CEL SCI CORP - Interim / Quarterly Report 2020

style header

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF

THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2020

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF

THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ___ to __.

Commission File Number 001-11889

CEL-SCI CORPORATION

Colorado	84-0916344
State
or other jurisdiction incorporation	(IRS)
Employer Identification Number

8229 Boone Boulevard, Suite 802

Vienna, Virginia 22182

Address of principal executive offices

(703) 506-9460

Registrant's telephone number, including area code

Securities registered pursuant to Section 12(b) of the Act:

| Title of each class | Trading Symbol(s) | Name of each exchange on which
registered |
| --- | --- | --- |
| Common
Stock | CVM | NYSE
American |

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) had been subject to such filing requirements for the past 90 days.

Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check One):

Large accelerated filer	☐	Accelerated filer	☒
Non-accelerated
filer	☐	Smaller reporting company	☒
		Emerging
growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the Registrant is a shell company (as defined in Exchange Act Rule 12b-2 of the Exchange Act).

Yes ☐ No ☒

Class of Stock	No. Shares Outstanding	Date
Common	37,633,894	May 5,
2020

style footer

page break

TABLE OF CONTENTS

PART I FINANCIAL INFORMATION

Item 1.		Page
	Condensed Balance Sheets at March 31, 2020 and September 30, 2019 (unaudited)	3
	Condensed Statements of Operations for the six months ended March 31, 2020 and 2019
(unaudited)	4
	Condensed Statements of Operations for the three months ended March 31, 2020 and 2019
(unaudited)	5
	Condensed Statement of Stockholders’ Equity for the six
months ended March 31, 2020 and 2019 (unaudited)	6
	Condensed Statements of Cash Flows for the six months ended March 31, 2020 and 2019
(unaudited)	7
	Notes to Condensed Financial Statements (unaudited)	9
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of
Operations	22
Item 3.	Quantitative and Qualitative Disclosures about Market
Risks	25
Item 4.	Controls and Procedures	25
PART II
Item 2.	Unregistered Sales of Equity Securities and Use of
Proceeds	27
Item 6.	Exhibits	27
	Signatures	28

page break

CEL-SCI CORPORATION
CONDENSED BALANCE SHEETS
(UNAUDITED)

	MARCH 31,	SEPTEMBER 30,
ASSETS	2020	2019
Current
Assets:
Cash
and cash equivalents	$ 14,329,870	$ 8,444,774
Receivables	62,289	62,765
Prepaid
expenses	565,246	524,953
Supplies
used for R&D and manufacturing	849,548	782,363
Total
current assets	15,806,953	9,814,855
Finance
lease right of use assets	12,741,195	-
Operating
lease right of use assets	899,508	-
Property
and equipment, net	3,286,273	15,825,636
Patent
costs, net	312,380	311,586
Deposits	1,670,917	1,670,917
Total
Assets	$ 34,717,226	$ 27,622,994
LIABILITIES
AND STOCKHOLDERS' EQUITY
Current
Liabilities:
Accounts
payable	$ 1,139,914	$ 1,586,478
Accrued
expenses	316,866	34,432
Due
to employees	675,408	709,442
Derivative
instruments, current portion	2,156,857	674,442
Lease
liabilities, current portion	977,264	-
Other
current liabilities	5,000	14,956
Total
current liabilities	5,271,309	3,019,750
Derivative
instruments, net of current portion	4,067,436	5,813,868
Finance
lease obligations, net of current portion	12,232,493	13,508,156
Operating
lease obligations, net of current portion	812,479	-
Other
liabilities	125,000	147,553
Total
liabilities	22,508,717	22,489,327
Commitments
and Contingencies
STOCKHOLDERS'
EQUITY
Preferred
stock, $.01 par value-200,000 shares authorized;
-0-
shares issued and outstanding	-	-
Common
stock, $.01 par value - 600,000,000 shares authorized;
37,336,411
and 35,231,776 shares issued and outstanding
at
March 31, 2020 and September 30, 2019, respectively	373,365	352,318
Additional
paid-in capital	379,943,932	358,507,603
Accumulated
deficit	(368,108,788 )	(353,726,254 )
Total
stockholders' equity	12,208,509	5,133,667
TOTAL
LIABILITIES AND STOCKHOLDERS' EQUITY	$ 34,717,226	$ 27,622,994
See
notes to condensed financial statements.

page break line

| CEL-SCI
CORPORATION |
| --- |
| CONDENSED
STATEMENTS OF OPERATIONS |
| SIX
MONTHS ENDED MARCH 31, 2020 and 2019 |
| (UNAUDITED) |

	2020	2019
Grant
income	$ 334,232	$ 277,183
Operating
Expenses:
Research
and development	8,598,960	6,304,260
General
and administrative	5,197,418	3,313,985
Total
operating expenses	13,796,378	9,618,245
Operating
loss	(13,462,146 )	(9,341,062 )
Other
income	36,896	36,127
(Loss)/gain
on derivative instruments	(2,282,518 )	4,589,135
Other
non-operating gains	1,725,180	421,353
Interest
expense, net	(504,190 )	(907,332 )
Net
loss	(14,486,778 )	(5,201,779 )
Modification
of warrants	(21,734 )	-
Net
loss available to common shareholders	$ (14,508,512 )	$ (5,201,779 )
Net
loss per common share
BASIC	$ (0.41 )	$ (0.18 )
DILUTED	$ (0.41 )	$ (0.19 )
Weighted
average common shares outstanding
BASIC	35,621,711	28,543,417
DILUTED	35,621,711	28,548,818
See
notes to condensed financial statements.

page break line

| CEL-SCI
CORPORATION |
| --- |
| CONDENSED
STATEMENTS OF OPERATIONS |
| THREE
MONTHS ENDED MARCH 31, 2020 and 2019 |
| (UNAUDITED) |

