CEL SCI CORP - Quarter Report: 2020 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, 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

 8229 Boone Boulevard, Suite 802

 Vienna, VA 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:

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 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:

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 ☒

TABLE OF CONTENTS

PART I FINANCIAL INFORMATION

CEL-SCI CORPORATION

NOTES TO CONDENSED FINANCIAL STATEMENTS

THREE MONTHS ENDED DECEMBER 31, 2020 AND 2019 (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 for the year ended September 30, 2020.

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, 2020 and the results of its operations for the three months then ended. The condensed balance sheet as of September 30, 2020 is derived from the September 30, 2020 audited financial statements.

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:

Property and Equipment - Property and 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.

Leases - The Company accounts for contracts that convey the right to control the use of identified property, plant or equipment, over a period of time, in exchange for consideration, as leases upon inception. The Company leases certain real estate, machinery, laboratory equipment and office equipment over 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. 

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, 2020 and September 30, 2020.

Derivative Instruments - The Company has 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 reporting period.

Stock-Based Compensation - Compensation cost for stock-based awards to employees and non-employees 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 common 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 and options granted under the 2020 Non-Qualified Stock Option Plan are subject to service, performance and market conditions and meet 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

In August 2018, the FASB issued ASU 2018-13, “Fair Value Measurement - Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement (Topic 820).”  Under the new standard, the amount and reason for a transfer between Level 1 and Level 2 of the fair value hierarchy is no longer required to be disclosed, but public companies are required to disclose a range and weighted average of significant unobservable inputs for Level 3 fair value measurements. The Company adopted the new standard on July 1, 2020 with no impact to the Company’s financial statements.

New Accounting Pronouncements

In August 2020, the FASB issued ASU No. 2020-06 (“ASU 2020-06”) Debt-Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging-Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity. The amendments in this Update simplify and clarify the guidance in Subtopic 815-40 and are effective for the Company for the fiscal year ending September 30, 2025, including interim periods within that fiscal year. Early adoption is permitted.  All of the Company’s liability classified warrants will be expired by that date and the Company does not expect the adoption to have a significant impact on its financial statements. The effect, if any, will largely depend on the composition and terms of the financial instruments at the time of adoption.

In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. The new standard includes several provisions that simplify accounting for income taxes by removing certain exceptions to the general principles in Topic 740 and increasing consistency and clarity for the users of financial statements. This standard will be effective for the Company on October 1, 2021. Early adoption is permitted. The Company is currently evaluating the impact this ASU will have on the financial statements.

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.   

On May 4, 2020, the Company announced that the pivotal Phase 3 head and neck cancer study of Multikine immunotherapy had reached the targeted threshold of 298 events (deaths) required to conduct the data evaluation. Database lock has been completed and the Phase 3 study is now in the final statistical analysis phase. The Company will continue to remain blinded to the study results throughout this process. The Company will be advised of the results when the analysis is completed, and the study results will be announced to the public at that time.

The Company has incurred significant costs since its inception for the acquisition of certain proprietary technology and scientific knowledge relating to the human immunological defense system, patent applications, research and development, administrative costs, construction of laboratory facilities and participation in clinical trials.  The Company has funded such costs primarily with proceeds from loans and the public and private sale of its securities.  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 believes there is a high likelihood that it will continue to receive funds from private and public offerings and warrant exercises 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.

To finance the Company through marketing approval, the Company plans to raise additional capital in the form of warrant exercises, corporate partnerships, and debt and/or equity financings.  The Company believes that it will be able to obtain additional financing because it has done so consistently in the past and because the Multikine Phase 3 study has ended and is only awaiting final data readout. 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 such time as it is able to raise the required funding. 

Impact of COVID-19 Pandemic

In response to the global outbreak of COVID-19 and the World Health Organization’s classification of the outbreak as a pandemic, the Company continues to take the necessary precautions to ensure the safety of its employees and to minimize interruptions to its operations.  Management follows the Centers for Disease Control and Prevention’s (“CDC”) guidance and the recommendations and restrictions provided by state and local authorities.  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 of impact the pandemic will have on the Company’s financial condition, liquidity and future results of operations. Management is actively monitoring the risks to public health and the impact of overall global business activity on its financial condition, liquidity, operations, suppliers, industry, and workforce.

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.

Proceeds from the Sale of Common Stock

In December 2020, the Company sold 1,000,000 shares of common stock at a public offering price of $14.65 per share and received aggregate proceeds of approximately $13.6 million. Under the terms of the Underwriting Agreement the Company granted the Underwriters a 30-day option to purchase up to an additional 150,000 shares of common stock at the public offering price to cover over-allotments.

