CEL SCI CORP - Quarter Report: 2019 December (Form 10-Q)

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 December 31, 2019

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	36,390,132	February 5, 2020

 

 

TABLE OF CONTENTS

 

PART I FINANCIAL INFORMATION

 

Item 1.		Page
	Condensed Balance Sheets at December 31, 2019 and September 30, 2019 (unaudited)	3
	Condensed Statements of Operations for the three months ended December 31, 2019 and 2018 (unaudited)	4
	Condensed Statement of Stockholders’ Equity for the three months ended December 31, 2019 and 2018 (unaudited)	5
	Condensed Statements of Cash Flows for the three months ended December 31, 2019 and 2018 (unaudited)	6
	Notes to Condensed Financial Statements (unaudited)	8
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	19
Item 3.	Quantitative and Qualitative Disclosures about Market Risks	22
Item 4.	Controls and Procedures	22
PART II
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	23
Item 6.	Exhibits	23
	Signatures	24

 

 

 

CEL-SCI CORPORATION
CONDENSED BALANCE SHEETS
(UNAUDITED)
	DECEMBER 31,	SEPTEMBER 30,
ASSETS	2019	2019
Current Assets:
Cash and cash equivalents	$9,383,378	$8,444,774
Receivables	91,043	62,765
Prepaid expenses	367,093	524,953
Supplies used for R&D and manufacturing	905,875	782,363
Total current assets	10,747,389	9,814,855
Finance lease right of use assets	13,120,256	-
Operating lease right of use assets	945,991	-
Property and equipment, net	2,712,577	15,825,636
Patent costs, net	310,703	311,586
Deposits	1,670,917	1,670,917
Total Assets	$29,507,833	$27,622,994
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable	$1,438,685	$1,586,478
Accrued expenses	210,580	34,432
Due to employees	785,962	709,442
Derivative instruments, current portion	1,161,544	674,442
Lease liabilities, current portion	964,088	-
Other current liabilities	5,000	14,956
Total current liabilities	4,565,859	3,019,750
Derivative instruments, net of current portion	4,560,257	5,813,868
Finance lease obligations, net of current portion	12,453,708	13,508,156
Operating lease obligations, net of current portion	834,695	-
Other liabilities	125,000	147,553
Total liabilities	22,539,519	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;
35,995,089 and 35,231,776 shares issued and outstanding
at December 31, 2019 and September 30, 2019, respectively	359,951	352,318
Additional paid-in capital	365,705,533	358,507,603
Accumulated deficit	(359,097,170)	(353,726,254)
Total stockholders' equity	6,968,314	5,133,667
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$29,507,833	$27,622,994
See notes to condensed financial statements.

 

 

CEL-SCI CORPORATION
CONDENSED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED DECEMBER 31, 2019 and 2018
(UNAUDITED)
	2019	2018
Grant income	$35,506	$126,414
Operating Expenses:
Research and development	4,196,613	3,471,714
General and administrative	2,638,896	1,689,162
Total operating expenses	6,835,509	5,160,876
Operating loss	(6,800,003)	(5,034,462)
Other income	18,448	17,911
Gain on derivative instruments	766,509	5,556,306
Other non-operating gains	790,669	1,152,176
Interest expense, net	(250,783)	(446,029)
Net (loss) income available to common shareholders	$(5,475,160)	$1,245,902
Net (loss) income per common share
BASIC	$(0.16)	$0.04
DILUTED	$(0.16)	$0.02
Weighted average common shares outstanding
BASIC	35,084,279	27,985,327
DILUTED	35,098,608	29,929,353
See notes to condensed financial statements.

 

 

CEL-SCI CORPORATION
CONDENSED STATEMENTS OF STOCKHOLDERS' EQUITY
THREE MONTHS ENDED DECEMBER 31, 2019 AND 2018
(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

			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

See notes to condensed financial statements.