	2020	2019
Grant
income	$ 298,726	$ 150,769
Operating
Expenses:
Research
and development	4,402,347	2,832,546
General
and administrative	2,558,522	1,624,823
Total
operating expenses	6,960,869	4,457,369
Operating
loss	(6,662,143 )	(4,306,600 )
Other
income	18,448	18,216
Loss
on derivative instruments	(3,049,027 )	(967,171 )
Other
non-operating gains (losses)	934,511	(730,823 )
Interest
expense, net	(253,407 )	(461,303 )
Net
loss	(9,011,618 )	(6,447,681 )
Modification
of warrants	(21,734 )	-
Net
loss available to common shareholders	$ (9,033,352 )	$ (6,447,681 )
Net
loss per common share
BASIC	$ (0.25 )	$ (0.22 )
DILUTED	$ (0.25 )	$ (0.22 )
Weighted
average common shares outstanding
BASIC	36,165,050	29,113,910
DILUTED	36,165,050	29,113,910
See
notes to condensed financial statements.

page break line

| CEL-SCI
CORPORATION |
| --- |
| STATEMENTS
OF STOCKHOLDERS' EQUITY |
| (UNAUDITED) |

	Common	Stock	Additional — Paid-In	Accumulated
	Shares	Amount	Capital	Deficit	Total
BALANCES AT
OCTOBER 1, 2019	35,231,776	$ 352,318	$ 358,507,603	$ (353,726,254 )	$ 5,133,667
Adoption of
new accounting standard				104,244	104,244
Issuance of
common stock	606,395	6,064	5,043,939	-	5,050,003
Warrant
exercises	132,900	1,329	295,772	-	297,101
Equity based
compensation - employees	-	-	1,800,225	-	1,800,225
401(k)
contributions paid in common stock	4,474	45	40,892	-	40,937
Stock issued
to nonemployees for service	15,819	158	84,289	-	84,447
Purchase of
stock by officer	3,725	37	24,963	-	25,000
Share issuance
costs	-	-	(92,150 )	-	(92,150 )
Net
loss	-	-	-	(5,475,160 )	(5,475,160 )
BALANCES AT
DECEMBER 31, 2019	35,995,089	359,951	365,705,533	(359,097,170 )	6,968,314
Proceeds from
the sale of common stock	721,459	7,215	7,860,414	-	7,867,629
Warrant
exercises	562,100	5,621	4,313,085	-	4,318,706
Equity based
compensation - employees	-	-	1,780,979	-	1,780,979
401(k)
contributions paid in common stock	3,376	34	38,925	-	38,959
Stock issued
to nonemployees for service	17,120	171	234,853	-	235,024
Purchase of
stock by officers and directors	16,787	168	159,822	-	159,990
Option
exercises	20,480	205	49,693	-	49,898
Share issuance
costs	-	-	(199,372 )	-	(199,372 )
Net
loss	-	-		(9,011,618 )	(9,011,618 )
BALANCES AT
MARCH 31, 2020	37,336,411	$ 373,365	$ 379,943,932	$ (368,108,788 )	$ 12,208,509

	Common	Stock	Additional — Paid-In	Accumulated
	Shares	Amount	Capital	Deficit	Total
BALANCES AT
OCTOBER 1, 2018	28,034,487	$ 280,346	$ 331,312,184	$ (331,591,614 )	$ 916
Warrant
exercises	298,682	2,987	646,766	-	649,753
401(k)
contributions paid in common stock	12,279	123	35,118	-	35,241
Stock issued
to nonemployees for service	62,784	628	201,752	-	202,380
Shares returned for settlement of
clinical research costs	(564,905 )	(5,649 )	5,649	-	-
Equity based
compensation - employees	-	-	573,660	-	573,660
Net
income	-	-	-	1,245,902	1,245,902
BALANCES AT
DECEMBER 31, 2018	27,843,327	278,435	332,775,129	(330,345,712 )	2,707,852
Warrant
exercises	1,523,933	15,239	2,640,395	-	2,655,634
401(k)
contributions paid in common stock	10,419	104	36,779	-	36,883
Stock issued
to nonemployees for service	77,449	774	224,855	-	225,629
Equity based
compensation - employees	(3,500 )	(35 )	530,865	-	530,830
Shares issued for settlement of
clinical research costs	500,000	5,000	1,285,000	-	1,290,000
Share issuance
costs	-	-	(43,625 )	-	(43,625 )
Net
loss	-	-	-	(6,447,681 )	(6,447,681 )
BALANCES AT
MARCH 31, 2019	29,951,628	$ 299,517	$ 337,449,398	$ (336,793,393 )	$ 955,522

See notes to condensed financial statements.

page break line

| CEL-SCI
CORPORATION |
| --- |
| CONDENSED
STATEMENTS OF CASH FLOWS |
| SIX
MONTHS ENDED MARCH 31, 2020 and 2019 |
| (UNAUDITED) |

	2020	2019
Net
loss	$ (14,486,778 )	$ (5,201,779 )
Adjustments
to reconcile net loss to
net
cash used in operating activities:
Depreciation
and amortization	951,831	316,083
Share-based
payments for services	347,227	511,424
Equity
based compensation	3,581,204	1,104,490
Common
stock contributed to 401(k) plan	79,896	72,124
Shares
issued for settlement of clinical research costs	-	1,290,000
Loss
(Gain) on derivative instruments	2,282,518	(4,589,135 )
Capitalized
lease interest	-	64,432
(Increase)/decrease
in assets:
Receivables	476	(4,579 )
Prepaid
expenses	96,951	(74,741 )
Supplies
used for R&D and manufacturing	(67,185 )	(115,774 )
Increase/(decrease)
in liabilities:
Accounts
payable	(765,872 )	(1,489,234 )
Accrued
expenses	20,110	82,580
Due
to employees	(34,034 )	245,074
Other
liabilities	3,438	(1,057 )
Net
cash used in operating activities	(7,990,218 )	(7,790,092 )
CASH
FLOWS FROM INVESTING ACTIVITIES:
Purchases
of property and equipment	(752,797 )	(160,920 )
Expenditures
for patent costs	(13,996 )	(67,661 )
Net
cash used in investing activities	(766,793 )	(228,581 )
CASH
FLOWS FROM FINANCING ACTIVITIES:
Proceeds
from issuance of common stock	12,917,632	-
Payments
of stock issuance costs	(190,553 )	(80,224 )
Proceeds
from the purchase of stock by officers and directors	184,990	-
Proceeds
from exercises of warrants	2,069,272	3,305,387
Proceeds
from exercises of options	49,898	-
Payments
on obligations under finance lease	(389,132 )	(2,521 )
Net
cash provided by financing activities	14,642,107	3,222,642
NET
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS	5,885,096	(4,796,031 )
CASH
AND CASH EQUIVALENTS, BEGINNING OF PERIOD	8,444,774	10,310,044
CASH
AND CASH EQUIVALENTS, END OF PERIOD	$ 14,329,870	$ 5,514,013
See
notes to condensed financial statements.

