CEL SCI CORP
10-Ks and 10-Qs
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FORM 10-K
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
(Mark
One)
(X) ANNUAL REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the
fiscal year ended September 30, 2018.
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 1-11889
CEL-SCI
CORPORATION
(Exact name of registrant as specified in its charter)
(Exact name of registrant as specified in its charter)
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COLORADO
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84-0916344
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(State or other
jurisdiction of incorporation or organization)
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(I.R.S. Employer
Identification No.)
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Vienna Virginia
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22182
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(Address of
principal executive offices)
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(Zip Code)
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Registrant's
telephone number, including area code: (703) 506-9460
Securities
registered pursuant to Section 12(b) of the Act: None
Securities
registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
Series S Warrants
(Title
of Class)
Indicate
by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act. [ ]
Indicate
by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) 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) has
been subject to such filing requirements for the past 90 days. Yes
[X] 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 [X] No [
]
Indicate by check
mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of
this Form 10-K or any amendment to this Form 10-K. [X]
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.
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Large accelerated
filer
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☐
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Accelerated
filer
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☐
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Non-accelerated
filer
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☒
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Smaller reporting
company
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☒
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Emerging Growth
Company
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☐
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If an
emerging growth company, indicate by checkmark 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 Rule 12b-2 of the Act): Yes [ ] No [X]
The
aggregate market value of the voting stock held by non-affiliates
of the Registrant, based upon the closing sale price of the
registrant’s common stock on March 31, 2018, as quoted on the
NYSE American, was $22,293,400.
As of
December 11, 2018, the Registrant had 28,388,453 issued and
outstanding shares of common stock.
Documents
Incorporated by Reference: None
CEL-SCI
Corporation (CEL-SCI) is focused on finding the best way to
activate the immune system to fight cancer and infectious diseases.
Its lead investigational therapy Multikine® (Leukocyte
Interleukin, Injection) is currently in a pivotal Phase 3 clinical
trial involving head and neck cancer, for which CEL-SCI has
received Orphan Drug Status from the U.S. FDA. The study was fully
enrolled with 928 patients in September 2016. Currently CEL-SCI is
waiting for the occurrence of 298 events (deaths) in the two main
groups to determine final results. If the primary endpoint of this
global study is achieved, the results will be used to support
applications to regulatory agencies around the world for worldwide
commercial marketing approvals as a first line cancer
therapy.
CEL-SCI’s
immune therapy, Multikine, is being used in a different way than
immune therapy is usually used. It is given before any other
therapy has been administered because that is when the immune
system is thought to be strongest.
It is also administered locally to
treat tumors or infections.
For example,
i
n the Phase 3 clinical trial, Multikine is
given locally at the site of the tumor as a first line treatment
before surgery, radiation and/or chemotherapy. The goal is to help
the intact immune system kill the micro metastases that usually
cause recurrence of the cancer. In short, CEL-SCI believes that
local administration and administration before weakening of the
immune system by chemotherapy and radiation will result in higher
efficacy with less or no toxicity.
CEL-SCI
is also investigating a different peptide-based immunotherapy as a
vaccine for Rheumatoid Arthritis using its LEAPS technology
platform. CEL-SCI was awarded a Phase 2 Small Business Innovation
Research (SBIR) grant in the amount of $1.5 million from the
National Institutes of Health (NIH) in September 2017. This grant
will provide funding to allow CEL-SCI to advance its first LEAPS
product candidate, CEL-4000, towards an Investigational New Drug
(IND) application.
CEL-SCI
was formed as a Colorado corporation in 1983. CEL-SCI’s
principal office is located at 8229 Boone Boulevard, Suite 802,
Vienna, VA 22182. CEL-SCI’s telephone number is 703-506-9460
and its website is www.cel-sci.com. CEL-SCI does not incorporate
the information on its website into this report, and you should not
consider it part of this report.
CEL-SCI
makes its electronic filings with the Securities and Exchange
Commission (SEC), including its annual reports on Form 10-K,
quarterly reports on Form 10-Q, current reports on Form 8-K and
amendments to these reports available on its website free of charge
as soon as practicable after they are filed or furnished to the
SEC.
2
CEL-SCI’S PRODUCTS
CEL-SCI is
dedicated to research and development directed at improving the
treatment of cancer and other diseases by using the immune system,
the body’s natural defense system. CEL-SCI is currently
focused on the development of the following product candidates and
technologies:
1)
Multikine,
an
investigational
immunotherapy under development for
the potential treatment of certain head and neck
cancers;
2)
L.E.A.P.S. (Ligand
Epitope Antigen Presentation System) technology, or LEAPS, with two
investigational therapies, LEAPS-H1N1-DC, a product candidate under
development for the potential treatment of pandemic influenza in
hospitalized patients, and CEL-2000 and CEL-4000, vaccine product
candidates under development for the potential treatment of
rheumatoid arthritis.
MULTIKINE
CEL-SCI’s
lead investigational therapy, Multikine, is currently being
developed as a potential therapeutic agent directed at using the
immune system to produce an anti-tumor immune response. Data from
Phase 1 and Phase 2 clinical trials suggest that Multikine may help
the immune system “see” the tumor and then attack it,
enabling the body’s own anti-tumor immune response to fight
the tumor. Multikine is the trademark that CEL-SCI has registered
for this investigational therapy, and this proprietary name is
subject to review by the U.S. Food and Drug Administration, or FDA,
in connection with CEL-SCI’s future anticipated regulatory
submission for approval. Multikine has not been licensed or
approved for sale, barter or exchange by the FDA or any other
regulatory agency, such as the European Medicine Agency, or EMA.
Neither has its safety or efficacy been established for any
use.
Multikine is an
immunotherapy product candidate comprised of a patented defined
mixture of 14 human natural cytokines and is manufactured in a
proprietary manner in CEL-SCI’s manufacturing facility.
CEL-SCI spent over 10 years and more than $80 million developing
and validating the manufacturing process for Multikine. The
pro-inflammatory cytokine mixture includes interleukins,
interferons, chemokines and colony-stimulating factors, which
contain elements of the body’s natural mix of defenses
against cancer.
Multikine is
designed to be used in a different way than immune therapy is
generally being used. Generally, immunotherapy is given to patients
who have already failed other treatments
of
such as surgery,
radiation and/or chemotherapy and most of the time it is
administered systemically. Multikine on the other hand is
administered locally to treat tumors and their microenvironment
before any other therapy has been administered because it is
believed that is the time when the immune system is thought to be
most amenable to activation against the tumor. For example,
in the Phase 3 clinical trial, Multikine was injected locally at
the site of the tumor and near the adjacent draining lymph nodes as
a first line of treatment before surgery, radiation and/or
chemotherapy because that is when the immune system is thought to
be strongest. The goal is to help the intact immune system
recognize and kill the tumor micro metastases that usually cause
recurrence of the cancer.
3
In short,
CEL-SCI believes that the local administration and administration
of Multikine and its administration before weakening of the immune
system by chemotherapy and radiation will result in better
anti-tumor response than if Multikine were administered as a
second- or later-line therapy. In clinical studies of Multikine,
administration of the investigational therapy to head and neck
cancer patients has demonstrated the potential for lesser or no
appreciable toxicity.
Source: Adapted from Timar et al., Journal of Clinical Oncology
23(15) May 20, 2005
The
first indication CEL-SCI is pursuing for its investigational drug
product candidate Multikine is an indication for the neoadjuvant
therapy in patients with squamous cell carcinoma of the head and
neck, or SCCHN (hereafter also referred to as advanced primary head
and neck cancer).
SCCHN
is a type of head and neck cancer, and CEL-SCI believes that, in
the aggregate, there is a large, unmet medical need among head and
neck cancer patients. CEL-SCI believes the last FDA approval of a
therapy indicated for the treatment of advanced primary head and
neck cancer was over 50 years ago. In the aggregate, head and neck
cancer represents about 6% of the world’s cancer cases, with
approximately over 650,000 patients diagnosed worldwide each year,
and about 60,000 patients diagnosed annually in the United States.
Multikine investigational immunotherapy was granted Orphan Drug
designation for neoadjuvant therapy in patients with SCCHN by the
FDA in the United States.
The
current Phase 3 study for Multikine was designed with the objective
that, if the study endpoint, which is an improvement in overall
survival of the subjects treated with the Multikine treatment
regimen plus the current standard of care (SOC) as compared to
subjects treated with the current SOC only, is satisfied, the study
results are expected to be used to support applications that
CEL-SCI plans to submit to regulatory agencies in order to seek
commercial marketing approvals for Multikine in major markets
around the world. This assessment can only be made when a certain
number of deaths have occurred in these two main comparator groups
of the study.
4
The
primary endpoint for the protocol for this Phase 3 head and neck
cancer study required that a 10% increase in overall survival be
obtained in the Multikine group which also is administered CIZ (CIZ
= low dose (non-chemotherapeutic) of cyclophosphamide, indomethacin
and Zinc-multivitamins) all of which are thought to enhance
Multikine activity), plus Standard of Care (Surgery + Radiotherapy
or Chemoradiotherapy) arm of the study over the Control comparator
(Standard of Care alone) arm. As the study was designed, the final
determination of whether this endpoint had been successfully
reached could only be determined when 298 events (deaths) had
occurred in the combined comparator arms of the study.
Nine
hundred twenty-eight (928) newly diagnosed head and neck cancer
patients have been enrolled in this Phase 3 cancer study and all
the patients who have completed treatment continue to be followed
for protocol-specific outcomes in accordance with the Study
Protocol. The last patient was enrolled in the study in September
2016. Approximately 135 patients were enrolled in the study from
2011 to 2013, about 195 were enrolled in 2014, about 340 in 2015,
and about 260 in 2016. The study protocol assumed an overall
survival rate of about 55% at 3 years for the SOC treatment group
alone. At this point in the study the 928 patients enrolled in the
study are being followed-up as required by the study
protocol.
This
trial is currently primarily under the management of two clinical
research organizations, or CROs: ICON Inc., or ICON, and Ergomed
Clinical Research Limited, or Ergomed.
Since
CEL-SCI launched its Phase 3 clinical trial for Multikine, CEL-SCI
has incurred expenses of approximately $50.6 million as of
September 30, 2018 on direct costs for the Phase 3 clinical trial.
CEL-SCI estimates it will incur additional expenses of
approximately $8.4 million for the remainder of the Phase 3
clinical trial. It should be noted that this estimate is based only
on the information currently available in CEL-SCI’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 and speed 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.
Ultimately, the
decision as to whether CEL-SCI’s drug product candidate is
safe and effective can only be made by the FDA and/or by other
regulatory authorities based upon an assessment of all of the data
from an entire drug development program submitted as part of an
application for marketing approval. As detailed elsewhere in this
report the current Phase 3 clinical study for CEL-SCI’s
investigational drug may or may not be able to be used as the
pivotal study supporting a marketing application in the United
States, and, if not, at least one entirely new Phase 3 pivotal
study would need to be conducted to support a marketing application
in the United States.
Development Agreements for Multikine
In
August 2008, CEL-SCI signed an agreement with Teva Pharmaceutical
Industries Ltd., or Teva, that gives Teva the exclusive right and
license to market, distribute and sell Multikine in Israel and
Turkey for treatment of head and neck cancer, if approved. The
agreement terminates on a country-by-country basis 10 years after
the product launch in each country or upon a material breach or
upon bankruptcy of either party. The agreement will automatically
extend for additional two year terms unless either party gives
notice of its intent not to extend the agreement. If CEL-SCI
develops Multikine for other oncology indications and Teva
indicates a desire to participate, the parties have agreed to
negotiate in good faith with respect to Teva’s participation
and contribution in future clinical trials.
Teva
has agreed to use all reasonable efforts to obtain regulatory
approval to market and sell Multikine in its territory at its own
cost and expense. Pursuant to the agreement, it is CEL-SCI’s
responsibility to supply Multikine and Teva’s responsibility
to sell Multikine, if approved. Net sales will be divided 50/50
between the two parties. Teva also initially agreed to fund certain
activities relating to the conduct of a clinical trial in Israel as
part of the global Phase 3 trial for Multikine. In January 2012,
pursuant to an assignment and assumption agreement between CEL-SCI,
Teva and GCP Clinical Studies Ltd., or GCP, Teva transferred all of
its rights and obligations concerning the Phase III trial in Israel
to GCP. GCP is now operating the Phase 3 trial in Israel pursuant
to a service agreement with CEL-SCI.
In July
2011, Serbia and Croatia were added to Teva’s territory,
pursuant to a joinder agreement between CEL-SCI and PLIVA Hrvatska
d.o.o., or PLIVA, an affiliate of Teva’s, subject to similar
terms as described above.
In
consideration for the rights granted by CEL-SCI to PLIVA under the
joinder agreement, CEL-SCI will be paid by PLIVA (in U.S.
dollars):
●
$100,000 upon EMA
grant of Marketing Authorization for Multikine;
●
$50,000 upon
Croatia’s grant of reimbursement status for Multikine in
Croatia; and
●
$50,000 upon
Serbia’s grant of reimbursement status for Multikine in
Serbia.
In
November 2000, CEL-SCI signed an agreement with Orient Europharma
Co., Ltd., or Orient Europharma, of Taiwan, which agreement was
amended in October 2008 and again in June 2010. Pursuant to this
agreement, as amended, Orient Europharma has the exclusive
marketing and distribution rights to Multikine, if approved, for
head and neck cancer, naso-pharyngeal cancer and potentially
cervical cancer indications in Taiwan, Singapore, Malaysia, Hong
Kong, the Philippines, South Korea, Australia and New Zealand.
CEL-SCI has granted Orient Europharma the first right of
negotiation with respect to Thailand and China.
5
The
agreement requires Orient Europharma to fund 10% of the cost of the
clinical trials needed to obtain marketing approvals in these
countries for head and neck cancer, naso-pharyngeal cancer and
potentially cervical cancer. Orient Europharma has set up clinical
centers for the Phase 3 trial in Taiwan, Malaysia, the Philippines
and Thailand and has made further financial contributions towards
the cost of the Phase 3 clinical trial.
If Multikine is approved for sale, Orient Europharma will purchase
Multikine from CEL-SCI for 35% of the gross selling price in each
country.
Orient
Europharma is obligated to use the same diligent efforts to
develop, register, market, sell and distribute Multikine in its
territory as with its own products or other licensed
products.
The
agreement will terminate on a country-by-country basis 15 years
after the product approval for Multikine in each country, at which
point the agreement will be automatically extended for successive
two year periods, unless either party gives notice of its intent
not to extend the agreement. The agreement may also be terminated
upon bankruptcy of either party or material misrepresentations that
are not cured within 60 days. If the agreement ends before the 15
year term through no fault of either party, CEL-SCI will reimburse
Orient Europharma for a prorated part of Orient Europhorma’s
costs towards the clinical trials of Multikine. If Orient
Europharma fails to make certain minimum purchases of Multikine
during the term of the agreement, Orient Europhorma’s rights
to the territory will become non-exclusive.
CEL-SCI
has a licensing agreement with Byron Biopharma LLC, or Byron, under
which CEL-SCI granted Byron an exclusive license to market and
distribute Multikine in the Republic of South Africa, if approved.
This license will terminate 20 years after marketing approval in
South Africa or after bankruptcy or uncured material breach. After
the 20-year period has expired, the agreement will be automatically
extended for successive two year periods, unless either party gives
notice of its intent not to extend the agreement.
Pursuant to the
agreement, Byron will be responsible for registering Multikine in
South Africa. If Multikine is approved for sale in South Africa,
CEL-SCI will be responsible for manufacturing the product, while
Byron will be responsible for sales in South Africa. Sales revenues
will be divided between CEL-SCI and Byron. CEL-SCI will be paid
fifty (50%) percent of the net sales of Multikine.
LEAPS
CEL-SCI’s
patented T-cell Modulation Process, referred to as LEAPS (Ligand
Epitope Antigen Presentation System), uses
“heteroconjugates” to direct the body to choose a
specific immune response. LEAPS is designed to stimulate the human
immune system to more effectively fight bacterial, viral and
parasitic infections as well as autoimmune, allergies,
transplantation rejection and cancer, when it cannot do so on its
own. Administered like a vaccine, LEAPS combines T-cell binding
ligands with small, disease associated, peptide antigens and may
provide a new method to treat and prevent certain
diseases.
The
ability to generate a specific immune response is important because
many diseases are often not combated effectively due to the
body’s selection of the “inappropriate” immune
response. The capability to specifically reprogram an immune
response may offer a more effective approach than existing vaccines
and drugs in attacking an underlying disease.
On
September 19, 2017, CEL-SCI announced that it had been awarded a
Phase 2 Small Business Innovation Research (SBIR) grant in the
amount of $1.5 million from the National Institute of Arthritis
Muscoskeletal and Skin Diseases, which is part of the National
Institutes of Health (NIH). This grant will provide funding to
allow CEL-SCI to advance its first LEAPS product candidate,
CEL-4000, towards an Investigational New Drug (IND) application, by
funding GMP manufacturing, IND enabling studies, and additional
mechanism of action studies. The work is being conducted at
CEL-SCI’s research laboratory and Rush University Medical
Center in Chicago, Illinois in the laboratories of Tibor Glant, MD,
Ph.D., The Jorge O. Galante Professor of Orthopedic Surgery and
Katalin Mikecz, MD, Ph.D. Professor of Orthopedic Surgery &
Biochemistry. The grant was awarded based on published data
described below by Dr. Glant's team in collaboration with CEL-SCI
showing that the administration of a proprietary peptide using
CEL-SCI's LEAPS technology prevented the development, and lessened
the severity, including inflammation, of experimental proteoglycan
induced arthritis (PGIA or GIA) when it was administered after the
disease was induced in animals.
In July
2014, CEL-SCI announced that it has been awarded a Phase 1 Small
Business Innovation Research (SBIR) grant in the amount of $225,000
from the National Institute of Arthritis Muscoskeletal and Skin
Diseases, which is part of the National Institutes of Health. The
grant funded the development of CEL-SCI’s LEAPS technology as
a potential treatment for rheumatoid arthritis, an autoimmune
disease of the joints. The work was conducted at Rush University
Medical Center in Chicago, Illinois in the laboratories of Tibor
Glant, MD, Ph.D., Katalin Mikecz, MD, Ph.D., and Allison Finnegan,
Ph.D. Professor of Medicine.
With
the support of the SBIR grant, CEL-SCI is developing two new drug
candidates, CEL-2000 and CEL-4000, as potential rheumatoid
arthritis therapeutic vaccines. The data from animal studies using
the CEL-2000 treatment vaccine demonstrated that it could be used
as an effective treatment against rheumatoid arthritis with fewer
administrations than those required by other anti-rheumatoid
arthritis treatments currently on the market for arthritic
conditions associated with the Th17 signature cytokine
TNF-
. The data for
CEL-4000 indicates it could be effective against rheumatoid
arthritis cases where a Th1 signature cytokine (IFN-c) is dominant.
CEL-2000 and CEL-4000 have the potential to be a more
disease-specific therapy, significantly less expensive, act at an
earlier step in the disease process than current therapies and may
be useful in patients not responding to existing rheumatoid
arthritis therapies. CEL-SCI believes this represents a large unmet
medical need in the rheumatoid arthritis market.
In
February 2017 and November 2016, CEL-SCI announced new preclinical
data that demonstrate its investigational new drug candidate
CEL-4000 has the potential for use as a therapeutic vaccine to
treat rheumatoid arthritis. This efficacy study was supported in
part by the SBIR Phase I Grant and was conducted in collaboration
with Drs. Katalin Mikecz and Tibor Glant, and their research team
at Rush University Medical Center in Chicago, IL.
6
In
March 2015, CEL-SCI and its collaborators published a review
article on vaccine therapies for rheumatoid arthritis based in part
on work supported by the SBIR grant. The article is entitled
“Rheumatoid arthritis vaccine therapies: perspectives and
lessons from therapeutic Ligand Epitope Antigen Presentation System
vaccines for models of rheumatoid arthritis” and was
published in Expert Review of Vaccines 1 - 18 and can be found
online at
http://www.ncbi.nlm.nih.gov/pubmed/25787143
.
In
August 2012, Dr. Zimmerman, CEL-SCI’s Senior Vice President
of Research, Cellular Immunology, gave a Keynote presentation at
the OMICS 2nd International Conference on Vaccines and Vaccinations
in Chicago. This presentation showed how the LEAPS peptides
administered altered only select cytokines specific for each
disease model, thereby improving the status of the test animals and
even preventing death and morbidity. These results support the
growing body of evidence that provides for its mode of action by a
common format in these unrelated conditions by regulation of Th1
(e.g., IL12 and IFN-c) and their action on reducing
TNF-
and other
inflammatory cytokines as well as regulation of antibodies to these
disease associated antigens. This was also illustrated by a
schematic model showing how these pathways interact and result in
the overall effect of protection and regulation of cytokines in a
beneficial manner.
Using
the LEAPS technology, CEL-SCI has created a potential peptide
treatment for H1N1 (swine flu) hospitalized patients. This
LEAPS flu treatment is designed to focus on the conserved,
non-changing epitopes of the different strains of Type A Influenza
viruses (H1N1, H5N1, H3N1, etc.), including “swine”,
“avian or bird”, and “Spanish Influenza”,
in order to minimize the chance of viral “escape by
mutations” from immune recognition. Therefore one should
think of this treatment not really as an H1N1 treatment, but as a
potential pandemic flu treatment. CEL-SCI’s LEAPS flu
treatment contains epitopes known to be associated with immune
protection against influenza in animal models.
In May
2011 NIAID scientists presented data at the Keystone Conference on
“Pathogenesis of Influenza: Virus-Host Interactions” in
Hong Kong, China, showing the positive results of efficacy studies
in mice of LEAPS H1N1 activated dendritic cells (DCs) to treat the
H1N1 virus. Scientists at the NIAID found that H1N1-infected mice
treated with LEAPS-H1N1 DCs showed a survival advantage over mice
treated with control DCs. The work was performed in collaboration
with scientists led by Kanta Subbarao, M.D., Chief of the Emerging
Respiratory Diseases Section in NIAID’s Division of
Intramural Research, part of the National Institutes of Health,
USA.
In July
2013, CEL-SCI announced the publication of the results of influenza
studies by researchers from the NIAID in the Journal of Clinical
Investigation (
www.jci.org/articles/view/67550
).
The studies described in the publication show that when
CEL-SCI’s investigational J-LEAPS Influenza Virus treatments
were used “in vitro” to activate DCs, these activated
DCs, when injected into influenza infected mice, arrested the
progression of lethal influenza virus infection in these mice. The
work was performed in the laboratory of Dr. Subbarao.
Even
though the various LEAPS vaccine candidates have not yet been given
to humans, they have been tested in vitro with human cells. They
have induced similar cytokine responses that were seen in these
animal models, which may indicate that the LEAPS technology might
translate to humans. The LEAPS candidates have demonstrated
protection against lethal herpes simplex virus (HSV1) and H1N1
influenza infection, as a prophylactic or therapeutic agent in
animals. They have also shown some level of efficacy in animals in
two autoimmune conditions, curtailing and sometimes preventing
disease progression in arthritis and myocarditis animal models.
CEL-SCI’s belief is that the LEAPS technology may be a
significant alternative to the vaccines currently available on the
market for these diseases.
None of
the LEAPS investigational products have been approved for sale,
barter or exchange by the FDA or any other regulatory agency for
any use to treat disease in animals or humans. The safety or
efficacy of these products has not been established for any use.
Lastly, no definitive conclusions can be drawn from the
early-phase, preclinical-trials data involving these
investigational products. Before obtaining marketing approval from
the FDA in the United States, and by comparable agencies in most
foreign countries, these product candidates must undergo rigorous
preclinical and clinical testing which is costly and time consuming
and subject to unanticipated delays. There can be no assurance that
these approvals will be granted.
INTELLECTUAL PROPERTY
Patents and other proprietary
rights are essential to CEL-SCI’s business. CEL-SCI files
patent applications to protect its technologies, inventions and
improvements to its inventions that CEL-SCI considers important to
the development of its business. CEL-SCI’S intellectual
property portfolio covers its proprietary technologies, including
Multikine and LEAPS, by multiple issued patents and pending patent
applications in the United States and in key foreign
markets.
Multikine is
protected by a U.S. patent, which is a composition-of-matter patent
issued in May 2005 that, in its current format, expires in 2023.
Additional composition-of-matter patents for Multikine have been
issued in Germany (issued in June 2011 and currently set to expire
in 2025), China (issued in May 2011 and currently set to expire in
2024), Japan (issued in November 2012 and currently set to expire
in 2025), and three in Europe (issued in September 2015, May 2016
and October 4, 2017, currently set to expire in 2025 and 2026). In
September 2017 CEL-SCI announced that the European Patent Office
has issued a new patent to CEL-SCI for Multikine. Patent # EP 1 879
618 B1, titled “A Method for Modulating HLA Class II Tumor
Cell Surface Expression With A Cytokine Mixture,” addresses
Multikine’s mechanism of action to make tumors more visible
to the immune system. This new patent is important because, along
with the other Multikine issued patents, it addresses how Multikine
enables the immune system to recognize and attack the tumor. One
way tumor cells evade the immune system is by expressing human
leukocyte antigens (HLA) on the tumor cell surface, thus appearing
as ‘self’ to the immune cells and therefore the tumor
cells are not attacked. It is important to note that the tumors of
the Multikine-treated responders in CEL-SCI’s prior Phase 2
studies had no HLA Class II expressed on the cell surface following
Multikine treatment as compared to controls.
7
This points to
Multikine’s ability to modulate HLA expression on the tumor
cell surface, thereby allowing the immune system to recognize and
attack the tumor.
In addition to the patents
that offer certain protections for Multikine, the method of
manufacture for Multikine, a complex biological product, is held by
CEL-SCI as a trade secret.
LEAPS is protected by patents
in the United States issued in February 2006, April 2007, and
August 2007. The LEAPS patents, which expire in 2021, 2022 and
2021, respectively, include overlapping claims, with composition of
both matter (new chemical entity), process and methods-of-use, to
maximize and extend the coverage in their current format. In
October 2017, a patent was issued in Europe for LEAPS, which
expires in 2029.
CEL-SCI has six patent
applications pending in the United States and one in Europe for
LEAPS, which, if issued, would extend protection through 2034,
subject to any potential patent term extensions. One pending U.S.
application is a joint application with Northeast Ohio Medical
University (“Neoucom”). If granted, CEL-SCI will share
the ability to use the patent, unless CEL-SCI licenses the rights
to the patent application and any ensuing patent from
Neoucom.
As of
December 19, 2018, there were no contested proceedings and/or third
party claims with respect to CEL-SCI’s patents or patent
applications.
MANUFACTURING FACILITY
Before
starting the Phase 3 clinical trial, for reasons related to
regulatory considerations, CEL-SCI needed to build a dedicated
manufacturing facility to produce Multikine. This facility has been
completed and validated, and has produced multiple clinical lots
for the Phase 3 clinical trial. The facility has also passed review
by a European Union Qualified Person on several
occasions.
CEL-SCI’s
lease on the manufacturing facility expires on October 31,
2028.
CEL-SCI
completed validation of its new manufacturing facility in January
2010. The state-of-the-art facility is being used to manufacture
Multikine for CEL-SCI’s Phase 3 clinical trial and to market
Multikine for commercial sale, if Multikine is approved by the FDA.
In addition to using this facility to manufacture Multikine,
CEL-SCI, only if the facility is not being used for Multikine, may
offer the use of the facility as a service to pharmaceutical
companies and others, particularly those that need to “fill
and finish” their drugs in a cold environment (4 degrees
Celsius, or approximately 39 degrees Fahrenheit). Fill and finish
is the process of filling injectable drugs in a sterile manner and
is a key part of the manufacturing process for many medicines.
However, priority will always be given to Multikine as management
considers the Multikine supply to the clinical studies and
preparation for a final marketing approval to be more important
than offering fill and finish services. See Item 2 of this report
for more information concerning the terms of this
lease.
8
The
risks described below could adversely affect the price of
CEL-SCI’s common stock.
Risks Related to CEL-SCI
CEL-SCI has incurred significant losses since inception, and
CEL-SCI anticipates that it will continue to incur significant
losses for the foreseeable future and may never achieve or maintain
profitability.
CEL-SCI
has a history of net losses, expects to incur substantial losses
and have negative operating cash flow for the foreseeable future,
and may never achieve or maintain profitability. Since
the date of its formation and through September 30, 2018, CEL-SCI
incurred net losses of approximately $332 million. CEL-SCI has
relied principally upon the proceeds from the public and private
sales of its securities to finance its activities to date. To date,
CEL-SCI has not commercialized any products or generated any
revenue from the sale of products, and CEL-SCI does not expect to
generate any product revenue for the foreseeable future. CEL-SCI
does not know whether or when it will generate product revenue or
become profitable.
CEL-SCI
is heavily dependent on the success of Multikine which is under
clinical development. CEL-SCI cannot be certain that Multikine will
receive regulatory approval or be successfully commercialized even
if CEL-SCI receives regulatory approval. Multikine is the only
product candidate in late-stage clinical development, and
CEL-SCI’s business currently depends heavily on its
successful development, regulatory approval and commercialization.
CEL-SCI has no drug products for sale currently and may never be
able to develop approved and marketable drug products.
Even
if CEL-SCI succeeds in developing and commercializing one or more
of its product candidates, CEL-SCI expects to continue to incur
significant operating and capital expenditures as
CEL-SCI:
●
continues
to undertake preclinical development and clinical trials for
product candidates;
●
seeks
regulatory approvals for product candidates; and
●
implements
additional internal systems and infrastructure.
To
become and remain profitable, CEL-SCI must succeed in developing
and commercializing product candidates which must generate
significant revenue. This will require CEL-SCI to be successful in
a range of challenging activities, including completing preclinical
testing and clinical trials of its product candidates, discovering
or acquiring additional product candidates, obtaining regulatory
approval for these product candidates and manufacturing, marketing
and selling any products for which CEL-SCI may obtain regulatory
approval. CEL-SCI is only in the preliminary stages of most of
these activities. CEL-SCI may never succeed in these activities
and, even if CEL-SCI does, may never generate revenue that is
significant enough to achieve profitability.
Even
if CEL-SCI does achieve profitability, it may not be able to
sustain or increase profitability on a quarterly or annual basis.
The failure to become and remain profitable could depress the value
of CEL-SCI and could impair its ability to raise capital, expand
its business, maintain research and development efforts, diversify
product offerings or even continue in operation. A decline in the
value of CEL-SCI could cause its stockholders to lose all or part
of their investment.
Our financial statements include an explanatory paragraph that
expresses substantial doubt about our ability to continue as a
going concern, indicating the possibility that we may not be able
to operate in the future.
Primarily
as a result of our losses incurred to date, our expected continued
future losses, and limited cash balances, we have included an
explanatory paragraph in our financial statements expressing
substantial doubt about our ability to continue as a going concern.
We have included such an explanatory paragraph on numerous
occasions in the preceding years. Our ability to continue as a
going concern is contingent upon, among other factors, the sale of
the shares of our common stock or obtaining alternate
financing.
Our Independent Registered Public Accountants have included in
their report on our financial statements a paragraph stating that
we may be unable to continue as a going concern.
As
a result of our recurring losses from operations, our independent
registered public accounting firm, BDO USA, LLP, has issued a
report in connection with their audit of our financial statements
for the year ended September 30, 2018, that included an explanatory
paragraph referring to our recurring losses from operations and
expressing substantial doubt in our ability to continue as a going
concern without additional capital becoming available. The doubt
about our ability to continue as a going concern could have an
adverse impact on our ability to execute our business plan, result
in the reluctance on the part of certain suppliers to do business
with us, or adversely affect our ability to raise additional debt
or equity capital.
9
CEL-SCI will require substantial additional capital to remain in
operation. A failure to obtain this necessary capital when needed
could force CEL-SCI to delay, limit, reduce or terminate the
product candidates’ development or commercialization
efforts.
As
of September 30, 2018, CEL-SCI had cash and cash equivalents of
approximately $10.3 million. CEL-SCI believes that it
will continue to expend substantial resources for the foreseeable
future developing Multikine, LEAPS and any other product candidates
or technologies that it may develop or acquire. These expenditures
will include costs associated with research and development,
potentially obtaining regulatory approvals and having the products
manufactured, as well as marketing and selling products approved
for sale, if any. In addition, other unanticipated costs may arise.
Because the outcome of the current and anticipated clinical trials
is highly uncertain, CEL-SCI cannot reasonably estimate the actual
amounts necessary to successfully complete the development and
commercialization of the product candidates.
CEL-SCI’s
future capital requirements depend on many factors,
including:
●
the
rate of progress of, results of and cost of completing Phase 3
clinical development of Multikine for the treatment of certain head
and neck cancers;
●
the
results of the applications to and meetings with the FDA, the EMA
and other regulatory authorities and the consequential effect on
operating costs;
●
assuming
favorable Phase 3 clinical results, the cost, timing and outcome of
the efforts to obtain marketing approval for Multikine in the
United States, Europe and in other jurisdictions, including the
preparation and filing of regulatory submissions for Multikine with
the FDA, the EMA and other regulatory authorities;
●
the
scope, progress, results and costs of additional preclinical,
clinical, or other studies for additional indications for
Multikine, LEAPS and other product candidates and technologies that
CEL-SCI may develop or acquire;
●
the
timing of, and the costs involved in, obtaining regulatory
approvals for LEAPS if clinical studies are
successful;
●
the
cost and timing of future commercialization activities for the
products, if any of the product candidates are approved for
marketing, including product manufacturing, marketing, sales and
distribution costs;
●
the
revenue, if any, received from commercial sales of the product
candidates for which CEL-SCI receives marketing
approval;
●
the
cost of having the product candidates manufactured for clinical
trials and in preparation for commercialization;
●
the
ability to establish and maintain strategic collaborations,
licensing or other arrangements and the financial terms of such
agreements;
●
the
costs involved in preparing, filing and prosecuting patent
applications and maintaining, defending and enforcing its
intellectual property rights, including litigation costs, and the
outcome of such litigation; and
●
the
extent to which CEL-SCI acquires or in-licenses other products or
technologies.
10
Based
on the current operating plan, and absent any future financings or
strategic partnerships, CEL-SCI believes that its existing cash and
cash equivalents and investments will be sufficient to fund its
projected operating expenses and capital expenditure requirements
into the second half of fiscal year 2019. However, CEL-SCI’s
operating plan may change as a result of many factors currently
unknown to CEL-SCI, and CEL-SCI may need additional funds sooner
than planned. Additional funds may not be available when CEL-SCI
needs them on terms that are acceptable to CEL-SCI, or at all. If
adequate funds are not available to CEL-SCI on a timely basis,
CEL-SCI may be required to delay, limit, reduce or terminate
preclinical studies, clinical trials or other development
activities for Multikine, LEAPS, or any other product candidates or
technologies that CEL-SCI develops or acquires, or delay, limit,
reduce or terminate its sales and marketing capabilities or other
activities that may be necessary to commercialize its product
candidates. Due to recurring losses from operations and future
liquidity needs, there is substantial doubt about CEL-SCI’s
ability to continue as a going concern without additional capital
becoming available. The doubt about CEL-SCI’s ability to
continue as a going concern could have an adverse impact on
CEL-SCI’s ability to execute its business plan, result in the
reluctance on the part of certain suppliers to do business with
CEL-SCI, or adversely affect CEL-SCI’s ability to raise
additional debt or equity capital.
The costs of the product candidates development and clinical trials
are difficult to estimate and will be very high for many years,
preventing CEL-SCI from making a profit for the foreseeable future,
if ever.
Clinical
and other studies necessary to obtain approval of a new drug can be
time consuming and costly, especially in the United States, but
also in foreign countries. The estimates of the costs associated
with future clinical trials and research may be substantially lower
than what CEL-SCI actually experiences. It is impossible to predict
what CEL-SCI will face in the development of a product candidate,
such as Multikine. The purpose of clinical trials is to provide
both CEL-SCI and regulatory authorities with safety and efficacy
data in humans. It is relatively common to revise a trial or add
subjects to a trial in progress. The difficult and often complex
steps necessary to obtain regulatory approval, especially that of
the FDA and the EMA, involve significant costs and may require
several years to complete. CEL-SCI expects that it will need
substantial additional financing over an extended period of time in
order to fund the costs of future clinical trials, related
research, and general and administrative expenses.
The
extent of the clinical trials and research programs are primarily
based upon the amount of capital available to CEL-SCI and the
extent to which CEL-SCI receives regulatory approvals for clinical
trials. CEL-SCI has established estimates of the future costs of
the Phase 3 clinical trial for Multikine, but, as explained above,
the estimates may not prove correct.