 

 

CEL-SCI CORPORATION
CONDENSED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED DECEMBER 31, 2019 and 2018
(UNAUDITED)
	2019	2018
Net (loss) income	$(5,475,160)	$1,245,902
Adjustments to reconcile net (loss) income to
net cash used in operating activities:
Depreciation and amortization	446,340	154,821
Share-based payments for services	155,740	238,904
Equity based compensation	1,800,225	573,660
Common stock contributed to 401(k) plan	40,937	35,241
Gain on derivative instruments	(766,509)	(5,556,306)
Capitalized lease interest	-	34,223
(Increase)/decrease in assets:
Receivables	(28,278)	(10,105)
Prepaid expenses	86,567	(105,685)
Supplies used for R&D and manufacturing	(123,512)	(37,287)
Increase/(decrease) in liabilities:
Accounts payable	(393,064)	(734,770)
Accrued expenses	80,432	(127,600)
Due to employees	76,520	131,892
Other liabilities	(1,914)	(369)
Net cash used in operating activities	(4,101,676)	(4,157,479)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment	(101,820)	(6,132)
Proceeds from the sale of equipment	4,500	-
Expenditures for patent costs	(12,390)	(66,131)
Net cash used in investing activities	(109,710)	(72,263)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock	5,050,003	-
Payments of stock issuance costs	(31,080)	(46,599)
Proceeds from the purchase of stock by officer	25,000	-
Proceeds from exercises of warrants	297,101	649,753
Payments on obligations under finance lease	(191,034)	(1,251)
Net cash provided by financing activities	5,149,990	601,903
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS	938,604	(3,627,839)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD	8,444,774	10,310,044
CASH AND CASH EQUIVALENTS, END OF PERIOD	$9,383,378	$6,682,205

See notes to condensed financial statements.

 

 

CEL-SCI CORPORATION
CONDENSED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED DECEMBER 31, 2019 and 2018
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
	2019	2018
Property and equipment included in current liabilities	$296,941	$-
Finance lease obligation included in accounts payable	$745	$421
Prepaid consulting services paid with issuance of common stock	$(71,293)	$(36,524)
Financing costs included in current liabilities	$76,650	$-
Cash paid for interest	$295,107	$448,486

See notes to condensed financial statements.

 

 

 

CEL-SCI CORPORATION

NOTES TO CONDENSED FINANCIAL STATEMENTS

THREE MONTHS ENDED DECEMBER 31, 2019 AND 2018 (UNAUDITED)

 

 

Basis of Presentation

 

The accompanying condensed financial statements of CEL-SCI Corporation (the Company) are unaudited and certain information and footnote disclosures normally included in the annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been omitted pursuant to the rules and regulations of the Securities and Exchange Commission. While management of the Company believes that the disclosures presented are adequate to make the information presented not misleading, these interim condensed financial statements should be read in conjunction with the financial statements and notes included in the Company’s annual report on Form 10-K/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 December 31, 2019 and the results of its operations for the three 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 (Topic 842)” using the modified retrospective transition approach. In accordance with this adoption method, results for the reporting period ended December 31, 2019 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 three months ended December 31, 2019 and 2018 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 – The leased manufacturing facility is recorded at total project costs incurred and is depreciated over the 20-year useful life of the building. Research and office equipment is recorded at cost and depreciated using the straight-line method over estimated useful lives of five to seven years. Leasehold improvements are depreciated over the shorter of the estimated useful life of the asset or the term of the lease. Repairs and maintenance which do not extend the life of the asset are expensed when incurred. The fixed assets are reviewed on a quarterly basis to determine if any of the assets are impaired.

 

Patents - Patent expenditures are capitalized and amortized using the straight-line method over the shorter of the expected useful life or the legal life of the patent (17 years). In the event changes in technology or other circumstances impair the value or life of the patent, appropriate adjustment in the asset value and period of amortization is made. An impairment loss is recognized when estimated future undiscounted cash flows expected to result from the use of the asset, and from its disposition, 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.

