
March 31, 2019. The variance is the result of the change in fair
value of the derivative liabilities at the respective period ends.
These changes were caused mainly by fluctuation in the share price
of the Company’s common stock.
Other non-operating
gain increased $1.3 million for the six months ended March 31, 2020
as compared to the six months ended March 31, 2019. This gain
relates to the SPA described in Item 4 under Note C. The amount of
the gain or loss is a result of the timing of shares issued to
Ergomed and the subsequent re-sale of those shares. During each of
the six-month periods ended March 31, 2020 and 2019, the Company
realized approximately $1.7 million in value upon the resale of
shares. Additionally, during the six months ended March 31, 2019,
the Company issued 500,000 shares to Ergomed and recorded a
non-operating loss equal to the fair value of those shares of
approximately $1.3 million.
Net interest
expense decreased by approximately $0.4 million for the six months
ended March 31, 2020 compared to the six months ended March 31,
2019 and decreased by approximately $0.2 million for the three
months ended March 31, 2020 compared to the three months ended
March 31, 2019 The decrease is due to a reduction in the interest
rate applied to the Company’s finance leases that were
re-measured in connection with the adoption of ASC 842,
Leases, effective October
1, 2019.
25
Research and Development Expenses
The Company’s
research and development efforts involve Multikine and LEAPS. The
table below shows the research and development expenses associated
with each project.
|
Six
months ended March 31,
|
Three months ended March
31,
|
||
|
2020
|
2019
|
2020
|
2019
|
MULTIKINE
|
$7,960,163
|
$5,839,245
|
$3,947,519
|
$2,588,967
|
LEAPS
|
751,197
|
465,015
|
511,028
|
243,579
|
TOTAL
|
$8,711,360
|
$6,304,260
|
$4,458,547
|
$2,832,546
|
Clinical and other
studies necessary to obtain regulatory approval of a new drug
involve significant costs and require several years to complete.
The extent of the Company’s clinical trials and research
programs are primarily based upon the amount of capital available
to the Company and the extent to which the Company has received
regulatory approvals for clinical trials. The inability of the
Company to conduct clinical trials or research, whether due to a
lack of capital or regulatory approval, will prevent the Company
from completing the studies and research required to obtain
regulatory approval for any products which the Company is
developing. Without regulatory approval, the Company will be unable
to sell any of its products. Since all the Company’s projects
are under development, the Company cannot predict when it will be
able to generate any revenue from the sale of any of its
products.
Critical Accounting Estimates and Policies
Management’s
discussion and analysis of the Company’s financial condition
and results of operations is based on its unaudited condensed
financial statements. The preparation of these financial statements
is based on the selection of accounting policies and the
application of significant accounting estimates, some of which
require management to make judgments, estimates and assumptions
that affect the amounts reported in the financial statements and
notes. The Company believes some of the more critical estimates and
policies that affect its financial condition and results of
operations are in the areas of operating leases and stock-based
compensation. For more information regarding the Company’s
critical accounting estimates and policies, see Part II,
Item 7 of the Company’s Annual Report on Form 10-K/A for
the year ended September 30, 2019. The application of these
critical accounting policies and estimates has been discussed with
the Audit Committee of the Company’s Board of
Directors.
Item 3. QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISKS
The Company does
not believe that it has any significant exposures to market
risk.
Item
4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Under the direction
and with the participation of the Company’s management,
including the Company’s Principal Executive and
Principal Financial Officer, the Company has conducted
an evaluation of the effectiveness of the design and operation of
its disclosure controls and procedures as of March 31, 2020. The
Company maintains disclosure controls and procedures that are
designed to ensure that information required to be disclosed in its
periodic reports with the Securities and Exchange Commission is
recorded, processed, summarized and reported within the time
periods specified in the SEC’s rules and regulations, and
that such information is accumulated and communicated to the
Company’s management, including its principal executive
officer and principal financial officer, as appropriate, to allow
timely decisions regarding required disclosure. The Company’s
disclosure controls and procedures are designed to provide a
reasonable level of assurance of reaching its desired disclosure
control objectives. Due to the material weaknesses
outlined below, CEL-SCI’s Principal Executive
and Principal Financial Officer has concluded that CEL-SCI’s
disclosure controls and procedures were not effective as of March
31, 2020.
26
Management’s
Report on Internal Control over Financial Reporting
CEL-SCI’s
management is responsible for establishing and maintaining adequate
internal control over financial reporting and for the assessment of
the effectiveness of internal control over financial reporting. As
defined by the Securities and Exchange Commission, internal control
over financial reporting is a process designed by, or under the
supervision of CEL-SCI’s Principal Executive and
Principal Financial Officer and implemented by CEL-SCI’s
Board of Directors, management and other personnel, to provide
reasonable assurance regarding the reliability of financial
reporting and the preparation of CEL-SCI’s financial
statements in accordance with U.S. generally accepted accounting
principles.