An adverse determination in any future legal proceedings could have
a material adverse effect on CEL-SCI.
CEL-SCI
may be the target of claims asserting violations of securities
fraud and derivative actions, or other litigation or arbitration
proceedings in the future. Any future litigation could result in
substantial costs and divert management’s attention and
resources. These legal proceedings may result in large judgments or
settlements against CEL-SCI, any of which could have a material
adverse effect on its business, operating results, financial
condition and liquidity.
Compliance with changing regulations concerning corporate
governance and public disclosure may result in additional
expenses.
Changing
laws, regulations and standards relating to corporate governance
and public disclosure may create uncertainty regarding compliance
matters. New or changed laws, regulations and standards are subject
to varying interpretations in many cases. As a result, their
application in practice may evolve over time. CEL-SCI is committed
to maintaining high standards of corporate governance and public
disclosure. Complying with evolving interpretations of new or
changing legal requirements may cause CEL-SCI to incur higher costs
as CEL-SCI revises current practices, policies and procedures, and
may divert management time and attention from potential
revenue-generating activities to compliance matters. If the efforts
to comply with new or changed laws, regulations and standards
differ from the activities intended by regulatory or governing
bodies due to ambiguities related to practice, CEL-SCI’s
reputation may also be harmed. Further, CEL-SCI’s board
members, chief executive officer, and other executive officers
could face an increased risk of personal liability in connection
with the performance of their duties. As a result, CEL-SCI may have
difficulty attracting and retaining qualified board members and
executive officers, which could harm its business.
CEL-SCI has not established a
definite plan for the marketing of Multikine, if
approved.
CEL-SCI
has not established a definitive plan for marketing nor has CEL-SCI
established a price structure for any of its product candidates, if
approved. However, CEL-SCI intends, if it is in a position to do
so, to sell Multikine itself in certain markets where it is
approved, and or to enter into written marketing agreements with
various third parties with established sales forces in such
markets. The sales forces in turn would, CEL-SCI
believes, focus on selling Multikine to targeted cancer centers,
physicians and clinics involved in the treatment of head and neck
cancer. CEL-SCI has already licensed future sales of Multikine, if
approved, to three companies: Teva Pharmaceutical Industries Ltd.
in Israel, Turkey, Serbia and Croatia; Orient Europharma in Taiwan,
Singapore, Hong Kong, Malaysia, South Korea, the Philippines,
Australia and New Zealand; and Byron BioPharma, LLC in South
Africa.
11
CEL-SCI
believes that these companies will have the resources to market
Multikine appropriately in their respective territories, if
approved, but there is no guarantee that they
will. There is no assurance that CEL-SCI will be able to
find qualified third-party partners to market its products in other
areas, on terms that are favorable to CEL-SCI, or at
all.
CEL-SCI
may encounter problems, delays and additional expenses in
developing marketing plans with third parties. In addition, even if
Multikine, if approved, is cost-effective and demonstrated to
increase overall patient survival, CEL-SCI may experience other
limitations involving the proposed sale of Multikine, such as
uncertainty of third-party coverage and reimbursement. There is no
assurance that CEL-SCI can successfully market Multikine, if
approved, or any other product candidates it may
develop.
CEL-SCI hopes to expand its clinical development capabilities in
the future, and any difficulties hiring or retaining key personnel
or managing this growth could disrupt its operations.
CEL-SCI
is highly dependent on the principal members of its management and
development staff. If the Phase 3 Multikine clinical trial is
successful, CEL-SCI expects to expand its clinical development and
manufacturing capabilities, which will involve hiring additional
employees. Future growth will require CEL-SCI to continue to
implement and improve its managerial, operational and financial
systems and continue to retain, recruit and train additional
qualified personnel, which may impose a strain on its
administrative and its operational infrastructure. The competition
for qualified personnel in the biopharmaceutical field is intense.
CEL-SCI is highly dependent on its ability to attract, retain and
motivate highly qualified management and specialized personnel
required for clinical development. Due to limited resources,
CEL-SCI may not be able to manage effectively the expansion of its
operations or recruit and train additional qualified
personnel. If CEL-SCI is unable to retain key personnel
or manage its future growth effectively, CEL-SCI may not be able to
implement its business plan.
If product liability or patient injury lawsuits are brought against
CEL-SCI, CEL-SCI may incur substantial liabilities and may be
required to limit clinical testing or future commercialization of
Multikine or its other product candidates.
CEL-SCI
faces an inherent risk of product liability as a result of the
clinical testing of Multikine and other product candidates, and
will face an even greater risk if CEL-SCI commercializes any of its
product candidates. For example, CEL-SCI may be sued if its
Multikine or LEAPS product candidates, or any other future product
candidates, allegedly cause injury or are found to be otherwise
unsuitable during clinical testing, manufacturing or, if approved,
marketing or sale. Any such product liability claims may include
allegations of defects in manufacturing, defects in design, a
failure to warn of dangers inherent in the product candidate,
negligence, strict liability and a breach of warranties. Claims
could also be asserted under state consumer protection
acts.
Furthermore,
Multikine is made, in part, from components of human blood. There
are inherent risks associated with products that involve human
blood such as possible contamination with viruses, including
hepatitis or HIV. Any possible contamination could cause injuries
to patients who receive contaminated Multikine, or could require
CEL-SCI to destroy batches of Multikine, thereby subjecting CEL-SCI
to possible financial losses, lawsuits and harm to its
business.
If
CEL-SCI cannot successfully defend itself against product liability
claims, CEL-SCI may incur substantial liabilities or be required to
limit or cease the clinical testing or commercialization of its
product candidates, if approved. Even a successful defense would
require significant financial and management resources. Regardless
of the merits or eventual outcome, liability claims may result
in:
●
decreased
demand for Multikine or other product candidates, if
approved;
●
injury
to CEL-SCI’s reputation;
●
withdrawal
of existing, or failure to enroll additional, clinical trial
participants;
●
costs
to defend any related litigation;
●
a
diversion of management’s time and resources;
●
substantial
monetary awards to trial participants or patients;
●
product
candidate recalls, withdrawals or labeling, marketing or
promotional restrictions;
●
loss
of revenue;
●
inability
to commercialize Multikine or other product candidates;
and
●
a
decline in the price of CEL-SCI’s common stock.
12
Although
CEL-SCI has product liability insurance for Multikine in the amount
of $5.0 million, the successful prosecution of a product liability
case against CEL-SCI could have a materially adverse effect upon
its business if the amount of any judgment exceeds the insurance
coverage. Any claim that may be brought against CEL-SCI could
result in a court judgment or settlement in an amount that is not
covered, in whole or in part, by CEL-SCI’s insurance or that
is in excess of the limits of the insurance coverage.
CEL-SCI’s insurance policies also have various exclusions,
and CEL-SCI may be subject to a claim for which CEL-SCI has no
coverage. CEL-SCI may have to pay any amounts awarded by a court or
negotiated in a settlement that exceed the coverage limitations or
that are not covered by its insurance, and CEL-SCI may not have, or
be able to obtain, sufficient capital to pay such
amounts. CEL-SCI commenced the Phase 3 clinical trial
for Multikine in December 2010. Although no claims have been
brought to date, participants in the clinical trials could bring
civil actions against CEL-SCI for any unanticipated harmful effects
allegedly arising from the use of Multikine or any other product
candidate that CEL-SCI may attempt to develop.
CEL-SCI’s commercial success depends, in part, upon attaining
significant market acceptance of its product candidates, if
approved, among physicians, patients, healthcare payors and major
operators of cancer clinics.
Even
if CEL-SCI obtains regulatory approval for its product candidates,
any resulting product may not gain market acceptance among
physicians, healthcare payors, patients and the medical community,
which are critical to commercial success. Market acceptance of any
product candidate for which CEL-SCI receives approval depends on a
number of factors, including:
●
the
efficacy and safety as demonstrated in clinical
trials;
●
the
timing of market introduction of such product candidate as well as
competitive products;
●
the
clinical indications for which the drug is approved;
●
the
approval, availability, market acceptance and reimbursement for the
companion diagnostic;
●
acceptance
by physicians, major operators of cancer clinics and patients of
the drug as a safe and effective treatment;
●
the
potential and perceived advantages of such product candidate over
alternative treatments, especially with respect to patient subsets
that are targeted with such product candidate;
●
the
safety of such product candidate seen in a broader patient group,
including its use outside the approved indications;
●
the
cost of treatment in relation to alternative
treatments;
●
the
availability of adequate reimbursement and pricing by third-party
payors and government authorities;
●
relative
convenience and ease of administration;
●
the
prevalence and severity of adverse side effects; and
●
the
effectiveness of sales and marketing efforts.
If
CEL-SCI’s product candidates are approved but fail to achieve
an adequate level of acceptance by physicians, healthcare payors
and patients, CEL-SCI will not be able to generate significant
revenues, and CEL-SCI may not become or remain
profitable.
13
Risks Related to Government Approvals
CEL-SCI’s product candidates must undergo rigorous
preclinical and clinical testing and regulatory approvals, which
could be costly and time-consuming and subject CEL-SCI to
unanticipated delays or prevent CEL-SCI from marketing any
products.
CEL-SCI’s
product candidates are subject to premarket approval from the FDA
in the United States, the EMA in the European Union, and by
comparable agencies in most foreign countries before they can be
sold. Before obtaining marketing approval, these product candidates
must undergo costly and time consuming preclinical and clinical
testing which could subject CEL-SCI to unanticipated delays and may
prevent CEL-SCI from marketing the product candidates. There can be
no assurance that such approvals will be granted on a timely basis,
if at all.
Clinical
testing is expensive and can take many years to complete, and its
outcome is inherently uncertain. Failure can occur at any time
during the clinical trial process. The results of preclinical
studies and early clinical trials of the product candidates may not
be predictive of the results of later-stage clinical trials. A
number of companies in the biopharmaceutical industry have suffered
significant setbacks in advanced clinical trials due to lack of
efficacy or adverse safety profiles, notwithstanding promising
results in earlier trials. CEL-SCI’s current and future
clinical trials may not be successful.
Although
CEL-SCI is no longer treating patients and simply following the
patients per the protocol of the Phase 3 clinical trial for
Multikine, CEL-SCI may experience delays in the clinical trials and
CEL-SCI does not know whether the clinical trials will need to be
redesigned. Clinical trials can be delayed for a variety of
reasons, including delays related to:
●
the
availability of financial resources needed to commence and complete
the planned trials;
●
obtaining
regulatory approval to commence a trial;
●
reaching
agreement on acceptable terms with prospective contract research
organizations, or CROs, and clinical trial sites, the terms of
which can be subject to extensive negotiation and may vary
significantly among different CROs and trial sites;
●
obtaining
Institutional Review Board, or IRB, approval at each clinical trial
site;
●
recruiting
suitable patients to participate in a trial;
●
having
patients complete a trial or return for post-treatment
follow-up;
●
clinical
trial sites deviating from trial protocol or dropping out of a
trial;
●
adding
new clinical trial sites; or
●
manufacturing
sufficient quantities of the product candidate for use in clinical
trials.
Patient
enrollment, a significant factor in the timing of clinical trials,
is affected by many factors including the competence of the CRO
running the study, size and nature of the patient population, the
proximity of patients to clinical sites, the eligibility criteria
for the trial, the design of the clinical trial, competing clinical
trials and clinicians' and patients perceptions as to the potential
advantages of the drug being studied in relation to other available
therapies, including any new drugs that may be approved for the
indications CEL-SCI is investigating. Furthermore, CEL-SCI relies
on CROs and clinical trial sites to ensure the proper and timely
conduct of the clinical trials and while CEL-SCI has agreements
governing their committed activities, CEL-SCI has limited influence
over their actual performance.
14
It
remains possible that the regulatory authorities could determine
that one Phase 3 study is not sufficient to support a marketing
application in the United States. Under this circumstance, at least
one entirely new Phase 3 clinical trial would need to be conducted
to support a marketing application in the United States. If there
is a need to conduct an additional Phase 3 clinical trial, any such
requirement would have significant and severe material consequences
for CEL-SCI and could impact CEL-SCI’s ability to continue as
a going concern.
CEL-SCI could also encounter significant delays
and/or need to terminate a development program for a product
candidate if physicians encounter unresolved ethical issues
associated with enrolling patients in clinical trials of the
product candidates while existing treatments have established
safety and efficacy profiles. Further, a clinical trial may be
suspended or terminated by CEL-SCI, one or more of the IRBs for the
institutions in which such trials are being conducted, by CEL-SCI
upon a final recommendation by the Independent Data Monitoring
Committee, or IDMC, with which CEL-SCI agrees for such trial, or by
FDA or other regulatory authorities due to a number of factors,
including failure to conduct the clinical trial in accordance with
regulatory requirements or the clinical protocols, as a result of
inspection of the clinical trial operations or trial site(s) by FDA
or other regulatory authorities, the imposition of a clinical
hold
or
partial clinical hold, unforeseen safety issues or adverse side
effects, failure to demonstrate a benefit from using a product
candidate, changes in governmental regulations or administrative
actions or lack of adequate funding to continue the clinical trial.
The occurrence of any one or more of these events would have
significant and severe material consequences for CEL-SCI and could
impact CEL-SCI’s ability to continue as a going
concern.
If
CEL-SCI experiences termination of, or delays in the completion of,
any clinical trial of its product candidates, the commercial
prospects for the product candidates will be harmed, and the
ability to generate product revenues will be delayed. In addition,
any delays in completing the clinical trials will increase the
costs, slow the product development and approval process and
jeopardize the ability to commence product sales and generate
revenues. Any of these occurrences may harm CEL-SCI’s
business, prospects, financial condition and results of operations
significantly. Many of the factors that cause, or lead to, a delay
in the commencement or completion of clinical trials may also
ultimately lead to a delay or the denial of regulatory approval for
the product candidates.
CEL-SCI
cannot be certain when or under what conditions it will undertake
future clinical trials. A variety of issues may delay
the Phase 3 clinical trial for Multikine. Early trials for the
other product candidates, or the plans for later trials, may not
satisfy the requirements of regulatory authorities, such as the
FDA. CEL-SCI may fail to find subjects willing to enroll in the
trials. CEL-SCI manufactures Multikine in its manufacturing
facility, but relies on third-party vendors to manage the trial
process and other activities, and these vendors may fail to meet
appropriate standards. Accordingly, the clinical trials
relating to the product candidates may not be completed on
schedule, the FDA or foreign regulatory agencies may order CEL-SCI
to stop or modify research, or these agencies may not ultimately
approve any of the product candidates for commercial sale. Varying
interpretations of the data obtained from pre-clinical and clinical
testing could delay, limit or prevent regulatory approval of the
product candidates. The data collected from the clinical trials may
not be sufficient to support regulatory approval of the various
product candidates, including Multikine. The failure to adequately
demonstrate the safety and efficacy of any of the product
candidates would delay or prevent regulatory approval of the
product candidates in the United States, which could prevent
CEL-SCI from achieving profitability. Although CEL-SCI had positive
results in the Phase 2 trials for Multikine, those results were for
a very small sample set, and CEL-SCI will not know how Multikine
will perform in a larger set of subjects until CEL-SCI is well
into, or completes, the Phase 3 clinical trial.
The
development and testing of product candidates and the process of
obtaining regulatory approvals and the subsequent compliance with
appropriate federal, state, local and foreign statutes and
regulations require the expenditure of substantial time and
financial resources. Failure to comply with the
applicable U.S. requirements at any time during the product
development process, approval process or after approval, may
subject an applicant to administrative or judicial sanctions. FDA
sanctions could include, among other actions, refusal to approve
pending applications, withdrawal of an approval, a clinical hold,
termination of the Phase 3 study, warning letters, product recalls
or withdrawals from the market, product seizures, total or partial
suspension of production or distribution, injunctions, fines,
refusals of government contracts, restitution, disgorgement or
civil or criminal penalties. Any agency or judicial enforcement
action could have a material adverse effect on
CEL-SCI.
The
requirements governing the conduct of clinical trials,
manufacturing and marketing of the product candidates, including
Multikine, outside the United States vary from country to country.
Foreign approvals may take longer to obtain than FDA approvals and
can require, among other things, additional testing and different
trial designs. Foreign regulatory approval processes include all of
the risks associated with the FDA approval process. Some of those
agencies also must approve prices for products approved for
marketing. Approval of a product by the FDA or the EMA does not
ensure approval of the same product by the health authorities of
other countries. In addition, changes in regulatory requirements
for product approval in any country during the clinical trial
process and regulatory agency review of each submitted new
application may cause delays or rejections.
15
CEL-SCI
has only limited experience in filing and pursuing applications
necessary to gain regulatory approvals. The lack of
experience may impede its ability to obtain timely approvals from
regulatory agencies, if at all. CEL-SCI will not be able to
commercialize Multikine and other product candidates until CEL-SCI
has obtained regulatory approval. In addition,
regulatory authorities may also limit the types of patients to
which CEL-SCI or its third-party partners may market Multikine or
the other product candidates. Any failure to obtain or any delay in
obtaining required regulatory approvals may adversely affect
CEL-SCI’s or its third-party partners’ ability to
successfully market the product candidates.
Even if CEL-SCI obtains regulatory approval for its investigational
products, CEL-SCI will be subject to stringent, ongoing government
regulation.
If
CEL-SCI’s investigational products receive regulatory
approval, either in the United States or internationally, those
products will be subject to limitations on the approved indicated
uses for which the product may be marketed or to the conditions of
approval, and may contain requirements for potentially costly
post-marketing testing, including Phase 4 clinical trials, and
surveillance of the safety and efficacy of the investigational
products. CEL-SCI will continue to be subject to
extensive regulatory requirements. These regulations are
wide-ranging and govern, among other things:
●
product
design, development and manufacture;
●
product
application and use
●
adverse
drug experience;
●
product
advertising and promotion;
●
product
manufacturing, including good manufacturing practices
●
record
keeping requirements;
●
registration
and listing of the establishments and products with the FDA, EMA
and other state and national agencies;
●
product
storage and shipping;
●
drug
sampling and distribution requirements;
●
electronic
record and signature requirements; and
●
labeling
changes or modifications.
16
CEL-SCI
and any of its third-party manufacturers or suppliers must
continually adhere to federal regulations setting forth
requirements, known as current Good Manufacturing Practices, or
cGMPs, and their foreign equivalents, which are enforced by the
FDA, the EMA and other national regulatory bodies through their
facilities inspection programs. If the facilities, or the
facilities of the contract manufacturers or suppliers, cannot pass
a pre-approval plant inspection or fail such inspections in the
future, the FDA, EMA or other national regulators will not approve
the marketing applications for the product candidates, or may
withdraw any prior approval. In complying with cGMP and foreign
regulatory requirements, CEL-SCI and any of its potential
third-party manufacturers or suppliers will be obligated to expend
time, money and effort in production, record-keeping and quality
control to ensure that the product candidates meet applicable
specifications and other requirements.
If
CEL-SCI does not comply with regulatory requirements at any stage,
whether before or after marketing approval is obtained, CEL-SCI may
be subject to, among other things, license suspension or
revocation, criminal prosecution, seizure, injunction, fines, be
forced to remove a product from the market or experience other
adverse consequences, including restrictions or delays in obtaining
regulatory marketing approval for such products or for other
product candidates for which CEL-SCI seeks
approval. This could materially harm CEL-SCI’s
financial results, reputation and stock price. Additionally,
CEL-SCI may not be able to obtain the labeling claims necessary or
desirable for product promotion. If CEL-SCI or other parties
identify adverse effects after any of the products are on the
market, or if manufacturing problems occur, regulatory approval may
be suspended or withdrawn. CEL-SCI may be required to reformulate
products, conduct additional clinical trials, make changes in
product labeling or indications of use, or submit additional
marketing applications to support any changes. If
CEL-SCI encounters any of the foregoing problems, its business and
results of operations will be harmed and the market price of its
common stock may decline.
The FDA and other governmental authorities’ policies may
change and additional government regulations may be enacted that
could prevent, limit or delay regulatory approval of
CEL-SCI’s product candidates. If CEL-SCI is slow or unable to
adapt to changes in existing requirements or the adoption of new
requirements or policies, or if CEL-SCI is not able to maintain
regulatory compliance, CEL-SCI may lose any marketing approval that
it may have obtained, which would adversely affect its business,
prospects and ability to achieve or sustain
profitability. CEL-SCI cannot predict the extent of
adverse government regulations which might arise from future
legislative or administrative action. Without government approval,
CEL-SCI will be unable to sell any of its product
candidates.
CEL-SCI’s product candidates may cause undesirable side
effects or have other properties that could delay or prevent their
regulatory approval, limit the commercial profile of an approved
label, or result in significant negative consequences following
marketing approval, if any.
Undesirable
side effects caused by its product candidates could cause CEL-SCI
or regulatory authorities to interrupt, delay or halt clinical
trials and could result in a more restrictive label or the delay or
denial of regulatory approval by the FDA or other comparable
foreign authorities. Results of the clinical trials could reveal a
high and unacceptable severity and/or prevalence of these or other
side effects. In such an event, the trials could be suspended or
terminated and the FDA or comparable foreign regulatory authorities
could order CEL-SCI to cease further development of, or deny
approval of, the product candidates for any or all targeted
indications. The drug-related side effects could affect patient
recruitment or the ability of enrolled patients to complete the
trial or result in potential product liability claims. Any of these
occurrences may harm CEL-SCI’s business, financial condition
and prospects significantly.
Additionally,
if one or more of the product candidates receives marketing
approval, and CEL-SCI or others later identify undesirable side
effects caused by such products, a number of potentially
significant negative consequences could result,
including:
●
regulatory
authorities may withdraw approvals of such product;
●
regulatory
authorities may require additional warnings on the
label;
●
CEL-SCI
may be required to create a medication guide outlining the risks of
such side effects for distribution to patients;
●
CEL-SCI
could be sued and held liable for harm caused to patients;
and
●
CEL-SCI’s
reputation may suffer.
Any
of these events could prevent CEL-SCI from achieving or maintaining
market acceptance of a particular product candidate, if approved,
and could significantly harm its business, results of operations
and prospects.
17
CEL-SCI relies on third parties to conduct its preclinical and
clinical trials. If these third parties do not successfully carry
out their contractual duties and meet regulatory requirements, or
meet expected deadlines, CEL-SCI may not be able to obtain
regulatory approval for or commercialize the product candidates and
its business could be substantially
harmed.
CEL-SCI
has relied upon and plans to continue to rely upon third-party CROs
to prepare for, conduct, monitor and manage data for its ongoing
preclinical and clinical programs. CEL-SCI relies on these parties
for all aspects of the execution of its preclinical studies and
clinical trials, and although CEL-SCI diligently oversees and
carefully manages the CROs, CEL-SCI directly controls only certain
aspects of their activities and relies upon them to provide timely,
complete, and accurate reports on the conduct of the studies.
Although such third parties provide support and represent CEL-SCI
for regulatory purposes in the context of the clinical trials,
ultimately CEL-SCI is responsible for ensuring that each of the
studies is conducted in accordance with the applicable protocol,
legal, regulatory, and scientific standards, and the reliance on
the CROs does not relieve CEL-SCI of its regulatory
responsibilities. CEL-SCI and the CROs acting on CEL-SCI’s
behalf, as well as principal investigators and trial sites, are
required to comply with Good Clinical Practice, or GCP, and other
applicable requirements, which are implemented through regulations
and guidelines enforced by the FDA, the Competent Authorities of
the Member States of the European Economic Area, or EEA, and
comparable foreign regulatory authorities for all of the products
in clinical development. Regulatory authorities enforce these GCPs
through periodic inspections of trial sponsors, principal
investigators, and trial sites. If CEL-SCI or any of the CROs fail
to comply with applicable GCPs or other applicable regulations, the
clinical data generated in the clinical trials may be determined to
be unreliable and CEL-SCI may therefore need to enroll additional
subjects in the clinical trials, or the FDA, EMA or comparable
foreign regulatory authorities may require CEL-SCI to perform an
additional clinical trial or trials before approving the marketing
applications. Moreover, if CEL-SCI or any of the CROs, principal
investigators, or trial sites, fail to comply with applicable
regulatory and GCP requirements, CEL-SCI, the CROs, principal
investigators, or trial sites may be subject to enforcement
actions, such as fines, warning letters, untitled letters, clinical
holds, civil or criminal penalties, and/or injunctions. CEL-SCI
cannot assure you that upon inspection by a given regulatory
authority, such regulatory authority will determine that any of the
clinical trials comply with GCP regulations. In addition, the
clinical trials must be conducted with product produced under GMP
regulations. The failure to comply with these regulations may
require CEL-SCI to delay or repeat clinical trials, which would
delay the regulatory approval process.
If
any of the relationships with the third-party CROs terminate,
CEL-SCI may not be able to enter into arrangements with alternative
CROs or to do so on commercially reasonable terms. In addition, the
CROs are not CEL-SCI’s employees, and except for remedies
available to CEL-SCI under the agreements with such CROs, CEL-SCI
cannot control whether or not they devote sufficient time and
resources to the on-going clinical, nonclinical and preclinical
programs. If CROs do not successfully fulfill their regulatory
obligations, carry out their contractual duties or obligations or
meet expected deadlines, if they need to be replaced or if the
quality or accuracy of the clinical data they obtain is compromised
due to the failure to adhere to the clinical protocols, regulatory
requirements or for other reasons, the clinical trials may be
extended, delayed or terminated, and CEL-SCI may not be able to
obtain regulatory approval for, or successfully commercialize, the
product candidates. As a result, CEL-SCI’s results of
operations and the commercial prospects for the product candidates
would be harmed, the costs could increase and the ability to
generate revenues could be delayed.
Switching
or adding additional CROs involves additional cost and requires
management time and focus. In addition, there is a natural
transition period when a new CRO commences work. As a result,
delays may occur, which can materially impact CEL-SCI’s
ability to meet the desired clinical development timelines. Though
CEL-SCI diligently oversees and carefully manages its relationships
with the CROs, there can be no assurance that CEL-SCI will not
encounter similar challenges or delays in clinical development in
the future or that these delays or challenges will not have a
material adverse impact on CEL-SCI’s business, financial
condition and prospects.
CEL-SCI has obtained orphan drug designation from the FDA for
Multikine for neoadjuvant, or primary, therapy in patients with
squamous cell carcinoma of the head and neck, but CEL-SCI may be
unable to maintain the benefits associated with orphan drug
designation, including the potential for market
exclusivity.
Under
the Orphan Drug Act, the FDA may grant orphan drug designation to a
drug or biologic intended to treat a rare disease or condition,
which is defined as one occurring in a patient population of fewer
than 200,000 in the United States, or a patient population greater
than 200,000 in the United States where there is no reasonable
expectation that the cost of developing the drug or biologic will
be recovered from sales in the United States. In the United States,
orphan drug designation entitles a party to financial incentives
such as opportunities for grant funding towards clinical trial
costs, tax advantages and user-fee waivers. In addition, if a
product that has orphan drug designation subsequently receives the
first FDA approval for the disease for which it has such
designation, the product is entitled to orphan drug exclusivity,
which means that the FDA may not approve any other applications,
including a full Biologics License Application, or BLA, to market
the same biologic for the same indication for seven years, except
in limited circumstances, such as a showing of clinical superiority
to the product with orphan drug exclusivity or where the
manufacturer is unable to assure sufficient product
quantity.
Even
though CEL-SCI has received orphan drug designation for Multikine
for the treatment of squamous cell carcinoma of the head and neck,
CEL-SCI may not be the first to obtain marketing approval of a
product for the orphan-designated indication due to the
uncertainties associated with developing pharmaceutical products.
In addition, exclusive marketing rights in the United States may be
limited if CEL-SCI seeks approval for an indication broader than
the orphan-designated indication, or may be lost if the FDA later
determines that the request for designation was materially
defective or if CEL-SCI is unable to assure sufficient quantities
of the product to meet the needs of patients with the rare disease
or condition. Further, even if CEL-SCI obtains orphan drug
exclusivity for a product candidate, that exclusivity may not
effectively protect the product candidate from competition because
different drugs with different active moieties can be approved for
the same condition. Even after an orphan product is approved, the
FDA can subsequently approve another drug with the same active
moiety for the same condition if the FDA concludes that the later
drug is safer, more effective, or makes a major contribution to
patient care. Orphan drug designation neither shortens the
development time or regulatory review time of a drug nor gives the
drug any advantage in the regulatory review or approval
process.
18
The current and future relationships with healthcare professionals,
principal investigators, consultants, potential customers and
third-party payors in the United States and elsewhere may be
subject, directly or indirectly, to applicable healthcare laws and
regulations.
Healthcare
providers, physicians and third-party payors in the United States
and elsewhere will play a primary role in the recommendation and
prescription of any drug candidates for which CEL-SCI obtains
marketing approval. The current and future arrangements with
healthcare professionals, principal investigators, consultants,
potential customers and third-party payors may expose CEL-SCI to
broadly applicable healthcare laws, including, without
limitation:
●
the
federal Anti-Kickback Statute, which prohibits, among other things,
persons from knowingly and willfully soliciting, offering,
receiving or providing remuneration, directly or indirectly, in
cash or in kind, to induce or reward, or in return for, either the
referral of an individual for, or the purchase, lease, order or
recommendation of, any good, facility, item or service, for which
payment may be made, in whole or in part, under federal and state
healthcare programs such as Medicare and Medicaid. A person or
entity does not need to have actual knowledge of the statute or
specific intent to violate it to have committed a violation. In
addition, the Affordable Care Act provides that the government may
assert that a claim including items or services resulting from a
violation of the federal Anti-Kickback Statute constitutes a false
or fraudulent claim for purposes of the False Claims
Act;
●
federal
civil and criminal false claims laws, including the federal False
Claims Act, which impose criminal and civil penalties, including
civil whistleblower actions, against individuals or entities for,
among other things, knowingly presenting, or causing to be
presented, to the federal government, including the Medicare and
Medicaid programs, claims for payment that are false or fraudulent
or making a false statement to avoid, decrease or conceal an
obligation to pay money to the federal government;
●
the
civil monetary penalties statute, which imposes penalties against
any person or entity who, among other things, is determined to have
presented or caused to be presented a claim to a federal health
program that the person knows or should know is for an item or
service that was not provided as claimed or is false or
fraudulent;
●
the
federal Health Insurance Portability and Accountability Act of
1996, or HIPAA, which created new federal criminal statutes that
prohibit knowingly and willfully executing, or attempting to
execute, a scheme to defraud any healthcare benefit program or
obtain, by means of false or fraudulent pretenses, representations
or promises, any of the money or property owned by, or under the
custody or control of, any healthcare benefit program, regardless
of the payor (e.g., public or private), knowingly and willfully
embezzling or stealing from a health care benefit program,
willfully obstructing a criminal investigation of a healthcare
offense and knowingly and willfully falsifying, concealing or
covering up by any trick or device a material fact or making any
materially false statements in connection with the delivery of, or
payment for, healthcare benefits, items or services relating to
healthcare matters. A person or entity does not need to have actual
knowledge of the statute or specific intent to violate it to have
committed a violation;
●
HIPAA,
as amended by the Health Information Technology for Economic and
Clinical Health Act of 2009, or HITECH, and their respective
implementing regulations, which impose obligations on covered
entities, including healthcare providers, health plans, and
healthcare clearinghouses, as well as their respective business
associates that create, receive, maintain or transmit individually
identifiable health information for or on behalf of a covered
entity, with respect to safeguarding the privacy, security and
transmission of individually identifiable health
information;
●
the
federal Physician Payments Sunshine Act and its implementing
regulations, which imposed annual reporting requirements for
certain manufacturers of drugs, devices, biologicals and medical
supplies for payments and “transfers of value” provided
to physicians and teaching hospitals, as well as ownership and
investment interests held by physicians and their immediate family
members; and
●
analogous
state and foreign laws, such as state anti-kickback and false
claims laws, which may apply to sales or marketing arrangements and
claims involving healthcare items or services reimbursed by
non-governmental third-party payors, including private insurers;
state laws that require pharmaceutical companies to comply with the
pharmaceutical industry’s voluntary compliance guidelines and
the relevant compliance guidance promulgated by the federal
government or otherwise restrict payments that may be made to
healthcare providers; state and foreign laws that require drug
manufacturers to report information related to payments and other
transfers of value to physicians and other healthcare providers or
marketing expenditures; and state and foreign laws governing the
privacy and security of health information in certain
circumstances, many of which differ from each other in significant
ways and often are not preempted by HIPAA, thus complicating
compliance efforts.
19
Efforts
to ensure that the future business arrangements with third parties
will comply with applicable healthcare laws and regulations may
involve substantial costs. It is possible that governmental
authorities will conclude that the business practices may not
comply with current or future statutes, regulations or case law
involving applicable fraud and abuse or other healthcare laws. If
CEL-SCI’s operations are found to be in violation of any of
these laws or any other governmental regulations, CEL-SCI may be
subject to significant civil, criminal and administrative
penalties, including, without limitation, damages, fines,
imprisonment, exclusion from participation in government healthcare
programs, such as Medicare and Medicaid, and the curtailment or
restructuring of the operations, all of which could significantly
harm CEL-SCI’s business. If any of the physicians or other
healthcare providers or entities with whom CEL-SCI expects to do
business, including current and future collaborators, are found not
to be in compliance with applicable laws, they may be subject to
criminal, civil or administrative sanctions, including exclusions
from participation in government healthcare programs, which could
also adversely affect CEL-SCI’s business.
Failure to obtain or maintain adequate coverage and reimbursement
for the product candidates, if approved, could limit the ability to
market those products and decrease CEL-SCI’s ability to
generate revenue.
Sales
of CEL-SCI’s product candidates will depend substantially,
both domestically and abroad, on the extent to which the costs of
the product candidates will be paid by health maintenance, managed
care, pharmacy benefit, and similar healthcare management
organizations, or reimbursed by government authorities, private
health insurers and other third-party payors. CEL-SCI anticipates
that government authorities and other third-party payors will
continue efforts to contain healthcare costs by limiting the
coverage and reimbursement levels for new drugs. If coverage and
reimbursement are not available, or are available only to limited
levels, CEL-SCI may not be able to successfully commercialize its
product candidates. Even if coverage is provided, the approved
reimbursement amount may not be high enough to allow CEL-SCI to
establish or maintain pricing sufficient to realize a return on its
investment. It is difficult to predict at this time what
third-party payors will decide with respect to the coverage and
reimbursement for CEL-SCI’s product candidates.
Healthcare legislative reform measures may have a material adverse
effect on CEL-SCI’s business and results of
operations.
In
the United States, there have been and continue to be a number of
legislative initiatives to contain healthcare costs that may result
in more limited coverage or downward pressure on the price CEL-SCI
may otherwise receive for its product candidates. For example, in
March 2010, the Patient Protection and Affordable Care Act, as
amended by the Health Care and Education Reconciliation Act, or
collectively, the Affordable Care Act, was passed, which
substantially changes the way health care is financed by both
governmental and private insurers, and significantly impacts the
U.S. pharmaceutical industry. The Affordable Care Act, among other
things, addressed a new methodology by which rebates owed by
manufacturers under the Medicaid Drug Rebate Program are calculated
for drugs that are inhaled, infused, instilled, implanted or
injected, increased the minimum Medicaid rebates owed by
manufacturers under the Medicaid Drug Rebate Program and extended
the rebate program to individuals enrolled in Medicaid managed care
organizations, established annual fees and taxes on manufacturers
of certain branded prescription drugs, and established the Center
for Medicare and Medicaid Innovation with broad authority to test
and implement new payment models under Medicare and Medicaid, which
are designed to reduce expenditures while preserving and enhancing
quality of care.
In
addition, other legislative changes have been proposed and adopted
in the United States since the Affordable Care Act was enacted. On
August 2, 2011, the Budget Control Act of 2011 among other things,
created measures for spending reductions by Congress. A Joint
Select Committee on Deficit Reduction, tasked with recommending a
targeted deficit reduction of at least $1.2 trillion for the years
2013 through 2021, was unable to reach required goals, thereby
triggering the legislation's automatic reduction to several
government programs. This includes aggregate reductions of Medicare
payments to providers of 2% per fiscal year, which went into effect
in April 2013 and, due to subsequent legislative amendments to the
statute, will remain in effect through 2024 unless additional
Congressional action is taken. On January 2, 2013, former President
Obama signed into law the American Taxpayer Relief Act of 2012,
which, among other things, further reduced Medicare payments to
several providers, including hospitals, imaging centers and cancer
treatment centers. On April 16, 2015, former President Obama signed
into law the Medicare Access and CHIP Reauthorization Act of 2015,
or MACRA. Among other things, MACRA creates incentives for
physicians to participate in alternative payment models under
Medicare that emphasize quality and value in place of the
traditional, volume-based fee-for-service program. CEL-SCI expects
that additional state and federal healthcare reform measures will
be adopted in the future, any of which could limit the amounts that
federal and state governments will pay for healthcare products and
services, which could result in reduced demand for its product
candidates or additional pricing pressures.