 

 

 

Income Taxes - The Company uses the asset and liability method of accounting for income taxes. Under the asset and liability method, deferred tax assets and liabilities are recognized for future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating and tax loss carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. The Company records a valuation allowance to reduce the deferred tax assets to the amount that is more likely than not to be recognized.  A full valuation allowance was recorded against the deferred tax assets as of December 31, 2019 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 Accounting Standards Codification (ASC) 815, “Accounting for Derivative Instruments and Hedging Activities.” In accordance with accounting principles generally accepted in the United States (U.S. GAAP), derivative instruments and hybrid instruments are recognized as either assets or liabilities in the balance sheet and are measured at fair value with gains or losses recognized in earnings or other comprehensive income depending on the nature of the derivative or hybrid instruments. The Company determines the fair value of derivative instruments and hybrid instruments based on available market data using appropriate valuation models considering all the rights and obligations of each instrument. The derivative liabilities are re-measured at fair value at the end of each interim period.

 

Stock-Based Compensation – Compensation cost for all stock-based awards is measured at fair value as of the grant date in accordance with the provisions of ASC 718 “Compensation – Stock Compensation.” The fair value of stock options is calculated using the Black-Scholes option pricing model. The Black-Scholes model requires various judgmental assumptions including volatility and expected option life. The stock-based compensation cost is recognized on the straight-line allocation method as expense over the requisite service or vesting period.

 

Equity instruments issued to non-employees are accounted for in accordance with ASC 505-50, “Equity-Based Payments to Non-Employees.” Accordingly, compensation is recognized when goods or services are received and is measured using the Black-Scholes valuation model. The Black-Scholes model requires various judgmental assumptions regarding the fair value of the equity instruments at the measurement date and the expected life of the options.

 

The Company has Incentive Stock Option Plans, Non-Qualified Stock Option Plans, a Stock Compensation Plan, Stock Bonus Plans and an Incentive Stock Bonus Plan. In some cases, these Plans are collectively referred to as the "Plans". All Plans have been approved by the stockholders.

 

The Company’s stock options are not transferable, and the actual value of the stock options that an employee may realize, if any, will depend on the excess of the market price on the date of exercise over the exercise price. The Company has based its assumption for stock price volatility on the variance of daily closing prices of the Company’s stock. The risk-free interest rate assumption was based on the U.S. Treasury rate at date of the grant with term equal to the expected life of the option. 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 Accounting Standards Update (“ASU”) 2016-02, Leases and its related amendments (collectively referred to as Topic 842 and codified as “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. The adoption of ASC 842 will not have a significant impact on the Company’s statements of operations or cash flows.

 

In June 2018, the Financial Accounting Standards Board ("FASB") issued ASU 2018-07, Compensation—Stock Compensation (Topic 718), (“ASU 2018-07”), 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 No. 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.  

 

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.

 

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.

 

Since the Company launched its Phase 3 clinical trial for Multikine, the Company has incurred expenses of approximately $57.0 million as of December 31, 2019 on direct costs for the Phase 3 clinical trial. The Company estimates it will incur additional expenses of approximately $3.3 million for the remainder of the Phase 3 clinical trial. This estimate is based only on the information currently available in the Company’s contracts with the Clinical Research Organizations responsible for managing the Phase 3 clinical trial and does not include other related costs, e.g., the manufacturing of the drug. This number may be affected by the rate of death accumulation in the study, foreign currency exchange rates, and many other factors, some of which cannot be foreseen today. It is therefore possible that the cost of the Phase 3 clinical trial will be higher than currently estimated.

 

Nine hundred twenty-eight (928) head and neck cancer patients have been enrolled and have completed treatment in the Phase 3 study. The study end point is a 10% increase in overall survival of patients between the two main comparator groups in favor of the group receiving the Multikine treatment regimen. The determination if the study end point is met will occur when there are a total of 298 deaths in those two groups.

 

 

Proceeds from the Sale of Common Stock

 

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 proceeds of approximately $5.0 million.