page break line

| CEL-SCI
CORPORATION | | |
| --- | --- | --- |
| CONDENSED
STATEMENTS OF CASH FLOWS | | |
| SIX
MONTHS ENDED MARCH 31, 2020 and 2019 | | |
| SUPPLEMENTAL
SCHEDULE OF NON-CASH INVESTING AND FINANCING
ACTIVITIES: | | |
| | 2020 | 2019 |
| Property
and equipment included in current liabilities | $ 318,984 | $ - |
| Capitalizable
patent costs included in current liabilities | $ 13,465 | $ - |
| Right
of use asset acquired and liability incurred | $ 13,712 | $ - |
| Finance
lease obligation included in accounts payable | $ 983 | $ 428 |
| Prepaid
consulting services paid with issuance of common stock | $ 137,244 | $ 83,415 |
| Accrued
consulting services to be paid with common stock | $ 165,000 | $ - |
| Fair
value of warrant liabilities on date of exercise | $ 2,546,535 | $ - |
| Stock
issuance costs included in current liabilities | $ 116,549 | $ 10,000 |
| Cash
paid for interest | $ 585,748 | $ 902,091 |

page break line

CEL-SCI CORPORATION

NOTES TO CONDENSED FINANCIAL STATEMENTS

SIX MONTHS ENDED MARCH 31, 2020 AND 2019 (UNAUDITED)

BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The accompanying condensed financial statements of CEL-SCI Corporation (the Company) are unaudited and certain information and footnote disclosures normally included in the annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP) have been omitted pursuant to the rules and regulations of the Securities and Exchange Commission. While management of the Company believes that the disclosures presented are adequate to make the information presented not misleading, these interim condensed financial statements should be read in conjunction with the financial statements and notes included in the Company’s annual report on Form 10-K/A for the year ended September 30, 2019.

In the opinion of management, the accompanying unaudited condensed financial statements contain all adjustments necessary for a fair presentation of the Company’s financial position as of March 31, 2020 and the results of its operations for the six months then ended. The condensed balance sheet as of September 30, 2019 is derived from the September 30, 2019 audited financial statements. On October 1, 2019, the Company adopted Accounting Standards Update (ASU) No. 2016-02 , “ Leases” and its related amendments (collectively referred to as Topic 842 and codified as Accounting Standards Codification 842, or ASC 842) using the modified retrospective transition approach. In accordance with this adoption method, results for the reporting period ended March 31, 2020 are presented under the new standard, while prior period results continue to be reported under the previous standard. All other significant accounting policies have been consistently applied in the interim financial statements and the annual financial statements. The results of operations for the six and three months ended March 31, 2020 and 2019 are not necessarily indicative of the results to be expected for the entire year.

The financial statements have been prepared assuming that the Company will continue as a going concern, but due to recurring losses from operations and future liquidity needs, there is substantial doubt about the Company’s ability to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. Refer to discussion in Note B.

Summary of Significant Accounting Policies:

Research and Office Equipment and Leasehold Improvements –Research and office equipment is recorded at cost and depreciated using the straight-line method over estimated useful lives of five to seven years. Leasehold improvements are depreciated over the shorter of the estimated useful life of the asset or the term of the lease. Repairs and maintenance which do not extend the life of the asset are expensed when incurred. The fixed assets are reviewed on a quarterly basis to determine if any of the assets are impaired.

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

Research and Development Costs - Research and development costs are expensed as incurred. Management accrues Clinical Research Organization (“CRO”) expenses and clinical trial study expenses based on services performed and relies on the CROs to provide estimates of those costs applicable to the completion stage of a study. Estimated accrued CRO costs are subject to revisions as such studies progress to completion. The Company charges revisions to estimated expense in the period in which the facts that give rise to the revision become known.

page break

Income Taxes - The Company uses the asset and liability method of accounting for income taxes. Under the asset and liability method, deferred tax assets and liabilities are recognized for future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating and tax loss carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. The Company records a valuation allowance to reduce the deferred tax assets to the amount that is more likely than not to be recognized. A full valuation allowance was recorded against the deferred tax assets as of March 31, 2020 and September 30, 2019.

Derivative Instruments – The Company has entered into financing arrangements that consist of freestanding derivative instruments that contain embedded derivative features. The Company accounts for these arrangements in accordance with ASC 815, “ Accounting for Derivative Instruments and Hedging Activities .” In accordance with ASC 815, derivative instruments and hybrid instruments are recognized as either assets or liabilities in the balance sheet and are measured at fair value with gains or losses recognized in earnings or other comprehensive income depending on the nature of the derivative or hybrid instruments. The Company determines the fair value of derivative instruments and hybrid instruments based on available market data using appropriate valuation models considering all the rights and obligations of each instrument. The derivative liabilities are re-measured at fair value at the end of each interim period.

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

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

The Company’s stock options are not transferable, and the actual value of the stock options that an employee may realize, if any, will depend on the excess of the market price on the date of exercise over the exercise price. The Company has based its assumption for stock price volatility on the variance of daily closing prices of the Company’s stock. The risk-free interest rate assumption was based on the U.S. Treasury rate at date of the grant with term equal to the expected life of the option. Forfeitures are accounted for when they occur. The expected term of options represents the period that options granted are expected to be outstanding and has been determined based on an analysis of historical exercise behavior. If any of the assumptions used in the Black-Scholes model change significantly, stock-based compensation expense for new awards may differ materially in the future from that recorded in the current period.

Vesting of restricted stock granted under the Incentive Stock Bonus Plan is subject to service, performance and market conditions and meets the classification of equity awards. These awards were measured at market value on the grant-dates for issuances where the attainment of performance criteria is likely and at fair value on the grant-dates, using a Monte Carlo simulation for issuances where the attainment of performance criteria is uncertain. The total compensation cost will be expensed over the estimated requisite service period.