20
Foreign governments often impose strict price controls, which may
adversely affect CEL-SCI’s future profitability.
CEL-SCI
intends to seek approval to market Multikine in both the United
States and foreign jurisdictions. If CEL-SCI obtains approval in
one or more foreign jurisdictions, CEL-SCI will be subject to rules
and regulations in those jurisdictions relating to Multikine. In
some foreign countries, particularly in the European Union,
prescription drug pricing is subject to governmental control. In
these countries, pricing negotiations with governmental authorities
can take considerable time after the receipt of marketing approval
for a drug candidate. Coverage and reimbursement decisions in one
foreign jurisdiction may impact decisions in other countries. To
obtain reimbursement or pricing approval in some countries, CEL-SCI
may be required to conduct clinical trials that demonstrate the
product candidate is more effective than current treatments and
that compare the cost-effectiveness of Multikine to other available
therapies. If reimbursement of Multikine is unavailable or limited
in scope or amount, or if pricing is set at unsatisfactory levels,
CEL-SCI may be unable to achieve or sustain
profitability.
Risks Related to Intellectual Property
CEL-SCI may not be able to achieve or maintain a competitive
position, and other technological developments may result in its
proprietary technologies becoming uneconomical or
obsolete.
CEL-SCI
is involved in a biomedical field that is undergoing rapid and
significant technological change. The pace of change continues to
accelerate. The successful development of product
candidates from the compounds, compositions and processes, through
research financed by CEL-SCI, or as a result of possible
third-party licensing arrangements with pharmaceutical or other
companies, is not assured. CEL-SCI may fail to apply for
patents on important technologies or product candidates in a timely
fashion, or at all.
Many
companies are working on drugs designed to cure or treat cancer or
cure and treat viruses, such as HPV or H1N1. Many of
these companies have financial, research and development, and
marketing resources, which are much greater than CEL-SCI’s,
and are capable of providing significant long-term competition
either by establishing in-house research groups or by forming
collaborative ventures with other entities. In addition, smaller
companies and non-profit institutions are active in research
relating to cancer and infectious diseases. The future
market share of Multikine or the other product candidates, if
approved, will be reduced or eliminated if the competitors develop
and obtain approval for products that are safer or more effective
than CEL-SCI’S product candidates. Moreover, the
patent positions of pharmaceutical companies are highly uncertain
and involve complex legal and factual questions for which important
legal principles are often evolving and remain unresolved. As a
result, the validity and enforceability of patents cannot be
predicted with certainty. In addition, CEL-SCI does not know
whether:
●
CEL-SCI
was the first to make the inventions covered by each of its issued
patents and pending patent applications;
●
CEL-SCI
was the first to file patent applications for these
inventions;
●
others
will independently develop similar or alternative technologies or
duplicate any of the technologies;
●
any
of the pending patent applications will result in issued
patents;
●
any
of the patents will be valid or enforceable;
●
any
patents issued to CEL-SCI or its collaboration partners will
provide CEL-SCI with any competitive advantages, or will be
challenged by third parties;
●
CEL-SCI
will be able to develop additional proprietary technologies that
are patentable;
●
the
U.S. government will exercise any of its statutory rights to
CEL-SCI’s intellectual property that was developed with
government funding; or
●
its
business may infringe the patents or other proprietary rights of
others.
21
CEL-SCI’s patents might not protect its technology from
competitors, in which case CEL-SCI may not have any advantage over
competitors in selling any products that CEL-SCI may
develop.
CEL-SCI’s
commercial success will depend in part on its ability to obtain
additional patents and protect its existing patent position, as
well as its ability to maintain adequate intellectual property
protection for the technologies, product candidates, and any future
products in the United States and other countries. If CEL-SCI does
not adequately protect its technology, product candidates and
future products, competitors may be able to use or practice them
and erode or negate any competitive advantage CEL-SCI may have,
which could harm CEL-SCI’s business and its ability to
achieve profitability. The laws of some foreign countries do not
protect the proprietary rights to the same extent or in the same
manner as U.S. laws, and CEL-SCI may encounter significant problems
in protecting and defending its proprietary rights in these
countries. CEL-SCI will be able to protect its proprietary rights
from unauthorized use by third parties only to the extent that its
proprietary technologies, product candidates and any future
products are covered by valid and enforceable patents or are
effectively maintained as trade secrets.
Certain
aspects of CEL-SCI’s technologies are covered by U.S. and
foreign patents. In addition, CEL-SCI has a number of new patent
applications pending. There is no assurance that the applications
still pending or which may be filed in the future will result in
the issuance of any patents. Furthermore, there is no assurance as
to the breadth and degree of protection any issued patents might
afford CEL-SCI. Disputes may arise between CEL-SCI and others as to
the scope and validity of these or other patents. Any defense of
the patents could prove costly and time consuming and there can be
no assurance that CEL-SCI will be in a position, or will deem it
advisable, to carry on such a defense.
A suit for patent infringement could result in increasing costs,
delaying or halting development, or even forcing CEL-SCI to abandon
a product candidate. Other private and public concerns,
including universities, may have filed applications for, may have
been issued, or may obtain additional patents and other proprietary
rights to technology potentially useful or necessary to CEL-SCI.
CEL-SCI is not currently aware of any such patents, but the scope
and validity of such patents, if any, and the cost and availability
of such rights are impossible to predict.
Much of CEL-SCI’s intellectual property is protected as trade
secrets or confidential know-how, not as a patent.
CEL-SCI
considers proprietary trade secrets and/or confidential and
unpatented know-how to be important to its
business. Much of the intellectual property pertains to
CEL-SCI’S manufacturing system, certain aspects of which may
not be suitable for patent filings and must be protected as trade
secrets and/or confidential know-how. This type of
information must be protected diligently by CEL-SCI to protect its
disclosure to competitors, since legal protections after disclosure
may be minimal or non-existent. Accordingly, much of the
value of this intellectual property is dependent upon the ability
of CEL-SCI to keep its trade secrets and know-how
confidential.
To
protect this type of information against disclosure or
appropriation by competitors, CEL-SCI’s policy is to require
its employees, consultants, contractors and advisors to enter into
confidentiality agreements with CEL-SCI. However, current or former
employees, consultants, contractors and advisers may
unintentionally or willfully disclose the confidential information
to competitors, and confidentiality agreements may not provide an
adequate remedy in the event of unauthorized disclosure of
confidential information. Enforcing a claim that a third party
obtained illegally, and is using, trade secrets and/or confidential
know-how is expensive, time consuming and unpredictable. The
enforceability of confidentiality agreements may vary from
jurisdiction to jurisdiction.
In
addition, in some cases a regulator considering the application for
product candidate approval may require the disclosure of some or
all of the proprietary information. In such a case,
CEL-SCI must decide whether to disclose the information or forego
approval in a particular country. If CEL-SCI is unable
to market its product candidates in key countries, CEL-SCI’s
opportunities and value may suffer.
Failure
to obtain or maintain trade secrets and/or confidential know-how
trade protection could adversely affect CEL-SCI’S competitive
position. Moreover, competitors may independently develop
substantially equivalent proprietary information and may even apply
for patent protection in respect of the same. If successful in
obtaining such patent protection, competitors could limit the use
of such trade secrets and/or confidential know-how.
22
CEL-SCI may be subject to claims challenging the inventorship or
ownership of its patents and other intellectual
property.
CEL-SCI
may also be subject to claims that former employees, collaborators
or other third parties have an ownership interest in its patents or
other intellectual property. CEL-SCI may be subject to ownership
disputes in the future arising, for example, from conflicting
obligations of consultants or others who are involved in developing
the product candidates. Litigation may be necessary to defend
against these and other claims challenging inventorship or
ownership. If CEL-SCI fails in defending any such claims, in
addition to paying monetary damages, CEL-SCI may lose valuable
intellectual property rights, such as exclusive ownership of, or
right to use, valuable intellectual property. Such an outcome could
have a material adverse effect on its business. Even if CEL-SCI is
successful in defending against such claims, litigation could
result in substantial costs and be a distraction to CEL-SCI’s
management and employees.
Risks Related to CEL-SCI’s common stock
You may experience future dilution as a result of future equity
offerings or other equity issuances.
CEL-SCI
expects that significant additional capital will be needed in the
future to continue its planned operations. To raise additional
capital, CEL-SCI may in the future offer additional shares of its
common stock or other securities convertible into or exchangeable
for its common stock. To the extent CEL-SCI
raises additional capital by issuing equity securities,
CEL-SCI’s stockholders may experience substantial dilution.
These sales may result in material dilution to CEL-SCI’s
existing stockholders and new investors could gain rights superior
to existing stockholders.
CEL-SCI’s outstanding options and warrants may adversely
affect the trading price of its common stock.
As
of September 30, 2018, there were outstanding warrants which allow
the holders to purchase 15,499,471 shares of common stock, with a
weighted average exercise price of $5.26 per share, and outstanding
options which allow the holders to purchase up to 3,160,127 shares
of common stock, with a weighted average exercise price of $7.30
per share. The outstanding options and warrants could adversely
affect the ability of CEL-SCI to obtain future financing or engage
in certain mergers or other transactions, since the holders of
options and warrants can be expected to exercise them at a time
when CEL-SCI may be able to obtain additional capital through a new
offering of securities on terms more favorable to CEL-SCI than the
terms of the outstanding options and warrants. For the life
of the options and warrants, the holders have the opportunity to
profit from a rise in the market price of its common stock without
assuming the risk of ownership. The issuance of shares upon
the exercise or conversion of outstanding options and warrants will
also dilute the ownership interests of CEL-SCI’s existing
stockholders.
CEL-SCI’s ability to utilize its net operating loss
carryforwards and certain other tax attributes may be
limited.
Under Section 382 of the Internal Revenue Code of
1986, as amended, if a corporation undergoes an “ownership
change” (generally defined as a greater than 50% change (by
value) in its equity ownership over a three-year period), the
corporation’s ability to use its pre-change net operating
loss carryforwards and other pre-change tax attributes to offset
its post-change income may be limited. As a result of public
offerings and other transactions, CEL-SCI may experience ownership
changes in the future based on subsequent shifts in CEL-SCI’s
stock ownership, some of which are outside its control. As a
result, the ability to use the pre-change net operating loss
carryforwards and other pre-change tax attributes to offset U.S.
federal taxable income may be subject to limitations, which could
result in increased tax liability to CEL-SCI
.
Since CEL-SCI does not intend to pay dividends on its common stock,
any potential return to investors will result only from any
increases in the price of its common stock.
At the present time, CEL-SCI intends to use available funds to
finance its operations. Accordingly, while payment of dividends
rests within the discretion of its board of directors, no common
stock dividends have been declared or paid by CEL-SCI and CEL-SCI
has no intention of paying any common stock dividends in the
foreseeable future. Additionally, any future debt financing
arrangement may contain terms prohibiting or limiting the amount of
dividends that may be declared or paid on CEL-SCI’s common
stock. Any return to CEL-SCI’s shareholders will
therefore be limited to appreciation in the price of its common
stock, which may never occur. If CEL-SCI’s stock
price does not increase, CEL-SCI’S shareholders are unlikely
to receive any return on their investments in CEL-SCI’s
common stock.
23
The price of CEL-SCI’s common stock has been volatile and is
likely to continue to be volatile, which could result in
substantial losses for CEL-SCI’s shareholders.
CEL-SCI’s
stock price has been, and is likely to continue to be, volatile. As
a result of this volatility, CEL-SCI’s shareholders may not
be able to sell their shares at or above its current market price.
The market price for CEL-SCI’s common stock may be influenced
by many factors, including:
●
actual
or anticipated fluctuations in CEL-SCI’s financial condition
and operating results;
●
actual
or anticipated changes in CEL-SCI’s growth rate relative to
competitors;
●
competition
from existing products or new products or product candidates that
may emerge;
●
development
of new technologies that may make CEL-SCI’s technology less
attractive;
●
changes
in physician, hospital or healthcare provider practices that may
make CEL-SCI’s product candidates less useful;
●
announcements
by CEL-SCI, its partners or competitors of significant
acquisitions, strategic partnerships, joint ventures,
collaborations or capital commitments;
●
developments
or disputes concerning patent applications, issued patents or other
proprietary rights;
●
the
recruitment or departure of key personnel;
●
failure
to meet or exceed financial estimates and projections of the
investment community or that CEL-SCI provides to the
public;
●
actual
or anticipated changes in estimates as to financial results,
development timelines or recommendations by securities
analysts;
●
variations
in its financial results or those of companies that are perceived
to be similar to CEL-SCI;
●
changes
to coverage and reimbursement levels by commercial third-party
payors and government payors, including Medicare, and any
announcements relating to reimbursement levels;
●
general
economic, industry and market conditions; and
●
the
other factors described in this “Risk Factors”
section.
24
CEL-SCI has been advised that it is not in compliance with certain
continued listing standards of the NYSE American.
On July
12, 2018, CEL-SCI received a letter from the NYSE American, its
current listing exchange, which advised CEL-SCI that, based upon
its quarterly report for the quarter ended March 31, 2018, CEL-SCI
was noncompliant with certain continued listing standards of the
NYSE American. CEL-SCI can maintain its listing by submitting a
plan of compliance by August 13, 2018. This plan must advise of
actions CEL-SCI has taken or will take to regain compliance with
the continued listing standards by January 14, 2019. CEL-SCI
submitted such a plan on July 30, 2018. On August 16, 2018, the
Exchange notified CEL-SCI that it accepted CEL-SCI’s plan of
compliance and granted CEL-SCI until January 14, 2019 to regain
compliance with the continued listing standards. Although, the NYSE
American will not normally remove the securities if an issuer has a
market capitalization of at least $50 million, if CEL-SCI does not
make sufficient progress under the plan to reestablish compliance
by January 14, 2019, the staff of the exchange may initiate
proceedings to delist CEL-SCI’s securities from the NYSE
American. CEL-SCI may appeal a delisting determination in
accordance with the rules of the exchange. On September 30, 2018,
CEL-SCI’s market capitalization was $113.5
million.
The
letter from the NYSE American had no immediate effect on the
listing of CEL-SCI’s securities on the exchange.
Under its amended bylaws, stockholders that initiate certain
proceedings may be obligated to reimburse CEL-SCI and its officers
and directors for all fees, costs and expenses incurred in
connection with such proceedings if the claim proves
unsuccessful.
On
February 18, 2015, CEL-SCI adopted new bylaws which include a
fee-shifting provision in Article X for stockholder claims. Article
X provides that in the event any stockholder initiates or asserts a
claim against CEL-SCI, or any of its officers or directors,
including any derivative claim or claim purportedly filed on
CEL-SCI’s behalf, and the stockholder does not obtain a
judgment on the merits that substantially achieves, in substance
and amount, the full remedy sought, then the stockholder will be
obligated to reimburse CEL-SCI and any of its officers or directors
named in the action, for all fees, costs and expenses of every kind
and description that CEL-SCI or its officers or directors may incur
in connection with the claim. In adopting Article X, it
is the intent that:
●
all
actions, including federal securities law claims, would be subject
to Article X;
●
the
phrase “a judgment on the merits” means the
determination by a court of competent jurisdiction on the matters
submitted to the court;
●
the
phrase “substantially achieves, in both substance and
amount” means the plaintiffs in the action would be awarded
at least 90% of the relief sought;
●
only
persons who were stockholders at the time an action was brought
would be subject to Article X; and
●
only
the directors or officers named in the action would be allowed to
recover.
The
fee-shifting provision contained in Article X of the bylaws is not
limited to specific types of actions, but is rather potentially
applicable to the fullest extent permitted by law. Fee-shifting
bylaws are relatively new and untested. The case law and potential
legislative action on fee-shifting bylaws are evolving and there
exists considerable uncertainty regarding the validity of, and
potential judicial and legislative responses to, such bylaws. For
example, it is unclear whether the ability to invoke the
fee-shifting bylaw in connection with claims under the federal
securities laws would be pre-empted by federal law. Similarly, it
is unclear how courts might apply the standard that a claiming
stockholder must obtain a judgment that substantially achieves, in
substance and amount, the full remedy sought. The application of
the fee-shifting bylaw in connection with such claims, if any, will
depend in part on future developments of the law. CEL-SCI cannot
assure its shareholders that CEL-SCI will or will not invoke the
fee-shifting bylaw in any particular dispute In addition, given the
unsettled state of the law related to fee-shifting bylaws, such as
CEL-SCI’s, CEL-SCI may incur significant additional costs
associated with resolving disputes with respect to such bylaw,
which could adversely affect its business and financial
condition.
25
If
a stockholder that brings any such claim, suit, action or
proceeding is unable to obtain the required judgment, the
attorneys’ fees and other litigation expenses that might be
shifted to a claiming stockholder are potentially significant. This
fee-shifting bylaw, therefore, may dissuade or discourage
stockholders (and their attorneys) from initiating lawsuits or
claims against CEL-SCI or its directors and officers. In
addition, it may impact the fees, contingency or otherwise,
required by potential plaintiffs’ attorneys to represent the
stockholders or otherwise discourage plaintiffs’ attorneys
from representing the stockholders at all. As a result, this bylaw
may limit the ability of stockholders to affect the management and
direction of CEL-SCI, particularly through litigation or the threat
of litigation.
The provision of the amended bylaws requiring exclusive venue in
the U.S. District Court for Delaware for certain types of lawsuits
may have the effect of discouraging lawsuits against CEL-SCI and
its directors and officers.
Article
X of CEL-SCI’s amended bylaws provides that stockholder
claims brought against CEL-SCI, or its officers or directors,
including any derivative claim or claim purportedly filed on
CEL-SCI’s behalf, must be brought in the U.S. District Court
for the district of Delaware and that with respect to any such
claim, the laws of Delaware will apply.
The
exclusive forum provision may limit a stockholder’s ability
to bring a claim in a judicial forum the stockholder finds
favorable for disputes with CEL-SCI or its directors or officers,
and may have the effect of discouraging lawsuits with respect to
claims that may benefit CEL-SCI or the stockholders.
None
CEL-SCI
leases office space at 8229 Boone Blvd., Suite 802, Vienna,
Virginia at a monthly rental of approximately $8,000. The lease on
the office space expires on June 30, 2020. CEL-SCI believes this
arrangement is adequate for the conduct of its present
business.
CEL-SCI
has a 17,900 square foot laboratory located in Baltimore, Maryland.
The laboratory is leased by CEL-SCI at a cost of approximately
$13,000 per month. The laboratory lease expires on February 28,
2022.
In
August 2007, CEL-SCI leased a building near Baltimore, Maryland
(the San Tomas lease). The building, which consists of
approximately 73,000 square feet, has been remodeled in accordance
with CEL-SCI’s specifications so that it can be used by
CEL-SCI to manufacture Multikine for CEL-SCI’s Phase 3
clinical trial and sales of the drug if approved by the FDA. The
lease expires on October 31, 2028 and required annual base rent
payments of approximately $1.7 million during the twelve months
ended September 30, 2018. The annual base rent escalates each year
at 3% beginning on November 1st. CEL-SCI is also required to pay
all real and personal property taxes, insurance premiums,
maintenance expenses, repair costs and utilities, which were
approximately $35,000 per month as of September 30, 2018. The lease
allows CEL-SCI, 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. CEL-SCI is not the legal owner of the manufacturing
building, but is deemed to be the owner for the accounting purposes
based on the accounting guidance for build-to-suit leases under ASC
840-40-55.The lease required CEL-SCI to pay $3,150,000 towards the
remodeling costs, which is being recouped by reductions in the
annual base rent of $303,228 beginning in fiscal year 2014. In
August 2011, CEL-SCI was required to deposit $1,670,917, the
equivalent of one year of base rent. The $1,670,917 was required to
be deposited when the amount of CEL-SCI’s cash had dropped
below the amount stipulated in the lease and is included in
non-current assets at September 30, 2018.
On
October 31, 2013, CEL-SCI commenced arbitration proceedings against
inVentiv Health Clinical, LLC, or inVentiv, its former clinical
research organization (CRO), and now part of Syneos Health. The
arbitration claim, initiated under the Commercial Rules of the
American Arbitration Association, alleges (i) breach of contract,
(ii) fraud in the inducement, and (iii) common law fraud. On June
25, 2018, the arbitrator ruled that inVentiv materially breached
its contract with CEL-SCI, denied inVentiv all but one of its
counterclaims ($429,649 for certain unpaid invoices) against
CEL-SCI and awarded CEL-SCI $2,917,834 in damages. This was a final
and binding decision and to CEL-SCI’s knowledge, marks the
first ever decision in favor of a pharmaceutical/biomedical company
against a CRO for breach of contract. Pursuant to the terms of an
agreement with an affiliate of Lake Whillans Litigation Finance,
LLC, a firm that produced partial funding for the legal expenses
incurred by CEL-SCI in the arbitration proceedings, all amounts
received from inVentiv by virtue of the arbitration award will be
paid to Lake Whillans Litigation Finance.
26
The
arbitration and its findings are subject to certain confidentiality
requirements and CEL-SCI is able to disclose only certain
information. Most importantly, the arbitrator concluded as
follows:
●
The arbitrator
found that inVentiv materially breached its contract with
CEL-SCI;
●
The arbitrator
found that inVentiv knowingly misled CEL-SCI with respect to
“enrollment projections,” which, in the
arbitrator’s opinion, was “fraudulent,” but the
arbitrator denied CEL-SCI’s fraud claim as a result of
certain legal “roadblocks”;
●
The arbitrator
assessed inVentiv for the entirety of the arbitrator’s fees
for the arbitration as a result of inVentiv’s “scorched
earth litigation tactics”; and
●
The arbitrator
denied all but one of inVentiv’s counterclaims against
CEL-SCI.
Not Applicable
ITEM
5.
MARKET FOR CEL-SCI'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
As of
September 30, 2018, there were approximately 750 record holders of
CEL-SCI’s common stock. CEL-SCI’s common stock is
traded on the NYSE American under the symbol
“CVM”.
Shown
below are the range of high and low quotations for CEL-SCI’s
common stock for the periods indicated as reported on the NYSE
American. The market quotations reflect inter-dealer prices,
without retail mark-up, mark-down or commissions and may not
necessarily represent actual transactions.
|
Quarter
Ending
|
High
|
Low
|
|
12/31/2016
|
$
7.75
|
$
1.50
|
|
03/31/2017
|
$
4.50
|
$
1.75
|
|
06/30/2017
|
$
4.00
|
$
1.46
|
|
09/30/2017
|
$
3.69
|
$
1.57
|
|
|
|
|
|
12/31/2017
|
$
2.14
|
$
1.60
|
|
03/31/2018
|
$
2.50
|
$
1.30
|
|
06/30/2018
|
$
3.66
|
$
0.83
|
|
09/30/2018
|
$
4.44
|
$
0.82
|
27
Holders
of common stock are entitled to receive dividends as may be
declared by CEL-SCI’s Board of Directors out of legally
available funds and, in the event of liquidation, to share pro rata
in any distribution of CEL-SCI’s assets after payment of
liabilities. CEL-SCI’s Board of Directors is not obligated to
declare a dividend. CEL-SCI has not paid any dividends on its
common stock and CEL-SCI does not have any current plans to pay any
common stock dividends.
The
provisions in CEL-SCI’s Articles of Incorporation relating to
CEL-SCI’s preferred stock allow CEL-SCI’s directors to
issue preferred stock with rights to multiple votes per share and
dividend rights which would have priority over any dividends paid
with respect to CEL-SCI’s common stock. The issuance of
preferred stock with such rights may make more difficult the
removal of management even if such removal would be considered
beneficial to shareholders generally, and will have the effect of
limiting shareholder participation in certain transactions such as
mergers or tender offers if such transactions are not favored by
incumbent management.
The
market price of CEL-SCI’s common stock, as well as the
securities of other biopharmaceutical and biotechnology companies,
have historically been highly volatile, and the market has from
time to time experienced significant price and volume fluctuations
that are unrelated to the operating performance of particular
companies. Factors such as fluctuations in CEL-SCI’s
operating results, announcements of technological innovations or
new therapeutic products by CEL-SCI or its competitors,
governmental regulation, developments in patent or other
proprietary rights, public concern as to the safety of products
which may be developed by CEL-SCI or other biotechnology and
pharmaceutical companies, and general market conditions may have a
significant effect on the market price of CEL-SCI’s common
stock.
The
graph below matches the cumulative 5-year total return of holders
of CEL-SCI’s common stock with the cumulative total returns
of the NYSE American Composite index and the RDG MicroCap
Biotechnology index. The graph assumes that the value of an
investment in CEL-SCI's common stock and in each of the indexes
(including reinvestment of dividends) was $100 on September 30,
2013 and tracks it through September 30, 2018.
The
stock price performance included in this graph is not necessarily
indicative of future stock price performance.
28
|
|
9/13
|
9/14
|
9/15
|
9/16
|
9/17
|
9/18
|
|
|
|
|
|
|
|
|
|
CEL-SCI
Corporation
|
100.00
|
53.63
|
35.30
|
17.94
|
3.91
|
9.53
|
|
NYSE
American
|
100.00
|
116.81
|
78.84
|
86.28
|
88.23
|
95.60
|
|
RDG
MicroCap Biotechnology
|
100.00
|
90.01
|
74.98
|
34.65
|
27.14
|
20.73
|
ITEM
6.
SELECTED FINANCIAL DATA
CEL-SCI
is a smaller reporting company as defined by Rule 12b-2 of the
Securities and Exchange Commission and are not required to provide
the information required under this item.
ITEM
7.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The
following discussion should be read in conjunction with the
financial statements and the related notes thereto appearing
elsewhere in this report.
CEL-SCI’s
lead investigational therapy, Multikine, has fully enrolled 928
patients in a Phase 3 clinical trial in advanced primary head and
neck cancer. This study was cleared by the U.S. FDA as well as
twenty-three other countries.
CEL-SCI
also owns and is developing a pre-clinical technology called
LEAPS.
All of
CEL-SCI’s projects are under development. As a result,
CEL-SCI cannot predict when it will be able to generate any revenue
from the sale of any of its products.
Since
inception, CEL-SCI has financed its operations through the issuance
of equity securities, convertible notes, loans and certain research
grants. CEL-SCI’s expenses will likely exceed its revenues as
it continues the development of Multikine and brings other drug
candidates into clinical trials. Until such time as CEL-SCI becomes
profitable, any or all of these financing vehicles or others may be
utilized to assist CEL-SCI’s capital
requirements.
Results of Operations
Fiscal 2018
During
the year ended September 30, 2018, grant and other income increased
by approximately $478,000 compared to the year ended September 30,
2017. The increase is due to work performed on a grant awarded in
September 2017. CEL-SCI was awarded a Phase 2 Small Business
Innovation Research (SBIR) grant in the amount of $1.5 million from
the National Institute of Arthritis Muscoskeletal and Skin
Diseases, which is part of the National Institutes of Health (NIH).
This grant will provide funding to allow CEL-SCI to advance its
first LEAPS product candidate, CEL-4000, towards an Investigational
New Drug (IND) application, by funding GMP manufacturing, IND
enabling studies, and additional mechanism of action
studies.
During
the year ended September 30, 2018, research and development
expenses decreased by approximately $6.2 million compared to the
year ended September 30, 2017. CEL-SCI is continuing the Phase 3
clinical trial and research and development fluctuates based on the
activity level of the clinical trial. The majority of
CEL-SCI’s research and development expense relates to its
on-going Phase 3 clinical trial. Clinical trial costs tend to be
higher during the enrollment phase of the study and because the
study is fully enrolled, the expenses incurred over the last twelve
months have decreased. However, as CEL-SCI investigates new study
opportunities, research and development costs may
increase.
29
During
the year ended September 30, 2018, general and administrative
expenses increased by approximately $2.0 million compared to the
year ended September 30, 2017. A major component of the increase is
an approximate $1.4 million increase in employee compensation
costs, of which approximately $0.9 million relates to expense
associated with achievement of the second of four milestones under
CEL-SCI’s Incentive Stock Bonus Plan, and $0.5 million
relates to an increase in costs associated with employee stock
options. Another major component of the increase is an approximate
$0.8 million increase in public relations costs, of which
approximately $0.3 million related to an increase in the value of
non-employee stock compensation costs for consultants. Other
components of the increase include a net decrease in other general
and administrative expenses of approximately $0.2
million.
During
the years ended September 30, 2018, CEL-SCI recorded a derivative
loss of approximately $8.6 million as compared to a derivative gain
of approximately $11.0 million recorded during the year ended
September 30, 2017. 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 increased approximately $2.5 million during the
year ended September 30, 2018 compared to the year ended September
30, 2017. The increase is primarily due to: 1) an increase of
approximately $1.1 million in amortization of discounts on notes
payable issued in June and July 2017, restructured in October 2017
and fully converted in June 2018, and accrued interest on those
notes; 2) the $0.3 million inducement loss recorded in June 2018 on
the conversion of the notes payable; and 3) the current period
impact of the financing arrangement with Ergomed (as explained in
Note 13 to the financial statements which are part of this report)
which resulted in approximately $1.1 million more in net interest
expense in 2018 over 2017.
Research and Development Expenses
CEL-SCI’s
research and development efforts involved Multikine and LEAPS. The
table below shows the research and development expenses associated
with each project during the reporting periods.
|
|
Year
ended September 30,
|
|
|
|
2018
|
2017
|
|
Multikine
|
$
8,666,936
|
$
15,253,190
|
|
LEAPS
|
733,370
|
353,795
|
|
Total
research and development
|
$
9,400,306
|
$
15,606,985
|
In
January 2007, CEL-SCI received a “no objection” letter
from the FDA indicating that it could proceed with Phase 3 trials
with Multikine in head and neck cancer patients. CEL-SCI
had previously received a “no objection” letter from
the Canadian Biologics and Genetic Therapies Directorate which
enabled CEL-SCI to begin its Phase 3 clinical trial in
Canada. Subsequently, CEL-SCI received similar
authorizations from twenty-two other regulators.
CEL-SCI’s Phase 3 clinical trial began in December 2010 after
the completion and validation of CEL-SCI’s dedicated
manufacturing facility.
As
explained in Item 1 of this report, as of November 30, 2018,
CEL-SCI was involved in pre-clinical studies with respect to its
LEAPS technology. As with Multikine, CEL-SCI does not know what
obstacles it will encounter in future pre-clinical and clinical
studies involving its LEAPS technology. Consequently, CEL-SCI
cannot predict with any certainty the funds required for future
research and clinical trials and the timing of future research and
development projects.
30
Liquidity and Capital Resources
CEL-SCI
has had only limited revenues from operations since its inception
in March 1983. CEL-SCI has relied upon capital generated
from the public and private offerings of its common stock and
convertible notes. In addition, CEL-SCI has utilized
short-term loans to meet its capital
requirements. Capital raised by CEL-SCI has been used to
acquire an exclusive worldwide license to use, and later purchase,
certain patented and unpatented proprietary technology and know-how
relating to the human immunological defense system and for clinical
trials. Capital has also been used for patent
applications, debt repayment, research and development,
administrative costs, and the construction of CEL-SCI’s
laboratory facilities. CEL-SCI does not anticipate
realizing significant revenues until it enters into licensing
arrangements regarding its technology and know-how or until it
receives regulatory approval to sell its products (which could take
a number of years). As a result, CEL-SCI has been dependent upon
the proceeds from the sale of its securities to meet all of its
liquidity and capital requirements and anticipates having to do so
in the future. During fiscal year 2018 and 2017, CEL-SCI raised net
proceeds of approximately $21.4 million and $13.3 million,
respectively, through a combination of the sale of stock, the
exercise of warrants and the issuance of convertible
notes.
In
August 2007, CEL-SCI leased a building near Baltimore, Maryland.
The building, which consists of approximately 73,000 square feet,
has been remodeled in accordance with CEL-SCI’s
specifications so that it can be used by CEL-SCI to manufacture
Multikine for CEL-SCI’s Phase III clinical trials and sales
of the drug if approved by the FDA. The lease expires on October
31, 2028, and required annual base rent payments of approximately
$1.7 million during the twelve months ended September 30, 2018. See
Item 2 of this report for more information concerning the terms of
this lease.
On
December 8, 2016, CEL-SCI sold 1,360,960 shares of common stock and
warrants to purchase common stock at a price of $3.13 in a public
offering. The warrants consist of 680,480 Series CC warrants to
purchase 680,480 shares of common stock, 1,360,960 Series DD
warrants to purchase 1,360,960 shares of common stock and 1,360,960
Series EE warrants to purchase 1,360,960 shares of common stock.
The Series CC warrants were immediately exercisable, expire in
five-years and have an exercise price of $5.00 per share. The
Series DD warrants were immediately exercisable, expire on December
10, 2018 and have an exercise price of $4.50 per share. The Series
EE warrants were immediately exercisable, expire on December 10,
2018 and have an exercise price of $4.50 per share. In addition,
CEL-SCI issued 68,048 Series FF warrants to purchase 68,048 shares
of common stock to the placement agent. The FF warrants are
exercisable at any time on or before December 1, 2021 and have an
exercise price $3.91. The net proceeds to CEL-SCI from this
offering were approximately $3.7 million, excluding any future
proceeds that may be received from the exercise of the warrants. As
of September 30, 2018, none of the Series CC, DD and EE warrants
had been exercised.
On
February 23, 2017, CEL-SCI sold 400,000 registered shares of common
stock and 400,000 Series GG warrants to purchase 400,000
unregistered shares of common stock at a combined price of $2.50
per share. The Series GG warrants have an exercise price of $3.00
per share are exercisable on or before August 23, 2022. In
addition, CEL-SCI issued 20,000 Series HH warrants to purchase
20,000 shares of unregistered common stock to the placement agent.
The Series HH warrants have an exercise price $3.13 and are
exercisable on or before February 16, 2022. The net proceeds from
this offering were approximately $0.8 million. As of September 30,
2018, 200,000 Series GG warrants had been exercised.
On
March 14, 2017, CEL-SCI sold 600,000 registered shares of common
stock and 600,000 Series II warrants to purchase 600,000
unregistered shares of common stock at combined offering price of
$2.50 per share. The Series II warrants have an exercise price of
$3.00 per share and are exercisable on or before September 14,
2022. In addition, CEL-SCI issued 30,000 Series JJ warrants to
purchase 30,000 shares of unregistered common stock to the
placement agent. The Series JJ warrants have an exercise price
$3.13 and are exercisable on or before March 8, 2022. The net
proceeds from this offering were approximately $1.3 million. As of
September 30, 2018, 383,500 Series II warrants had been
exercised.
On
April 30, 2017, CEL-SCI sold 527,960 registered shares of common
stock and 395,970 Series KK warrants to purchase 395,970
unregistered shares of common stock at combined offering price of
$2.88 per share. The Series KK warrants have an exercise price of
$3.04 per share, are exercisable on November 3, 2017 and expire on
November 3, 2022. In addition, CEL-SCI issued 26,398 Series LL
warrants to purchase 26,398 shares of unregistered common stock to
the placement agent. The Series LL warrants have an exercise price
$3.59, are exercisable on October 30, 2017 and expire on April 30,
2022. The net proceeds from this offering were approximately $1.4
million. As of September 30, 2018, 182,100 Series KK warrants had
been exercised.
31
On July
26, 2017, CEL-SCI sold 100,000 registered shares of common stock
and 60,000 Series OO warrants to purchase 60,000 unregistered
shares of common stock at a combined price of $2.29 per share. The
Series OO warrants have an exercise price of $2.52 per share are
exercisable on January 31, 2018 and expire on July 31, 2022. The
net proceeds from this offering were approximately $222,000. As of
September 30, 2018, none of the Series OO warrants had been
exercised.
On
August 22, 2017, CEL-SCI sold 1,750,000 registered shares of common
stock and 1,750,000 Series PP warrants to purchase 1,750,000
unregistered shares of common stock at combined offering price of
$2.00 per share. The Series PP warrants have an exercise price of
$2.30 per share, are exercisable on February 28, 2018 and expire on
February 28, 2023. In addition, CEL-SCI issued 87,500 Series QQ
warrants to purchase 87,500 shares of unregistered common stock to
the placement agent. The Series QQ warrants have an exercise price
$2.50, are exercisable on February 22, 2018 and expire on August
22, 2022. The net proceeds from this offering were approximately
$3.2 million. As of September 30, 2018, 1,577,500 Series PP
warrants and 84,000 Series QQ warrants had been
exercised.