 

Equity Compensation

 

Underlying share information for equity compensation plans as of December 31, 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 Options Plans	138,400	89,895	N/A	213
Non-Qualified Stock Option Plans	6,387,200	6,129,285	N/A	111,170
Stock Bonus Plans	783,760	N/A	335,700	448,027
Stock Compensation Plan	634,000	N/A	133,908	481,682
Incentive Stock Bonus Plan	640,000	N/A	616,500	23,500

 

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 Plan	634,000	N/A	130,183	485,407
Incentive Stock Bonus Plan	640,000	N/A	616,500	23,500

 

 

 

 

Stock option activity:

 

	Three Months Ended December 31,
	2019	2018
Options granted	1,000	500
Options expired	36	2,400

 

Stock-Based Compensation Expense

 

	Three months Ended December 31,
	2019	2018
Employees	$1,800,225	$573,660
Non-employees	$155,740	$238,904

 

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.

 

Warrants and Non-Employee Options

 

The following chart represents the warrants and non-employee options outstanding at December 31, 2019:

 

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	2/18/2020	*
Series V	5/28/2015	810,127	$19.75	5/28/2020	*
Series UU	6/11/2018	154,810	$2.80	6/11/2020	*
Series W	10/28/2015	688,930	$16.75	10/28/2020	*
Series X	1/13/2016	120,000	$9.25	1/13/2021	*
Series Y	2/15/2016	26,000	$12.00	2/15/2021	*
Series ZZ	5/23/2016	20,000	$13.75	5/18/2021	*
Series BB	8/26/2016	16,000	$13.75	8/22/2021	*
Series Z	5/23/2016	264,000	$13.75	11/23/2021	*
Series FF	12/8/2016	68,048	$3.91	12/1/2021	*
Series CC	12/8/2016	277,463	$5.00	12/8/2021	*
Series HH	2/23/2017	6,500	$3.13	2/16/2022	*
Series AA	8/26/2016	200,000	$13.75	2/22/2022	*
Series JJ	3/14/2017	9,450	$3.13	3/8/2022	*
Series LL	4/30/2017	26,398	$3.59	4/30/2022	*
Series MM	6/22/2017	893,491	$1.86	6/22/2022	*
Series NN	7/24/2017	473,798	$2.52	7/24/2022	*
Series OO	7/31/2017	40,000	$2.52	7/31/2022	2
Series RR	10/30/2017	457,116	$1.65	10/30/2022	*
Series SS	12/19/2017	460,012	$2.09	12/18/2022	2
Series TT	2/5/2018	459,421	$2.24	2/5/2023	2
Series VV	7/2/2018	82,500	$1.75	1/2/2024	*
Consultants	7/28/17	10,000	$2.18	7/27/2027	3

 

* No current period changes to these warrants

 

 

 

 

The table below presents the fair value of the warrant liabilities at the balance sheet dates:

	December 31, 2019	September 30, 2019
Series V warrants	$119,411	$674,442
Series W warrants	1,042,133	1,193,507
Series Z warrants	1,098,996	1,109,545
Series ZZ warrants	62,791	77,638
Series AA warrants	851,930	916,908
Series BB warrants	64,397	63,966
Series CC warrants	1,733,579	1,710,898
Series FF warrants	453,374	446,185
Series HH warrants	45,739	45,657
Series JJ warrants	66,729	66,599
Series LL warrants	182,722	182,965
Total warrant liabilities	$5,721,801	$6,488,310

The table below presents the gains and (losses) on the warrant liabilities for the three months ended December 31:

	2019	2018
Series S warrants	$-	$33
Series V warrants	555,031	556,332
Series W warrants	151,374	626,850
Series Z warrants	10,549	204,121
Series ZZ warrants	14,847	14,323
Series AA warrants	64,978	157,219
Series BB warrants	(431)	12,110
Series CC warrants	(22,681)	665,606
Series DD warrants	-	1,249,287
Series EE warrants	-	1,249,287
Series FF warrants	(7,189)	69,062
Series GG warrants	-	212,782
Series HH warrants	(82)	20,951
Series II warrants	-	230,589
Series JJ warrants	(130)	31,462
Series KK warrants	-	228,095
Series LL warrants	243	28,197
Net gain on warrant liabilities	$766,509	$5,556,306

  

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.