Newly Adopted Accounting Pronouncements

Effective October 1, 2019, the Company adopted ASC 842. ASC 842 requires that lessees recognize right-of-use assets and lease liabilities that are measured at the present value of the future lease payments at the lease commencement date. Subsequent measurement, including the presentation of expenses and cash flows, depends on the classification of the lease as either a finance lease or an operating lease. The Company elected the optional transition method that allows for a cumulative-effect adjustment in the period of adoption and did not restate prior periods. The Company also elected the transition package of three practical expedients which eliminates the requirements to reassess prior conclusions about lease identification, lease classification and initial direct costs. Further, the Company elected a short-term lease exception policy permitting the option to not apply the recognition requirements of this standard to short-term leases (i.e., leases with terms of 12 months or less) and an accounting policy to account for lease and non-lease components as a single component. The Company’s lease portfolio includes both finance and operating leases. The impact of adopting ASC 842 was to increase long term assets by approximately $1.0 million, decrease total liabilities by approximately $0.9 million and record a cumulative effect adjustment of approximately $0.1 million to opening accumulated deficit.

page break

In June 2018, the Financial Accounting Standards Board ("FASB") issued ASU 2018-07, Compensation—Stock Compensation (Topic 718 ), which expands the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees, and thus, the accounting for share-based payments to non-employees will be substantially aligned. The Company adopted ASU 2018-07 as of October 1, 2019 with no impact on its financial statements and related disclosures.

New Accounting Pronouncements

In August 2018, the FASB issued ASU 2018-13, “ Fair Value Measurement - Disclosure Framework (Topic 820 )” (“ASU 2018-13”). The updated guidance improves the disclosure requirements on fair value measurements. The updated guidance becomes effective for the Company on October 1, 2021. Early adoption is permitted for any removed or modified disclosures. The Company is currently assessing the timing and impact of adopting the updated provisions.

The Company has considered all other recently issued accounting pronouncements and does not believe the adoption of such pronouncements will have a material impact on its financial statements.

OPERATIONS AND FINANCING

On January 30, 2020, the World Health Organization (“WHO”) announced a global health emergency because of a new strain of coronavirus originating in Wuhan, China (the “COVID-19 outbreak”) and the risks to the international community as the virus spreads globally beyond its point of origin. In March 2020, because of the rapid increase in exposure globally, the WHO classified the COVID-19 outbreak as a pandemic. The full impact of the COVID-19 outbreak continues to evolve as of the date of this report. As such, it is uncertain as to the full magnitude that the pandemic will have on the Company’s financial condition, liquidity, and future results of operations. Management is actively monitoring the impact of the global situation on its financial condition, liquidity, operations, suppliers, industry, and workforce. Given the daily evolution of the COVID-19 outbreak and the global responses to curb its spread, the Company is not able to estimate the effects of the COVID-19 outbreak on its results of operations, financial condition, or liquidity for fiscal year 2020. Although the Company cannot estimate the length or gravity of the impact of the COVID-19 outbreak, if the pandemic continues, it may have an adverse effect on the Company’s results of future operations, financial position, and liquidity in fiscal year 2020.

On March 27, 2020, the United States enacted the Coronavirus Aid, Relief and Economic Security Act (CARES Act). The Cares Act is an emergency economic stimulus package that includes spending and tax breaks to strengthen the United States economy and fund a nationwide effort to curtail the effect of COVID-19. While the CARES Act provides sweeping tax changes in response to the COVID-19 pandemic, some of the more significant provisions which are expected to impact the Company’s financial statements include removal of certain limitations on utilization of net operating losses, increasing the loss carryback period for certain losses to five years, and increasing the ability to deduct interest expense, as well as amending certain provisions of the previously enacted Tax Cuts and Jobs Act. The Company does not expect the enactment of the CARES Act to have a material impact to its financial position, results of operations or cash flows.

The Company has incurred significant costs since its inception for the acquisition of certain patented and unpatented proprietary technology and know-how relating to the human immunological defense system, patent applications, research and development, administrative costs, construction of laboratory facilities, and clinical trials. The Company has funded such costs with proceeds from loans and the public and private sale of its common stock. The Company will be required to raise additional capital or find additional long-term financing to continue with its research efforts. The ability to raise capital may be dependent upon market conditions that are outside the control of the Company. The ability of the Company to complete the necessary clinical trials and obtain FDA approval for the sale of products to be developed on a commercial basis is uncertain. Ultimately, the Company must complete the development of its products, obtain the appropriate regulatory approvals and obtain sufficient revenues to support its cost structure. The Company is taking cost-cutting initiatives, as well as exploring other sources of funding, to finance operations over the next 12 months. The Company believes there is a high likelihood that it will continue to receive funds from private and public offerings and warrant conversions similar to the way it has substantially funded operations for the past 12 months. However, there can be no assurance that the Company will be able to raise sufficient capital to support its operations.

page break

The Company is currently in the final stages of its large multi-national Phase 3 clinical trial for head and neck cancer with its partners TEVA Pharmaceuticals and Orient Europharma. To finance the study beyond the next twelve months, the Company plans to raise additional capital in the form of corporate partnerships, warrant exercises, debt issuances and/or equity financings. The Company believes that it will be able to obtain additional financing because it has done so consistently in the past and because Multikine is a product in the Phase 3 clinical trial stage. However, there can be no assurance that the Company will be successful in raising additional funds on a timely basis or that the funds will be available to the Company on acceptable terms or at all. If the Company does not raise the necessary amounts of money, it may have to curtail its operations until it can raise the required funding.

The financial statements have been prepared assuming the Company will continue as a going concern, but due to the Company’s recurring losses from operations and future liquidity needs, there is substantial doubt about the Company’s ability to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

Nine hundred twenty-eight (928) head and neck cancer patients have been enrolled and have completed treatment in the Phase 3 study. The study end point is a 10% increase in overall survival of patients between the two main comparator groups in favor of the group receiving the Multikine treatment regimen. The determination if the study end point is met will occur when there are a total of 298 deaths in those two groups. On May 4, 2020, we announced the threshold of 298 deaths (events) was reached.