Equity Compensation

Underlying share information for equity compensation plans as of December 31, 2020 is as follows:

Underlying share information for equity compensation plans as of September 30, 2020 is as follows:

Stock option activity:

Stock-Based Compensation Expense

Employee compensation expense includes the expense related to options and restricted stock granted expensed over their vesting periods.  Non-employee expense includes the expense related to options and stock issued to consultants expensed over the period of the related service contracts.

Warrants and Non-Employee Options

The following chart represents the warrants and non-employee options outstanding at December 31, 2020: 

* No current period changes to these warrants

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

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

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 October 28, 2020, 688,930 Series W warrants, with an exercise price of $16.75 expired. 

During the three months ended December 31, 2020, 5,000 Series CC warrants were exercised at an exercise price of $5.00 for gross proceeds of $25,000.

No warrants recorded as liabilities were exercised during the three months ended December 31, 2019.

Changes in Equity Warrants

On December 7, 2020, the expiration date of the Series N warrants was extended six months from February 18, 2021 to August 18, 2021. The incremental cost of this extension was approximately $1,000, which was recorded as a deemed dividend in the financial statements for the three months ended December 31, 2020. The Series N warrants are held by the de Clara Trust, of which the Company’s CEO, Geert Kersten, is a beneficiary.

On December 7, 2020, the expiration date of the Series X warrants was extended six months from January 13, 2021 to July 13, 2021. The incremental cost of this extension was approximately $85,000, which was recorded as a deemed dividend in the financial statements for the three months ended December 31, 2020. The Series X warrants are held by the de Clara Trust, of which the Company’s CEO, Geert Kersten, is a beneficiary.

On December 7, 2020, the expiration date of the Series Y warrants, which were issued in connection with a financing, was extended six months from February 15, 2021 to August 15, 2021. The incremental cost of this extension was approximately $41,000 and was recorded as additional paid-in capital.

On December 7, 2020, the expiration date of Series UU warrants were extended six months from December 31, 2020 to June 30, 2021. These warrants were previously issued as an inducement to convert notes payable into shares of common stock. The incremental cost of this extension was $192 and was recorded as interest expense for the three months ended December 31, 2020. The Series UU warrants are held by Geert Kersten, Patricia Prichep (current Officers of the Company) and the de Clara Trust, of which the Company’s CEO, Geert Kersten, is a beneficiary.

Exercise of Equity Warrants

During the three months ended December 31, 2020, 10,000 Series TT warrants were exercised at an exercise price of $2.24 for gross proceeds of $22,400.

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

During the three months ended December 31, 2020 and 2019, the Company issued 15,044 and 15,819 shares of restricted common stock, respectively, to consultants for services.  The weighted average grant date fair value of the shares issued to consultants was $12.45 and $7.18, respectively, during the three months ended December 31, 2020 and 2019. 

Additionally, during the three months ended December 31, 2020, the Company issued to a consultant 5,000 options to purchase common stock with an exercise price of $11.61.  The options are exercisable beginning May 18, 2021 and expire on November 17, 2022.  The options are being expensed on a straight-line basis over the six month vesting period at a fair value of approximately $28,000 or $5.65 per option. No options were issued to consultants during the three months ended December 31, 2019.

As of December 31, 2020 and September 30, 2020, 15,000 and 10,000 options issued to consultants remained outstanding, respectively, all of which were issued from the Non-Qualified Stock Option plans and of which 10,000 are vested as of the balance sheet dates.

During the three months ended December 31, 2020 and 2019, the Company recorded total expense of approximately $249,000 and $156,000, respectively, relating to these consulting agreements. At December 31, 2020 and September 30, 2020, approximately $244,000 and $395,000, respectively, are included in prepaid expenses.

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 payment of amounts due to 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 three months ended December 31, 2020 and 2019, the Company realized approximately $0.1 million and $0.8 million, respectively, through the sale by Ergomed of 9,000 and 98,350 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, 2020 and 2019.

As of December 31, 2020, Ergomed held 93,521 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, 2020:

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, 2020:

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, 2020 and the year ended September 30, 2020:

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.

On December 7, 2020, the expiration dates of the Series N and Series X warrants held by the de Clara Trust, of which the Company’s CEO, Geert Kersten, is a beneficiary, were extended by six months (Note C). The incremental cost of these modifications was approximately $86,000 and was recorded as a deemed dividend in the financial statements for the three months ended December 31, 2020.

On December 7, 2020, the expiration date of 93,603 Series UU warrants was extended from December 31, 2020 to June 30, 2021. The incremental cost of this extension was $192 and was recorded as interest expense for the three months ended December 31, 2020. The Series UU warrants are held by certain officers of the Company and were originally issued with convertible debt.

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 $34.0 million for Ergomed’s services. This amount is net of Ergomed’s discount of approximately $11.3 million. During the three months ended December 31, 2020 and 2019, the Company recorded, net of Ergomed’s discount, approximately $0.6 million and $0.9 million, respectively, as research and development expense related to Ergomed’s services.