 

 

 

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 Equity Warrants

The following warrants recorded as equity were exercised during the three months ended December 31, 2019.

Warrants	Warrants Exercised	Exercise Price	Proceeds
Series OO	10,000	$2.52	$25,200
Series SS	22,632	$2.09	47,301
Series TT	100,628	$2.24	224,600
	132,900		$297,101

 

The following warrants recorded as equity were exercised during the three months ended December 31, 2018.

Warrants	Warrants Exercised	Exercise Price	Proceeds
Series PP	60,000	$2.30	$138,000
Series SS	152,632	$2.09	319,001
Series TT	86,050	$2.24	192,752
	298,682		$649,753

 

 

During the three months ended December 31, 2019 and 2018, respectively, the Company issued 15,819 and 62,784 shares of restricted common stock to consultants for services. The weighted average grant date fair value of the shares issued to consultants was $7.18 and $3.22 during the three months ended December 31, 2019 and 2018, respectively. The aggregate values of the issuances of restricted common stock and common stock options are recorded as prepaid expenses and are charged to general and administrative expenses over the periods of service.

 

During the three months ended December 31, 2019 and 2018, the Company recorded total expense of approximately $156,000 and $239,000, respectively, relating to these consulting agreements. At December 31, 2019 and September 30, 2019, approximately $159,000 and $230,000, respectively, are included in prepaid expenses. During the three months ended December 31, 2019 and 2018, 0 and 2,400 options, respectively, expired that were issued to consultants as payment for services rendered. As of December 31, 2019, 10,000 options issued to consultants remained outstanding, all of which were issued from the Non-Qualified Stock Option plans and are fully vested.

 

 

The Company entered into a Securities Purchase Agreement with Ergomed plc, one of the Company’s Clinical Research Organizations responsible for managing the Company’s Phase 3 clinical trial, to facilitate a partial payment of amounts due Ergomed. Under the Agreement, the Company issued Ergomed shares of common stock that 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.

 

 

 

During the quarters ended December 31, 2019 and 2018, respectively, the Company realized approximately $0.8 million and $1.2 million through the sale by Ergomed of 98,350 and 353,995 shares of the Company’s common stock and the Company reduced the payables to Ergomed and credited Other Operating Gain by those amounts. No shares were issued to Ergomed during the quarters ended December 31, 2019 and 2018.

 

On December 31, 2018, the expiration date of the prior agreement, Ergomed returned 564,905 unsold shares for cancellation.

As of December 31, 2019, Ergomed held 99,650 shares for resale.

 

In accordance with ASC 820-10, “Fair Value Measurements,” the Company determines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The Company generally applies the income approach to determine fair value. This method uses valuation techniques to convert future amounts to a single present amount. The measurement is based on the value indicated by current market expectations with respect to those future amounts.

 

ASC 820-10 establishes a fair value hierarchy that prioritizes the inputs used to measure fair value. The hierarchy gives the highest priority to active markets for identical assets and liabilities (Level 1 measurement) and the lowest priority to unobservable inputs (Level 3 measurement). The Company classifies fair value balances based on the observability of those inputs. The three levels of the fair value hierarchy are as follows:

 

 

 

 

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 December 31, 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	$-	$-	$5,721,801	$5,721,801

 

 

 

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 three months ended December 31, 2019 and the year ended September 30, 2019:

 

	3 months ended	12 months ended
	December 31, 2019	September 30, 2019
Beginning balance	$6,488,310	$9,317,031
Issuances	-	-
Exercises	-	(3,589,357)
Realized and unrealized (gains) and losses	(766,509)	760,636
Ending balance	$5,721,801	$6,488,310

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.

 

 

During the quarter ended December 31, 2019, the Company’s CEO purchased 3,725 shares of restricted common stock at an aggregate fair market value of $25,000.