During
the year ended September 30, 2017, the Company issued two series of
convertible notes to individual investors, Series MM and Series NN
convertible notes (the Notes). The Notes had an
aggregate principal amount of $2.7 million
,
bore interest at 4% and were originally due on December 22, 2017.
At the option of the note holders, the Series MM Notes could be
converted into shares of the Company’s common stock at a
fixed conversion rate of $1.69 and the Series NN Notes could be
converted into shares of the Company’s common stock at a
fixed conversion rate of $2.29. The purchasers of the convertible
notes also received Series MM and Series NN warrants which allow
the purchasers to acquire up to 893,491 and 539,300 shares of the
Company’s common stock, respectively. The Series MM warrants
are exercisable at a price of $1.86 per share and expire on June
22, 2022. The Series NN warrants are exercisable at a price of
$2.52 per share and expire on July 24, 2022.
On October 30, 2017, the Company
extended
the due dates of the Notes from December 22, 2017 to September 21,
20l8, and issued the note holders 583,057 of Series RR Warrants.
The Series RR warrants expire on October 30, 2022 and are
exercisable at a price of $1.65 per share. As of September 30,
2018, 27,687 Series RR warrants had been exercised
for total proceeds of approximately
$46,000.
On June
11, 2018, as an inducement to convert, the Company issued the then
outstanding note holders 187,562 Series UU warrants The Series UU
warrants are exercisable at a fixed price of $2.80 per share, are
exercisable on December 11, 2018 and expire on June 11,
2020
During
the year ended September 30, 2018, note holders converted all
outstanding Notes in the principal amount of $2,294,300, into
1,166,105 shares of common stock. During the year ended September
30, 2017, note holders converted Notes in the principal amount of
$450,700 into 266,686 shares of common stock. The unamortized debt
discount relating to the converted notes was charged to interest
expense.
On
December 19, 2017 the Company sold 1,289,478 shares of its common
stock at a price of $1.90 per share for total proceeds of
approximately $2.45 million. The purchasers of the common
stock also received Series SS warrants which allow the purchasers
to acquire up to 1,289,478 shares of the Company’s common
stock. The warrants are exercisable at a fixed price of
$2.09 per share, and will expire on December 18, 2022. As of
September 30, 2018, 328,948 Series SS warrants had been exercised
for total proceeds of approximately $0.7 million.
On
February 5, 2018, the Company sold 2,501,145 shares of its common
stock at a price of $1.87 per share for total proceeds of
approximately $4.7 million. The purchasers of the common stock also
received Series TT warrants which allow the purchasers to acquire
up to 1,875,860 shares of the Company’s common stock. The
warrants are exercisable at a fixed price of $2.24 per share, were
exercisable on August 6, 2018 and expire on February 5, 2023. As of
September 30, 2018, 578,983 Series TT
Warrants had been exercised for total proceeds of approximately
$1.30 million.
On July
2, 2018 the Company issued 3,900,000 registered shares of common
stock at a purchase price of $1.30 per share in a registered direct
offering. For each share of common stock purchased, the investors
received an unregistered Series VV warrant to purchase one share of
common stock. The Series VV warrants have an exercise price of
$1.75 per share, will be exercisable on January 2, 2019 and expire
on January 2, 2024. As part of this transaction, the Company also
issued 195,000 Series WW warrants to the placement agent. These
Series WW warrants have an exercise price of $1.63 per share, will
be exercisable on January 2, 2019 and expire on July 2,
2023.
32
The
following chart lists the warrants that were exercised and the
proceeds received during the year ended September 30, 2018. No
warrants were exercised during the year ended September 30,
2017.
|
Warrants
|
Warrants
Exercised
|
Exercise
Price
|
Proceeds
|
|
Series
S
|
709,391
|
$
1.75
|
$
1,241,434
|
|
Series
GG
|
200,000
|
$
3.00
|
$
600,000
|
|
Series
II
|
383,500
|
$
3.00
|
$
1,150,500
|
|
Series
KK
|
182,100
|
$
3.04
|
$
552,674
|
|
Series
PP
|
1,577,500
|
$
2.30
|
$
3,628,250
|
|
Series
QQ
|
84,000
|
$
2.50
|
$
210,000
|
|
Series
RR
|
27,687
|
$
1.65
|
$
45,684
|
|
Series
SS
|
328,948
|
$
2.09
|
$
687,500
|
|
Series
TT
|
578,983
|
$
2.24
|
$
1,296,922
|
|
|
4,072,109
|
|
$
9,412,964
|
During
the years ended September 30, 2018 and 2017, CEL-SCI entered into
Securities Purchase Agreements with Ergomed plc, one of
CEL-SCI’s Clinical Research Organizations responsible for
managing CEL-SCI’s Phase 3 clinical trial, to facilitate a
partial payment of the accounts payable balances due Ergomed. Under
the Agreements, CEL-SCI issued Ergomed shares of common stock as a
forbearance fee in exchange for Ergomed’s agreement to
provisionally forbear collection of the payables in an amount equal
to the net proceeds from the resales of the shares issued to
Ergomed. Upon issuance, CEL-SCI expenses the full value of the
shares and subsequently offsets the expense as amounts are realized
through the resale by Ergomed and reduces accounts payable to
Ergomed. During the year ended September 30, 2018, CEL-SCI issued
Ergomed 2,260,000 shares valued at approximately $5.5 million.
During the year ended September 30, 2017, CEL-SCI issued Ergomed
480,000 shares valued at approximately $1.3 million. During the
years ended September 30, 2018 and 2017, Ergomed credited CEL-SCI
approximately $3.2 million and $0.1 million for the resale of
shares. As a result, CEL-SCI has recorded a net interest expense of
$2.3 million and $1.2 million for the years ended September 30,
2018 and 2017, respectively. As of September 30, 2018, Ergomed
holds 918,900 shares and may resell the shares or return the shares
to CEL-SCI for cancellation until December 31, 2018. As of
September 30, 2017, Ergomed held 415,208 shares, all of which were
resold during the year ended September 30, 2018.
During
the year ended September 30, 2018, CEL-SCI’s cash increased
by approximately $7.9 million. Significant components of this
increase include: net cash used in operating activities of
approximately $13.4 million, which were offset by proceeds from the
sale of common stock and warrants of approximately $12.0 million
and proceeds from the exercise of warrants of approximately $9.4
million.
Primarily
as a result of our losses incurred to date, our expected continued
future losses, and limited cash balances, we have included an
explanatory paragraph in our financial statements expressing
substantial doubt about our ability to continue as a going concern.
We have included such an explanatory paragraph on numerous
occasions in the preceding years.
33
Future Capital Requirements
The
Company’s material capital commitments include funding
operating losses, funding its research and development program,
making required lease payments and repaying convertible notes. For
information on employment contracts, see Item 11 of this
report.
Further, CEL-SCI
has contingent obligations with vendors for work that will be
completed in relation to the Phase 3 trial. The timing of these
obligations cannot be determined at this time. CEL-SCI estimates it
will incur additional expenses of approximately $8.4 million for
the remainder of the Phase 3 clinical trial. It should be noted
that this estimate is based only on the information currently
available in CEL-SCI’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.
CEL-SCI
may or may not need to raise additional funds to reach the final
read-out of the Phase 3 trial the timing of which depends on when
298 events is reached in the study. However, CEL-SCI will need to
raise additional funds, either through the exercise of outstanding
warrants/options, through a debt or equity financing or a
partnering arrangement, to bring Multikine to market. The ability
of CEL-SCI to complete the necessary clinical trials and obtain FDA
approval for the sale of products to be developed on a commercial
basis is uncertain.
In
general, CEL-SCI believes that it will be able to raise sufficient
capital in fiscal year 2019 to continue operations into the second
half of fiscal year 2019. However, it is possible that CEL-SCI will
not be able to generate enough cash to continue operations at its
current level. CEL-SCI's registered independent public accounting
firm has issued an audit opinion that includes an explanatory
paragraph that expresses substantial doubt about CEL-SCI’s
ability to continue as a going concern mainly due to continued
losses from operations and future liquidity needs of CEL-SCI.
CEL-SCI’s management has engaged in fundraising for over 20
years and believes that the manner in which it is proceeding will
produce the best possible outcome for the shareholders. There can
be no assurances that CEL-SCI will be successful in raising
additional funds.
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 CEL-SCI’s clinical trials and research programs
are primarily based upon the amount of capital available to CEL-SCI
and the extent to which CEL-SCI has received regulatory approvals
for clinical trials. The inability of CEL-SCI to conduct clinical
trials or research, whether due to a lack of capital or regulatory
approval, will prevent CEL-SCI from completing the studies and
research required to obtain regulatory approval for any products
which CEL-SCI is developing. Without regulatory approval, CEL-SCI
will be unable to sell any of its products.
In the
absence of revenues, CEL-SCI will be required to raise additional
funds through the sale of securities, debt financing or other
arrangements in order to continue with its research efforts.
However, there can be no assurance that such financing will be
available or be available on favorable terms. Ultimately, CEL-SCI
must complete the development of its products, obtain appropriate
regulatory approvals and obtain sufficient revenues to support its
cost structure.
Since
all of CEL-SCI’s projects are under development, CEL-SCI
cannot predict with any certainty the funds required for future
research and clinical trials, the timing of future research and
development projects, or
when it will be able to generate any
revenue from the sale of any of its products.
CEL-SCI's cash flow
and earnings are subject to fluctuations due to changes in interest
rates on its bank accounts, and, to an immaterial extent, foreign
currency exchange rates.
Critical Accounting Policies
CEL-SCI's
significant accounting policies are more fully described in Note 3
to the financial statements included as part of this report.
However, certain accounting policies are particularly important to
the portrayal of CEL-SCI’s financial position and results of
operations and require the application of significant judgments by
management. As a result, the financial statements are subject to an
inherent degree of uncertainty. In applying those policies,
management uses its judgment to determine the appropriate
assumptions to be used in the determination of certain estimates.
These estimates are based on CEL-SCI's historical experience, terms
of existing contracts, observance of trends in the industry and
information available from outside sources, as appropriate.
CEL-SCI’s critical accounting policies include:
Stock Options and Warrants
–
Compensation cost is measured at fair value as of the grant date in
accordance with the provisions of ASC 718. The fair value of the
stock options is calculated using the Black-Scholes option pricing
model. The Black-Scholes model requires various judgmental
assumptions including volatility, forfeiture rates and expected
option life. The stock-based compensation cost is recognized on the
accelerated method as expense over the requisite service or vesting
period.
34
Options
to non-employees are accounted for in accordance with ASC 505-50,
“
Equity-Based Payments to
Non-Employees
.” Accordingly, compensation cost is
recognized when goods or services are received and is measured
using the Black-Scholes valuation model. The Black-Scholes model
requires CEL-SCI’s management to make assumptions regarding
the fair value of the options at the date of grant and the expected
life of the options.
Asset Valuations and Review for Potential
Impairments
- CEL-SCI reviews its fixed assets and
intangibles every fiscal quarter. This review requires that CEL-SCI
make assumptions regarding the value of these assets and the
changes in circumstances that would affect the carrying value of
these assets. If such analysis indicates that a possible impairment
may exist, CEL-SCI is then required to estimate the fair value of
the asset and, as deemed appropriate, expense all or a portion of
the asset. The determination of fair value includes numerous
uncertainties, such as the impact of competition on future value.
CEL-SCI believes that it has made reasonable estimates and
judgments in determining whether its long-lived assets have been
impaired; however, if there is a material change in the assumptions
used in its determination of fair values or if there is a material
change in economic conditions or circumstances influencing fair
value, CEL-SCI could be required to recognize certain impairment
charges in the future. As a result of the reviews, no changes in
asset values were required.
Derivative Instruments—
CEL-SCI
enters into financing arrangements that consist of freestanding
derivative instruments or hybrid instruments that contain embedded
derivative features. CEL-SCI accounts for these arrangements in
accordance with ASC 815, “
Accounting for Derivative Instruments and
Hedging Activities
, as well as related interpretations of
these standards. In accordance with accounting principles generally
accepted in the United States (“GAAP”), derivative
instruments and hybrid instruments are recognized as either assets
or liabilities in the statement of financial position 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. Embedded derivatives that are not
clearly and closely related to the host contract are bifurcated and
recognized at fair value with changes in fair value recognized as
either a gain or loss in earnings if they can be reliably measured.
When the fair value of embedded derivative features cannot be
reliably measured, CEL-SCI measures and reports the entire hybrid
instrument at fair value with changes in fair value recognized as
either a gain or loss in earnings. CEL-SCI determines the fair
value of derivative instruments and hybrid instruments based on
available market data using appropriate valuation models, giving
consideration to all of the rights and obligations of each
instrument and precluding the use of “blockage”
discounts or premiums in determining the fair value of a large
block of financial instruments. Fair value under these conditions
does not necessarily represent fair value determined using
valuation standards that give consideration to blockage discounts
and other factors that may be considered by market participants in
establishing fair value.
ITEM
7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET
RISKS
Not
applicable.
ITEM
8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See the
financial statements included with this report.
ITEM
9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not
applicable
ITEM
9A.
CONTROLS AND PROCEDURES
Under
the direction and with the participation of CEL-SCI’s
management, including CEL-SCI’s Chief Executive Officer and
Chief Financial Officer, CEL-SCI carried out an evaluation of the
effectiveness of the design and operation of its disclosure
controls and procedures as of September 30, 2018. CEL-SCI 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 CEL-SCI’s management,
including its principal executive officer and principal financial
officer, as appropriate, to allow timely decisions regarding
required disclosure. CEL-SCI’s disclosure controls and
procedures are designed to provide a reasonable level of assurance
of reaching its desired disclosure control objectives. Based on
this evaluation, CEL-SCI’s Chief Executive and Principal
Financial Officer has concluded that CEL-SCI’s disclosure
controls were effective as of September 30, 2018.
Management’s Report on Internal Control over Financial
Reporting
CEL-SCI’s
management is responsible for establishing and maintaining adequate
internal control over financial reporting and for the assessment of
the effectiveness of internal control over financial reporting. As
defined by the Securities and Exchange Commission, internal control
over financial reporting is a process designed by, or under the
supervision of CEL-SCI’s principal executive officer and
principal financial officer and implemented by CEL-SCI’s
Board of Directors, management and other personnel, to provide
reasonable assurance regarding the reliability of financial
reporting and the preparation of CEL-SCI’s financial
statements in accordance with U.S. generally accepted accounting
principles.
35
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.
Geert
Kersten, CEL-SCI’s Chief Executive and Principal Financial
Officer, evaluated the effectiveness of CEL-SCI’s internal
control over financial reporting as of September 30, 2018 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.
In
November 2017, CEL-SCI discovered an error in the way it accounted
for the lease for its manufacturing facility. CEL-SCI initially
recorded this lease as an operating lease but later identified that
it should have accounted for it as a financing lease and
capitalized an asset and related liability. Management concluded
that the correction of the error for this lease, the lack of
impairment assessment for the related asset, and the operating
effectiveness of the financial close process are control
deficiencies that constitute material weaknesses.
In
order to remediate these material weaknesses, CEL-SCI changed
certain control activities over financial reporting to include the
following:
●
All facility
leasing activities were subject to a thorough review of capital
versus operating lease classification and CEL-SCI engaged outside
financial reporting specialists to assist it in the review
process.
●
CEL-SCI enhanced
its policy for reviewing long-lived assets for impairments by
incorporating additional triggering event factors for consideration
as part of its control. This review was carried out by CEL-SCI and
was assisted by an outside financial reporting
specialist.
●
The financial
reporting process included the use of quarterly and annual closing
checklists to capture routine and non-routine transactions that
require additional review.
Based
on this evaluation and the corrective measures CEL-SCI has taken,
Mr. Kersten concluded that CEL-SCI’s internal control over
financial reporting was effective as of September 30,
2018.
There
was no change in CEL-SCI’s internal control over financial
reporting that occurred during the fiscal year ended September 30,
2018 that has materially affected, or is reasonably likely to
materially affect, CEL-SCI’s internal control over financial
reporting except as disclosed above.
ITEM
9B.
OTHER INFORMATION
None.
36
ITEM
10.
DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Officers and Directors
|
Name
|
Age
|
Position
|
|
Geert R Kersten, Esq.
|
60
|
Director, Chief
Executive Officer and Treasurer
|
|
Patricia B. Prichep
|
67
|
Senior Vice
President of Operations and Corporate
Secretary
|
|
Dr. Eyal Taylor
|
62
|
Chief Scientific
Officer
|
|
Dr Daniel H. Zimmerman
|
77
|
Senior Vice
President of Research, Cellular
Immunology
|
|
John Cipriano
|
76
|
Senior Vice
President of Regulatory Affairs
|
|
Dr Peter R. Young
|
73
|
Director
|
|
Bruno Baillavoine
|
66
|
Director
|
|
Robert Watson
|
61
|
Director
|
The
directors of CEL-SCI serve in such capacity until the next annual
meeting of CEL-SCI's shareholders or until their successors have
been duly elected and qualified. The officers of CEL-SCI serve at
the discretion of CEL-SCI's directors.
All of
CEL-SCI’s directors have served as directors for a
significant period of time. Consequently, their long-standing
experience with CEL-SCI benefits both CEL-SCI and its
shareholders.
The
principal occupations of CEL-SCI's officers and directors, during
the past several years, are as follows:
Geert
Kersten has served in his current leadership role at CEL-SCI since
1995. Mr. Kersten has been with CEL-SCI since 1987. He has been
involved in the pioneering field of cancer immunotherapy for over
two decades and has successfully steered CEL-SCI through many
challenging cycles in the biotechnology industry. Mr. Kersten also
provides CEL-SCI with significant expertise in the fields of
finance and law and has a unique vision of how CEL-SCI's Multikine
product could potentially change the way cancer is treated.
Prior to joining CEL-SCI, Mr. Kersten worked at the law firm of
Finley & Kumble and worked at Source Capital, an investment
banking firm located in McLean, VA. He is a native of Germany,
graduated from high school in England, and completed his studies in
the US. Mr. Kersten received his Undergraduate Degree in Accounting
and an M.B.A. from George Washington University, and a law degree
(J.D.) from American University in Washington,
DC.
Patricia B. Prichep
joined CEL-SCI in 1992 and has been CEL-SCI's Senior Vice President
of Operations since March 1994. Between December 1992 and March
1994, Ms. Prichep was CEL-SCI's Director of Operations. Ms. Prichep
became CEL-SCI's Corporate Secretary in May 2000. She is
responsible for all day-to-day operations of CEL-SCI, including
human resources and is the liaison with CEL-SCI’s independent
registered public accounting firm for financial reporting. From
June 1990 to December 1992, Ms. Prichep was the Manager of Quality
and Productivity for the NASD’s Management, Systems and
Support Department and was responsible for the internal auditing
and work flow analysis of operations. Between 1982 and 1990, Ms.
Prichep was Vice President and Operations Manager for Source
Capital, Ltd. She handled all operations and compliance for Source
Capital and was licensed as a securities broker. Ms. Prichep
received her B.A. from the University of Bridgeport in
Connecticut.
37
Eyal Talor, Ph.D. joined CEL-SCI in October 1993.
In October 2009, Dr. Talor was promoted to Chief Scientific
Officer. Between this promotion and March of 1994 he was the Senior
Vice President of Research and Manufacturing. He is a
clinical immunologist with over 19 years of hands-on management of
clinical research and drug development for immunotherapy
application; pre-clinical to Phase III, in the biopharmaceutical
industry. His expertise includes; biopharmaceutical R&D
and Biologics product development, GMP (Good Manufacturing
Practices) manufacture, Quality Control testing, and the design and
building of GMP manufacturing and testing facilities. He
served as Director of Clinical Laboratories (certified by the State
of Maryland) and has experience in the design of clinical trials
(Phase I – III) and GCP (Good Clinical Practices)
requirements. He also has broad experience in the different
aspects of biological assay development, analytical methods
validation, raw material specifications, and QC (Quality Control)
tests development under FDA/GMP, USP, and ICH guidelines. He
has extensive experience in the preparation of documentation for
IND and other regulatory submissions. His scientific area of
expertise encompasses immune response assessment. He is the
author of over 25 publications and has published a number of
reviews on immune regulations in relation to clinical immunology.
Before coming to CEL-SCI, he was Director of R&D and Clinical
Development at CBL, Inc., Principal Scientist - Project Director,
and Clinical Laboratory Director at SRA Technologies, Inc. Prior to
that he was a full time faculty member at The Johns Hopkins
University, Medical Institutions; School of Public Health. He
has invented technologies which are covered by
two US patents; one on Multikine’s
composition of matter and method of use in cancer, and one on a
platform Peptide technology (‘Adapt’) for the treatment
of autoimmune diseases, asthma, allergy, and transplantation
rejection. He also
is responsible for
numerous product and process inventions as well as
a number of pending US and PCT patent applications. He
received his Ph.D. in Microbiology and Immunology from the
University of Ottawa, Ottawa, Ontario, Canada, and had
post-doctoral training in clinical and cellular immunology at The
John Hopkins University, Baltimore, Maryland, USA. He holds
an Adjunct Associate teaching position at the Johns Hopkins
University Medical Institutions.
Daniel H. Zimmerman, Ph.D., was CEL-SCI's Senior
Vice President of Cellular Immunology between 1996 and December
2008 and again since November 2009. He joined CEL-SCI in
January 1996 as the Vice President of Research, Cellular
Immunology. Dr. Zimmerman founded CELL-MED, Inc. and was its
president from 1987-1995. From 1973-1987, Dr. Zimmerman
served in various positions at Electronucleonics, Inc. His
positions included: Scientist, Senior Scientist, Technical Director
and Program Manager. Dr. Zimmerman held various teaching positions
at Montgomery College between 1987 and 1995. Dr. Zimmerman has
invented technologies which are covered by over a dozen US patents
as well as many foreign equivalent patents. He is the author of
over 40 scientific publications in the area of immunology and
infectious diseases. He has been awarded numerous grants from NIH
and DOD. From 1969-1973, Dr. Zimmerman was a Senior Staff
Fellow at NIH. For the following 25 years, he continued on at NIH
as a guest worker. Dr. Zimmerman received a Ph.D. in
Biochemistry in 1969, and a Masters in Zoology in 1966 from the
University of Florida as well as a B.S. in Biology from Emory and
Henry College in
1963.
John
Cipriano, was CEL-SCI’s Senior Vice President of Regulatory
Affairs between March 2004 and December 2008 and again since
October 2009. Mr. Cipriano brings to CEL-SCI over 30 years of
experience with both biotech and pharmaceutical companies. In
addition, he held positions at the United States Food and Drug
Administration (FDA) as Deputy Director, Division of Biologics
Investigational New Drugs, Office of Biologics Research and Review
and was the Deputy Director, IND Branch, Division of Biologics
Evaluation, Office of Biologics. Mr. Cipriano completed his B.S. in
Pharmacy from the Massachusetts College of Pharmacy in Boston,
Massachusetts and his M.S. in Pharmaceutical Chemistry from Purdue
University in West Lafayette, Indiana.
Peter
R. Young, Ph.D. has been a Director of CEL-SCI since August 2002.
Dr. Young has been a senior executive within the pharmaceutical
industry in the United States and Canada for most of his career,
originally in organizations that are now part of Sanofi S.A. Over
the last 20 years he has primarily held positions of Chief
Executive Officer or Chief Financial Officer and has extensive
experience with acquisitions and equity financing. Since November
2001, Dr. Young has been the President of Agnus Dei, LLC, which has
acted as a partner in an organization managing immune system
clinics which treats patients with diseases such as cancer,
multiple sclerosis and hepatitis. Dr. Young was also the President
and Chief Executive Officer of SRL Technology, Inc., a company
involved in the development of pharmaceutical drug delivery
systems. Between 1998 and 2001, Dr. Young was the Chief Financial
Officer of Adams Laboratories, Inc., the developer of
Mucinex®. Dr. Young received his Ph.D. in Organic Chemistry
from the University of Bristol, England after obtaining his
Bachelor's degree in Honors Chemistry, Mathematics and Economics.
Subsequently,
he qualified as a Fellow of the Chartered Institute of Management
Accountants.
Bruno
Baillavoine joined CEL-SCI’s board of directors in June 2015.
Since 2017 Mr. Baillavoine has been the Director, Head of Pericles
Group UK the subsidiary of the Paris based leading French
consulting firm which is an expert in the field of Banking,
Finance, Asset Management and Insurance with over 350 institutional
clients. He has also been an advisor to the Board of CSL Inc,
Combatives Sports League a US Mix Martial Arts Company since 2017.
Between 2010-2016, Mr. Baillavoine was a partner of Globomass
Holdings Limited, a London, England based developer of renewable
energy projects from concept through final operations. From
2012-2016 Mr. Baillavoine was the Executive Chairman of Globomass
Holdings. Globomass was acquired by CleanBay Inc. to which Mr.
Baillavoine is an advisor to the Board and an investor. Between
1978 and 1982 he was the marketing manager of Ravenhead Ltd., a
manufacturer of glass tableware, and part of United Distillers
Group (later acquired by Grand Metropolitan). During this time Mr.
Baillavoine became the UK Business Manager where he restored market
share and profit for United Distillers. From 1982 to 1986 Mr.
Baillavoine was Group Corporate Planning and Group Marketing
Director for Prontaprint where he expanded the number of shops to
500 locations in four years. Mr. Baillavoine joined Grand
Metropolitan Plc between 1986-1988 (now Diageo Plc), an FTSE 100
beverage, food, hotel and leisure company, as director in the
Special Operations division. In this capacity, he developed plans
for Grand Met’s trouble-shooting division for over 20,000
Grand Met retail outlets. From 1988-1991 he was the Managing
Director of Nutri Systems (UK) Ltd., a subsidiary of the US based
provider of professionally supervised weight loss programs. Between
1991 and 1995, Mr. Baillavoine was Director of BET Group plc, a
multinational business support services group, and in 1992, was
promoted to the Managing Director for the manufacturing businesses.
The £2.3 billion turnaround of BET during his tenure is one of
the most successful turnarounds of a top 100 FTSE company. Since
1995, Mr. Baillavoine has held a number of CEO positions across a
wide range of industries and geographical locations. Mr.
Baillavoine has European and American educations (US high school
and University of Wisconsin Eau Claire 1972-1976).
38
Robert
Watson has been a director of CEL-SCI since December 2017. Mr.
Watson joined Intermedix, Inc. in July 2017 as President of its
Preparedness Technology Division. Immediately prior to joining
Intermedix, he was the President and Chief Growth Officer of
NantHealth, Inc. (Nasdaq: NH) from January 2015 to May 2017. Prior
to NantHealth, he was President and CEO of Streamline Health, Inc.
(Nasdaq: STRM) from January 2011 to January 2015. Mr. Watson has
over 35 years of experience in the healthcare information
technology industry as a CEO, board member and advisor to multiple
healthcare information technology companies. He has participated in
over 75 acquisitions, raised nearly $750,000,000 in capital,
completed three public offerings and successfully sold four
companies. Mr. Watson holds a MBA from the Wharton School of
Business at the University of Pennsylvania and a BA degree from
Syracuse University.
All of
CEL-SCI's officers devote substantially all of their time to
CEL-SCI's business.
CEL-SCI’s
Board of Directors does not have a “leadership
structure”, as such, since each director is entitled to
introduce resolutions to be considered by the Board and each
director is entitled to one vote on any resolution considered by
the Board. CEL-SCI’s Chief Executive Officer is not the
Chairman of CEL-SCI’s Board of Directors.
CEL-SCI’s
Board of Directors has the ultimate responsibility to evaluate and
respond to risks facing CEL-SCI. CEL-SCI’s Board of Directors
fulfills its obligations in this regard by meeting on a regular
basis and communicating, when necessary, with CEL-SCI’s
officers.
Dr.
Peter R. Young, Bruno Baillavoine and Robert Watson are independent
directors as that term is defined in section 803 of the listing
standards of the NYSE American.
CEL-SCI
has adopted a Code of Ethics which is applicable to CEL-SCI’S
principal executive, financial, and accounting officers and persons
performing similar functions. The Code of Ethics is available on
CEL-SCI’s website, located at
www.cel-sci.com.
If a
violation of this code of ethics act is discovered or suspected,
any person (anonymously, if desired) may send a detailed note, with
relevant documents, to CEL-SCI’s Audit Committee, c/o Dr.
Peter Young, 208 Hewitt Drive, Suite 103-143, Waco, TX
76712
.
For
purposes of electing directors at its annual meeting, CEL-SCI has a
nominating committee that is made up of CEL-SCI’s independent
directors. The nominating committee selects the nominees to the
Board of Directors and they are approved by CEL-SCI’s
shareholders.
CEL-SCI does not have
any policy regarding the consideration of director candidates
recommended by shareholders and under Colorado law, any shareholder
can nominate a person for election as a director at the annual
shareholders’ meeting. However, CEL-SCI’s Board of
Directors will consider candidates recommended by shareholders. To
submit a candidate for the Board of Directors the shareholder
should send the name, address and telephone number of the
candidate, together with any relevant background or biographical
information, to CEL-SCI’s Chief Executive Officer, at the
address shown on the cover page of this report. The Board has not
established any specific qualifications or skills a nominee must
meet to serve as a director. Although the Board does not have any
process for identifying and evaluating director nominees, the Board
does not believe there would be any differences in the manner in
which the Board evaluates nominees submitted by shareholders as
opposed to nominees submitted by any other person.
CEL-SCI does not
have a policy with regard to Board member’s attendance at
annual meetings. All Board members attended the last annual
shareholder’s meeting held on September 20,
2018.
Holders
of CEL-SCI’s common stock can send written communications to
CEL-SCI’s entire Board of Directors, or to one or more Board
members, by addressing the communication to “the Board of
Directors” or to one or more directors, specifying the
director or directors by name, and sending the communication to
CEL-SCI’s offices in Vienna, Virginia. Communications
addressed to the Board of Directors as whole will be delivered to
each Board member. Communications addressed to a specific director
(or directors) will be delivered to the director (or directors)
specified.
A
security holder communication not sent to the Board of Directors as
a whole are not relayed to Board members which did not receive the
communication.
39
Components of Compensation — Executive Officers
CEL-SCI’s
executive officers are compensated through the following three
components:
●
Base
Salary
●
Long-Term
Incentives (“LTIs”) (stock options and/or grants of
stock)
●
Benefits
These
components provide a balanced mix of base compensation and
compensation that is contingent upon each executive officer’s
individual performance. A goal of the compensation program is to
provide executive officers with a reasonable level of security
through base salary and benefits. CEL-SCI wants to ensure that the
compensation programs are appropriately designed to encourage
executive officer retention and motivation to create shareholder
value.
The Compensation Committee
believes that CEL-SCI’s stockholders are best served when
CEL-SCI can attract and retain talented executives by providing
compensation packages that are competitive but
fair.
Base Salaries
Base
salaries generally have been targeted to be competitive when
compared to the salary levels of persons holding similar positions
in other pharmaceutical companies and other publicly traded
companies of comparable size. Each executive officer’s
respective responsibilities, experience, expertise and individual
performance are considered.
A
further consideration in establishing compensation for the senior
employees is their long term history with CEL-SCI. Taken into
consideration are factors that have helped CEL-SCI survive in times
when it was financially weak, such as: willingness to accept salary
cuts, willingness not to be paid at all for extended time periods,
and in general an attitude that helped CEL-SCI survive during
financially difficult times.
Long-Term Incentives
Stock
grants and option grants help to align the interests of
CEL-SCI’s employees with those of its
shareholders. Options and stock grants are made under
CEL-SCI’s Stock Option, Incentive Stock Bonus, Stock Bonus
and Stock Compensation Plans. Options are granted with
exercise prices equal to the closing price of CEL-SCI’s
common stock on the day immediately preceding the date of grant,
with pro rata vesting at the end of each of the following three
years.
CEL-SCI
believes that grants of equity-based compensation:
●
Enhance the link
between the creation of shareholder value and long-term executive
incentive compensation;
●
Provide focus,
motivation and retention incentive; and
●
Provide competitive
levels of total compensation.
Benefits
In
addition to cash and equity compensation programs, executive
officers participate in the health and welfare benefit programs
available to other employees. In a few limited circumstances,
CEL-SCI provides other benefits to certain executive officers, such
as car allowances.
All
executive officers are eligible to participate in CEL-SCI’s
401(k) plan on the same basis as its other employees. CEL-SCI
matches 100% of each employee’s contribution up to 6% of his
or her salary.
40
The
following table sets forth in summary form the compensation
received by (i) the Chief Executive and Financial Officer of
CEL-SCI and (ii) by each other executive officer of CEL-SCI who
received in excess of $100,000 during the two fiscal years ended
September 30, 2018.
|
Name
and
Principal
Position
|
Fiscal
Year
|
Salary
(1)
|
Bonus
(2)
|
Stock Awards
(3)
|
Option Awards
(4)
|
All Other
Compensation
(5)
|
Total
|
|
|
$
|
$
|
$
|
$
|
$
|
$
|
|
|
|
|
|
|
|
|
|
|
|
Geert R.
Kersten,
|
2018
|
557,756
|
--
|
16,350
|
1,011,048
|
55,631
|
1,640,784
|
|
Chief
Executive
|
2017
|
437,461
|
--
|
15,900
|
326,961
|
55,631
|
835,953
|
|
Officer and
Treasurer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Patricia B.
Prichep,
|
2018
|
162,374
|
--
|
14,679
|
424,557
|
9,031
|
610,641
|
|
Senior Vice
President
|
2017
|
171,028
|
--
|
13,704
|
217,974
|
9,031
|
411,737
|
|
of Operations
and
|
|
|
|
|
|
|
|
|
Secretary
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Eyal Talor,
Ph.D.,
|
2018
|
264,927
|
--
|
9,600
|
681,389
|
6,031
|
961,946
|
|
Chief Scientific
Officer
|
2017
|
270,163
|
--
|
9,600
|
217,974
|
6,031
|
503,768
|
|
|
|
|
|
|
|
|
|
|
Daniel Zimmerman,
Ph.D.,
|
2018
|
276,159
|
--
|
13,666
|
240,677
|
6,031
|
536,534
|
|
Senior Vice
President of
|
2017
|
166,320
|
--
|
13,333
|
35,989
|
6,031
|
221,673
|
|
Research,
Cellular
|
|
|
|
|
|
|
|
|
Immunology
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
John
Cipriano,
|
2018
|
234,207
|
--
|
--
|
282,928
|
31
|
517,166
|
|
Senior Vice
President of
|
2017
|
185,592
|
--
|
--
|
163,480
|
31
|
349,103
|
|
Regulatory
Affairs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
The dollar value of
base salary (cash and non-cash) earned. As of September 30, 2018,
CEL-SCI owed back salaries to the following employees:
|
Name
|
Salary
|
|
Geert
Kersten
|
$
148,888
|
|
Patricia
Prichep
|
155,078
|
|
Eyal
Talor, Ph.D.
|
71,696
|
|
Daniel
Zimmerman, Ph.D.
|
20,337
|
|
John
Cipriano
|
9,041
|
41
(2)
The dollar value of
bonus (cash and non-cash) earned.
(3)
For all persons
listed in the table, the shares were issued as CEL-SCI's
contribution on behalf of the named officer who participates in
CEL-SCI's 401(k) retirement plan. The value of all stock awarded
during the periods covered by the table is calculated according to
ASC 718-10-30-3 which represented the grant date fair
value.
(4)
The fair value of
all stock options granted during the periods covered by the table
are calculated on the grant date in accordance with ASC 718-10-30-3
which represented the grant date fair value.
(5)
All other
compensation received that CEL-SCI could not properly report in any
other column of the table including the dollar value of any
insurance premiums paid by, or on behalf of, CEL-SCI with respect
to term life insurance for the benefit of the named executive
officer and car allowances paid by CEL-SCI. Includes board of
directors fees for Mr. Kersten.