STOCKHOLDERS’ EQUITY

Proceeds from the Sale of Common Stock

In March 2020, the Company sold 630,500 shares of common stock at a public offering price of $12.22 per share and received aggregate net proceeds of approximately $7.1 million. Under the terms of the Underwriting Agreement the Company granted the Underwriters a 45-day option to purchase up to an additional 94,575 shares of common stock solely to cover over-allotments. The underwriter fully exercised this option in May 2020 resulting in additional net proceeds to the Company of approximately $1.1 million.

In December 2019, the Company sold 606,395 shares of common stock at a public offering price of $9.07 per share and received aggregate net proceeds of approximately $5.0 million. In January 2020, the underwriters of that offering fully exercised the option to purchase 90,959 additional shares of common stock at the public offering price of $9.07 per share for aggregate net proceeds to the Company of approximately $0.8 million.

Equity Compensation

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

| Name of
Plan | Total Shares
Reserved Under Plans | Shares Reserved
for Outstanding Options | Shares
Issued | Remaining
Options/Shares Under
Plans |
| --- | --- | --- | --- | --- |
| Incentive Stock
Options Plans | 138,400 | 89,895 | N/A | 213 |
| Non-Qualified Stock
Option Plans | 6,387,200 | 6,108,173 | N/A | 131,146 |
| Stock Bonus
Plans | 783,760 | N/A | 339,076 | 444,651 |
| Stock Compensation
Plans | 634,000 | N/A | 150,695 | 464,895 |
| Incentive Stock
Bonus Plan | 640,000 | N/A | 616,500 | 23,500 |

page break

Underlying share information for equity compensation plans as of September 30, 2019 is as follows:

| Name of
Plan | Total Shares
Reserved Under Plans | Shares Reserved
for Outstanding Options | Shares
Issued | Remaining
Options/Shares Under Plans |
| --- | --- | --- | --- | --- |
| Incentive Stock
Option Plans | 138,400 | 89,895 | N/A | 213 |
| Non-Qualified Stock
Option Plans | 6,387,200 | 6,128,321 | N/A | 112,166 |
| Stock Bonus
Plans | 783,760 | N/A | 331,226 | 452,501 |
| Stock Compensation
Plans | 634,000 | N/A | 130,183 | 485,407 |
| Incentive Stock
Bonus Plan | 640,000 | N/A | 616,500 | 23,500 |

Stock option activity :

| | Six Months Ended
March 31, — 2020 | 2019 |
| --- | --- | --- |
| Options
granted | 2,500 | 500 |
| Options
exercised | 20,480 | - |
| Options
forfeited | 1,000 | 24,193 |
| Options
expired | 1,168 | 2,400 |

| | Three Months
Ended March 31, — 2020 | 2019 |
| --- | --- | --- |
| Options
granted | 1,500 | - |
| Options
exercised | 20,480 | - |
| Options
forfeited | 1,000 | 24,193 |
| Options
expired | 1,132 | - |

Stock-Based Compensation Expense

| | Six months Ended
March 31, — 2020 | 2019 |
| --- | --- | --- |
| Employees | $ 3,581,204 | $ 1,104,490 |
| Non-employees | $ 347,227 | $ 511,424 |

| | Three months
Ended March 31, — 2020 | 2019 |
| --- | --- | --- |
| Employees | $ 1,780,979 | $ 530,830 |
| Non-employees | $ 191,487 | $ 272,520 |

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

page break

Warrants and Non-Employee Options

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

Warrant/Options	Issue Date	Shares Issuable upon Exercise of Warrants/ Options	Exercise Price	Expiration Date	Reference
Series
N	8/18/2008	85,339	$ 3.00	2/18/2021	2
Series
V	5/28/2015	810,127	$ 19.75	5/28/2020	1
Series
UU	6/11/2018	154,810	$ 2.80	6/11/2020	*
Series
W	10/28/2015	688,930	$ 16.75	10/28/2020	1
Series
X	1/13/2016	120,000	$ 9.25	1/13/2021	*
Series
Y	2/15/2016	26,000	$ 12.00	2/15/2021	*
Series
ZZ	5/23/2016	20,000	$ 13.75	5/18/2021	1
Series
BB	8/26/2016	16,000	$ 13.75	8/22/2021	1
Series
Z	5/23/2016	264,000	$ 13.75	11/23/2021	1
Series
CC	12/8/2016	153,643	$ 5.00	12/8/2021	1
Series
HH	2/23/2017	200	$ 3.13	2/16/2022	1
Series
AA	8/26/2016	200,000	$ 13.75	2/22/2022	1
Series MM	6/22/2017	893,491	$ 1.86	6/22/2022	*
Series
NN	7/24/2017	375,545	$ 2.52	7/24/2022	2
Series
OO	7/31/2017	10,000	$ 2.52	7/31/2022	2
Series
RR	10/30/2017	457,116	$ 1.65	10/30/2022	*
Series
SS	12/19/2017	365,538	$ 2.09	12/18/2022	2
Series
TT	2/5/2018	381,564	$ 2.24	2/5/2023	2
Series
VV	7/2/2018	55,000	$ 1.75	1/2/2024	2
Consultants	7/28/17	10,000	$ 2.18	7/27/2027	*

No current period changes to these warrants and non-employee options

Warrant Liabilities

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

| | March
31, 2020 | September
30, 2019 |
| --- | --- | --- |
| Series V
warrants | $ 595,981 | $ 674,442 |
| Series W
warrants | 1,560,876 | 1,193,507 |
| Series Z
warrants | 1,421,421 | 1,109,545 |
| Series ZZ
warrants | 82,223 | 77,638 |
| Series AA
warrants | 1,243,531 | 916,908 |
| Series BB
warrants | 70,994 | 63,966 |
| Series CC
warrants | 1,247,399 | 1,710,898 |
| Series FF
warrants | - | 446,185 |
| Series HH
warrants | 1,868 | 45,657 |
| Series JJ
warrants | - | 66,599 |
| Series LL
warrants | - | 182,965 |
| Total warrant
liabilities | $ 6,224,293 | $ 6,488,310 |

page break

The table below presents the gains/(losses) on the warrant liabilities for the six months ended March 31:

	2020	2019
Series S
warrants	$ -	$ 33
Series V
warrants	78,461	494,852
Series W
warrants	(367,369 )	616,028
Series Z
warrants	(311,876 )	114,831
Series ZZ
warrants	(4,585 )	12,638
Series AA
warrants	(326,623 )	93,268
Series BB
warrants	(7,028 )	7,736
Series CC
warrants	(826,277 )	339,698
Series DD
warrants	-	1,249,287
Series EE
warrants	-	1,249,287
Series FF
warrants	(319,706 )	34,603
Series GG
warrants	-	106,750
Series HH
warrants	(34,457 )	10,642
Series II
warrants	-	115,343
Series JJ
warrants	(64,992 )	15,926
Series KK
warrants	-	113,467
Series LL
warrants	(98,066 )	14,746
Net (loss)/gain on
warrant liabilities	$ (2,282,518 )	$ 4,589,135

The table below presents the losses on the warrant liabilities for the three months ended March 31:

	2020	2019
Series V
warrants	$ (476,570 )	$ (61,480 )
Series W
warrants	(518,743 )	(10,822 )
Series Z
warrants	(322,425 )	(89,290 )
Series ZZ
warrants	(19,432 )	(1,685 )
Series AA
warrants	(391,601 )	(63,951 )
Series BB
warrants	(6,597 )	(4,374 )
Series CC
warrants	(803,596 )	(325,908 )
Series FF
warrants	(312,517 )	(34,459 )
Series GG
warrants	-	(106,032 )
Series HH
warrants	(34,375 )	(10,309 )
Series II
warrants	-	(115,246 )
Series JJ
warrants	(64,862 )	(15,536 )
Series KK
warrants	-	(114,628 )
Series LL
warrants	(98,309 )	(13,451 )
Net loss on warrant
liabilities	$ (3,049,027 )	$ (967,171 )

The Company reviews all outstanding warrants in accordance with the requirements of ASC 815. This topic provides that an entity should use a two-step approach to evaluate whether an equity-linked financial instrument (or embedded feature) is indexed to its own stock, including evaluating the instrument’s contingent exercise and settlement provisions. The warrant agreements provide for adjustments to the exercise price for certain dilutive events. Under the provisions of ASC 815, the warrants are not considered indexed to the Company’s stock because future equity offerings or sales of the Company’s stock are not an input to the fair value of a “fixed-for-fixed” option on equity shares, and equity classification is therefore precluded.

In accordance with ASC 815, derivative liabilities must be measured at fair value upon issuance and re-valued at the end of each reporting period through expiration. Any change in fair value between the respective reporting dates is recognized as a gain or loss.

page break

Changes in Warrant Liabilities

On December 10, 2018, 1,360,960 Series DD and 1,360,960 Series EE warrants, with an exercise price of $4.50 expired.

On October 11, 2018, 327,729 Series S warrants, with an exercise price of $31.25 expired.

Exercise of Warrant Liabilities

The following warrants recorded as liabilities were exercised during the periods ended March 31, 2020.

Warrants	Three Months — Warrants Exercised	Exercise Price	Proceeds	Six Months — Warrants Exercised	Exercise Price	Proceeds
Series
CC	123,820	$ 5.00	$ 619,100	123,820	$ 5.00	$ 619,100
Series
FF	68,048	$ 3.91	265,812	68,048	$ 3.91	265,812
Series
HH	6,300	$ 3.13	19,687	6,300	$ 3.13	19,687
Series
JJ	9,450	$ 3.13	29,531	9,450	$ 3.13	29,531
Series
LL	26,398	$ 3.59	94,867	26,398	$ 3.59	94,867
	234,016		$ 1,028,997	234,016		$ 1,028,997

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

Equity Warrants

Changes in Equity Warrants

On January 23, 2020, the expiration date of the Series N warrants was extended to February 18, 2021. The incremental cost of this extension was approximately $22,000, which was recorded as a deemed dividend in the financial statements for the six and three months ended March 31, 2020. The Series N warrants are held by the de Clara Trust, of which the Company’s CEO, Geert Kersten, is a beneficiary.

Exercise of Equity Warrants

The following warrants recorded as equity were exercised during the periods ended March 31, 2020.

Warrants	Three Months — Warrants Exercised	Exercise Price	Proceeds	Six Months — Warrants Exercised	Exercise Price	Proceeds
Series
NN	98,253	$ 2.52	$ 247,598	98,253	$ 2.52	$ 247,598
Series
OO	30,000	$ 2.52	75,600	40,000	$ 2.52	100,800
Series
SS	94,474	$ 2.09	197,451	117,106	$ 2.09	244,752
Series
TT	77,857	$ 2.24	174,400	178,125	$ 2.24	399,000
Series
VV	27,500	$ 1.75	48,125	27,500	$ 1.75	48,125
	328,084		$ 743,174	460,984		$ 1,040,275

The following warrants recorded as equity were exercised during the periods ended March 31, 2019.

Warrants	Three Months — Warrants Exercised	Exercise Price	Proceeds	Six Months — Warrants Exercised	Exercise Price	Proceeds
Series
PP	-	-	-	60,000	$ 2.30	$ 138,000
Series
SS	13,158	$ 2.09	$ 27,500	165,790	$ 2.09	346,501
Series
TT	-	-	-	86,050	$ 2.24	192,752
Series
VV	1,385,000	$ 1.75	2,423,750	1,385,000	$ 1.75	2,423,750
Series
WW	125,775	$ 1.63	204,384	125,775	$ 1.63	204,384
	1,523,933		$ 2,655,635	1,822,615		$ 3,305,387

page break

Options and Shares Issued to Consultants

During the six months ended March 31, 2020 and 2019, the Company issued 32,939 and 140,233 shares, respectively, of restricted common stock to consultants for services. The weighted average grant date fair value of the shares issued to consultants was $9.44 and $3.04 during the six months ended March 31, 2020 and 2019, respectively. During the three months ended March 31, 2020 and 2019, the Company issued 17,120 and 77,449 shares of restricted common stock to consultants for services. The weighted average grant date fair value of the shares issued to consultants was $11.53 and $2.89, respectively, during the three months ended March 31, 2020 and 2019. The aggregate values of the issuances of restricted common stock and common stock options are recorded as prepaid expenses and are charged to general and administrative expenses over the periods of service.