Lease Agreements

The Company leases a manufacturing facility near Baltimore, Maryland (the San Tomas lease). The building was remodeled in accordance with the Company’s specifications so that it can be used by the Company to manufacture Multikine for the Company’s Phase 3 clinical trial and sales of the drug if approved by the FDA. The lease is for a term of twenty years and requires annual base rent to escalate each year at 3%. The Company is required to pay all real estate and personal property taxes, insurance premiums, maintenance expenses, repair costs and utilities. The lease allows the Company, at its election, to extend the lease for two ten-year periods or to purchase the building at the end of the 20-year lease, which expires in October 2028.

On December 31, 2020 and September 30, 2020, the net book value of the finance lease right of use asset is approximately $13.4 million and $13.8 million, respectively and the balance of the finance lease liability is approximately $12.5 million and $12.7 million, respectively, of which approximately $1.0 million and $0.9 million, respectively, 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 each of the three months ended December 31, 2020 and 2019 was approximately $0.5 million, of which approximately $0.3 million 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 7.8 years.

In August 2020, the Company entered into an amendment to the San Tomas lease agreement under which the landlord agreed to allow the Company to substantially upgrade the manufacturing facility in preparation for the potential commercial production of Multikine.  The estimated cost of the upgrades is $10.5 million, of which approximately $6.7 million has been incurred to date.  Pursuant to the amendment, the landlord agreed to finance the final $2.4 million of the costs incurred, i.e., after the Company has financed the initial $8.1 million.  Per the terms of the financing, upon completion of the project, the $2.4 million will be repaid through increased lease payments over the remaining lease term.

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, 2020 and September 30, 2020.

Approximate future minimum lease payments under finance leases as of December 31, 2020 are as follows:

Effective April 30, 2020, the Company terminated a month-to-month arrangement with a sub-lessee as the sub-leased 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 sublease rental income for the three months ended December 31, 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 was renewed on July 1, 2020 and expires on November 30, 2025.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. As of December 31, 2020 and September 30, 2020, the net book value of the operating lease right of use assets is approximately $1.2 million. As of December 31, 2020 and September 30, 2020, the balance of the operating lease liabilities is approximately $1.2 million and $1.3 million, respectively, of which approximately $0.2 million and $0.1 million, respectively, is current.  The Company incurred lease expense for operating leases of approximately $66,000 and $68,000, respectively, for the three months ended December 31, 2020 and 2019. Total cash paid related to operating leases during the three months ended December 31, 2020 and 2019 was approximately $48,000 and $66,000, respectively.

As of December 31, 2020, future minimum lease payments on operating leases are as follows:

During the three months ended December 31, 2020 and 2019, no patent impairment charges were recorded. For both the three months ended December 31, 2020 and 2019, amortization of patent costs totaled approximately $13,000. Approximate estimated future amortization expense is as follows:

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

The gain on derivatives priced lower than the average market price during the period is excluded from the numerator and the related shares are excluded from the denominator in calculating diluted loss per share.

In accordance with the contingently issuable shares guidance of FASB ASC Topic 260, Earnings Per Share, the calculation of diluted net earnings (loss) per share excludes the following securities because their inclusion would have been anti-dilutive as of December 31:

Between January 1, 2021 and February 5, 2021, the Company received approximately $3.9 million through the exercise of options and warrants to purchase shares of the Company’s common stock.

Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Liquidity and Capital Resources

The Company has fully enrolled 928 patients in a Phase 3 clinical trial for its lead investigational therapy, Multikine, in advanced primary head and neck cancer. This study was cleared by the U.S. FDA as well as twenty-three other countries. The pivotal Phase 3 study reached the targeted threshold of 298 events (deaths) required to conduct the data evaluation.  The Company is now at the end of this 10-year-long study to prove this completely novel concept of activating the immune system to fight cancer before surgery, radiation and chemotherapy. The extensive database for the study was locked late last year (meaning it was ready to be analyzed) and experts are now analyzing the data according to a statistical analysis plan that was agreed to and finalized before database lock.  The Company is blinded to the study data and is not involved in this process. The statistical analysis plan follows the protocol stated objectives and is designed to meet FDA requirements to define the clinical benefits that Multikine might provide for these patients. The analysis looks at multiple parameters to be able to gain the most information on the possible benefits of using Multikine immunotherapy before any other treatment in these patients.  The Company will be advised of the results when the analysis is completed and the study results will be announced to the public at that time.

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).  The Company has product candidates under development for the potential treatment of rheumatoid arthritis and to potentially treat the COVID-19 coronavirus.

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 and upgrade of the Company’s manufacturing and laboratory facilities. The Company does not anticipate realizing significant revenues until entering 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.