Employee Pension, Profit Sharing or Other Retirement
Plans
CEL-SCI
has a defined contribution retirement plan, qualifying under
Section 401(k) of the Internal Revenue Code and covering
substantially all CEL-SCI’s employees. CEL-SCI’s
contribution to the plan is made in shares of CEL-SCI's common
stock. Each participant's contribution is matched by CEL-SCI with
shares of common stock which have a value equal to 100% of the
participant's contribution, not to exceed the lesser of $1,000 or
6% of the participant's total compensation. CEL-SCI's contribution
of common stock is valued each quarter based upon the closing price
of its common stock. The fiscal 2018 expenses for this plan were
approximately $144,000. Other than the 401(k) Plan, CEL-SCI does
not have a defined benefit, pension plan, profit sharing or other
retirement plan.
Compensation of Directors During Year Ended September 30,
2018
|
Name
|
Fees
|
Stock Awards
(1)
|
Option Awards
(2)
|
Total
|
|
Geert
Kersten
|
$
40,000
|
-
|
1,011,048
|
$
1,051,048
|
|
Peter R.
Young
|
$
50,000
|
-
|
152,576
|
$
202,576
|
|
Bruno
Baillavoine
|
$
50,000
|
-
|
152,576
|
$
202,576
|
|
Robert Watson
(3)
|
$
30,000
|
-
|
168,332
|
$
198,332
|
(1)
The fair value of
stock issued for services.
(2)
The fair value of
options granted computed in accordance with ASC 718-10-30-3 on the
date of grant which represents their grant date fair
value.
(3)
Mr. Watson joined
the CEL-SCI’s Board of Directors in December
2017.
Directors’
fees paid to Geert Kersten are included in the Executive
Compensation table.
42
Employment Contracts
Geert Kersten
On
August 31, 2016, CEL-SCI entered into a three-year employment
agreement with Geert Kersten, CEL-SCI’s Chief Executive
Officer. The employment agreement with Mr. Kersten, which is
essentially the same as Mr. Kersten’s prior employment
agreement, as amended on August 30, 2013, provided that, during the
term of the agreement, CEL-SCI would pay Mr. Kersten an annual
salary of $559,052, plus any increases in proportion to salary
increases granted to other senior executive officers of CEL-SCI, as
well any increases approved by the Board of Directors during the
term of the employment agreement.
During the
employment term, Mr. Kersten will be entitled to receive any other
benefits which are provided to CEL-SCI's executive officers or
other full time employees in accordance with CEL-SCI's policies and
practices and subject to Mr. Kersten’s satisfaction of any
applicable conditions of eligibility.
If Mr.
Kersten resigns within ninety (90) days of the occurrence of any of
the following events: (i) a reduction in Mr. Kersten’s salary
(ii) a relocation (or demand for relocation) of Mr. Kersten’s
place of employment to a location more than ten (10) miles from his
current place of employment, (iii) a significant and material
reduction in Mr. Kersten’s authority, job duties or level of
responsibility or the imposition of significant and material
limitations on the Mr. Kersten’s autonomy in his position, or
(iv) a Change in Control, then the employment agreement will be
terminated and Mr. Kersten will be entitled to receive a lump-sum
payment from CEL-SCI equal to 24 months of salary ($1,118,104) and
the unvested portion of any stock options would vest immediately.
For purposes of the employment agreement a change in the control of
CEL-SCI means: (1) the merger of CEL-SCI with another entity if
after such merger the shareholders of CEL-SCI do not own at least
50% of voting capital stock of the surviving corporation; (2) the
sale of substantially all of the assets of CEL-SCI; (3) the
acquisition by any person of more than 50% of CEL-SCI's common
stock; or (4) a change in a majority of CEL-SCI's directors which
has not been approved by the incumbent directors.
The
employment agreement will also terminate upon the death of Mr.
Kersten or Mr. Kersten’s physical or mental disability. If
the employment agreement is terminated for any of these reasons,
Mr. Kersten, or his legal representatives, as the case may be, will
be paid the salary provided by the employment agreement through the
date of termination, any options or bonus shares of CEL-SCI then
held by Mr. Kersten will become fully vested and the expiration
date of any options which would expire during the four year period
following his termination of employment will be extended to the
date which is four years after his termination of employment. The
employment agreement will also terminate upon the willful
misconduct, an act of fraud against CEL-SCI, or a breach of the
employment agreement by Mr. Kersten, in which case Mr. Kersten will
be paid the salary provided by the employment agreement through the
date of termination.
Patricia B. Prichep / Eyal Talor, Ph.D.
On
August 31, 2016, CEL-SCI entered into a three-year employment
agreement with Patricia B. Prichep, CEL-SCI’s Senior Vice
President of Operations. The employment agreement with Ms. Prichep,
which is essentially the same as Ms. Prichep’s prior
employment agreement entered into on August 30, 2013 provided that,
during the term of the agreement, CEL-SCI would pay Ms. Prichep an
annual salary of $245,804 plus any increases approved by the Board
of Directors during the period of the employment
agreement.
On
August 31, 2016, CEL-SCI entered into a three-year employment
agreement with Eyal Talor, Ph.D., CEL-SCI’s Chief Scientific
Officer. The employment agreement with Dr. Talor, which is
essentially the same as Dr. Talor’s prior employment
agreement entered into on August 30, 2013, provided that, during
the term of the agreement, CEL-SCI would pay Dr. Talor an annual
salary of $303,453 plus any increases approved by the Board of
Directors during the period of the employment
agreement.
If Ms.
Prichep or Dr. Talor resigns within ninety (90) days of the
occurrence of any of the following events: (i) a relocation (or
demand for relocation) of employee’s place of employment to a
location more than ten (10) miles from the employee’s current
place of employment, (ii) a significant and material reduction in
the employee’s authority, job duties or level of
responsibility or (iii) the imposition of significant and material
limitations on the employee’s autonomy in her or his
position, the employment agreement will be terminated and the
employee will be paid the salary provided by the employment
agreement through the date of termination and the unvested portion
of any stock options held by the employee will vest
immediately.
In the
event there is a change in the control of CEL-SCI, the employment
agreements with Ms. Prichep and Dr. Talor allow Ms. Prichep and/or
Dr. Talor (as the case may be) to resign from her or his position
at CEL-SCI and receive a lump-sum payment from CEL-SCI equal to 18
months of salary ($368,706 and $455,180 respectively). In addition,
the unvested portion of any stock options held by the employee will
vest immediately. For purposes of the employment agreements, a
change in the control of CEL-SCI means: (1) the merger of CEL-SCI
with another entity if after such merger the shareholders of
CEL-SCI do not own at least 50% of voting capital stock of the
surviving corporation; (2) the sale of substantially all of the
assets of CEL-SCI; (3) the acquisition by any person of more than
50% of CEL-SCI's common stock; or (4) a change in a majority of
CEL-SCI's directors which has not been approved by the incumbent
directors.
The
employment agreements with Ms. Prichep and Dr. Talor will also
terminate upon the death of the employee, the employee’s
physical or mental disability, willful misconduct, an act of fraud
against CEL-SCI, or a breach of the employment agreement by the
employee. If the employment agreement is terminated for any of
these reasons the employee, or her or his legal representatives, as
the case may be, will be paid the salary provided by the employment
agreement through the date of termination.
43
Compensation Committee Interlocks and Insider
Participation
CEL-SCI
has a compensation committee comprised of Mr. Bruno Baillavoine and
Dr. Peter Young, both of whom are independent
directors.
During
the year ended September 30, 2018, no director of CEL-SCI was also
an executive officer of another entity, which had an executive
officer of CEL-SCI serving as a director of such entity or as a
member of the compensation committee of such entity.
Loan
from Officer and Director
On
January 12, 2016, CEL-SCI owed the de Clara Trust $1,105,989, which
amount included accrued and unpaid interest. On January 13, 2016,
the de Clara Trust demanded payment on the note payable. At the
same time CEL-SCI sold 120,000 shares of its common stock and
120,000 Series X warrants to the de Clara Trust for approximately
$1,100,000. Each warrant allows the de Clara Trust to purchase one
share of CEL-SCI’s common stock at a price of $9.25 per share
at any time on or before January 13, 2021.
Stock Option, Bonus and Compensation Plans
CEL-SCI
has Incentive Stock Option Plans, Non-Qualified Stock Option Plans,
Stock Bonus Plans, Stock Compensation Plans and an Incentive Stock
Bonus Plan. All Stock Option, Bonus and Compensation Plans have
been approved by the stockholders. A summary description of these
Plans follows. In some cases these Plans are collectively referred
to as the "Plans".
Incentive Stock Option Plan
.
The Incentive Stock Option Plans authorize the issuance of shares
of CEL-SCI's common stock to persons who exercise options granted
pursuant to the Plans. Only CEL-SCI’s employees may be
granted options pursuant to the Incentive Stock Option
Plans.
Options
may not be exercised until one year following the date of grant.
Options granted to an employee then owning more than 10% of the
common stock of CEL-SCI may not be exercisable by its terms after
five years from the date of grant. Any other option granted
pursuant to the Plans may not be exercisable by its terms after ten
years from the date of grant.
The
purchase price per share of common stock purchasable under an
option is determined by the CEL-SCI’s Compensation Committee
but cannot be less than the fair market value of the common stock
on the date of the grant of the option (or 110% of the fair market
value in the case of a person owning more than 10% of CEL-SCI's
outstanding shares).
Non-Qualified Stock Option
Plans
. The Non-Qualified Stock Option Plans authorize the
issuance of shares of CEL-SCI's common stock to persons that
exercise options granted pursuant to the Plans. CEL-SCI's
employees, directors, officers, consultants and advisors are
eligible to be granted options pursuant to the Plans, provided
however that bona fide services must be rendered by such
consultants or advisors and such services must not be in connection
with a capital-raising transaction or promoting CEL-SCI’s
common stock. The option exercise price is determined by
CEL-SCI’s Compensation Committee.
Stock Bonus Plan
. Under the
Stock Bonus Plans shares of CEL-SCI’s common stock may be
issued to CEL-SCI's employees, directors, officers, consultants and
advisors, provided however that bona fide services must be rendered
by consultants or advisors and such services must not be in
connection with a capital-raising transaction or promoting
CEL-SCI’s common stock.
Stock Compensation Plan
. Under
the Stock Compensation Plan, shares of CEL-SCI’s common stock
may be issued to CEL-SCI’s employees, directors, officers,
consultants and advisors in payment of salaries, fees and other
compensation owed to these persons. However, bona fide services
must be rendered by consultants or advisors and such services must
not be in connection with a capital-raising transaction or
promoting CEL-SCI’s common stock.
Incentive Stock Bonus Plan
.
Under the 2014 Incentive Stock Bonus Plan, shares of
CEL-SCI’s common stock may be issued to executive officers
and other employees who contribute significantly to the success of
CEL-SCI, to participate in its future prosperity and growth and
aligns their interests with those of CEL-SCI’s shareholders.
The purpose of the Plan is to provide long term incentive for
outstanding service to CEL-SCI and its shareholders and to assist
in recruiting and retaining people of outstanding ability and
initiative in executive and management positions.
Other Information Regarding the
Plans
. The Plans are administered by CEL-SCI's Compensation
Committee (“the Committee”), each member of which is a
director of CEL-SCI. The members of the Committee were selected by
CEL-SCI's Board of Directors and serve for a one-year tenure and
until their successors are elected. A member of the Committee may
be removed at any time by action of the Board of Directors. Any
vacancies which may occur on the Committee will be filled by the
Board of Directors. The Committee is vested with the authority to
interpret the provisions of the Plans and supervise the
administration of the Plans. In addition, the Committee is
empowered to select those persons to whom shares or options are to
be granted, to determine the number of shares subject to each grant
of a stock bonus or an option and to determine when, and upon what
conditions, shares or options granted under the Plans will vest or
otherwise be subject to forfeiture and cancellation.
44
In the
discretion of the Committee, any option granted pursuant to the
Plans may include installment exercise terms such that the option
becomes fully exercisable in a series of cumulating portions. The
Committee may also accelerate the date upon which any option (or
any part of any options) is first exercisable. Any shares issued
pursuant to the Stock Bonus Plans or Stock Compensation Plan and
any options granted pursuant to the Incentive Stock Option Plans or
the Non-Qualified Stock Option Plans will be forfeited if the
"vesting" schedule established by the Committee administering the
Plans at the time of the grant is not met. For this purpose,
vesting means the period during which the employee must remain an
employee of CEL-SCI or the period of time a non-employee must
provide services to CEL-SCI. At the time an employee ceases working
for CEL-SCI (or at the time a non-employee ceases to perform
services for CEL-SCI), any shares or options not fully vested will
be forfeited and cancelled. At the discretion of the Committee
payment for the shares of common stock underlying options may be
paid through the delivery of shares of CEL-SCI's common stock
having an aggregate fair market value equal to the option price,
provided such shares have been owned by the option holder for at
least one year prior to such exercise. A combination of cash and
shares of common stock may also be permitted at the discretion of
the Committee.
Options
are generally non-transferable except upon death of the option
holder. Shares issued pursuant to the Stock Bonus Plans will
generally not be transferable until the person receiving the shares
satisfies the vesting requirements imposed by the Committee when
the shares were issued.
The
Board of Directors of CEL-SCI may at any time, and from time to
time, amend, terminate, or suspend one or more of the Plans in any
manner it deems appropriate, provided that such amendment,
termination or suspension will not adversely affect rights or
obligations with respect to shares or options previously
granted.
Stock Options
The
following table show information concerning the options granted
during the fiscal year ended September 30, 2018, to the persons
named below:
Options Granted
|
Name
|
Grant
Date
|
Options
Granted
|
Price Per
Share
|
Expiration
Date
|
|
Geert
Kersten
|
05/01/2018
|
530,121
|
$
2.45
|
04/30/2028
|
|
Patricia
Prichep
|
05/01/2018
|
222,607
|
$
2.45
|
04/30/2028
|
|
Eyal
Talor
|
05/01/2018
|
193,934
|
$
2.45
|
04/30/2028
|
|
Eyal
Talor
|
09/21/2018
|
100,000
|
$
3.55
|
09/20/2028
|
|
Daniel
Zimmerman
|
05/01/2018
|
126,194
|
$
2.45
|
04/30/2028
|
|
John
Cipriano
|
05/01/2018
|
148,347
|
$
2.45
|
04/30/2028
|
|
Peter
Young
|
05/01/2018
|
80,000
|
$
2.45
|
04/30/2028
|
|
Bruno
Baillavoine
|
05/01/2018
|
80,000
|
$
2.45
|
04/30/2028
|
|
Robert
Watson
|
12/18/2017
|
10,000
|
$
1.84
|
12/17/2027
|
|
Robert
Watson
|
05/01/2018
|
80,000
|
$
2.45
|
04/30/2028
|
45
The
following table shows the outstanding options held by the persons
named below on September 30, 2018:
|
|
Shares
underlying unexercised
|
|
|
|
|
|
Option
which are:
|
Exercise
|
Expiration
|
|
|
Name
|
Exercisable
|
Unexercisable
|
Price
|
Date
|
|
Geert
Kersten
|
7,354
|
|
62.50
|
04/23/19
|
|
|
10,667
|
5,333
|
95.00
|
07/06/19
|
|
|
1,200
|
|
95.00
|
07/20/19
|
|
|
1,200
|
|
120.00
|
07/20/20
|
|
|
1,200
|
|
172.50
|
04/14/21
|
|
|
1,800
|
|
3.90
|
05/17/22
|
|
|
14,336
|
5,664
|
70.00
|
12/17/22
|
|
|
1,800
|
|
52.50
|
06/30/23
|
|
|
3,600
|
|
27.25
|
02/25/24
|
|
|
60,000
|
120,000
|
2.18
|
7/27/2027
|
|
|
|
530,121
|
2.45
|
04/30/28
|
|
|
|
|
|
|
|
Patricia B.
Prichep
|
2,868
|
|
62.50
|
04/23/19
|
|
|
8,000
|
4,000
|
95.00
|
07/06/19
|
|
|
600
|
|
95.00
|
07/20/19
|
|
|
600
|
|
120.00
|
07/20/20
|
|
|
600
|
|
172.50
|
04/14/21
|
|
|
1,200
|
|
97.50
|
05/17/22
|
|
|
6,000
|
|
70.00
|
12/17/22
|
|
|
1,200
|
|
52.50
|
06/30/23
|
|
|
2,400
|
|
27.25
|
02/25/24
|
|
|
40,000
|
80,000
|
2.18
|
07/27/27
|
|
|
|
222,607
|
2.45
|
04/30/28
|
46
|
|
Shares
underlying unexercised
|
|
|
|
|
|
Option
which are:
|
Exercise
|
Expiration
|
|
|
Name
|
Exercisable
|
Unexercisable
|
Price
|
Date
|
|
Eyal Talor,
PhD
|
963
|
|
62.50
|
04/23/19
|
|
|
8,000
|
4,000
|
95.00
|
07/06/19
|
|
|
600
|
|
95.00
|
07/20/19
|
|
|
600
|
|
120.00
|
07/20/20
|
|
|
600
|
|
172.50
|
04/14/21
|
|
|
1,200
|
|
97.50
|
05/17/22
|
|
|
6,000
|
|
70.00
|
12/17/22
|
|
|
1,200
|
|
52.50
|
06/30/23
|
|
|
2,400
|
|
27.25
|
02/25/24
|
|
|
40,000
|
80,000
|
2.18
|
07/27/27
|
|
|
|
227,268
|
2.45
|
04/30/28
|
|
|
|
100,000
|
3.55
|
09/20/28
|
|
|
|
|
|
|
|
Daniel Zimmerman,
PhD
|
600
|
|
120.00
|
07/20/20
|
|
|
600
|
|
172.50
|
04/14/21
|
|
|
900
|
|
97.50
|
05/17/22
|
|
|
900
|
|
52.50
|
06/30/23
|
|
|
1,800
|
|
27.25
|
02/25/24
|
|
|
8,000
|
|
27.50
|
08/05/24
|
|
|
4,000
|
|
15.50
|
06/25/25
|
|
|
2,667
|
1,333
|
11.75
|
07/21/26
|
|
|
2,000
|
4,000
|
1.87
|
06/28/27
|
|
|
6,667
|
13,333
|
1.59
|
09/17/27
|
|
|
|
126,194
|
2.45
|
04/30/28
|
|
|
|
|
|
|
|
John
Cipriano
|
600
|
|
120.00
|
07/20/20
|
|
|
600
|
|
172.50
|
04/14/21
|
|
|
400
|
|
62.50
|
09/30/19
|
|
|
900
|
|
97.50
|
05/17/22
|
|
|
900
|
|
57.50
|
06/30/23
|
|
|
1,800
|
|
27.25
|
02/25/24
|
|
|
30,000
|
60,000
|
2.18
|
07/27/27
|
|
|
|
148,347
|
2.45
|
04/30/28
|
47
Summary
. The following shows
certain information as of September 30, 2018 concerning the stock
options and stock bonuses granted by CEL-SCI. Each option
represents the right to purchase one share of CEL-SCI's common
stock.
|
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
|
123,558
|
N/A
|
385
|
|
Non-Qualified Stock
Option Plans
|
3,387,200
|
3,036,569
|
N/A
|
309,526
|
|
Stock Bonus
Plans
|
783,760
|
N/A
|
297,230
|
486,497
|
|
Stock Compensation
Plan
|
134,000
|
N/A
|
118,590
|
15,410
|
|
Incentive Stock
Bonus Plan
|
640,000
|
N/A
|
624,000
|
16,000
|
Of the
shares issued pursuant to CEL-SCI's Stock Bonus Plans, 217,908
shares were issued as part of CEL-SCI's contribution to its 401(k)
plan.
The
following table shows the weighted average exercise price of the
outstanding options granted pursuant to CEL-SCI’s Incentive
and Non-Qualified Stock Option Plans as of September 30, 2018,
CEL-SCI’s most recent fiscal year end. CEL-SCI's Incentive
and Non-Qualified Stock Option Plans have been approved by
CEL-SCI's shareholders.
|
Plan
category
|
Number of
Securities to be Issued Upon Exercise of Outstanding Options
(a)
|
Weighted-Average
Exercise Price of Outstanding Options
|
Number of
Securities Remaining Available For Future Issuance Under Equity
Compensation Plans, Excluding Securities
Reflected in Column
(a)
|
|
|
|
|
|
|
Incentive Stock
Option Plans
|
123,558
|
$
37.69
|
385
|
|
Non-Qualified Stock
Option Plans
|
3,036,569
|
$
6.06
|
309,526
|
Long Term Incentive Plans - Awards in Last Fiscal Year
See
footnote 9 to the financial statements included as part of this
report.
48
ITEM
12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The
following table shows, as of December 1, 2018, information with
respect to the only persons owning beneficially 5% or more of
CEL-SCI’s outstanding common stock and the number and
percentage of outstanding shares owned by each director and officer
of CEL-SCI and by the officers and directors as a group. Unless
otherwise indicated, each owner has sole voting and investment
powers over his shares of common stock.
|
Name and
Address
|
Number of Shares
(1)
|
Percent of class
(2)
|
|
Geert R.
Kersten
8229 Boone Blvd.,
Suite 802
Vienna, VA
22182
|
2,177,425
(3)
|
7.4
%
|
|
Patricia B.
Prichep
8229 Boone Blvd.,
Suite 802
Vienna, VA
22182
|
272,509
|
1.0
%
|
|
Eyal Talor,
Ph.D.
8229 Boone Blvd.,
Suite 802
Vienna, VA
22182
|
177,722
|
*
|
|
Daniel H.
Zimmerman, Ph.D.
8229 Boone Blvd.,
Suite 802
Vienna, VA
22182
|
124,327
|
*
|
|
John
Cipriano
8229 Boone Blvd.,
Suite 802
Vienna, VA
22182
|
141,073
|
*
|
|
Peter R. Young,
Ph.D.
208 Hewitt Drive,
Suite 103-143
Waco, TX
76712
|
45,292
|
*
|
|
Bruno
Baillavoine
8229 Boone Blvd.,
Suite 802
Vienna, VA
22182
|
17,501
|
*
|
|
Robert
Watson
245 N. Highland
Ave. NE
Suite
230-296
Atlanta, GA
30307
|
3,334
|
*
|
|
All Officers and
Directors
as a Group (8
persons)
*Less than
1%
|
2,959,183
|
10
%
|
(1)
Includes shares
issuable prior to February 28, 2019 upon the exercise of options or
warrants granted to the following persons:
49
|
Name
|
Options or Warrants
Exercisable
Prior to February 28,
2019
|
|
Geert R Kersten
Esq.
|
1,101,981
(3)
|
|
Patricia B
Prichep
|
82,027
|
|
Eyal Talor,
Ph.D.
|
61,563
|
|
Daniel Zimmerman,
Ph.D.
|
28,134
|
|
John
Cipriano
|
35,200
|
|
Peter R Young,
Ph.D.
|
29,201
|
|
Bruno
Baillavoine
|
17,501
|
|
Robert
Watson
|
3,334
|
(2)
Amount includes
shares referred to in (1) above but excludes shares which may be
issued upon the exercise of options and warrants previously issued
by CEL-SCI.
(3)
Amount includes
shares held in trust for the benefit of Mr. Kersten's children and
warrants held in the de Clara Trust, of which Mr. Kersten is a
beneficiary.
ITEM
13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
See
Item 11 of this report, “Loan from Officer and
Director,” for information concerning modifications to the
terms of a loan originally made by Maximilian de Clara,
CEL-SCI’s former President and director, and subsequently
transferred to the de Clara Trust. Geert Kersten, CEL-SCI’s
Chief Executive Officer and a director, is a beneficiary of the de
Clara Trust.
See
Note 12 of the Footnotes for additional information concerning
related party transactions.
ITEM
14.
PRINCIPAL ACCOUNTING FEES AND SERVICES
BDO
USA, LLP served as CEL-SCI’s independent registered public
accountant for the two years ended September 30, 2018. The
following table shows the aggregate fees billed to CEL-SCI for
these years by BDO USA, LLP:
|
|
Year Ended
September 30,
|
|
|
|
2018
|
2017
|
|
|
|
|
|
Audit
Fees
|
$
445,000
|
$
375,000
|
|
Audit Related
Fees
|
-
|
-
|
|
Tax
Fees
|
-
|
-
|
|
All Other
Fees
|
-
|
-
|
Audit
fees represent amounts billed for professional services rendered
for the audit of CEL-SCI’s annual financial statements and
the reviews of the financial statements included in CEL-SCI’s
10-Q reports for the fiscal year and all regulatory
filings.
Before
BDO USA, LLP was engaged by CEL-SCI to render audit or non-audit
services, the engagement was approved by CEL-SCI’s audit
committee. CEL-SCI’s Board of Directors is of the opinion
that the Audit Fees charged by BDO USA, LLP are consistent with BDO
USA, LLP maintaining its independence from CEL-SCI.
50
See the
Financial Statements attached to this Report.
|
Exhibits
|
|
|
|
3(a)
|
Articles
of Incorporation
|
Incorporated
by reference to Exhibit 3(a) of CEL-SCI's combined Registration
Statement on Form S-1 and Post-Effective Amendment ("Registration
Statement"), Registration Nos. 2-85547-D and 33-7531.
|
|
3(b)
|
Amended Articles
|
Incorporated
by reference to Exhibit 3(a) of CEL-SCI's Registration Statement on
Form S-1, Registration Nos. 2-85547-D and 33-7531.
|
|
3(c)
|
Amended
Articles (Name change only)
|
Filed
as Exhibit 3(c) to CEL-SCI's Registration Statement on Form S-1
Registration Statement (No. 33-34878).
|
|
3(d)
|
Bylaws
|
Incorporated by
reference to Exhibit 3(b) of CEL-SCI's Registration Statement on
Form S-1, Registration Nos. 2-85547-D and 33-7531.
|
|
|
|
|
|
|
|
Amended
Bylaws
|
Incorporated by
reference to Exhibit 3(ii) of CEL-SCI’s report on Form 8-K
dated March 16, 2015.
|
||
|
|
|
|
|
|
Shareholders Rights
Agreement, as Amended
|
Incorporated by
reference to Exhibit 4 filed with CEL-SCI’s 10-K report
for the year ended September 30, 2015.
|
||
|
|
|
|
|
|
Incentive Stock
Option Plan
|
Incorporated by
reference to Exhibit 4 (b) filed on September 25, 2012 with the
Company’s registration statement on Form S¬8 (File
number 333-184092).
|
||
|
|
|
|
|
|
Non-Qualified Stock
Option Plan
|
Incorporated by
reference to Exhibit 4 (b) filed on August 19, 2014 with the
Company’s registration statement on Form S¬8 (File
number 333-198244).
|
||
|
|
|
|
|
|
Stock Bonus
Plan
|
Incorporated by
reference to Exhibit 4 (d) filed on September 25, 2012 with the
Company’s registration statement on Form S¬8 (File
number 333-184092).
|
||
|
|
|
|
|
|
Stock Compensation
Plan
|
Incorporated by
reference to Exhibit 4 (e) filed on September 25, 2012 with the
Company’s registration statement on Form S¬8 (File
number 333-184092).
|
||
|
|
|
|
|
|
2014 Incentive
Stock Bonus Plan
|
Incorporated by
reference to Exhibit 4 (c) filed with the Company’s
registration statement on Form S-8 (333-198244).
|
||
|
Securities Purchase
Agreement (together with schedule required by Instruction 2
to Item 601 of Regulation S-K) pertaining to Series K
notes and warrants, together with the exhibits to the Securities
Purchase Agreement
|
Incorporated by
reference to Exhibit 10 to CEL-SCI’s report on Form 8-K
dated August 4, 2006.
|
||
|
|
|
|
|
|
Subscription
Agreement (together with Schedule required by Instruction 2 to
Item 601 of Regulation S-K) pertaining to April 2007 sale of
800,000 shares of CEL-SCI’s common stock,
400,000 Series L warrants and 400,000 Series
M Warrants
|
Incorporated by
reference to Exhibit 10 of CEL-SCI’s report on Form 8-K
dated April 18, 2007
|
||
|
|
|
|
|
|
Warrant Adjustment
Agreement with Laksya Ventures
|
Incorporated by
reference to Exhibit 10(i) of CEL-SCI’s report on Form
8-K dated August 3, 2010
|
||
|
|
|
|
|
|
First Amendment to
Development Supply and Distribution Agreement with Orient
Europharma.
|
Incorporated by
reference to Exhibit 10(m) filed with CEL-SCI’s 10-K
report for the year ended September 30, 2010.
|
||
|
|
|
|
|
|
Exclusive License
and Distribution Agreement with Teva Pharmaceutical
Industries Ltd.
|
Incorporated by
reference to Exhibit 10(n) filed with CEL-SCI’s 10-K
report for the year ended September 30, 2010.
|
||
|
|
|
|
|
|
Lease
Agreement
|
Incorporated by
reference to Exhibit 10(o) filed with CEL-SCI’s 10-K
report for the year ended September 30, 2010.
|
||
|
|
|
|
|
|
Promissory
Note with Maximilian de Clara,
together with
Amendments 1 and 2
|
Incorporated by
reference to Exhibit 10(p) filed with CEL-SCI’s 10-K
report for the year ended September 30,
2010
|
||
51
|
10(p)
|
Licensing Agreement
with Byron
Biopharma
|
Incorporated by
reference to Exhibit 10(i) of CEL-SCI’s report on Form
8-K dated March 27, 2009
|
|
|
|
|
|
10(z)
|
Development, Supply
and Distribution Agreement with Orient Europharma
|
Incorporated by
reference to Exhibit 10(z) filed with CEL-SCI’s
report on Form 10-K for the year ended September 30,
2003.
|
|
|
|
|
|
Securities Purchase
Agreement and form of the Series F warrants, which is and
exhibit to the Securities
Purchase Agreement
|
Incorporated by
reference to Exhibit 10(aa) of CEL-SCI’s report on Form
8-K dated October 3, 2011.
|
|
|
|
|
|
|
Placement Agent
Agreement
|
Incorporated by
reference to Exhibit 10(bb) of CEL-SCI’s report on Form
8-K dated October 3, 2011.
|
|
|
|
|
|
|
Securities Purchase
Agreement, together with
the form of the
Series H warrant, which is an exhibit to the securities Purchase
Agreement
|
Incorporated by
reference to Exhibit 10(cc) of CEL-SCI’s report on Form 8-K
dated January 25, 2012.
|
|
|
|
|
|
|
Placement Agent
Agreement
|
Incorporated by
reference to Exhibit 10(dd) of CEL-SCI’s report on Form
8-K dated January 25, 2012.
|
|
|
|
|
|
|
Warrant
Amendment Agreement, together with
the form of the
Series P warrant, which is an exhibit to the Warrant Amendment
Agreement
|
Incorporated by
reference to Exhibit 10(ee) of CEL-SCI’s report on Form
8-K dated February 10, 2012.
|
|
|
|
|
|
|
Placement Agent
Agreement
|
Incorporated by
reference to Exhibit 10(ff) of CEL-SCI’s report on Form
8-K dated February 10, 2012.
|
|
|
|
|
|
|
Securities Purchase Agreement and
the form
of
the Series Q warrant, which
is an exhibit
to the Securities
Purchase Agreement
|
Incorporated by
reference to Exhibit 10(gg) of CEL-SCI’s report on Form
8-K dated June 18, 2012.
|
|
|
|
|
|
|
10(hh)
|
Placement Agent
Agreement
|
|
|
|
|
|
|
Securities Purchase Agreement and
the form of the Series R warrant, which is
an exhibit to the Securities Purchase
Agreement
|
Incorporated by
reference to Exhibit 10(ii) of CEL-SCI’s report on Form
8-K dated December 5, 2012.
|
|
|
|
|
|
|
Placement Agent
Agreement
|
Incorporated by
reference to Exhibit 10(jj) of CEL-SCI’s report on Form
8-K dated December 5, 2012.
|
|
|
|
|
|
|
Underwriting
Agreement, together with the form of Series S warrant which is an
exhibit to the underwriting agreement
|
Incorporated by
reference to Exhibit 1.1 of CEL-SCI’s report on Form 8-K
dated October 8, 2013.
|
|
|
|
|
|
|
Underwriting
Agreement, together with the form of Series S warrant which is an
exhibit to the Underwriting Agreement.
|
Incorporated by
reference to Exhibit 1.1 of CEL-SCI’s report on Form 8-K
dated December 19, 2013.
|
|
|
|
|
|
|
Underwriting
Agreement, together with the form of Series T warrant which is an
exhibit to the warrant agent agreement
|
Incorporated by
reference to Exhibit 1.1 of CEL-SCI’s report on Form 8-K
dated April 15, 2014.
|
|
|
|
|
|
|
Underwriting
Agreement, together with the form of Series S warrant which is an
exhibit to the warrant agent agreement
|
Incorporated by
reference to Exhibit 1.1 of CEL-SCI’s report on Form 8-K
dated October 23, 2014.
|
|
|
|
|
|
|
Assignment and
Assumption Agreement with Teva Pharmaceutical Industries, Ltd. and
GCP Clinical Studies, Ltd.
|
Incorporated by
reference to Exhibit 10(rr) of CEL-SCI’s report on Form
10-K/A report for the year ended September 30, 2014 dated
April 17, 2015.
|
|
|
|
|
|
|
Service Agreement
with GCP Clinical Studies, Ltd., together with Amendment 1
thereto*
|
Incorporated by
reference to Exhibit 10(ss) of CEL-SCI’s first amendment to
its Form 10-K report for the year ended September 30, 2014
dated April 17, 2015.
|
|
|
|
|
|
|
Joinder Agreement
with PLIVA Hrvatska d.o.o.
|
Incorporated by
reference to Exhibit 10(tt) of CEL-SCI’s first amendment to
its Form 10-K report for the year ended September 30, 2014
dated April 17, 2015.
|
|
|
|
|
|
|
Master Service
Agreement with Ergomed Clinical Research, Ltd., and
Clinical Trial Orders thereunder
|
Incorporated by
reference to Exhibit 10(uu) of CEL-SCI’s first amendment to
its Form 10-K report for the year ended September 30, 2014
dated April 17, 2015.
|
|
|
|
|
|
52
|
Co-Development and
Revenue Sharing Agreement with Ergomed Clinical Research Ltd.,
dated April 19, 2013, as amended
|
Incorporated by
reference to Exhibit 10(vv) of CEL-SCI’s first amendment to
its Form 10-K report for the year ended September 30, 2014
dated April 17, 2015.
|
||
|
|
|
|
|
|
Co-Development and
Revenue Sharing Agreement II: Cervical Intraepithelial
Neoplasia in HIV/HPV co-infected women, with Ergomed Clinical
Research Ltd., dated October 10, 2013, as amended
|
Incorporated by
reference to Exhibit 10(ww) of CEL- first amendment to its Form
10-K report for the year ended September 30, 2014 dated April
17, 2015.
|
||
|
|
|
|
|
|
Co-Development and
Revenue Sharing Agreement III: Anal warts and anal intraepithelial
neoplasia in HIV/HPV co-infected patients, with Ergomed Clinical
Research Ltd., dated October 24, 2013
|
Incorporated by
reference to Exhibit 10(xx) of CEL-SCI’s first amendment to
its Form 10-K report for the year ended September 30, 2014
dated April 17, 2015.
|
||
|
|
|
|
|
|
Master Services
Agreement with Aptiv Solutions, Inc.
|
Incorporated by
reference to Exhibit 10(yy) of CEL-SCI’s first amendment to
its Form 10-K report for the year ended September 30, 2014
dated April 17, 2015.
|
||
|
|
|
|
|
|
Project Agreement
Number 1 with Aptiv Solutions, Inc. together with Amendments 1 and
2 thereto*
|
Incorporated by
reference to Exhibit 10(zz) of CEL-SCI’s first amendment to
its Form 10-K report for the year ended September 30, 2014
dated April 17, 2015.
|
||
|
|
|
|
|
|
Second Amendment to
Development Supply and Distribution Agreement with Orient
Europharma
|
Incorporated by
reference to Exhibit 10(aaa) of CEL-SCI’s first amendment to
its Form 10-K report for the year ended September 30, 2014
dated April 17, 2015.
|
||
|
|
|
|
|
|
Amended and
Restated Promissory Note with Maximilian de
Clara
|
Incorporated by
reference to Exhibit 10(bbb) of CEL-SCI’s report on Form
10-K/A report for the year ended September 30, 2014 dated
April 17, 2015.
|
||
|
|
|
|
|
|
Placement
Agent Agreement dated May 22,
2015 by and among
CEL-SCI Corporation and Dawson James Securities, Inc.
|
Incorporated by
reference to Exhibit 1.1 of CEL-SCI’s report on Form 8-K
filed on May 26, 2015.
|
||
|
|
|
|
|
|
Warrant Agent
Agreement (as amended), Series V warrants
|
Incorporated by
reference to Exhibit 10 (ccc) of CEL-SCI’s report on Form 8-K
filed on May 29, 2015.