During the six months ended March 31, 2020 and 2019, the Company recorded total expense of approximately $347,000 and $511,000, respectively, relating to these consulting agreements. At March 31, 2020 and September 30, 2019, approximately $367,000 and $230,000, respectively, are included in prepaid expenses. At March 31, 2020, the Company has accrued $165,000 for shares to be issued. As of March 31, 2020, 10,000 options issued to consultants remained outstanding, all of which were issued from the Non-Qualified Stock Option plans and are fully vested.

Securities Purchase Agreements

The Company has entered into Securities Purchase Agreements (SPA) with Ergomed plc, one of the Company’s Clinical Research Organizations responsible for managing the Company’s Phase 3 clinical trial, to facilitate payment of amounts due Ergomed. Under the Agreements, the Company issued Ergomed shares of common stock and the net proceeds from the sales of those shares would reduce outstanding amounts due Ergomed. Upon issuance, the Company expenses the full value of the shares as Other non-operating gain/loss and subsequently offsets the expense as amounts are realized through the sale by Ergomed and reduces accounts payable to Ergomed.

On January 9, 2019, the Company entered into an SPA under which it issued Ergomed 500,000 restricted shares of the Company’s common stock valued at approximately $1.3 million. No other shares were issued under the SPA during the periods presented.

The following table summarizes the Other Non-Operating Gains (Loss) for the six and three months ended March 31, 2020 and 2019 relating to these agreements:

	Six Months Ended — 3/31/2020	3/31/2019	Three Months Ended — 3/31/2020	3/31/2019
Amount
realized through the resale of shares	$ 1,720,680	$ 1,711,353	$ 934,511	$ 559,177
Fair
value of shares upon issuance	-	1,290,000	-	1,290,000
Other
non-operating gain (loss)	$ 1,720,680	$ 421,353	$ 934,511	$ (730,823 )

On August 15, 2019, the Company entered into an SPA under which it issued Ergomed 250,000 restricted shares of the Company’s common stock. As of March 31, 2020, Ergomed held 20,250 shares for resale.

FAIR VALUE MEASUREMENTS

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

page break

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

●

Level 1 – Observable inputs such as quoted prices in active markets for identical assets or liabilities

●

Level 2 – Inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly. These include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active and amounts derived from valuation models where all significant inputs are observable in active markets

●

Level 3 – Unobservable inputs that reflect management’s assumptions

For disclosure purposes, assets and liabilities are classified in their entirety in the fair value hierarchy level based on the lowest level of input that is significant to the overall fair value measurement. The Company’s assessment of the significance of an input to the fair value measurement requires judgment and may affect the placement within the fair value hierarchy levels.

The table below sets forth the assets and liabilities measured at fair value on a recurring basis, by input level, in the condensed balance sheet at March 31, 2020:

| | Quoted Prices in
Active Markets for Identical Assets or Liabilities (Level
1) | Significant
Other Observable Inputs (Level
2) | Significant
Unobservable Inputs (Level
3) | Total |
| --- | --- | --- | --- | --- |
| Derivative
instruments | $ - | $ - | $ 6,224,293 | $ 6,224,293 |

The table below sets forth the assets and liabilities measured at fair value on a recurring basis, by input level, in the condensed balance sheet at September 30, 2019:

The following sets forth the reconciliation of beginning and ending balances related to fair value measurements using significant unobservable inputs (Level 3) for the six months ended March 31, 2020 and the year ended September 30, 2019:

	Six months ended	Twelve months ended
	March 31, 2020	September 30, 2019
Beginning
balance	$ 6,488,310	$ 9,317,031
Issuances	-	-
Exercises	(2,546,535 )	(3,589,357 )
Realized and
unrealized losses	2,282,518	760,636
Ending
balance	$ 6,224,293	$ 6,488,310

page break

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.

RELATED PARTY TRANSACTIONS

During the six months ended March 31, 2020, officers and directors of the Company purchased 20,512 shares of restricted common stock at an aggregate fair market value of approximately $185,000. This include 16,787 shares purchased during the three months ended March 31, 2020 with an aggregate fair market value of approximately $160,000.

COMMITMENTS AND CONTINGENCIES

Clinical Research Agreements

Under co-development and revenue sharing agreements with Ergomed, Ergomed agreed to contribute up to $12 million towards the Company’s Phase 3 Clinical Trial in the form of discounted clinical services in exchange for a single digit percentage of milestone and royalty payments, up to a specific maximum amount . The Company accounted for the co-development and revenue sharing agreements in accordance with ASC 808 “Collaborative Arrangements”. The Company determined the payments to Ergomed are within the scope of ASC 730 “Research and Development.” Therefore, the Company records the discount on the clinical services as a credit to research and development expense on its Statements of Operations. Since the inception of the agreement with Ergomed, the Company has incurred research and development expenses of approximately $32.5 million for Ergomed’s services. This amount is net of Ergomed’s discount of approximately $11 million. During the six months ended March 31, 2020 and 2019, the Company recorded, net of Ergomed’s discount, approximately $1.6 million and $1.5 million, respectively, as research and development expense related to Ergomed’s services. During the three months ended March 31, 2020 and 2019, the Company recorded, net of Ergomed’s discount, approximately $0.8 million and $0.7 million, respectively, as research and development expense related to Ergomed’s services.

Lease Agreements

The Company determines whether a contract contains a lease at the inception of a contract by determining if the contract conveys the right to control the use of identified property, plant or equipment over a period of time in exchange for consideration. The Company leases certain real estate, machinery, equipment and office equipment for varying periods. Many of these leases include an option to either renew or terminate the lease. For purposes of calculating lease liabilities, these options are included in the lease term when it is reasonably certain that the Company will exercise such options. The incremental borrowing rate utilized to calculate the lease liabilities is based on the information available at commencement date, as most of the leases do not provide an implicit borrowing rate. Short-term leases, defined as leases with initial terms of 12 months or less, are not reflected on the balance sheet. Lease expense for such short-term leases is not material. For purposes of calculating lease liabilities, lease and non-lease components are combined.