Because of its
inherent limitations, internal control over financial reporting may
not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the
risk that controls may become inadequate because of changes in
conditions, or that the degree of compliance with the policies or
procedures may deteriorate.
Under the supervision and with the
participation of management, including CEL-SCI’s
Principal Executive and Principal Financial Officer, CEL-SCI
evaluated the effectiveness of its internal control over financial
reporting as of March 31, 2020 based on criteria established in
Internal Control - Integrated Framework (2013) issued by the
Committee of Sponsoring Organizations of the Treadway Commission,
or the COSO Framework. Management’s assessment included an
evaluation of the design of CEL-SCI’s internal control over
financial reporting and testing of the operational effectiveness of
those controls.
Due to
the material weaknesses noted below, CEL-SCI's Principal Executive
and Principal Financial Officer concluded that as of such date,
CEL-SCI's internal controls over financial reporting were not
effective.
Material Weaknesses in Internal Control Over Financial
Reporting
On December 20,
2019, CEL-SCI discovered an error in the EDGAR filed Form 10-K
report. The Company’s Statements of Cash Flows for the years
ended September 30, 2019 and 2018 were not included, in their
entirety, in the EDGAR filed Form 10-K report filed on December 16,
2019 with the SEC. However, the entire Statements of Cash Flows
were included in the Interactive Data Files (“XBRL”)
which were filed on December 16, 2019. The omission of the
Statements of Cash Flows was the result of a failure of the Company
to perform an adequate review of the EDGAR Form 10-K proof to
ensure that the filing was accurate and complete. The failure of
the Company to perform an adequate review of the EDGAR Form 10-K
proof is a control deficiency that constitutes a material
weakness.
To remediate this
material weakness, the Company will change certain control
activities to include the following:
●
The
Company will compare the final EDGAR proofs with the Company
reports that are provided to the EDGAR filing service to ensure
that the EDGAR proofs are accurate and complete.
When
calculating the right of use (ROU) asset under ASC 842 during the
preparation of the year-end financial statements, CEL-SCI
determined that the opening finance ROU asset and total
stockholders’ equity balances were understated by
approximately $2.04 million as of October 1, 2019, the date of
adoption. The changes do not impact any prior year’s
financial statements but are an adjustment to the opening finance
ROU asset and accumulated deficit balances effective October 1,
2019. As a result of the changes to the opening finance ROU asset
and accumulated deficit balances, the financial statements filed
for the quarter ended March 31, 2020 were restated. The failure to
properly value the finance ROU asset as of October 1, 2019 under
ASC 842 is a control deficiency that constitutes a material
weakness.
In
order to remediate this material weakness, CEL-SCI will change
certain control activities over financial reporting to include the
following:
●
CEL-SCI
will thoroughly review all leases against the guidance in ASC
842.
●
CEL-SCI
will engage additional outside financial reporting specialists to
assist in the review process.
●
CEL-SCI
will provide additional training for those involved in the review
process of new leases.
CEL-SCI
is committed to maintaining a strong internal control environment
and implementing measures designed to help ensure that control
deficiencies contributing to the material weaknesses are remediated
as soon as possible.
Based on the
evaluation of CEL-SCI’s internal control over financial
reporting as of March 31, 2020, and the material
weaknesses identified above,
CEL-SCI's Principal Executive and Principal Financial Officer
has concluded that as of such date, CEL-SCI's internal
control over financial reporting was not effective.
Changes in Internal Control over Financial Reporting
Other than the
improvement noted in the preceding section, there were no other
changes in the Company’s internal control over financial
reporting that occurred during the quarter ended March 31, 2020
that have materially affected, or are reasonably likely to
materially affect, the Company’s internal control over
financial reporting
27
PART
II
Item
2. Unregistered Sales of Equity Securities and Use of
Proceeds.
During the six
months ended March 31, 2020 the Company issued 32,939 restricted
shares of common stock to consultants for investor relations
services.
The Company relied
upon the exemption provided by Section 4(a)(2) of the Securities
Act of 1933 with respect to the issuance of these shares. The
individuals who acquired these shares were sophisticated investors
and were provided full information regarding the Company’s
business and operations. There was no general solicitation in
connection with the offer or sale of these securities. The
individuals who acquired these shares acquired them for their own
accounts. The certificates representing these shares bear a
restricted legend which provides they cannot be sold except
pursuant to an effective registration statement or an exemption
from registration. No commission or other form of remuneration was
given to any person in connection with the issuance of these
shares.
Item 6. Exhibits
Number
Exhibit
Rule 13a-14(a)
Certifications
Section 1350
Certifications
28
SIGNATURES
Pursuant to the
requirements of the Securities Exchange Act of 1934, the Registrant
has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
|
CEL-SCI
CORPORATION
|
|
|
|
|
|
|
Date:
December 30, 2020
|
By:
|
/s/ Geert
Kersten
|
|
|
|
Geert
Kersten
|
|
|
|
Principal Executive
Officer*
|
|
* Also signing in
the capacity of the Principal Financial Officer.
29