|
||
|
|
|
|
|
|
Assignment of
Proceeds and Investment Agreement between CEL-SCI Corporation and
Lake Whillans Vehicle 1.
|
Incorporated by
reference to Exhibit 10 (ddd) of CEL-SCI’s report on Form 8-K
filed on October 16, 2015.
|
||
|
|
|
|
|
|
Placement
Agent Agreement dated October 22, 2015 by and among CEL-SCI
Corporation and Dawson James Securities, Inc.
|
Incorporated by
reference to Exhibit 1.1 of CEL-SCI’s report on Form 8-K
filed on October 23, 2015.
|
||
|
|
|
|
|
|
Warrant Agent
Agreement, Series W warrants
|
Incorporated by
reference to Exhibit 10 (eee) of CEL-SCI’s report on Form 8-K
filed on October 23, 2015.
|
||
|
|
|
|
|
|
Amendment
to Co-Development and Revenue
Sharing Agreement
with Ergomed Clinical
Research, Ltd.,
dated September 15, 2015
|
Incorporated by
reference to Exhibit 10 (iii) filed with CEL-SCI’s 10-K
report for the year ended September 30,
2015.
|
||
|
|
|
|
|
|
Securities Purchase
Agreement
|
Incorporated by
reference to Exhibit 10(jjj) of CEL-SCI’s report on Form 8-K
dated May 19, 2016.
|
||
|
|
|
|
|
|
Securities Purchase
Agreement
|
Incorporated by
reference to Exhibit 10(kkk) of CEL-SCI’s report on Form 8-K
dated August 24, 2016.
|
||
|
|
|
|
|
|
Termination
Agreement with Maximilian de Clara
|
Incorporated by
reference to Exhibit 10(lll) of CEL-SCI’s report on Form 8-K
dated September 2, 2016.
|
||
|
|
|
|
|
|
Employment
Agreement with Geert Kersten (2016-2019)
|
Incorporated by
reference to Exhibit 10(mmm) of CEL-SCI’s report on Form 8-K
dated September 2, 2016.
|
||
|
|
|
|
|
|
Employment
Agreement with Patricia Prichep (2016-2019)
|
Incorporated by
reference to Exhibit 10(nnn) of CEL-SCI’s report on Form 8-K
dated September 2, 2016.
|
||
53
|
Employment
Agreement with Eyal Taylor (2016-2019)
|
Incorporated by
reference to Exhibit 10(ooo) of CEL-SCI’s report on Form 8-K
dated September 2, 2016.
|
|
|
|
|
|
|
Securities Purchase
Agreement
|
Incorporated by
reference to Exhibit 10(ppp) of CEL-SCI’s report on Form 8-K
dated December 1, 2016.
|
|
|
|
|
|
|
Securities Purchase
Agreement
|
Incorporated by
reference to Exhibit 10(qqq) of CEL-SCI’s report on Form 8-K
dated February 16, 2017.
|
|
|
|
|
|
|
Securities Purchase
Agreement
|
Incorporated by
reference to Exhibit 10(rrr) of CEL-SCI’s report on Form 8-K
dated March 8, 2017.
|
|
Securities Purchase
Agreement
|
Incorporated by
reference to Exhibit 10(sss) of CEL-SCI’s report on Form 8-K
dated April 30, 2017.
|
|
|
|
|
|
|
Securities Purchase
Agreement (sale of 100,000 shares to private investor, plus Series
OO warrants).
|
Incorporated by
reference to Exhibit 10(ttt) of CEL-SCI’s report on Form 8-K
dated July 27, 2017.
|
|
|
|
|
|
|
Securities Purchase
Agreement with Ergomed
|
Incorporated by
reference to Exhibit 10(uuu) of CEL-SCI’s report on Form 8-K
dated August 17, 2017.
|
|
|
|
|
|
|
Securities Purchase
Agreement
|
Incorporated by
reference to Exhibit 10(vvv) of CEL-SCI’s report on Form 8-K
dated August 22, 2017.
|
|
|
|
|
|
|
Amendment No. 1 to
Assignment of Proceeds and Investment Agreement
|
Incorporated by
reference to Exhibit 10(www) of CEL-SCI’s report on Form 8-K
dated November 2, 2017.
|
|
|
|
|
|
|
Amendment to
Convertible Promissory Notes
|
Incorporated by
reference to Exhibit 10(xxx) of CEL-SCI’s registration
statement on Form S-1 dated January 5, 2018.
|
|
|
|
|
|
|
Securities Purchase
Agreement with Ergomed
|
Incorporated by
reference to Exhibit 10(zzz) of CEL-SCI’s report on Form 8-K
dated January 1, 2018.
|
|
|
|
|
|
|
Securities Purchase
Agreements (December 2017 Financing)
|
Incorporated by
reference to Exhibit 10.1 of CEL-SCI’s registration statement
on Form S-1 dated January 5, 2018.
|
|
|
|
|
|
|
Securities Purchase
Agreements
(February 2018
Financing)
|
Incorporated by
reference to Exhibit 10.1 of CEL-SCI’s registration statement
on Form S-1 dated February 14, 2018.
|
|
|
|
|
|
|
Securities Purchase
Agreement with Ergomed
|
Incorporated by
reference to Exhibit 10.3 of CEL-SCI’s report on Form 8-K
dated May 21, 2018.
|
|
|
|
|
|
|
Securities Purchase
Agreement
|
Incorporated by
reference to Exhibit 10.4 of CEL-SCI’s report on Form 8-K
dated June 29, 2018.
|
|
|
|
|
|
|
Consent of Hart
& Hart, LLC
|
|
|
|
|
|
|
|
23.2
|
Consent of BDO USA,
LLP
|
|
|
|
|
|
|
Rule 13a-14(a)
Certifications
|
|
|
|
|
|
|
|
Section 1350
Certifications
|
|
*
Portions of this
exhibit have been omitted pursuant to a request for confidential
treatment filed with the Commission under Rule 24b-2 of the
Securities Exchange Act of 1934. The omitted confidential material
has been filed separately with the Commission. The location of the
omitted confidential information is indicated in the exhibit with
asterisks (*)
54
CEL-SCI
CORPORATION
Financial
Statements for the Years
Ended
September 30, 2018 and 2017, and
Report
of Independent Registered Public Accounting Firm
CEL-SCI CORPORATION
TABLE OF CONTENTS
|
|
Page
|
|
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
|
F-2
|
|
FINANCIAL
STATEMENTS FOR THE YEARS ENDED SEPTEMBER 30, 2018 and
2017:
|
|
|
Balance Sheets
|
F-3
|
|
Statements of Operations
|
F-4
|
|
Statements of Stockholders Equity
(Deficit)
|
F-5
|
|
Statement of Cash Flows
|
F-6
|
|
Notes Financial Statements
|
F-8
|
F-1
Report of Independent Registered Public Accounting
Firm
Board of Directors and Stockholders
CEL-SCI Corporation
Vienna, Virginia
Opinion on the Financial Statements
We have audited the accompanying balance sheets of CEL-SCI
Corporation (the “Company”) as of September 30, 2018
and 2017 and the related statements of operations,
stockholders’ equity (deficit), and cash flows for the years
then ended, and the related notes (collectively referred to as the
“financial statements”). In our opinion, the financial
statements present fairly, in all material respects, the financial
position of the Company at September 30, 2018 and 2017, and the
results of its operations and its cash flows for the years then
ended
,
in conformity with accounting principles generally
accepted in the United States of America.
Going
Concern Uncertainty
The accompanying financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in
Note 2 to the financial statements, the Company has suffered
recurring losses from operations and expects to incur substantial
losses for the foreseeable future that raise substantial doubt
about its ability to continue as a going concern.
Management’s plans in regard to these matters are also
described in Note 2. The financial statements do not include any
adjustments that might result from the outcome of this
uncertainty.
Basis for Opinion
These financial statements are the responsibility of the
Company’s management. Our responsibility is to express an
opinion on the Company’s financial statements based on our
audits. We are a public accounting firm registered with the Public
Company Accounting Oversight Board (United States)
(“PCAOB”) and are required to be independent with
respect to the Company in accordance with the U.S. federal
securities laws and the applicable rules and regulations of the
Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the
PCAOB. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial
statements are free of material misstatement, whether due to error
or fraud. The Company is not required to have, nor were we engaged
to perform, an audit of its internal control over financial
reporting. As part of our audits we are required to obtain an
understanding of internal control over financial reporting but not
for the purpose of expressing an opinion on the effectiveness of
the Company’s internal control over financial reporting.
Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of
material misstatement of the financial statements, whether due to
error or fraud, and performing procedures that respond to those
risks. Such procedures included examining, on a test basis,
evidence regarding the amounts and disclosures in the financial
statements. Our audits also included evaluating the accounting
principles used and significant estimates made by management, as
well as evaluating the overall presentation of the financial
statements. We believe that our audits provide a reasonable basis
for our opinion.
/s/
BDO USA, LLP
We have served as the Company's auditor since 2005.
McLean,
Virginia
December
19, 2018
F-2
|
CEL-SCI
CORPORATION
|
||
|
BALANCE
SHEETS
|
||
|
SEPTEMBER
30, 2018 and 2017
|
||
|
|
|
|
|
ASSETS
|
2018
|
2017
|
|
|
|
|
|
Current
Assets:
|
|
|
|
Cash
and cash equivalents
|
$
10,310,044
|
$
2,369,438
|
|
Receivables
|
118,657
|
218,481
|
|
Prepaid
expenses
|
364,622
|
826,429
|
|
Deposits
- current portion
|
-
|
150,000
|
|
Inventory
used for R&D and manufacturing
|
645,238
|
672,522
|
|
|
|
|
|
Total
Current Assets
|
11,438,561
|
4,236,870
|
|
|
|
|
|
Plant,
property and equipment
|
16,218,851
|
16,793,220
|
|
Patent
costs, net
|
258,093
|
223,167
|
|
Deposits
|
1,670,917
|
1,670,917
|
|
|
|
|
|
Total
Assets
|
$
29,586,422
|
$
22,924,174
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' EQUITY (DEFICIT)
|
|
|
|
|
|
|
|
Current
Liabilities:
|
|
|
|
Accounts
payable
|
$
5,743,913
|
$
8,196,334
|
|
Accrued
expenses
|
205,310
|
936,698
|
|
Due
to employees
|
764,941
|
693,831
|
|
Notes
payable, net of discounts
|
-
|
994,258
|
|
Derivative
instruments, current portion
|
2,498,606
|
10,984
|
|
Other
current liabilities
|
14,029
|
12,449
|
|
|
|
|
|
Total
Current Liabilities
|
9,226,799
|
10,844,554
|
|
|
|
|
|
Derivative
instruments, net of current portion
|
6,818,458
|
2,042,418
|
|
Lease
liability
|
13,379,962
|
13,211,925
|
|
Deferred
revenue
|
126,795
|
125,000
|
|
Other
liabilities
|
33,492
|
37,254
|
|
|
|
|
|
Total
liabilities
|
29,585,506
|
26,261,151
|
|
|
|
|
|
Commitments
and Contingencies
|
|
|
|
|
|
|
|
STOCKHOLDERS'
EQUITY (DEFICIT)
|
|
|
|
Preferred
stock, $.01 par value- 200,000 shares authorized;
|
|
|
|
-0-
shares issued and outstanding
|
-
|
-
|
|
Common
stock, $.01 par value - 600,000,000 shares authorized;
|
|
|
|
28,034,487
and 11,903,133 shares issued and outstanding
|
|
|
|
at
September 30, 2018 and 2017, respectively
|
280,346
|
119,031
|
|
Additional
paid-in capital
|
331,312,184
|
296,298,401
|
|
Accumulated
deficit
|
(331,591,614
)
|
(299,754,409
)
|
|
|
|
|
|
Total
stockholders' equity (deficit)
|
916
|
(3,336,977
)
|
|
|
|
|
|
TOTAL
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
|
$
29,586,422
|
$
22,924,174
|
|
|
|
|
|
See
notes to financial statements.
|
||
|
|
|
|
F-3
|
CEL-SCI
CORPORATION
|
||
|
STATEMENTS
OF OPERATIONS
|
||
|
YEARS
ENDED SEPTEMBER 30, 2018 and 2017
|
||
|
|
|
|
|
|
2018
|
2017
|
|
|
|
|
|
Grant
income
|
$
476,556
|
$
-
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
Research
and development
|
9,400,306
|
15,606,985
|
|
General
& administrative
|
7,848,496
|
5,800,348
|
|
|
|
|
|
Total
operating expenses
|
17,248,802
|
21,407,333
|
|
|
|
|
|
Operating
loss
|
(16,772,246
)
|
(21,407,333
)
|
|
|
|
|
|
Other
income
|
70,896
|
69,020
|
|
|
|
|
|
(Loss)
gain on derivative instruments
|
(8,643,561
)
|
11,007,215
|
|
|
|
|
|
Interest
expense, net
|
(6,492,294
)
|
(4,032,189
)
|
|
|
|
|
|
Net
loss
|
(31,837,205
)
|
(14,363,287
)
|
|
|
|
|
|
Modification
of warrants
|
(14,368
)
|
(63,768
)
|
|
|
|
|
|
Net
loss available to common shareholders
|
$
(31,851,573
)
|
$
(14,427,055
)
|
|
|
|
|
|
NET
LOSS PER COMMON SHARE
|
|
|
|
BASIC
|
$
(1.87
)
|
$
(1.83
)
|
|
DILUTED
|
$
(1.87
)
|
$
(1.91
)
|
|
|
|
|
|
WEIGHTED
AVERAGE COMMON SHARES
|
|
|
|
OUTSTANDING
|
|
|
|
BASIC
|
17,004,722
|
7,891,843
|
|
DILUTED
|
17,004,722
|
7,902,647
|
|
|
|
|
See
notes to financial statements.
F-4
|
CEL-SCI
CORPORATION
|
|||||
|
STATEMENTS
OF STOCKHOLDERS' EQUITY (DEFICIT)
|
|||||
|
YEARS
ENDED SEPTEMBER 30, 2018 and 2017
|
|||||
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
Common
|
Stock
|
Paid-In
|
Accumulated
|
|
|
|
Shares
|
Amount
|
Capital
|
Deficit
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE,
OCTOBER 1, 2016
|
6,248,035
|
62,480
|
284,649,429
|
(285,391,122
)
|
(679,213
)
|
|
|
|
|
|
|
|
|
Sale
of common stock
|
4,738,920
|
47,389
|
10,482,917
|
-
|
10,530,306
|
|
Issuance
of warrants in connection with
|
|
|
|
|
|
|
sale
of common stock
|
-
|
-
|
(4,665,683
)
|
-
|
(4,665,683
)
|
|
Warrants
issued with notes payable
|
-
|
-
|
1,108,867
|
-
|
1,108,867
|
|
Beneficial
conversion feature on warrants issued
|
-
|
-
|
1,108,867
|
-
|
1,108,867
|
|
401(k)
contributions paid in common stock
|
79,941
|
799
|
150,509
|
-
|
151,308
|
|
Conversion
of notes payable to common stock
|
266,686
|
2,667
|
448,033
|
-
|
450,700
|
|
Stock
issued to nonemployees for service
|
76,551
|
766
|
203,817
|
-
|
204,583
|
|
Shares issued for
settlement of clinical research costs
|
480,000
|
4,800
|
1,305,600
|
-
|
1,310,400
|
|
Equity
based compensation - employees
|
13,000
|
130
|
1,481,120
|
-
|
1,481,250
|
|
Equity
based compensation - non-employees
|
-
|
-
|
24,925
|
-
|
24,925
|
|
Net
loss
|
-
|
-
|
-
|
(14,363,287
)
|
(14,363,287
)
|
|
|
|
|
|
|
|
|
BALANCE,
SEPTEMBER 30, 2017
|
11,903,133
|
$
119,031
|
$
296,298,401
|
$
(299,754,409
)
|
$
(3,336,977
)
|
|
|
|
|
|
|
|
|
Sale
of common stock
|
7,690,623
|
76,906
|
11,508,752
|
-
|
11,585,658
|
|
Warrant
exercises
|
4,072,109
|
40,721
|
10,752,142
|
-
|
10,792,863
|
|
401(k)
contributions paid in common stock
|
93,640
|
937
|
144,153
|
-
|
145,090
|
|
Stock
issued to nonemployees for service
|
356,197
|
3,562
|
689,626
|
-
|
693,188
|
|
Equity
based compensation - employees
|
-
|
-
|
2,743,267
|
-
|
2,743,267
|
|
Employee
stock purchases
|
463,855
|
4,639
|
380,361
|
-
|
385,000
|
|
Warrants
issued with notes payable
|
-
|
-
|
947,616
|
-
|
947,616
|
|
Conversion
of notes payable and interest to common stock
|
1,194,930
|
11,950
|
2,363,066
|
-
|
2,375,016
|
|
Shares issued for
settlement of clinical research costs
|
2,260,000
|
22,600
|
5,484,800
|
-
|
5,507,400
|
|
Net
loss
|
-
|
-
|
-
|
(31,837,205
)
|
(31,837,205
)
|
|
|
|
|
|
|
|
|
BALANCE,
SEPTEMBER 30, 2018
|
28,034,487
|
$
280,346
|
$
331,312,184
|
$
(331,591,614
)
|
$
916
|
See notes to
financial statements.
F-5
|
CEL-SCI
CORPORATION
|
||
|
STATEMENTS
OF CASH FLOWS
|
||
|
YEARS
ENDED SEPTEMBER 30, 2018 and 2017
|
||
|
|
|
|
|
|
2018
|
2017
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
Net
loss
|
$
(31,837,205
)
|
$
(14,363,287
)
|
|
Adjustments
to reconcile net loss to
|
|
|
|
net
cash used in operating activities:
|
|
|
|
Depreciation
and amortization
|
650,131
|
632,915
|
|
Share
based payments for services
|
530,736
|
232,847
|
|
Share
based payments for interest
|
80,716
|
-
|
|
Equity
based compensation
|
2,743,267
|
1,380,500
|
|
Common
stock contributed to 401(k) plan
|
145,090
|
151,308
|
|
Shares
issued for settlement of clinical research costs
|
5,507,400
|
1,310,400
|
|
Write
off of prepaid research and development
|
471,157
|
-
|
|
Loss
on retired equipment
|
-
|
1,187
|
|
Loss
(gain) on derivative instruments
|
8,643,561
|
(11,007,215
)
|
|
Amortization
of debt discount
|
1,956,424
|
917,692
|
|
Inducement
expense
|
291,234
|
-
|
|
Capitalized
lease interest
|
168,037
|
200,902
|
|
(Increase)/decrease
in assets:
|
|
|
|
Receivables
|
99,824
|
(129,307
)
|
|
Prepaid
expenses
|
153,102
|
151,909
|
|
Inventory
used for R&D and manufacturing
|
27,284
|
336,120
|
|
Deposits
|
150,000
|
154,995
|
|
Increase/(decrease)
in liabilities:
|
|
|
|
Accounts
payable
|
(2,514,488
)
|
5,420,816
|
|
Accrued
expenses
|
(731,388
)
|
558,026
|
|
Due
to employees
|
71,110
|
256,303
|
|
Other
liabilities
|
4,450
|
1,995
|
|
|
|
|
|
Net
cash used in operating activities
|
(13,389,558
)
|
(13,791,894
)
|
|
|
|
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
Purchases
of equipment
|
(1,015
)
|
(10,525
)
|
|
Expenditures
for patent costs
|
(57,125
)
|
(6,477
)
|
|
|
|
|
|
Net
cash used in investing activities
|
(58,140
)
|
(17,002
)
|
|
|
|
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
Proceeds
from issuance of common stock and warrants
|
11,596,652
|
10,519,306
|
|
Proceeds
from employee stock purchases
|
385,000
|
-
|
|
Proceeds
from issuance of notes payable
|
-
|
2,745,000
|
|
Proceeds
from exercise of warrants
|
9,412,964
|
-
|
|
Payments
on obligations under capital lease
|
(6,312
)
|
(3,968
)
|
|
|
|
|
|
Net
cash provided by financing activities
|
21,388,304
|
13,260,338
|
|
|
|
|
|
NET
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
|
7,940,606
|
(548,558
)
|
|
|
|
|
|
CASH
AND CASH EQUIVALENTS, BEGINNING OF YEAR
|
2,369,438
|
2,917,996
|
|
|
|
|
|
CASH
AND CASH EQUIVALENTS, END OF YEAR
|
$
10,310,044
|
$
2,369,438
|
|
See
notes to financial statements.
|
|
|
F-6
CEL-SCI
CORPORATION
STATEMENTS
OF CASH FLOWS
YEARS
ENDED SEPTEMBER 30, 2018 and 2017
SUPPLEMENTAL
SCHEDULE OF NON-CASH INVESTING AND FINANCING
ACTIVITIES:
|
|
|
|
|
|
2018
|
2017
|
|
Prepaid
consulting services paid with issuance of common stock
|
$
162,452
|
$
(3,339
)
|
|
Conversion
of accrued salaries and fees to notes payable
|
$
-
|
$
275,000
|
|
Conversion
of notes payable to common stock
|
$
2,294,300
|
$
450,700
|
|
Exercise
of derivative liabilities
|
$
1,379,899
|
$
-
|
|
Fair
value of warrants issued in connection with public
offering
|
$
-
|
$
(4,665,683
)
|
|
Lease
payments included in accounts payable at year end
|
$
415
|
$
1,890
|
|
Financing
costs included in accounts payable at year end
|
$
46,599
|
$
35,605
|
|
Decrease
in receivable due under the litigation funding arrangement
offset
|
|
|
|
by
the same amount payable to the legal firm providing the
services
|
$
-
|
$
(305,341
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
paid for interest
|
$
1,750,897
|
$
1,888,612
|
|
|
|
|
|
See
notes to financial statements.
|
|
|
F-7
CEL-SCI CORPORATION
NOTES TO FINANCIAL STATEMENTS
1.
ORGANIZATION
CEL-SCI
Corporation (the Company) was incorporated on March 22, 1983, in
the state of Colorado, to finance research and development in
biomedical science and ultimately to engage in marketing and
selling products.
The
Company is focused on finding the best way to activate the immune
system to fight cancer and infectious diseases. Its lead
investigational therapy, Multikine® (Leukocyte Interleukin,
Injection), is currently in a pivotal Phase 3 clinical trial
involving head and neck cancer, for which the Company has received
Orphan Drug Status from the United States Food and Drug
Administration (FDA). The study was fully enrolled with 928
patients in September 2016. Currently the Company is waiting for
the occurrence of 298 events (deaths) in the two main groups to
determine final results. If the primary endpoint of this global
study is achieved, the results will be used to support applications
to regulatory agencies around the world for worldwide commercial
marketing approvals as a first line cancer therapy.
The
Company’s immune therapy, Multikine, is being used in a
different way than other immune therapies. It is given before any
other therapy has been administered because that is when the immune
system is thought to be strongest.
It is also administered locally to
treat tumors or infections
.
For
example,
i
n the Phase 3
clinical trial, Multikine is given locally at the site of the tumor
as a first line treatment before surgery, radiation and/or
chemotherapy. The goal is to help the intact immune system kill the
micro metastases that usually cause recurrence of the cancer. In
short, CEL-SCI believes that local administration and
administration before weakening of the immune system by
chemotherapy and radiation will result in higher efficacy with less
or no toxicity.
The
Company is also investigating a different peptide-based
immunotherapy as a vaccine for Rheumatoid Arthritis. The Company
was recently awarded a Phase 2 Small Business Innovation Research
(SBIR) grant in the amount of $1.5 million from the National
Institutes of Health (NIH). This grant will provide funding to
allow the Company to advance its first LEAPS product candidate for
Rheumatoid Arthritis towards an Investigational New Drug (IND)
application, by funding GMP manufacturing, IND enabling studies,
and additional mechanism of action studies.
2.
OPERATIONS
AND FINANCING
The
Company has incurred significant costs since its inception in
connection with 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 securities. The Company will be required to raise
additional capital or find additional long-term financing in order
to continue with its research efforts. To date, the Company
has not generated any revenue from product sales. As a
result, the Company has been dependent upon the proceeds from the
sale of its securities to meet all of its liquidity and capital
requirements and anticipates having to do so in the future. During
fiscal year 2018 and 2017, the Company raised net proceeds of
approximately $21.4 million and $13.3 million, respectively,
through the sale of stock, the exercise of warrants and the
issuance of convertible notes. 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 currently in the final stages of its large
multi-national Phase 3 clinical trial for head and neck cancer with
its partners TEVA Pharmaceuticals and Orient Europharma. To finance
the study beyond the next twelve months, the Company plans to raise
additional capital in the form of corporate partnerships, debt
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 such time as it is able to raise the required
funding.
The
financial statements have been prepared assuming that 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.
F-8
Since
the Company launched its Phase 3 clinical trial for Multikine, the
Company has incurred expenses of approximately $50.6 million as of
September 30, 2018 on direct costs for the Phase 3 clinical trial.
The Company estimates it will incur additional expenses of
approximately $8.4 million for the remainder of the Phase 3
clinical trial. It should be noted that this estimate is
based only on the information currently available in the
Company’s contracts with the Clinical Research Organizations
responsible for managing the Phase 3 clinical trial and does not
include other related costs, e.g., the manufacturing of the drug.
This number may be affected by the rate of death accumulation
in the study, foreign currency exchange rates and many other
factors, some of which cannot be foreseen today. It is therefore
possible that the cost of the Phase 3 clinical trial will be higher
than currently estimated.
Nine
hundred twenty-eight (928) head and neck cancer patients have been
enrolled and have completed treatment in the Phase 3 study. The
study end point is a 10% increase in overall survival of patients
between the two main comparator groups in favor of the group
receiving the Multikine treatment regimen. The determination if the
study end point is met will occur when there are a total of 298
deaths in those two groups.
On
October 31, 2013, the Company commenced arbitration proceedings
against inVentiv Health Clinical, LLC, or inVentiv, its former
clinical research organization (CRO), and now part of Syneos
Health. The arbitration claim, initiated under the Commercial Rules
of the American Arbitration Association, alleged (i) breach of
contract, (ii) fraud in the inducement, and (iii) common law fraud.
On June 25, 2018, the arbitrator ruled that inVentiv materially
breached its contract with the Company and denied inVentiv all but
one of its counterclaims ($429,649 for certain unpaid invoices)
against the Company. The arbitrator awarded the Company $2,917,834
in damages. This is a final and binding decision and to the
Company’s knowledge, marks the first ever decision in favor
of a pharmaceutical/biomedical company against a CRO for breach of
contract. However, pursuant to the terms of an agreement with an
affiliate of Lake Whillans Litigation Finance, LLC, a firm that
produced partial funding for the legal expenses incurred by the
Company in the arbitration proceedings, all amounts received from
inVentiv by virtue of the arbitration award will be paid to Lake
Whillans Litigation Finance. As a result of the arbitrator’s
ruling, the Company wrote off a prepaid asset in the amount of
approximately $471,000, which will no longer be
realized.
3.
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
Cash and Cash Equivalents
– For
purposes of the statements of cash flows, cash and cash equivalents
consist principally of unrestricted cash on deposit and short-term
money market funds. The Company considers all highly liquid
investments with a maturity when purchased of less than three
months as cash and cash equivalents.
Prepaid Expenses
– Prepaid
expenses are payments for future services to be rendered and are
expensed over the time period for which the service is rendered.
Prepaid expenses may also include payment for goods to be received
within one year of the payment date.
Inventory
– Inventory consists of
manufacturing production advances and bulk purchases of laboratory
supplies to be consumed in the manufacturing of the Company’s
product for clinical studies. Inventories are stated at the lower
of cost or market, where cost is determined using the first-in,
first out method applied on a consistent basis.
Deposits
– The deposits are
required by the lease agreement for the manufacturing facility and
by the clinical research organization (CRO)
agreements.
Plant, property and equipment
–
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
plant, property and equipment are reviewed on a quarterly basis to
assess impairment, if any.
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 to 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
disposition, are less than the carrying value of the asset. The
amount of the impairment loss would be the difference between the
estimated fair value of the asset and its carrying
value.
Leases –
Leases are categorized
as either operating or capital leases at inception. Operating lease
costs are recognized on a straight-line basis over the term of the
lease. An asset and a corresponding liability for the capital lease
obligation are established for the cost of capital leases. The
capital lease obligation is amortized over the life of the lease.
For build-to-suit leases, the Company establishes an asset and
liability for the estimated construction costs incurred to the
extent that it is involved in the construction of structural
improvements or takes construction risk prior to the commencement
of the lease. Upon occupancy of facilities under build-to-suit
leases, the Company assesses whether these arrangements qualify for
sales recognition under the sale-leaseback accounting guidance. If
a lease does not meet the criteria to qualify for a sale-leaseback
transaction, the established asset and liability remain on the
Company's balance sheet. See Note 11.
F-9
Deferred Rent
– Certain of the
Company’s operating leases provide for minimum annual
payments that adjust over the life of the lease. The
aggregate minimum annual payments are expensed on a straight-line
basis over the minimum lease term. The Company recognizes a
deferred rent liability for rent escalations when the amount of
straight-line rent exceeds the lease payments, and reduces the
deferred rent liability when the lease payments exceed the
straight-line rent expense. For tenant improvement allowances
and rent holidays, the Company records a deferred rent liability
and amortizes the deferred rent over the lease term as a reduction
to rent expense.
Derivative Instruments
- The Company
has entered into financing arrangements that consist of
freestanding derivative instruments that contain embedded
derivative features, specifically, the settlement provisions in the
warrant agreements preclude the warrants from being treated as
equity. 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 on 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, giving consideration to all of the rights and
obligations of each instrument. The derivative liabilities are
remeasured at fair value at the end of each reporting period as
long as they are outstanding.
Grant Income
– The Company's
grant arrangements are handled on a reimbursement basis. Grant
income under the arrangements is recognized when costs are
incurred.
Research and Development Costs
–
Research and development expenditures are expensed as incurred.
Management accrues CRO expenses and clinical trial study expenses
as services are performed and relies on the CROs to provide
estimates of those costs according to the completion stage of a
study. Estimated accrued CRO costs are subject to revisions as the
clinical trial studies progress toward completion. The Company
adjusts the estimated expense in the period in which the facts that
give rise to the change become known.
Net Loss Per Common Share
– The
Company calculates net loss per common share in accordance with ASC
260 “Earnings Per Share” (ASC 260). Basic and diluted
net loss per common share was determined by dividing net loss
applicable to common shareholders by the weighted average number of
common shares outstanding during the period. The Company’s
potentially dilutive shares, which include outstanding common stock
options, restricted stock units, convertible preferred stock and
common stock warrants, have not been included in the computation of
diluted net loss per share for all periods as the result would be
anti-dilutive.
Concentration of Credit Risk
–
Financial instruments, which potentially subject the Company to
concentrations of credit risk, consist of cash and cash
equivalents. The Company maintains its cash and cash
equivalents with high quality financial institutions. At
times, these accounts may exceed federally insured limits.
The Company has not experienced any losses in such bank
accounts. The Company believes it is not exposed to
significant credit risk related to cash and cash equivalents. All
non-interest bearing cash balances were fully insured
up to
$250,000 at September 30, 2018.
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 September 30, 2018 and 2017.
On
December 22, 2017, the “Tax Cuts and Jobs Act” (the
“Tax Act”:), was signed into law by the President of
the United States. The Tax Act includes significant changes to
corporate taxation, including reduction of the U.S. corporate tax
rate from 35% to 21%, effective January 1, 2018, limitation of the
tax deduction for interest expense to 30% of earnings (except for
certain small businesses), limitation of the deduction for net
operating losses to 80% of current year taxable income and
elimination of net operating loss carrybacks. The Company has
accounted for certain income tax effects of the Act in applying
FASB ASC 740 to the current reporting period. Because the Company
records a valuation allowance for its entire deferred income tax
asset, there was no impact to the amounts reported in the
Company’s financial statements resulting from the Tax
Act.
Use of Estimates
– The
preparation of financial statements in conformity U.S. GAAP
requires management to make estimates and assumptions that affect
the amounts reported in the financial statements and the
accompanying disclosures.
These
estimates are based on management’s best knowledge of current
events and actions the Company may undertake in the future.
Estimates are used in accounting for, among other items, inventory
obsolescence, accruals, stock options, useful lives for
depreciation and amortization of long-lived assets, deferred tax
assets and the related valuation allowance, and the valuation of
derivative liabilities.
Actual results could differ from
estimates, although management does not generally believe such
differences would materially affect the financial statements in any
given year. However, in regard to the valuation of derivative
liabilities determined using various valuation techniques including
the Black-Scholes and binomial pricing methodologies, significant
fluctuations may materially affect the financial statements in a
given year. The Company considers such valuations to be significant
estimates.
F-10
Fair Value
Measurements
– The Company evaluates financial assets
and liabilities subject to fair value measurements in accordance
with a fair value hierarchy to prioritize the inputs used to
measure fair value. A financial instrument’s level within the
fair value hierarchy is based on the lowest level of input
significant to the fair value measurement, where Level 1 is the
highest and Level 3 is the lowest. See Note 14 for the definition
of levels and the classification of assets and liabilities in those
levels.
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 may be measured using the
Black-Scholes valuation model, based on the type of award. 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
Options 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 Company’s 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.
Historical data was used to estimate option exercise and employee
termination within the valuation model. 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. Forfeitures of awards are recognized
as they occur. 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 or market conditions and meets the
classification of equity awards. These awards were measured at fair
market value on the grant-dates for issuances where the attainment
of performance criteria is probable 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.
Recent Accounting
Pronouncements
–
In June 2018, the Financial Accounting Standards
Board ("FASB") issued ASU 2018-07,
Compensation—Stock
Compensation (Topic 718
),
(“ASU 2018-7”), which expands the scope of Topic 718 to
include share-based payment transactions for acquiring goods and
services from nonemployees. An entity should apply the requirements
of Topic 718 to nonemployee awards except for specific guidance on
inputs to an option pricing model and the attribution of cost.
Under current GAAP, non-employee share-based payment awards are
measured at the fair value of the consideration received or the
fair value of the equity instruments issued, whichever can be more
reliably measured. Under ASU 2018-07, non-employee share-based
payments would be measured at the grant-date fair value of the
equity instruments an entity is obligated to issue when the good
has been delivered or the service has been rendered and any other
conditions necessary to earn the right to benefit from the
instruments have been satisfied. Under current GAAP, the
measurement date for equity classified non-employee share-based
payment awards is the earlier of the date at which a commitment for
performance by the counterparty is reached and the date at which
the counterparty’s performance is complete. Under ASU
2018-07, equity-classified nonemployee share-based payment awards
are measured at the grant date. The definition of the term
grant date
is amended to generally state the date
at which a
grantor
and a
grantee
reach a mutual understanding of the key terms and
conditions of a share-based payment award. The amendments in this
Update are effective for public business entities for fiscal years
beginning after December 15, 2018, including interim periods within
that fiscal year. Early adoption is permitted, but no earlier than
an entity’s adoption date of Topic 606. An entity should only
remeasure liability-classified awards that have not been settled by
the date of adoption and equity classified awards for which a
measurement date has not been established through a
cumulative-effect adjustment to retained earnings as of the
beginning of the fiscal year of adoption. Upon transition, the
entity is required to measure these non-employee awards at fair
value as of the adoption date. The entity must not remeasure awards
that are completed. The Company is currently evaluating the impact
the adoption of the standard will have on the Company’s
financial position and results of operations.
In May 2017, the FASB issued ASU
2017-09,
Compensation – Stock
Compensation (Topic 718)
, which
affects any entity that changes the terms or conditions of a
share-based payment award. This Update amends the definition
of modification by qualifying that modification accounting does not
apply to changes to outstanding share-based payment awards that do
not affect the total fair value, vesting requirements, or
equity/liability classification of the awards. The amendments
in this Update are effective for all entities for annual periods,
and interim periods within those annual periods, beginning after
December 15, 2017. Early adoption is permitted, including adoption
in any interim period, for (1) public business entities for
reporting periods for which financial statements have not yet been
issued and (2) all other entities for reporting periods for which
financial statements have not yet been made available for issuance.
The amendments in this Update should be applied prospectively to an
award modified on or after the adoption date.
The Company adopted the provisions
of ASU 2017-09 effective January 1, 2018. There was no impact
on the Company’s financial position or results operations for
the year ended September 30, 2018.