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.  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 $60.2 million as of December 31, 2020 on direct costs for the Phase 3 clinical trial and the filing of the clinical study report to the FDA. The Company estimates it will incur additional expenses of approximately $5.1 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 from 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 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, who are both international leaders in managing oncology trials.

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 $11.3 million of these credits were realized as of December 31, 2020.

During the three months ended December 31, 2020, the Company’s cash increased by approximately $6.4 million.  Significant components of this increase include net proceeds from the sale of common stock and the exercise of warrants and options of approximately $13.6 million, offset by net cash used to fund the Company’s regular operations, including its Phase 3 clinical trial, of approximately $3.8 million, expenditures for leasehold improvements and equipment of approximately $3.2 million, and approximately $0.2 million in lease payments.  During the three months ended December 31, 2019, the Company’s cash increased by approximately $0.9 million.  Significant components of this increase include approximately $5.0 million in net proceeds from the sale of common stock in a public offering and the exercise of warrants of approximately $0.3 million, offset by net cash used to fund the Company’s regular operations, including its Phase 3 clinical trial, of approximately $4.1 million, approximately $0.1 million of equipment purchases and approximately $0.2 million in lease payments.

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 of the Company’s shares by Ergomed and reduces accounts payable to Ergomed.  During the quarters ended December 31, 2020 and 2019, the Company realized approximately $0.1 million and $0.8 million, respectively, through the sale by Ergomed of 9,000 and 98,350 shares of the Company’s common stock and the Company reduced accounts payable to Ergomed and credited Other operating gains by those amounts. 

Prepaid expenses decreased by approximately $0.7 million, or 52%, at December 31, 2020 as compared to September 30, 2020 due to the utilization of amounts paid in advance to the Company’s CRO.

During the three months ended December 31, 2020, supplies used for R&D and manufacturing increased by approximately $0.3 million, or 41%, as compared to September 30, 2020 due to support of the work on modifications of the manufacturing facility in order 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.

During the three months ended December 31, 2020, the Company incurred approximately $3.6 million in costs to upgrade its manufacturing facility to prepare for the potential commercial production of Multikine. Total estimated costs of this upgrade are approximately $10.5 million, of which approximately $6.7 million has been incurred to date.  The landlord of the property has contingently agreed to finance the final $2.4 million of costs and allow for the repayment through increased lease payments upon completion of the project.  Upon completion of these upgrades and the finalization of costs and timing of the upgrades, the Company expects to enter into an amendment to the lease which would include an increase to the monthly lease payments and the effective interest rate.   

Results of Operations and Financial Condition

During the three months ended December 31, 2020, research and development expenses increased by approximately $1.2 million, or 27%, compared to the three months ended December 31, 2019.  Major components of this increase include approximately $0.6 million in expenses related to the Phase 3 clinical study and approximately $0.7 million in employee stock compensation expense, of which $0.4 million relates to the 2020 Non-Qualified Stock Option Plan. These increases were offset by a net decrease of approximately $0.1 million in other research and development costs.

During the three months ended December 31, 2020, general and administrative expenses increased by approximately $0.7 million, or 26%, compared to the three months ended December 31, 2019.  A major component of the increase is an approximate $0.8 million increase in employee stock compensation costs relating to the 2020 Non-Qualified Stock Option Plan, offset by approximately $0.1 million net decrease in other general and administrative costs. 

During the three months ended December 31, 2020 and 2019, the Company recorded derivative gains of approximately $0.9 million and $0.8 million, respectively. This variation was the result of the change in fair value of the derivative liabilities during the period which was caused by fluctuations in the share price of CEL-SCI’s common stock.

 Net interest expense remained relatively constant at approximately $0.3 million for both the three months ended December 31, 2020 and December 31, 2019.   

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.

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 of 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 for the year ended September 30, 2020. 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 Chief Executive and Chief Financial Officer, the Company has conducted an evaluation of the effectiveness of the design and operation of its disclosure controls and procedures as of December 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. Based on the evaluation, the Chief Executive and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were not effective as of December 31, 2020. 

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 Chief Executive and Principal Financial and Accounting 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 Chief Executive and Principal Financial and Accounting Officer, CEL-SCI evaluated the effectiveness of its internal control over financial reporting as of December 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 Chief Executive and Principal Financial and Accounting Officer concluded that as of such date, CEL-SCI's internal control over financial reporting was not effective.

Material Weaknesses in Internal Control Over Financial Reporting

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 December 31, 2019 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 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.

Changes in Internal Control over Financial Reporting

There were no other changes in the Company’s internal control over financial reporting that occurred during the quarter ended December 31, 2020 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

During the three months ended December 31, 2020 the Company issued 15,819 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

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.

* Also signing in the capacity of the Principal Accounting and Financial Officer.