 

  

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 $31.8 million for Ergomed’s services. This amount is net of Ergomed’s discount of approximately $10.8 million. During the three months ended December 31, 2019 and 2018, the Company recorded, net of Ergomed’s discount, approximately $0.9 million and $0.8 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 for 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. Upon lease inception in October 2008, the Company contributed approximately $9.3 million towards the tenant-directed improvements, of which $3.2 million, plus interest, is being refunded during years six through twenty through reduced rental payments. As of December 31, 2019, approximately $2.7 million is remaining to be refunded through the duration of the lease term. This lease is classified as a finance lease. As of October 1, 2019, the initial improvements have a net book value of approximately $2.1 million and are included in leasehold improvements on the balance sheet.

 

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 December 31, 2019, the net book value of the finance lease right of use asset is approximately $13.1 million and the balance of the finance lease liability is approximately $13.3 million, of which approximately $0.8 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 three months ended December 31, 2019 was approximately $468,000, of which approximately $295,000 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 December 31, 2019 and September 30, 2019.

 

Approximate future minimum lease payments under finance leases as of December 31, 2019 are as follows:

 

Nine months ending September 30, 2020	$1,416,000
Year ending September 30,
2021	1,948,000
2022	2,010,000
2023	2,079,000
2024	2,146,000
2025	2,218,000
Thereafter	7,322,000
Total future minimum lease obligation	19,139,000
Less imputed interest on finance lease obligations	(5,855,000)
Net present value of lease finance lease obligations	$13,284,000

 

 

 

The Company rents a portion of its space on a month-to-month term basis, which requires a 30-day notice for termination. The rental income for each of the three months ended December 31, 2019 and 2018 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 quarter ended December 31, 2019, the Company incurred approximately $70,000 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 December 31, 2019, 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 $1.0 million, of which approximately $0.1 million is current. The Company incurred lease expense for operating leases of approximately $68,000 for the three months ended December 31, 2019. Total cash paid related to operating leases during the three months ended December 31, 2019 was approximately $66,000.

 

As of December 31, 2019, future minimum lease payments on operating leases are as follows:

 

Nine months ending September 30, 2020	$173,000
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	1,307,000
Less imputed interest on operating lease obligation	(338,000)
Net present value of operating lease obligation	$969,000

 

G.      PATENTS

 

During the three months ended December 31, 2019 and 2018, no patent impairment charges were recorded. For the three months ended December 31, 2019 and 2018, amortization of patent costs totaled approximately $13,000 and $12,000, respectively. Approximate estimated future amortization expense is as follows:

 

Nine months ending September 30, 2020	$39,000
Year ending September 30,
2021	49,000
2022	45,000
2023	35,000
2024	27,000
2025	24,000
Thereafter	92,000
Total	$311,000

 

  

 

 

H.             (LOSS) EARNINGS PER COMMON SHARE

 

The following tables provide the details of the basic and diluted (loss) earnings per-share computations:

 

	Three months ended December 31,
	2019	2018
(Loss) earnings per share - basic
Net (loss) earnings available to common shareholders - basic	$(5,475,160)	$1,245,902
Weighted average shares outstanding - basic	35,084,279	27,985,327
Basic (loss) earnings per common share	$(0.16)	$0.04
(Loss) earnings per share - diluted
Net (loss) earnings available to common shareholders - basic	$(5,475,160)	$1,245,902
Gain on derivatives (1)	(243)	(723,879)
Net (loss) earnings available to common shareholders - diluted	$(5,474,403)	$522,023
Weighted average shares outstanding - basic	35,084,279	27,985,327
Incremental shares underlying dilutive-warrants and options (1)	14,329	1,944,026
Weighted average shares outstanding - diluted	35,098,608	29,929,353
Diluted (loss) earnings per common share	$(0.16)	$0.02
(1) Includes Series LL warrants for the three months ended December 31, 2019 and Series GG, HH, II, JJ and KK warrants for the three months ended December 31, 2018.