F-11
In July 2017, the FASB issued ASU
2017-11,
Earnings Per Share (Topic
260), Distinguishing Liabilities from Equity (Topic 480), and
Derivative and Hedging (Topic 815)
. The amendments in Part I of this Update change
the classification analysis of certain equity-linked financial
instruments (or embedded features) with down-round features. When
determining whether certain financial instruments should be
classified as liabilities or equity instruments, a down-round
feature no longer precludes equity classification when assessing
whether the instrument is indexed to an entity’s own stock.
The amendments also clarify existing disclosure requirements for
equity-classified instruments. As a result, a freestanding
equity-linked financial instrument (or embedded conversion option)
no longer would be accounted for as a derivative liability at fair
value as a result of the existence of a down-round feature. For
freestanding equity classified financial instruments, the
amendments require entities that present earnings per share
(“EPS”) in accordance with Topic 260 to recognize the
effect of the down-round feature when it is triggered. That effect
is treated as a dividend and as a reduction of income available to
common shareholders in basic EPS. Convertible instruments with
embedded conversion options that have down-round features are now
subject to the specialized guidance for contingent beneficial
conversion features (in Subtopic 470-20,
Debt—Debt with
Conversion and Other Options
),
including related EPS guidance (in Topic 260).
The Company
adopted the provisions of ASU 2017-11 effective October 1,
2017. There was no impact on the financial position or results
operations for the year ended September 30, 2018.
In February 2016, the FASB issued
ASU
2016-02,
Leases
, which will require most leases (with the
exception of leases with terms of less than one year) to be
recognized on the balance sheet as an asset and a lease liability.
Leases will be classified as an operating lease or a financing
lease. Operating leases are expensed using the straight-line method
whereas financing leases will be treated similarly to a capital
lease under the current standard. The new standard will be
effective for annual and interim periods, within those fiscal
years, beginning after December 15, 2018, but early adoption is
permitted. The new standard must be presented using the modified
retrospective method beginning with the earliest comparative period
presented. The Company is currently evaluating the effect of the
new standard on its financial statements and related
disclosures.
The
Company has considered all other recently issued accounting
pronouncements and does not believe the adoption of such
pronouncements will have a material impact on its financial
statements.
F-12
4.
WARRANTS
AND NON-EMPLOYEE OPTIONS
The
following chart represents the warrants and non-employee options
outstanding at September 30, 2018:
|
Warrant
|
Issue
Date
|
Shares Issuable upon Exercise
of
Warrants
|
Exercise
Price
|
Expiration
Date
|
Reference
|
|
Series
S
|
10/11/13-
10/24/14
|
327,729
|
$
31.25
|
10/11/2018
|
1
|
|
Series
DD
|
12/8/2016
|
1,360,960
|
$
4.50
|
12/10/2018
|
1
|
|
Series
EE
|
12/8/2016
|
1,360,960
|
$
4.50
|
12/10/2018
|
1
|
|
Series
N
|
8/18/2008
|
85,339
|
$
3.00
|
2/18/2020
|
2
|
|
Series
V
|
5/28/2015
|
810,127
|
$
19.75
|
5/28/2020
|
*
|
|
Series
UU
|
6/11/2018
|
187,562
|
$
2.80
|
6/11/2020
|
2
|
|
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
|
1
|
|
Series
CC
|
12/8/2016
|
680,480
|
$
5.00
|
12/8/2021
|
1
|
|
Series
HH
|
2/23/2017
|
20,000
|
$
3.13
|
2/16/2022
|
1
|
|
Series
AA
|
8/26/2016
|
200,000
|
$
13.75
|
2/22/2022
|
*
|
|
Series
JJ
|
3/14/2017
|
30,000
|
$
3.13
|
3/8/2022
|
1
|
|
Series
LL
|
4/30/2017
|
26,398
|
$
3.59
|
4/30/2022
|
1
|
|
Series
MM
|
6/22/2017
|
893,491
|
$
1.86
|
6/22/2022
|
2
|
|
Series
NN
|
7/24/2017
|
539,300
|
$
2.52
|
7/24/2022
|
2
|
|
Series
OO
|
7/31/2017
|
60,000
|
$
2.52
|
7/31/2022
|
2
|
|
Series
QQ
|
8/22/2017
|
3,500
|
$
2.50
|
8/22/2022
|
2
|
|
Series
GG
|
2/23/2017
|
200,000
|
$
3.00
|
8/23/2022
|
1
|
|
Series
II
|
3/14/2017
|
216,500
|
$
3.00
|
9/14/2022
|
1
|
|
Series
RR
|
10/30/2017
|
555,370
|
$
1.65
|
10/30/2022
|
2
|
|
Series
KK
|
5/3/2017
|
213,870
|
$
3.04
|
11/3/2022
|
1
|
|
Series
SS
|
12/19/2017
|
960,530
|
$
2.09
|
12/18/2022
|
2
|
|
Series
TT
|
2/5/2018
|
1,296,877
|
$
2.24
|
2/5/2023
|
2
|
|
Series
PP
|
8/28/2017
|
172,500
|
$
2.30
|
2/28/2023
|
2
|
|
Series
WW
|
7/2/2018
|
195,000
|
$
1.63
|
6/28/2023
|
2
|
|
Series
VV
|
7/2/2018
|
3,900,000
|
$
1.75
|
1/2/2024
|
2
|
|
Consultants
|
1/1/16
- 7/28/17
|
30,400
|
$
2.18- $11.50
|
12/31/18-
7/27/27
|
3
|
*No
current period changes to these warrants.
F-13
The
following chart represents the warrants and non-employee options
outstanding at September 30, 2017:
|
Warrant
|
Issue
Date
|
Shares Issuable upon Exercise
of
Warrants
|
Exercise
Price
|
Expiration
Date
|
Reference
|
|
|
|
|
|
|
|
|
Series
U
|
4/17/2014
|
17,821
|
$
43.75
|
10/17/2017
|
1
|
|
Series
DD
|
12/8/2016
|
1,360,960
|
$
4.50
|
12/1/2017
|
1
|
|
Series
EE
|
12/8/2016
|
1,360,960
|
$
4.50
|
12/1/2017
|
1
|
|
Series
N
|
8/18/2008
|
85,339
|
$
3.00
|
8/18/2018
|
2
|
|
Series
S
|
10/11/13-
10/24/14
|
1,037,120
|
$
31.25
|
10/11/2018
|
1
|
|
Series
V
|
5/28/2015
|
810,127
|
$
19.75
|
5/28/2020
|
*
|
|
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
|
1
|
|
Series
CC
|
12/8/2016
|
680,480
|
$
5.00
|
12/8/2021
|
1
|
|
Series
HH
|
2/23/2017
|
20,000
|
$
3.13
|
2/16/2022
|
1
|
|
Series
AA
|
8/26/2016
|
200,000
|
$
13.75
|
2/22/2022
|
*
|
|
Series
JJ
|
3/14/2017
|
30,000
|
$
3.13
|
3/8/2022
|
1
|
|
Series
LL
|
4/30/2017
|
26,398
|
$
3.59
|
4/30/2022
|
1
|
|
Series
MM
|
6/22/2017
|
893,491
|
$
1.86
|
6/22/2022
|
2
|
|
Series
NN
|
7/24/2017
|
539,300
|
$
2.52
|
7/24/2022
|
2
|
|
Series
OO
|
7/31/2017
|
60,000
|
$
2.52
|
7/31/2022
|
2
|
|
Series
QQ
|
8/22/2017
|
87,500
|
$
2.50
|
8/22/2022
|
2
|
|
Series
GG
|
2/23/2017
|
400,000
|
$
3.00
|
8/23/2022
|
1
|
|
Series
II
|
3/14/2017
|
600,000
|
$
3.00
|
9/14/2022
|
1
|
|
Series
KK
|
5/3/2017
|
395,970
|
$
3.04
|
11/3/2022
|
1
|
|
Series
PP
|
8/28/2017
|
1,750,000
|
$
2.30
|
2/28/2023
|
2
|
|
Consultants
|
12/28/12-
7/28/17
|
42,000
|
$
2.18- $70.00
|
12/27/17-
7/27/27
|
3
|
*No
current period changes to these warrants.
F-14
1.
Warrant Liabilities
The
table below presents the warrant liabilities and their respective
balances at September 30:
|
|
2018
|
2017
|
|
Series S
warrants
|
$
33
|
$
32,773
|
|
Series V
warrants
|
770,436
|
72,912
|
|
Series W
warrants
|
999,081
|
83,754
|
|
Series Z
warrants
|
487,767
|
77,216
|
|
Series ZZ
warrants
|
34,215
|
4,753
|
|
Series AA
warrants
|
380,474
|
65,087
|
|
Series BB
warrants
|
28,456
|
4,322
|
|
Series CC
warrants
|
1,779,724
|
394,220
|
|
Series DD
warrants
|
1,249,287
|
5,492
|
|
Series EE
warrants
|
1,249,287
|
5,492
|
|
Series FF
warrants
|
188,921
|
47,154
|
|
Series GG
warrants
|
607,228
|
342,173
|
|
Series HH
warrants
|
58,816
|
16,014
|
|
Series II
warrants
|
660,135
|
511,636
|
|
Series JJ
warrants
|
88,642
|
24,203
|
|
Series KK
warrants
|
656,930
|
345,720
|
|
Series LL
warrants
|
77,632
|
20,481
|
|
|
|
|
|
Total warrant
liabilities
|
$
9,317,064
|
$
2,053,402
|
|
|
|
|
F-15
The
table below presents the (losses)/gains on the warrant liabilities
for the years ended September 30:
|
|
2018
|
2017
|
|
Series S
Warrants
|
$
(751,378
)
|
$
3,078,588
|
|
Series V
warrants
|
(697,526
)
|
1,547,341
|
|
Series W
warrants
|
(915,327
)
|
1,716,104
|
|
Series Z
warrants
|
(410,551
)
|
893,388
|
|
Series ZZ
warrants
|
(29,461
)
|
65,856
|
|
Series AA
warrants
|
(315,387
)
|
698,574
|
|
Series BB
warrants
|
(24,134
)
|
54,266
|
|
Series CC
warrants
|
(1,385,504
)
|
666,203
|
|
Series DD
warrants
|
(1,243,795
)
|
437,780
|
|
Series EE
warrants
|
(1,243,795
)
|
685,915
|
|
Series FF
warrants
|
(141,767
)
|
73,828
|
|
Series GG
warrants
|
(408,555
)
|
272,464
|
|
Series HH
warrants
|
(42,802
)
|
13,616
|
|
Series II
warrants
|
(462,519
)
|
404,823
|
|
Series JJ
warrants
|
(64,439
)
|
20,410
|
|
Series KK
warrants
|
(449,470
)
|
25,564
|
|
Series LL
warrants
|
(57,151
)
|
352,495
|
|
Net (loss) gain on
warrant liabilities
|
$
(8,643,561
)
|
$
11,007,215
|
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 periods is recognized as a gain or loss in the
statement of operations.
Issuance of Warrant Liabilities
On
March 14, 2017, the Company sold 600,000 registered shares of
common stock and 600,000 Series II warrants to purchase 600,000
unregistered shares of common stock at combined offering price of
$2.50 per share. The Series II warrants have an exercise
price of $3.00 per share and expire September 14, 2022.
In addition, the Company issued 30,000
Series JJ warrants to purchase 30,000 shares of unregistered common
stock to the placement agent. The Series JJ warrants have an
exercise price $3.13 and expire on March 8, 2022.
The net proceeds from this
offering were approximately $1.3 million.
The
fair value of the Series II and JJ warrants of approximately $1.0
million on the date of issuance was recorded as a warrant
liability.
F-16
On
February 23, 2017, the Company sold 400,000 registered shares of
common stock and 400,000 Series GG warrants to purchase 400,000
unregistered shares of common stock at a combined price of $2.50
per share. The Series GG warrants have an exercise price of
$3.00 per share and expire August 23, 2022.
In addition, the Company issued to the placement
agent 20,000 Series HH warrants to purchase 20,000 shares of
unregistered common stock. The Series HH warrants have an exercise
price $3.13 and expire on February 16, 2022.
The net proceeds from this
offering were approximately $0.8 million.
The
fair value of the Series GG and HH warrants of approximately $0.6
million on the date of issuance was recorded as a warrant
liability.
On December 8, 2016, the Company sold 1,360,960
shares of common stock and warrants to purchase common stock at a
price of $3.13 in a public offering. The warrants consist of
680,480 Series CC warrants to purchase 680,480 shares of common
stock, 1,360,960 Series DD warrants to purchase 1,360,960 shares of
common stock and 1,360,960 Series EE warrants to purchase 1,360,960
shares of common stock. The Series CC warrants were immediately
exercisable, expire in five-years from the offering date and have
an exercise price of $5.00 per share. The Series DD warrants were
immediately exercisable and have an exercise price of $4.50 per
share. On June 5, 2017 and June 29, 2017, the expiration date of
the Series DD warrants was extended from June 8, 2017 to July 10,
2017 and then to August 10, 2017. On August 29, 2017, the
expiration date of the Series DD warrants was extended to December
1, 2017. The Series EE warrants are immediately exercisable and
have an exercise price of $4.50 per share. On August 29, 2017, the
initial expiration date of the Series EE warrants was extended from
September 8, 2017 to December 1, 2017. In addition, the Company
issued 68,048 Series FF warrants to purchase 68,048 shares of
common stock to the placement agent. The FF warrants expire on
December 1, 2021 and have an exercise price $3.91.
Net proceeds from this offering were approximately
$3.7 million.
The fair value of the Series CC, DD, EE
and FF warrants of approximately $2.3 million on the date of
issuance was recorded as a warrant liability.
On July
10, 2018, the Company extended the expiration date of its Series DD
and Series EE warrants to December 10, 2018. The Series DD and
Series EE warrants were issued on December 8, 2016. These warrants
had been previously extended to July 12, 2018. The modifications
are reflected in the fair value measurement of the
warrants.
On
April 30, 2017, the Company entered into a securities purchase
agreement with an institutional investor whereby it sold 527,960
shares of its common stock for net proceeds of approximately $1.4
million, or $2.875 per share, in a registered direct offering. In a
concurrent private placement, the Company also issued to the
purchaser of the Company’s common stock Series KK warrants to
purchase 395,970 shares of common stock. The warrants can be
exercised at a price of $3.04 per share at any time on or after
November 3, 2017 and expire on November 3, 2022. In addition, the
Company issued 26,398 Series LL warrants to the placement agent as
part of its compensation. The Series LL warrants are exercisable on
October 30, 2017 at a price of $3.59 per share and expire on April
30, 2022. The fair value of the Series KK and LL warrants of
approximately $0.7 million on the date of issuance was recorded as
a warrant liability.
Exercise of Warrant Liabilities
The
following chart lists the warrant liabilities that were exercised
during the year ended September 30, 2018. No warrants were
exercised during the year ended September 30, 2017.
|
Warrants
|
Warrants
Exercised
|
Exercise
Price
|
Proceeds
|
|
Series
S
|
709,391
|
$
1.75
|
$
1,241,434
|
|
Series
GG
|
200,000
|
$
3.00
|
600,000
|
|
Series
II
|
383,500
|
$
3.00
|
1,150,500
|
|
Series
KK
|
182,100
|
$
3.04
|
552,674
|
|
|
1,474,991
|
|
$
3,544,608
|
F-17
Expiration of Warrants
On
October 17, 2017, 17,821 Series U warrants, with an exercise price
of $43.75, expired. The fair value of the Series U warrants was $0
on the date of expiration.
On
March 16, 2017, 23,600 Series P warrants, with an exercise price of
$112.50, expired. The fair value of the Series P warrants was $0 on
the date of expiration.
On
December 6, 2016, 105,000 Series R warrants, with an exercise price
of $100.00, expired. The fair value of the Series R warrants was $0
on the date of expiration.
2.
Equity Warrants
Series VV and Series WW Warrants
On July
2, 2018 the Company issued 3,900,000 registered shares of common
stock at a purchase price of $1.30 per share in a registered direct
offering. For each share of common stock purchased, the investors
received an unregistered Series VV warrant to purchase one share of
common stock. The Series VV warrants have an exercise price of
$1.75 per share, will be exercisable on January 2, 2019 and expire
on January 2, 2024. As part of this transaction, the Company also
issued 195,000 Series WW warrants to the placement agent. These
Series WW warrants have an exercise price of $1.63 per share, will
be exercisable on January 2, 2018 and expire on June 28, 2023.
The Company allocated the proceeds
received to the shares and the warrants on a relative fair value
basis. As a result of such allocation, the Company determined the
relative fair value of the Series VV warrants to be approximately
$1.88 million and the relative fair value of the Series WW warrants
to be approximately $0.1 million. The Series VV and WW warrants
qualify for equity treatment in accordance with ASC
815.
Series UU Warrants
On June
11, 2018, the Company issued 187,562 Series UU Warrants to holders
of the outstanding Series MM and NN notes payable as an inducement
to convert their notes into common stock (See Note F). The Series
UU warrants are exercisable at a fixed price of $2.80 per share,
will not be exercisable on December 11, 2018 and expire on June 11,
2020.
Shares issuable
upon the exercise of the warrants are restricted securities unless
registered.
The Company recognized an
expense equal to the fair value of the consideration transferred in
the transaction in excess of the fair value of consideration
issuable under the original conversion terms. This expense
represents the fair value of the Series UU warrants, which was
calculated to be approximately $291,000 and is included as interest
expense on the statement of operations. The Series UU warrants
qualify for equity treatment in accordance with ASC
815.
Series TT Warrants
On
February 5, 2018, the Company sold 2,501,145 shares of its common
stock at a price of $1.87 per share for total proceeds of
approximately $4.7 million. The purchasers of the common stock also
received Series TT warrants which allow the purchasers to acquire
up to 1,875,860 shares of the Company’s common stock. The
warrants are exercisable at a fixed price of $2.24 per share, were
exercisable on August 6, 2018 and expire on February 5, 2023. The
shares issued and those issuable upon the exercise of the warrants
were restricted until they were registered on February 28, 2018.
The Company allocated the proceeds
received to the shares and the Series TT warrants on a relative
fair value basis. As a result of such allocation, the Company
determined the relative fair value of the Series TT warrants to be
approximately $1.56 million. The Series TT warrants qualify for
equity treatment in accordance with ASC 815.
During
the period from issuance through September 30, 2018, 578,983 Series
TT Warrants were exercised for total proceeds of approximately $1.3
million.
Series SS Warrants
On
December 19, 2017 the Company sold 1,289,478 shares of its common
stock at a price of $1.90 per share for total proceeds of
approximately $2.45 million. The purchasers of the common
stock also received Series SS warrants which allow the purchasers
to acquire up to 1,289,478 shares of the Company’s common
stock. The warrants are exercisable at a fixed price of
$2.09 per share, and will expire on December 18, 2022. Shares
issuable upon the exercise of the warrants were restricted
securities until they were registered on January 23, 2018. The
Company allocated the proceeds received to the shares and the
Series SS warrants on a relative fair value basis. As a result of
such allocation, the Company determined the relative fair value of
the Series SS warrants to be approximately $1.0 million. The Series
SS warrants qualify for equity treatment in accordance with ASC
815.
During
the period from issuance through September 30, 2018, 328,948 Series
SS warrants were exercised for total proceeds of approximately $0.7
million.
F-18
Series RR Warrants
On
October 30, 2017, in consideration for an extension of the maturity
date of the Series MM and Series NN convertible notes, the Company
issued a total of 583,057 Series RR warrants to the note holders
who agreed to the extension. Each Series RR warrant
allows the holder to purchase one share of the Company’s
common stock at an exercise price of $1.65 per share through the
expiration date of October 30, 2022. The Series RR warrants were
classified as equity warrants and are recorded at approximately
$0.7 million, the relative fair value on the date of issuance, as
described in Note 7.
During
the period from issuance through September 30, 2018, 27,687 Series
RR warrants were exercised for total proceeds of approximately
$46,000.
Series PP and Series QQ Warrants
On
August 22, 2017, the Company entered into a securities purchase
agreement with institutional investors whereby it sold 1,750,000
shares of its common stock for net proceeds of approximately $3.2
million, or $2.00 per share, in a registered direct offering. In a
concurrent private placement, the Company also issued to the
purchasers of the Company’s common stock Series PP warrants
to purchase 1,750,000 shares of common stock. The warrants can be
exercised at a price of $2.30 per share and expire on February 28,
2023. In addition, the Company issued 87,500 Series QQ warrants to
the placement agent as part of its compensation. The Series QQ
warrants can be exercised at a price of $2.50 per share and expire
on August 22, 2022. The Series PP and Series QQ warrants qualify
for equity treatment in accordance with ASC 815. The relative fair
value of the warrants was approximately $1.4 million.
During
the period from issuance through September 30, 2018, 1,577,500 and
84,000 Series PP and Series QQ warrants were exercised for total
proceeds of approximately $3.6 and $0.2 million,
respectively.
Series OO Warrants
On July
26, 2017, the Company entered into a securities purchase agreement
with an investor whereby it sold 100,000 shares of its common stock
for gross proceeds of $229,000, or $2.29 per share, in a registered
offering. In a concurrent private placement, the Company also
issued to the purchaser of the common stock Series OO warrants to
purchase 60,000 shares of the Company’s common stock. The
warrants can be exercised at a price of $2.52 per share, and expire
on July 31, 2022. The Series OO warrants qualify for equity
treatment in accordance with ASC 815. The relative fair value of
the warrants was approximately $62,000.
Series NN Warrants
On July
24, 2017, in connection with the issuances of convertible notes
(See Note 7), the Company issued the note holders Series NN
warrants which entitle the purchasers to acquire up to an aggregate
of 539,300 shares of the Company’s common stock. The warrants
are exercisable at a fixed price of $2.52 per share and expire on
July 24, 2022.
The Company allocated
the proceeds received to the notes and the Series NN warrants on a
relative fair value basis. As a result of such allocation, the
Company determined the initial carrying value of the Series NN
warrants to be approximately $0.5 million. The Series NN warrants
qualify for equity treatment in accordance with ASC
815.
Series MM Warrants
On June
22, 2017, in connection with the issuance of convertible notes (see
Note 7), the Company issued the note holders Series MM warrants,
which entitle the purchasers to acquire up to an aggregate of
893,491 shares of the Company’s common stock. The Series MM
warrants are exercisable at a price of $1.86 per share and expire
on June 22, 2022.
The Company
allocated proceeds received to the Notes and the Series MM warrants
on a relative fair value basis. As a result of such allocation, the
Company determined the initial carrying value of the Series MM
warrants to be approximately $0.6 million. The Series MM warrants
qualify for equity treatment in accordance with ASC
815.
F-19
Series N Warrants
Series
N warrants were previously issued in connection with a financing
and were subsequently transferred to the de Clara Trust, of which
the Company’s CEO, Geert Kersten, is a
beneficiary.
On
August 4, 2018, the Series N warrants were modified. The
modification extended the expiration date to February 18, 2020. The
incremental cost of this modification was approximately $14,000,
which was recorded as a deemed dividend. The warrants had
previously been modified on July 17, 2017, when the expiration date
was extended by one year to August 18, 2018; the 113,785 warrants
outstanding were reduced by 25% to 85,339 warrants outstanding; and
the exercise price was reduced to $3.00 per share. The incremental
cost of this modification was approximately $64,000, which was
recorded as a deemed dividend.
On
August 4, 2018 the expiration date of the Series N warrants was
extended by eighteen months to expire on February 18, 2020. The
incremental cost of this extension was approximately $14,000, which
was recorded as a deemed dividend.
Exercise of Equity Warrants
The
following chart lists the equity warrants that were exercised
during the year ended September 30, 2018.
|
Warrants
|
Warrants
Exercised
|
Exercise
Price
|
Proceeds
|
|
Series
PP
|
1,577,500
|
$
2.30
|
$
3,628,250
|
|
Series
QQ
|
84,000
|
$
2.50
|
210,000
|
|
Series
RR
|
27,687
|
$
1.65
|
45,684
|
|
Series
SS
|
328,948
|
$
2.09
|
687,500
|
|
Series
TT
|
578,983
|
$
2.24
|
1,296,922
|
|
|
2,597,118
|
|
$
5,868,356
|
3.
Options and Shares Issued to Consultants
The
Company typically enters into consulting arrangements in exchange
for common stock or stock options. During the years ended September
30, 2018 and 2017 the Company issued 356,197 and 76,551 shares,
respectively, of common stock to consultants of which 353,197 and
68,352 shares, respectively, were restricted shares. Under these
arrangements, the common stock was issued with stock prices ranging
between $0.85 and $7.25 per share. The weighted average grant price
was $1.95 and $2.67 for stock issued during the years and September
30, 2018 and 2017, respectively.
Additionally,
during the year ended September 30, 2017 the Company issued to
consultants 20,000 options to purchase common stock with an
exercise price of $2.18 per share and a fair value of $1.87 per
share. 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 years ended September 30, 2018 and 2017, the Company recorded
total expense of approximately $531,000 and $233,000, respectively,
relating to these consulting agreements. At September 30, 2018 and
2017, approximately $207,000 and $45,000, respectively, are
included in prepaid expenses. As of September 30, 2018, 42,000
options issued to consultants as payment for services remained
outstanding, all of which were issued from the Non-Qualified Stock
Option plans and are fully vested.
F-20
5.
PLANT,
PROPERTY AND EQUIPMENT
Plant,
property and equipment consisted of the following at September
30:
|
|
2018
|
2017
|
|
Leased
manufacturing facility
|
$
21,183,756
|
$
21,183,756
|
|
Research
equipment
|
3,162,150
|
3,169,158
|
|
Furniture
and equipment
|
124,369
|
124,369
|
|
Leasehold
improvements
|
131,910
|
131,910
|
|
|
24,602,186
|
24,609,193
|
|
|
|
|
|
Accumulated
depreciation and amortization
|
(8,383,335
)
|
(7,815,973
)
|
|
|
|
|
|
Net
plant, property and equipment
|
$
16,218,851
|
$
16,793,220
|
The
Company is not the legal owner of the manufacturing building, but
is deemed to be the owner for accounting purposes, based on the
accounting guidance for build-to-suit leases. See Note 11,
Commitments and Contingencies–Lease Obligations, for
additional information.
As of
September 30, 2018 and 2017, accumulated depreciation on the
manufacturing building is approximately $5.1 million and $4.6
million, respectively. Depreciation expense for the years ended
September 30, 2018 and 2017 totaled approximately $575,000 and,
$593,000, respectively. Depreciation expense includes depreciation
on the leased manufacturing building of approximately $514,000,
which is included in research and development costs on the
Statements of Operations. During the year ended September 30, 2017,
the Company purchased an asset under a lease classified as a
capital lease. That asset has a net book value of approximately
$16,000 and $21,000 on September 30, 2018 and 2017, respectively.
Amortization of the capital lease asset is included in general and
administrative expenses on the Statements of
Operations.
6.
PATENTS
Patents
consisted of the following at September 30:
|
|
2018
|
2017
|
|
Patents
|
$
1,644,759
|
$
1,535,087
|
|
Accumulated
amortization
|
(1,386,666
)
|
(1,311,920
)
|
|
|
|
|
|
Patents,
net
|
$
258,093
|
$
223,167
|
F-21
During
the years ended September 30, 2018 and 2017,there was no impairment
of patent costs. Amortization expense for the years ended September
30, 2018 and 2017 totaled approximately $75,000 and $40,000,
respectively. The total estimated future amortization is as
follows:
|
Years ending
September 30,
|
|
|
2019
|
$
42,000
|
|
2020
|
38,000
|
|
2021
|
35,000
|
|
2022
|
31,000
|
|
2023
|
21,000
|
|
Thereafter
|
91,000
|
|
|
$
258,000
|
7. NOTES PAYABLE
During
the year ended September 30, 2017, the Company issued two series of
convertible notes to individual investors, Series MM and Series NN
(the Notes). The Notes had an
aggregate principal amount of $1.5 million and
$1.2 million, respectively
, bore interest at 4% and were
originally due on December 22, 2017. At the option of the note
holders, the Series MM Notes could be converted into shares of the
Company’s common stock at a fixed conversion rate of $1.69
and the Series NN Notes could be converted into shares of the
Company’s common stock at a fixed conversion rate of $2.29.
The purchasers of the convertible notes also received Series MM and
Series NN warrants which allow the purchasers to acquire up to
893,491 and 539,300 shares of the Company’s common stock,
respectively. The Series MM warrants are exercisable at a price of
$1.86 per share and expire on June 22, 2022. The Series NN warrants
are exercisable at a price of $2.52 per share and expire on July
24, 2022.A trust in which Geert Kersten, the Company’s Chief
Executive Officer, holds a beneficial interest participated in the
offering and purchased a note in the principal amount of $250,000.
Patricia B. Prichep, the Company’s Senior Vice President of
Operations, participated in the offering and purchased a note in
the principal amount of $25,000.
Upon
issuance, the Company allocated proceeds received to the Notes and
warrants on a relative fair value basis. As a result of such
allocation, the Company determined the initial carrying value of
the Notes to be approximately $1.6 million, the Series MM warrants
to be approximately $0.6 million, the Series NN warrants to be
approximately $0.5 million, and recorded a debt discount in the
amount of approximately $1.1 million.
Pursuant to the guidance in ASC 815-40,
Contracts in
Entity’s Own Equity
, the
Company evaluated whether the conversion feature of the note needed
to be bifurcated from the host instrument as a freestanding
financial instrument. Under ASC 815-40, to qualify for equity
classification (or non-bifurcation, if embedded) the instrument (or
embedded feature) must be both (1) indexed to the issuer’s
own stock and (2) meet the requirements of the equity
classification guidance. Based upon the Company’s analysis,
it was determined the conversion option is indexed to its own stock
and also met all the criteria for equity classification.
Accordingly, the conversion option is not required to be bifurcated
from the host instrument as a freestanding financial instrument.
Since the conversion feature meets the equity scope exception from
derivative accounting, the Company then evaluated whether the
conversion feature needed to be separately accounted for as an
equity component under ASC 470-20,
Debt with Conversion and Other
Options
. Based upon the
Company’s analysis, it was determined that a beneficial
conversion feature existed as a result of the reduction in the face
value of the Series MM and NN Notes, due to a portion of proceeds
being allocated to the related warrants, and thus the conversion
features needed to be separately accounted for as an equity
component. The Company recorded beneficial conversion features
relating to the Series MM and NN notes of approximately $603,000
and $506,000, respectively, which were also recorded as debt
discounts.
On October 30, 2017, the Company
extended
the due dates of the Notes from December 22, 2017 to September 21,
20l8, and issued the note holders 583,057 of Series RR Warrants.
The Series RR warrants expire on October 30, 2022 and are
exercisable at a price of $1.65 per share. These Series RR warrants
are classified as equity warrants and are recorded at approximately
$0.7 million, the fair value on the date of issuance.
F-22
Because the Company was experiencing financial
difficulties at the time of the modification and the creditors
granted the Company a concession they would not have otherwise
considered in the form of a lower effective interest rate, this
modification was accounted for under ASC 470-60,
“
Troubled Debt
Restructuring.
” The
Company calculated the future cash flows of the restructured debt
to be greater than the carrying value of the debt and accounted for
the change in debt prospectively, using the effective interest rate
that equated the carrying amount to the future cash flows
.
The carrying value of the debt on the date of restructuring was
approximately $0.7 million, which was net of a discount of
approximately $1.6 million. The discount is being amortized to
interest expense over the life of the Notes using the effective
interest method.
On June
11, 2018, all remaining outstanding Series MM and Series NN notes
were converted into common stock in accordance with the original
agreements resulting in notes in the principal amount of $1,860,000
being converted into 937,804 shares of common stock. As an
inducement to convert, the Company issued the note holders 187,562
Series UU warrants The Series UU warrants are exercisable at a
fixed price of $2.80 per share, are exercisable on December 11,
2018 and expire on June 11, 2020.
Shares issuable upon the exercise
of the warrants are restricted securities unless registered.
The Company recognized an expense
equal to the fair value of the consideration transferred in the
transaction in excess of the fair value of consideration issuable
under the original conversion terms. This expense represents the
fair value of the Series UU warrants, which was calculated to be
approximately $291,000 and is included as interest expense on the
statement of operations.
During
the year ended September 30, 2018 and including the inducement,
note holders converted all outstanding Notes in the principal
amount of $2,294,300, into 1,166,105 shares of common stock. During
the year ended September 30, 2017, note holders converted Notes in
the principal amount of $450,700 into 266,686 shares of common
stock. The unamortized debt discount relating to the converted
notes was charged to interest expense.
The total debt discount was amortized to interest
expense using the effective interest method over the expected term
of the Notes.
During the years ended September 30, 2018 and
2017, the Company recorded approximately $2.0 million and $0.9
million in interest expense, respectively, relating to the
amortization of the debt discount.
At
September 30, 2017, the remaining debt discount is approximately
$1.3 million.
On June
11, 2018, all note holders were given the option to receive the
interest accrued on the Notes in cash or in shares converted at
$2.80, the fair value of the shares on that date. Accrued interest
in the amount of approximately $0.1 million was converted into
28,825 shares of common stock.
8.
INCOME
TAXES
At
September 30, 2018 and 2017,
the Company had net
deferred tax assets of $24.8 million and $99.0 million,
respectively. Due to uncertainties surrounding the Company’s
ability to generate future taxable income to realize these assets,
a full valuation allowance has been established to offset the net
deferred tax assets.
In assessing the realization of
deferred tax assets, management considered whether it was more
likely than not that some, or all, of the deferred tax asset will
be realized. The ultimate realization of the deferred tax
assets is dependent upon the generation of future taxable
income. Management has considered the history of the
Company’s operating losses and believes that the realization
of the benefit of the deferred tax assets cannot be reasonably
assured.
Pursuant to Section 382 of the Internal Revenue Code, or IRC,
annual use of the Company’s net operating loss (NOL)
carryforwards may be limited in the event a cumulative change in
ownership of more than 50% occurs within a three-year period. The
Company determined that because of various stock issuances used to
finance its operations, an ownership change as defined in the
provisions of Section 382 of the IRC occurred on February 5,
2018. Such ownership change resulted in annual limitations on the
utilization of tax attributes, including NOL carryforwards and tax
credits. The Company estimates that $188.9 million of its NOL
carryforwards were effectively eliminated under Section 382
for federal income tax purposes. A portion of the remaining NOL
carryforwards limited by Section 382 will become available
each year. As a result of the Section 382 estimated analysis
completed during 2018, the Company has included $18.6 million in
the deferred tax asset schedule, which is the deferred tax asset
relating to the unlimited portion of the NOL carryforwards. The
Company’s Section 382 estimated analysis was completed
through September 30, 2018. If additional changes in ownership
occur subsequent to year end, additional NOL and tax credit
carryforwards could be eliminated or restricted. If eliminated, the
related asset would be removed from the deferred tax asset schedule
with a corresponding reduction in the valuation
allowance.
T
he Company had
federal NOL carryforwards of approximately $18.6 million and $187.8
million at September 30, 2018 and 2017, respectively. The NOL
carryforwards begin to expire during the year ended September 30,
2020 and become fully expired by the end of the fiscal year ended
2037. In addition, the Company has a general business credit as a
result of the credit for increasing research activities
(“R&D credit”) of approximately $1.2 million at
September 30, 2018 and 2017. The R&D credit begins to
expire during the year ended September 30, 2020 and becomes fully
expired during the fiscal year ended 2029.
F-23
Significant components
of the Company’s deferred tax assets as of
September
30, 2018 and 2017
are listed
below
:
|
|
2018
|
2017
|
|
|
|
|
|
NOL
carryforwards
|
$
5,052,000
|
$
70,752,000
|
|
R&D
credit
|
1,221,000
|
1,221,000
|
|
Stock-based
compensation
|
3,097,000
|
6,292,000
|
|
Capitalized
R&D
|
15,518,000
|
21,160,000
|
|
Vacation
and other
|
544,000
|
121,000
|
|
Total
deferred tax assets
|
25,432,000
|
99,546,000
|
|
|
|
|
|
Fixed
assets and intangibles
|
(634,000
)
|
(523,000
)
|
|
Total
deferred tax liability
|
(634,000
)
|
(523,000
)
|
|
|
|
|
|
Net
deferred tax asset
|
24,798,000
|
99,023,000
|
|
Valuation
allowance
|
(24,798,000
)
|
(99,023,000
)
|
|
Ending
Balance
|
$
-
|
$
-
|
The
Company has no federal or state current or deferred tax expense or
benefit. The Company’s effective tax rate differs from
the applicable federal statutory tax rate. The reconciliation
of these rates is as follows at for the years ended September
30:
|
|
2018
|
2017
|
|
|
|
|
|
Federal
Rate
|
24.28
%
|
34.00
%
|
|
Federal
rate change
|
(88.94
)
|
-
|
|
State
tax rate, net of federal benefit
|
4.47
|
6.44
|
|
State
tax rate change
|
-
|
(3.91
)
|
|
Net
operating loss – write-off
|
(161.21
)
|
-
|
|
Other
adjustments
|
(5.95
)
|
(3.39
)
|
|
Permanent
differences
|
(5.79
)
|
25.49
|
|
Change
in valuation allowance
|
233.14
|
(58.63
)
|
|
|
|
|
|
Effective
tax rate
|
0.00
%
|
0.00
%
|
|
|
||
F-24
The
Company applies the provisions of ASC 740,
“Accounting for Uncertainty in Income
Taxes,”
which requires financial statement benefits to
be recognized for positions taken for tax return purposes when it
is more likely than not that the position will be sustained.
The Company has elected to reflect any tax penalties or interest
resulting from tax assessments on uncertain tax positions as a
component of tax expense. The Company has generated federal
net operating losses in tax years ending September 30, 1998 through
2017. These years remain open to examination by the major
domestic taxing jurisdictions to which the Company is
subject.
On
December 22, 2017, the U.S. government enacted comprehensive tax
legislation commonly referred to as the Tax Cuts and Jobs Act (the
"Act" or "Tax Reform"). Among other changes, the Act reduces the
current corporate federal income tax rate from 35% to 21% effective
January 1, 2018. As deferred tax assets and deferred tax
liabilities are measured using the tax rates expected to apply to
taxable income in the years during which the temporary differences
are anticipated to be recovered or settled, the Company determined
that it was necessary to revalue its deferred tax assets and
deferred tax liabilities as of December 31, 2017.
9.
STOCK
COMPENSATION
The
Company recognized the following expenses for options issued or
vested and restricted stock awarded during the year:
|
|
Year
Ended September 30,
|
|
|
|
2018
|
2017
|
|
Employees
|
$
2,743,267
|
$
1,380,500
|
|
Non-employees
|
$
530,736
|
$
232,847
|
Stock
compensation expenses were recorded as general and administrative
expense. During the years ended September 30, 2018 and 2017,
non-employee stock compensation excluded approximately $207,000 and
$45,000, respectively, for future services to be performed (Note
12).
During
the years ended September 30, 2018 and 2017 the fair value of each
option grant was estimated on the date of grant using the
Black-Scholes option-pricing model with the following
assumptions.
|
|
2018
|
2017
|
|
Expected stock
price volatility
|
89.90 – 94.32
%
|
88.54 – 90.67
%
|
|
Risk-free interest
rate
|
2.30 – 3.04
%
|
2.18 – 2.29
%
|
|
Expected life of
options
|
9.67
– 9.70 Years
|
9.69 – 10
Years
|
|
Expected dividend
yield
|
-
|
-
|
F-25
Non-Qualified Stock Option
Plans
– At September 30, 2018, the Company has
collectively authorized the issuance of 3,387,200 shares of common
stock under its Non-Qualified Stock Option Plans. Options typically
vest over a three-year period and expire no later than ten years
after the grant date. Terms of the options were determined by the
Company’s Compensation Committee, which administers the
plans. The Company’s employees, directors, officers, and
consultants or advisors are eligible to be granted options under
the Non-Qualified Stock Option Plans.
Incentive Stock Option Plans
– At September 30, 2018, the Company had collectively
authorized the issuance of 138,400 shares of common stock under its
Incentive Stock Option Plans. Options typically vest over a
three-year period and expire no later than ten years after the
grant date. Terms of the options were determined by the
Company’s Compensation Committee, which administers the
plans. Only the Company’s employees are eligible to be
granted options under the Incentive Stock Option
Plans.
Activity in the
Company’s Non-Qualified and Incentive Stock Option Plans for
the two years ended September 30, 2018 is summarized as
follows:
Non-Qualified and Incentive Stock Option Plans
|
|
Outstanding
|
Exercisable
|
||||||
|
|
|
|
Weighted
|
|
|
|
Weighted
|
|
|
|
|
Weighted
|
Ave
|
Aggregate
|
|
Weighted
|
Ave
|
Aggregate
|
|
|
Number
of
|
Average
|
Remaining
Contractual
|
Intrinsic
|
Number
of
|
Average
|
Remaining
Contractual
|
Intrinsic
|
|
|
Shares
|
Exercise
Price
|
Term
(Years)
|
Value
|
Shares
|
Exercise
Price
|
Term
(Years)
|
Value
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
at September 30, 2016
|
343,575
|
$
59.22
|
5.35
|
$
0
|
232,931
|
$
66.28
|
4.76
|
$
0
|
|
Vested
|
|
|
|
|
63,812
|
$
18.45
|
|
|
|
Granted
(a)
|
932,825
|
$
2.17
|
|
|
|
|
|
|
|
Exercised
|
|
|
|
|
|
|
|
|
|
Forfeited
|
15,795
|
$
9.46
|
|
|
|
|
|
|
|
Expired
|
20,761
|
$
88.80
|
|
|
20,761
|
$
88.80
|
|
|
|
Cancelled
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
at September 30, 2017
|
1,239,844
|
$
16.44
|
8.50
|
$
1,400
|
275,982
|
$
53.53
|
4.91
|
$
0
|
|
Vested
|
|
|
|
|
334,111
|
$
7.63
|
|
|
|
Granted
|
1,958,108
|
$
2.50
|
|
|
|
|
|
|
|
Exercised
|
|
|
|
|
|
|
|
|
|
Forfeited
|
5,426
|
$
3.79
|
|
|
|
|
|
|
|
Expired
|
32,399
|
$
67.73
|
|
|
32,399
|
$
67.73
|
|
|
|
Cancelled
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
at September 30, 2018
|
3,160,127
|
$
7.30
|
8.88
|
$
4,761,973
|
577,694
|
$
26.18
|
6.74
|
$
604,763
|
(a)
Includes 20,000
stock options granted to consultants
F-26
A
summary of the status of the Company’s non-vested options for
the two years ended September 30, 2018 is presented
below:
|
|
Number
of Options
|
Weighted
Average Grant Date Fair Value
|
|
Unvested
at October 1, 2016
|
110,644
|
$
36.96
|
|
Vested
|
(63,812
)
|
|
|
Granted
|
932,825
|
|
|
Forfeited
|
(15,795
)
|
|
|
Unvested
at September 30, 2017
|
963,862
|
$
4.91
|
|
Vested
|
(334,111
)
|
|
|
Granted
|
1,958,108
|
|
|
Forfeited
|
(5,426
)
|
|
|
Unvested
at September 30, 2018
|
2,582,433
|
$
2.48
|
Incentive Stock Bonus Plan
– Up to 640,000 shares are authorized under the 2014
Incentive Stock Bonus Plan. The shares will only be earned upon the
achievement of certain milestones leading to the commercialization
of the Company’s Multikine technology, or specified increases
in the market price of the Company’s stock
.
If the performance or market criteria
are not met as specified in the Incentive Stock Bonus Plan, all or
a portion of the awarded shares will be forfeited. The fair value
of the shares on the grant date was calculated using the market
value on the grant-date for issuances where the attainment of
performance criteria is likely and using a Monte Carlo simulation
for issuances where the attainment of performance criteria is
uncertain. The grant date fair value of shares issued that remain
outstanding as of September 30, 2018 was approximately $8.6
million. The total value of the shares, if earned, is being
expensed over the requisite service periods for each milestone,
provided the requisite service periods are rendered, regardless of
whether the market conditions are met. No compensation cost is
recognized for awards where the requisite service period is not
rendered. During the years ended September 30, 2018 and 2017, the
Company recorded expense relating to the issuance of restricted
stock pursuant to the plan of approximately $1.4 million and
$633,000, respectively. At September 30, 2018, the Company has
unrecognized compensation expense of approximately $1.0 million
which is expected to be recognized over a weighted average period
of 3.3 years.
A
summary of the status of the Company’s restricted common
stock issued from the Incentive Stock Bonus Plan for the two years
ended September 30, 2018 is presented below:
|
|
Number of
Shares
|
Weighted Average
Grant Date Fair Value
|
|
|
|
|
|
Unvested at
September 30, 2016
|
604,000
|
$
13.75
|
|
Vested
|
(136,000
)
|
|
|
Unvested at
September 30, 2017
|
468,000
|
$
13.75
|
|
Vested
|
(156,000
)
|
|
|
Unvested at
September 30, 2018
|
312,000
|
$
13.75
|
F-27
Stock Bonus Plans
– At
September 30, 2018, the Company was authorized to issue up to
783,760 shares of common stock under its Stock Bonus Plans. All
employees, directors, officers, consultants, and advisors are
eligible to be granted shares. As of September 30, 2018, the
Company has issued a total of 297,230 shares of common stock from
the Stock Bonus Plans.
Stock Compensation Plans
– At September 30, 2018, 134,000 shares were authorized for
use in the Company’s Stock Compensation Plans. During the
years ended September 30, 2018, and 2017, zero and 23,202 shares,
respectively, were issued from the Stock Compensation Plans to
consultants for payment of services at a cost of approximately $0
and $60,000, respectively. During the year ended September 30, 2018
and 2017, 3,000 and 13,000 shares, respectively, were issued to
employees and directors from the Stock Compensation Plans as part
of their compensation at a cost of approximately $4,000 and
$24,000, respectively. As of September 30, 2018, the Company has
issued 118,590 shares of common stock from the Stock Compensation
Plans.
10.
EMPLOYEE
BENEFIT PLAN
The
Company maintains a defined contribution retirement plan,
qualifying under Section 401(k) of the Internal Revenue Code,
subject to the Employee Retirement Income Security Act of 1974, as
amended, and covering substantially all Company employees. Each
participant’s contribution is matched by the Company with
shares of common stock that have a value equal to 100% of the
participant’s contribution, not to exceed the lesser of
$10,000 or 6% of the participant’s total compensation. The
Company’s contribution of common stock is valued each quarter
based upon the closing bid price of the Company’s common
stock. During the year ended September 30, 2018, 93,640 shares were
issued to the Company’s 401(k) plan for a cost of
approximately $145,000. During the year ended September 30, 2017,
79,941 shares were issued to the Company’s 401(k) plan for a
cost of approximately $151,000.
11.
COMMITMENTS
AND CONTINGENCIES
Clinical Research Agreements
In
March 2013, the Company entered into an agreement with Aptiv
Solutions to provide certain clinical research services in
accordance with a master service agreement. The Company will
reimburse Aptiv for costs incurred. The agreement required the
Company to make $600,000 in advance payments which were being
credited against future invoices in $150,000 annual increments
through December 2017. As of September 30, 2018, all advance
payments have been expensed.
In April 2013, the Company entered into a
co-development and revenue sharing agreement with Ergomed. Under
the agreement, Ergomed will contribute up to $10 million towards
the Company’s Phase III clinical study in the form of
offering discounted clinical services in exchange for a single
digit percentage of milestone and royalty payments, up to a
specific maximum amount
. In October 2015, the Company
entered into a second
co-development
and revenue sharing agreement with Ergomed
for an additional
$2 million, for a total of $12 million. The Company accounted for
the co-development and revenue sharing agreement 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 Company entered into the co-development and revenue
sharing agreement with Ergomed, it has incurred research and
development expenses of approximately $28.1 million related to
Ergomed’s services. This amount is net of Ergomed’s
discount of approximately $9.4 million. During the years ended
September 30, 2018 and 2017, the Company recorded, approximately
$3.1 million and $5.8 million, respectively, as research and
development expense related to Ergomed’s services. These
amounts were net of Ergomed’s discount of approximately $1.0
and $2.1 million during the years ended September 30, 2018 and
2017, respectively.
In
October 2013, the Company entered into two co-development and
profit sharing agreements with Ergomed. One agreement
supported the Phase 1 study conducted at UCSF for the development
of Multikine as a potential treatment for peri-anal warts in
HIV/HPV co-infected men and women. The other agreement
focuses on the development of Multikine as a potential treatment
for cervical dysplasia in HIV/HPV co-infected women. Ergomed will
assume up to $3 million in clinical and regulatory costs for each
study.
F-28
Lease Agreements
The
Company leases a manufacturing facility near Baltimore, Maryland
under an operating lease (the San Tomas lease). The building was
remodeled in accordance with the Company’s specifications so
that it can be used by the Company to manufacture Multikine for the
Company’s Phase 3 clinical trial and sales of the drug if
approved by the FDA. The lease is for a term of twenty years and
requires annual base rent to escalate each year at 3%. The Company
is required to pay all real estate and personal property taxes,
insurance premiums, maintenance expenses, repair costs and
utilities. The lease allows the Company, at its election, to extend
the lease for two ten-year periods or to purchase the building at
the end of the 20-year lease. The Company contributed approximately
$9.3 million towards the tenant-directed improvements, of which
$3.2 million is being refunded during years six through twenty
through reduced rental payments. The landlord paid approximately
$11.9 million towards the purchase of the building, land and the
tenant-directed improvements. The asset was placed in service in
October 2008.
Because the terms of the original lease agreements
required the Company to be responsible for cost overruns, if there
had been any, but of which there were none, the Company was deemed
to be the owner of the building for accounting purposes under the
build-to-suit guidance in ASC 840-40-55. In addition to the tenant
improvements the Company incurred and capitalized on its balance
sheet, the Company recorded an asset for tenant-directed
improvements and for the costs paid by the lessor to purchase the
building and to perform improvements, as well as a corresponding
liability for the landlord costs. Upon completion of the
improvements, the Company did not meet the
“sale-leaseback” criteria under ASC 840-40-25,
Accounting for
Leases, Sale-Leaseback Transactions,
and therefore, treated the lease as a financing
obligation. Therefore, the asset and corresponding liability were
not derecognized.
As
of September 30, 2018 and 2017, the leased building asset has a net
book value of approximately $16.1 million and $16.6 million,
respectively, and the landlord liability has a balance of $13.4
million and $13.2 million, respectively. The leased asset is being
depreciated using a straight line method of the 20 year lease term
to a residual value. The landlord liability is being amortized over
the 20 years using the effective interest method.
The
Company was required to deposit the equivalent of one year of base
rent in accordance with the San Tomas 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 on September 30, 2018 and
2017.
Approximate future
minimum lease payments under the San Tomas lease as of September
30, 2018 are as follows:
|
Years ending September
30,
|
|
|
2019
|
$
1,808,000
|
|
2020
|
1,872,000
|
|
2021
|
1,937,000
|
|
2022
|
2,004,000
|
|
2023
|
2,073,000
|
|
Thereafter
|
11,685,000
|
|
Total
future minimum lease obligation
|
21,379,000
|
|
Less:
imputed interest on financing obligation
|
(7,999,000
)
|
|
Net
present value of lease financing obligation
|
$
13,380,000
|
F-29
The
Company subleases a portion of its rental space on a month to month
term lease, which requires a 30 day notice for termination. The
sublease rent for the years ended September 30, 2018 and 2017 was
approximately $71,000 and $69,000, respectively.
The
Company leases its research and development laboratory under a 60
month lease which expires February 28, 2022. The operating lease
includes escalating rental payments. The Company is recognizing the
related rent expense on a straight line basis over the full 60
month term of the lease at the rate of approximately $13,000 per
month. As of September 30, 2018 and 2017, the Company has recorded
a deferred rent liability of approximately $12,000 and $5,000,
respectively.
The
Company leases its office headquarters under a 60 month lease which
expires June 30, 2020. The operating lease includes escalating
rental payments. The Company is recognizing the related rent
expense on a straight line basis over the full 60 month term of the
lease at the rate approximately $8,000 per month. As of September
30, 2018 and 2017, the Company has recorded a deferred rent
liability of approximately $14,000 and $18,000,
respectively.
The
Company leases office equipment under a capital lease arrangement.
The term of the capital lease is 60 months and it expires on
October 31, 2021. The monthly lease payment is $505. The lease
bears annual interest at approximately 6.25%.
Approximate
future minimum annual lease payments due under non-cancelable
operating leases, excluding the San Tomas lease, for the years
ending after September 30, 2018 are as follows:
|
Years ending September
30,
|
|
|
2019
|
$
258,000
|
|
2020
|
238,000
|
|
2021
|
163,000
|
|
2022
|
69,000
|
|
Thereafter
|
-
|
|
Total
future minimum lease obligation
|
$
728,000
|
Rent
expense, for the years ended September 30, 2018 and 2017, excluding
the rent paid on the San Tomas lease, was approximately $253,000
and $245,000, respectively.
Vendor Obligations
Further, the
Company has contingent obligations with vendors for work that will
be completed in relation to the Phase 3 trial. The timing of these
obligations cannot be determined at this time. CEL-SCI estimates it
will incur additional expenses of approximately $8.4 million for
the remainder of the Phase 3 clinical trial. It should be noted
that this estimate is based only on the information currently
available in CEL-SCI’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.
F-30
12.
RELATED PARTY TRANSACTIONS
On
August 13, 2018, four officers of the Company (Geert Kersten,
Patricia Prichep, Daniel Zimmerman and John Cipriano) purchased
463,855 restricted shares of the Company’s common stock from
the Company for $385,000, or $0.83 per share. The shares are
subject to the conditions of Rule 144 under the Securities Act of
1933.
On June
22, 2017, CEL-SCI issued convertible notes (Series MM Notes) in the
aggregate principal amount of $1.5 million to six individual
investors. Geert Kersten, the Company’s Chief Executive
Officer, participated in the offering and purchased notes in the
principal amount of $250,000. The terms of Mr. Kersten’s Note
were identical to the other participants. The number of shares of
the Company’s common stock issued upon conversion will be
determined by dividing the principal amount to be converted by
$1.69, which would result in the issuance of 147,929 shares to Mr.
Kersten upon conversion. Along with the other purchasers of the
convertible notes, Mr. Kersten also received Series MM warrants to
purchase up to 147,929 shares of the Company’s common stock.
The Series MM warrants are exercisable at a fixed price of $1.86
per share and expire on June 22, 2022. Shares issuable upon the
exercise of the notes and warrants were restricted securities
unless registered. The shares were registered effective August 8,
2017.
On July
24, 2017, the Company issued convertible notes (Series NN Notes) in
the aggregate principal amount of $1.2 million to 12 individual
investors. A trust in which Geert Kersten, the Company’s
Chief Executive Officer, holds a beneficial interest participated
in the offering and purchased a note in the principal amount of
$250,000. Patricia B. Prichep, the Company’s Senior Vice
President of Operations, participated in the offering and purchased
a note in the principal amount of $25,000. The terms of the
trust’s Note and Ms. Prichep’s Note were identical to
the other participants. The number of shares of the Company’s
common stock issued upon conversion would be determined by dividing
the principal amount to be converted by $2.29, which would result
in the issuance of 109,170 shares to the trust and 10,917 shares to
Ms. Prichep upon conversion. Along with the other purchasers of the
convertible notes, the trust and Ms. Prichep also received Series
NN warrants to purchase up to 109,170 and 10,917 shares,
respectively, of the Company’s common stock. The Series NN
warrants are exercisable at a fixed price of $2.52 per share and
expire on July 24, 2022. Shares issuable upon the exercise of the
notes and warrants were restricted securities unless registered.
The shares were registered effective September 1,
2017.
On
October 30, 2017, in consideration for an extension of the maturity
date of the Series MM and Series NN convertible notes, the Company
issued a total of 583,057 Series RR warrants to the note holders
who agreed to the extension. Mr. Kersten, the trust and Ms. Prichep
received 73,965, 54,585 and 5,459 Series RR warrants, respectively.
The Series RR warrants were classified
as equity warrants in accordance with ASC 815 and the fair value of
the portion attributable to Mr. Kersten, the trust and Ms. Prichep
was calculated to be approximately $151,000 on the date of
issuance.
On June
11, 2018, to induce conversion of the Series MM and NN Notes, all
note holders, including Mr. Kersten and Ms. Prichep were issued
Series UU warrants in an amount equal to 20% of the shares into
which the Notes were convertible. This resulted in the issuance of
29,586, 21,834 and 2,183 Series UU warrants to Mr. Kersten, the
trust and Ms. Prichep, respectively. The Series UU warrants have an
exercise price of $2.80 per share and expired on June 11, 2018.
These terms are identical to the other recipients of the Series UU
Warrants. At that time, all outstanding Notes were converted,
including those held by the related parties.
The Company recognized an expense equal to the
fair value of the consideration transferred in the transaction in
excess of the fair value of consideration issuable under the
original conversion terms. The portion of the expense attributed to
the fair value of the Series UU warrants issued to Mr. Kersten, the
trust and Ms. Prichep was approximately $83,000 and is included as
interest expense on the Statement of Operations. The Series UU
warrants qualify for equity treatment in accordance with ASC
815.
The
Series MM and NN Notes accrued interest at 4%. Upon conversion, the
officers elected to receive the accrued interest in shares of
common stock instead of cash. On the conversion date, the officers
converted approximately $19,000 in accrued interest into 6,930
shares of common stock.
No
other interest payments were made to officers during the years
ended September 30, 2018 and 2017.
Effective August
31, 2016, the Company issued Maximilian de Clara, the
Company’s then President and a director, through the de Clara
Trust, 26,000 shares of restricted stock in payment of past
services. The de Clara Trust was established by Maximilian de
Clara. The shares were issued as follows; 13,000 shares upon his
resignation on August 31, 2016 and 13,000 on August 31, 2017. The
total value of the shares issued was approximately $176,000, of
which approximately $24,000 was expensed during the year ended
September 30, 2017.
F-31
13.
STOCKHOLDERS’ EQUITY
Sales of Securities
On July
2, 2018, the Company closed on a registered direct offering and
concurrent private placement with institutional investors. The
Company received net proceeds of approximately $4.7 million. The
Company issued approximately 3,900,000 registered shares of common
stock at a purchase price of $1.30 per share. Concurrently in a
private placement, the Company issued to the investors warrants to
purchase up to 3,900,000 shares of its common stock. For each share
of common stock purchased in the registered direct offering, the
investors in the private placement received an unregistered warrant
to purchase one share of common stock. The warrants have an
exercise price of $1.75 per share, will be exercisable on January
2, 2019, and will expire on January 2, 2024. The Company also
issued 195,000 Series WW warrants to the placement agent. These
Series WW warrants have an exercise price of $1.63 per share, will
be exercisable on January 2, 2018 and expire on July 2, 2023.
The Company allocated the proceeds
received to the shares and the warrants on a relative fair value
basis. As a result of such allocation, the Company determined the
relative fair value of the Series VV warrants to be approximately
$1.88 million and the relative fair value of the Series WW warrants
to be approximately $0.1 million. The Series VV and WW warrants
qualify for equity treatment in accordance with ASC
815.
On
February 5, 2018, the Company sold 2,501,145 shares of its common
stock at a price of $1.87 per share for total proceeds of
approximately $4.7 million. The common stock was restricted until
registered. The purchasers of the common stock also received Series
TT warrants which allow the purchasers to acquire up to 1,875,860
shares of the Company’s common stock. The warrants are
exercisable at a fixed price of $2.24 per share, were exercisable
on August 6, 2018 and expire on February 5, 2023. The shares and
warrants were registered on February 28, 2018.
The Company allocated the proceeds received to the
shares and the Series TT warrants on a relative fair value basis.
As a result of such allocation, the Company determined the relative
fair value of the Series TT warrants to be approximately $1.56
million. The Series TT warrants qualify for equity treatment in
accordance with ASC 815.
During
the period from issuance through September 30, 2018, 578,983 Series
TT Warrants were exercised for total proceeds of approximately $1.3
million.
On
December 19, 2017 the Company sold 1,289,478 shares of its common
stock at a price of $1.90 per share for total proceeds of
approximately $2.45 million. The common stock was restricted until
registered. The purchasers of the common stock also received
warrants which allow the purchasers to acquire up to 1,289,478
shares of the Company’s common stock. The warrants are
exercisable at a fixed price of $2.09 per share, were exercisable
on December 20, 2017 and will expire on December 18, 2022. The
shares and warrants were registered on January 23, 2018.
The Company allocated the proceeds
received to the shares and the Series SS warrants on a relative
fair value basis. As a result of such allocation, the Company
determined the relative fair value of the Series SS warrants to be
approximately $1.0 million. The Series SS warrants qualify for
equity treatment in accordance with ASC 815.
During
the period from issuance through September 30, 2018, 328,948 Series
SS warrants were exercised for total proceeds of approximately $0.7
million.
On
August 22, 2017, the Company entered into a securities purchase
agreement with institutional investors whereby it sold 1,750,000
shares of its common stock for net proceeds of approximately $3.2
million, or $2.00 per share, in a registered direct offering. In a
concurrent private placement, the Company also issued to the
purchasers of the Company’s common stock Series PP warrants
to purchase 1,750,000 shares of common stock. In addition, the
Company issued 87,500 Series QQ warrants to the placement agent as
part of its compensation. See Note 4 for more information with
respect to the Series PP & QQ warrants.
F-32
On July
26, 2017, the Company entered into a securities purchase agreement
with an investor whereby it sold 100,000 shares of its common stock
for gross proceeds of $229,000, or $2.29 per share, in a registered
offering. In a concurrent private placement, the Company also
issued to the purchaser of that common stock Series OO warrants to
purchase 60,000 shares of the Company’s common stock. See
Note 4 for more information with respect to the Series OO
warrants.
On
April 30, 2017, the Company entered into a securities purchase
agreement with an institutional investor whereby it sold 527,960
shares of its common stock for net proceeds of approximately $1.4
million, or $2.875 per share, in a registered direct offering. In a
concurrent private placement, the Company also issued to the
purchaser of the Company’s common stock, Series KK warrants
to purchase 395,970 shares of common stock. In addition, the
Company issued 26,398 Series LL warrants to the Placement Agent as
part of its compensation. See Note 4 for more information with
respect to the Series KK and LL warrants.
On
March 14, 2017, the Company sold 600,000 registered shares of
common stock and 600,000 Series II warrants to purchase 600,000
unregistered shares of common stock at combined offering price of
$2.50 per share.
In addition,
the Company issued 30,000 Series JJ warrants to purchase 30,000
shares of unregistered common stock to the placement agent.
The net proceeds from this
offering were approximately $1.3 million.
See
Note 4 for more information with respect to the Series II and JJ
warrants.
On
February 23, 2017, the Company sold 400,000 registered shares of
common stock and 400,000 Series GG warrants to purchase 400,000
unregistered shares of common stock at a combined price of $2.50
per share.
In addition, the
Company issued to the placement agent, 20,000 Series HH warrants to
purchase 20,000 shares of unregistered common stock.
The net proceeds from this
offering were approximately $0.8 million.
See
Note 4 for more information with respect to the Series GG and HH
warrants.
On December 8, 2016, the Company sold 1,360,960
shares of common stock and warrants to purchase common stock at a
price of $3.13 in a public offering. The warrants consist of
680,480 Series CC warrants to purchase 680,480 shares of common
stock, 1,360,960 Series DD warrants to purchase 1,360,960 shares of
common stock and 1,360,960 Series EE warrants to purchase 1,360,960
shares of common stock. In addition, the Company issued 68,048
Series FF warrants to purchase 68,048 shares of common stock to the
placement agent. Net proceeds from this
offering were approximately $3.7 million.
See
Note 4 for more information with respect to the Series CC, DD, EE
and FF warrants.
Other Equity Transactions
Periodically, the
Company has entered into Securities Purchase Agreements with
Ergomed plc, one of the Company’s Clinical Research
Organizations responsible for managing the Company’s Phase 3
clinical trial, to facilitate a partial payment of the accounts
payable balances due Ergomed. Under the Agreements, the Company
issued Ergomed shares of common stock as a forbearance fee in
exchange for Ergomed’s agreement to provisionally forbear
collection of the payables in an amount equal to the net proceeds
from the resales of the shares issued to Ergomed. Upon issuance,
the Company expenses the full value of the shares as interest
expense and subsequently offsets the expense as amounts are
realized through the resale by Ergomed and reduces accounts payable
to Ergomed. During the year ended September 30, 2018, the Company
issued Ergomed 2,260,000 shares valued at approximately $5.5
million. During the year ended September 30, 2017, the Company
issued Ergomed 480,000 shares valued at approximately $1.3 million.
During the years ended September 30, 2018 and 2017, Ergomed
credited the Company approximately $3.2 million and $0.1 million
for the resale of shares. As a result, the Company has recorded a
net interest expense of $2.3 million and $1.2 million for the years
ended September 30, 2018 and 2017, respectively. As of September
30, 2018, Ergomed holds 918,900 shares and may resell the shares or
return the shares to the Company for cancellation until December
31, 2018. As of September 30, 2017, Ergomed held 415,208 shares,
all of which were resold during the year ended September 30,
2018.
14.
FAIR
VALUE MEASUREMENTS
In
accordance with the provisions of ASC 820, “
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 the
future amounts.
ASC 820
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:
o
Level 1 –
Observable inputs such as quoted prices in active markets for
identical assets or liabilities
o
Level 2 –
Inputs other than quoted prices that are observable for the asset
or liability, either directly or indirectly. These include quoted
prices for similar assets or liabilities in active markets, quoted
prices for identical or similar assets or liabilities in markets
that are not active and amounts derived from valuation models where
all significant inputs are observable in active
markets
o
Level 3 –
Unobservable inputs that reflect management’s
assumptions
For
disclosure purposes, assets and liabilities are classified in their
entirety in the fair value hierarchy level based on the lowest
level of input that is significant to the overall fair value
measurement. The Company’s assessment of the significance of
a particular input to the fair value measurement requires judgment
and may affect the placement within the fair value hierarchy
levels.
F-33
The
table below sets forth the liabilities measured at fair value on a
recurring basis, by input level, on the balance sheet at September
30, 2018:
|
|
Quoted
Prices in Active Markets for Identical Liabilities (Level
1)
|
Significant
Other Observable Inputs (Level 2)
|
Significant
Unobservable Inputs (Level 3)
|
Total
|
|
Derivative
Instruments
|
$
33
|
$
-
|
$
9,317,031
|
$
9,317,064
|
The
table below sets forth the liabilities measured at fair value on a
recurring basis, by input level, on the balance sheet at September
30, 2017:
|
|
Quoted
Prices in Active Markets for Identical Liabilities (Level
1)
|
Significant
Other Observable Inputs (Level 2)
|
Significant
Unobservable Inputs (Level 3)
|
Total
|
|
Derivative
Instruments
|
$
32,773
|
$
-
|
$
2,020,629
|
$
2,053,402
|
The
following sets forth the reconciliation of beginning and ending
balances related to fair value measurements using significant
unobservable inputs (Level 3), as of September 30:
|
|
2018
|
2017
|
|
Beginning
balance
|
$
2,020,629
|
$
5,283,573
|
|
Issuances
|
-
|
4,665,683
|
|
Exercises
|
(595,780
)
|
-
|
|
Net realized
and unrealized derivative loss (gain)
|
7,892,182
|
(7,928,627
)
|
|
Ending
balance
|
$
9,317,031
|
$
2,020,629
|
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. At September 30, 2018, the
Company’s Level 3 derivative instruments have a weighted
average fair value of $1.50 per share and a weighted average
exercise price of $8.50 per share. Fair values were determined
using a weighted average risk free interest rate of 2.68% and 121%
volatility. The instruments have a weighted average time to
maturity of 2.3 years. At September 30, 2017, the Company’s
Level 3 derivative instruments have a weighted average fair value
of $0.29 per share and a weighted average exercise price of $5.41
per share. Fair values were determined using a weighted average
risk free interest rate of 1.85% and 80% volatility. The
instruments have a weighted average time to maturity of 4.55
years.
15. NET LOSS PER COMMON SHARE
Basic
loss per share is computed by dividing net loss available to common
shareholders by the weighted average number of common shares
outstanding during the period. The Company’s potentially
dilutive shares, which include outstanding common stock options,
common stock warrants, restricted stock and shares issuable on
convertible debt, have not been included in the computation of
diluted net loss per share for all periods presented, as the result
would be anti-dilutive. For the years presented, the gain on
derivative instruments is not included in net loss available to
common shareholders for purposes of computing dilutive loss per
share because its effect is anti-dilutive.
F-34
The
following table provides a reconciliation of the numerators and
denominators of the basic and diluted per-share
computations:
|
|
Year
ended September 30,
|
|
|
|
2018
|
2017
|
|
Loss per share - basic
|
|
|
|
Net
loss available to common shareholders - basic
|
$
(31,851,573
)
|
$
(14,427,055
)
|
|
Weighted
average shares outstanding - basic
|
17,004,722
|
7,891,843
|
|
Basic
loss per common share
|
$
(1.87
)
|
$
(1.83
)
|
|
Loss per share - diluted
|
|
|
|
Net
loss available to common shareholders - basic
|
$
(31,851,573
)
|
$
(14,427,055
)
|
|
Gain
on derivatives (1)
|
-
|
(677,287
)
|
|
Net
loss available to common shareholders - diluted
|
$
(31,851,573
)
|
$
(15,104,342
)
|
|
Weighted
average shares outstanding - basic
|
17,004,722
|
7,891,843
|
|
Incremental
shares underlying dilutive "in the money" warrants (1)
|
-
|
10,804
|
|
Weighted
average shares outstanding - diluted
|
17,004,722
|
7,902,647
|
|
Diluted
loss per common share
|
$
(1.87
)
|
$
(1.91
)
|
|
(1) Includes series GG & II for the year ended September 30,
2017
|
|
|
The
gain on derivative instruments that contain exercise prices lower
than the average market share 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 loss per share
excludes the following dilutive securities because their inclusion
would have been anti-dilutive as of September 30:
|
|
2018
|
2017
|
|
Options and
Warrants
|
11,794,603
|
2,538,130
|
|
Convertible
Debt
|
-
|
1,166,106
|
|
Unvested Restricted
Stock
|
312,000
|
604,000
|
|
Total
|
12,106,603
|
4,308,236
|
F-35
16. SUBSEQUENT EVENTS
In
accordance with ASC 855, “
Subsequent Events
”, the Company
has reviewed subsequent events through the date of the
filing.
F-36
|
|
|
SIGNATURES
|
In
accordance with Section 13 or 15(a) of the Securities Exchange Act
of 1934, the Registrant has caused this Report to be signed on its
behalf by the undersigned, thereunto duly authorized on the 19th
day of December 2018.
|
|
CEL-SCI
CORPORATION
|
|
|
|
|
|
|
|
|
|
By:
|
/s/ Geert
Kersten
|
|
|
|
|
Name Geert
Kersten
|
|
|
|
|
Title
Chief Executive Officer
|
|
Pursuant to the
requirements of the Securities Act of l934, this Report has been
signed below by the following persons on behalf of the Registrant
and in the capacities and on the dates indicated.
|
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
|
|
/s/ Geert R.
Kersten
|
|
Chief Executive,
Principal Accounting, Principal Financial Officer and a
Director
|
|
December 19,
2018
|
|
Geert R.
Kersten
|
|
|
|
|
|
|
|
|
|
|
|
/s/ Peter R.
Young
|
|
Director
|
|
December 19,
2018
|
|
Peter R
Young
|
|
|
|
|
|
|
|
|
|
|
|
/s/ Bruno
Baillavoine
|
|
Director
|
|
December 19,
2018
|
|
Bruno
Baillavoine
|
|
|
|
|
|
|
|
|
|
|
|
/s/ Robert
Watson
|
|
Director
|
|
December 19,
2018
|
|
Robert
Watson
|
|
|
|
|
TABLE OF CONTENTS
Part IItem 1. BusinessItem 1B. Risk FactorsItem 1B. Unresolved Sec CommentsItem 2. PropertiesItem 3. Legal ProceedingsItem 4. Mine Safety DisclosuresItem 5. Market For Cel-sci's Common Equity and Related Stockholder MattersItem 6. Selected Financial DataItem 7. Management's Discussion and Analysis Of Financial Condition and Results Of OperationsItem 7A. Quantitative and Qualitative Disclosure About Market RisksItem 8. Financial Statements and Supplementary DataItem 9. Changes in and Disagreements with Accountants on Accounting and Financial DisclosureItem 9A. Controls and ProceduresItem 9B. Other InformationItem 10. Directors and Executive Officers Of The RegistrantItem 11. Executive CompensationItem 12. Security Ownership Of Certain Beneficial Owners and Management and Related Stockholder MattersItem 13. Certain Relationships and Related TransactionsItem 14. Principal Accounting Fees and ServicesItem 15. Exhibits and Financial Statement Schedules