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

page break

Upon adoption of ASC 842 on October 1, 2019, the Company recorded a finance lease right of use asset and a finance lease liability of approximately $13.5 million. As of March 31, 2020, the net book value of the finance lease right of use asset is approximately $12.7 million and the balance of the finance lease liability is approximately $13.1 million, of which approximately $0.9 million is current. These amounts include the San Tomas lease as well as several other smaller finance leases for office equipment. The finance right of use assets are being depreciated using a straight-line method over the underlying lease terms. Total cash paid related to finance leases during the six months ended March 31, 2020 was approximately $940,000, of which approximately $586,000 was for interest. The weighted average discount rate of the Company’s finance leases is 8.8% and the weighted average time to maturity is 8.8 years.

The Company was required to deposit the equivalent of one year of base rent in accordance with the lease. When the Company meets the minimum cash balance required by the lease, the deposit will be returned to the Company. The approximate $1.7 million deposit is included in non-current assets at March 31, 2020 and September 30, 2019.

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

| Six months
ending September 30, 2020 | $ 946,000 |
| --- | --- |
| Year ending
September 30, | |
| 2021 | 1,953,000 |
| 2022 | 2,014,000 |
| 2023 | 2,083,000 |
| 2024 | 2,148,000 |
| 2025 | 2,218,000 |
| Thereafter | 7,322,000 |
| Total future
minimum lease obligation | 18,684,000 |
| Less imputed
interest on finance lease obligations | (5,585,000 ) |
| Net present
value of lease finance lease obligations | $ 13,099,000 |

The Company rents a portion of its space on a month-to-month term basis, which requires a 30-day notice for termination. On January 3, 2020, the Company notified the tenant of the sublet property of its intention to terminate the sublease effective April 30, 2020 since this space is needed to prepare the facility to produce Multikine for commercial purposes and before the Company’s Biologics License Application (BLA) can be submitted to the FDA. The rental income for each of the six months ended March 31, 2020 and 2019 was approximately $37,000 and $36,000, respectively. The sublease rental income for each of the three months ended March 31, 2020 and 2019 was approximately $18,000.

The Company leases two facilities under 60-month operating leases – the lease for its research and development laboratory expires February 28, 2022 and the lease for its office headquarters expires June 30, 2020. During the six months ended March 31, 2020, the Company incurred approximately $80,000 in leasehold improvements costs for the research and development lab and is reasonably certain to renew the lease through February 28, 2027. The renewal period is included in the right of use asset and liability calculations. The operating leases include escalating rental payments. The Company is recognizing the related rent expense on a straight-line basis over the full 60-month terms of the leases. Upon adoption of ASC 842 on October 1, 2019, the Company recorded an operating lease right of use asset and an operating lease liability of approximately $1.0 million. As of March 31, 2020, the net book value of the operating lease right of use asset is approximately $0.9 million and the balance of the operating lease liability is approximately $0.9 million, of which approximately $0.1 million is current. The Company incurred lease expense under operating leases of approximately $135,000 and $68,000 for the six and three months ended March 31, 2020, respectively. Total cash paid related to operating leases during the six and three months ended March 31, 2020 was approximately $132,000 and $66,000, respectively.

page break

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

| Six months ending
September 30, 2020 | $ 107,000 |
| --- | --- |
| Year ending
September 30, | |
| 2021 | 163,000 |
| 2022 | 168,000 |
| 2023 | 173,000 |
| 2024 | 178,000 |
| 2025 | 183,000 |
| Thereafter | 269,000 |
| Total
future minimum lease obligation | 1,241,000 |
| Less
imputed interest on operating lease obligation | (317,000 ) |
| Net
present value of operating lease obligation | $ 924,000 |

G. PATENTS

During the six months ended March 31, 2020 and 2019, no patent impairment charges were recorded. For the six months ended March 31, 2020 and 2019, amortization of patent costs totaled approximately $27,000 and $23,000, respectively. For the three months ended March 31, 2020 and 2019, amortization of patent costs totaled approximately $14,000 and $11,000, respectively. Approximate estimated future amortization expense is as follows:

| Six months ending
September 30, 2020 | $ 26,000 |
| --- | --- |
| Year ending
September 30, | |
| 2021 | 50,000 |
| 2022 | 46,000 |
| 2023 | 36,000 |
| 2024 | 28,000 |
| 2025 | 25,000 |
| Thereafter | 101,000 |
| Total | $ 312,000 |

H. LOSS PER COMMON SHARE

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

	Six months ended March 31, — 2020	2019	Three months ended March 31, — 2020	2019
Loss per share - basic
Net
loss available to common shareholders - basic	$ (14,508,512 )	$ (5,201,779 )	$ (9,033,352 )	$ (6,447,681 )
Weighted
average shares outstanding - basic	35,621,711	28,543,417	36,165,050	29,113,910
Basic
loss per common share	$ (0.41 )	$ (0.18 )	$ (0.25 )	$ (0.22 )
Loss per share - diluted
Net
loss available to common shareholders - basic	$ (14,508,512 )	$ (5,201,779 )	$ (9,033,352 )	$ (6,447,681 )
Gain on derivatives (1)	-	(335,560 )	-	-
Net
loss available to common shareholders - diluted	$ (14,508,512 )	$ (5,537,339 )	$ (9,033,352 )	$ (6,447,681 )
Weighted
average shares outstanding - basic	35,621,711	28,543,417	36,165,050	29,113,910
Incremental shares underlying dilutive "in the
money" warrants (1)	-	5,401	-	-
Weighted
average shares outstanding - diluted	35,621,711	28,548,818	36,165,050	29,113,910
Diluted
loss per common share	$ (0.41 )	$ (0.19 )	$ (0.25 )	$ (0.22 )

(1)

Includes shares issuable upon the exercise of the Series GG, II and KK warrants for the six months ended March 31, 2019.

page break

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

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

	2020	2019
Options
and Warrants	6,452,645	10,576,881
Unvested
Restricted Stock	318,798	308,500
Total	6,771,443	10,885,381

J. SUBSEQUENT EVENTS

On April 6, 2020, the Company agreed to issue Ergomed 100,000 restricted shares of the Company’s common stock in payment of amounts the Company may owe Ergomed for providing services to the Company.

Under the terms of the March 2020 Underwriting Agreement the Company granted the Underwriters a 45-day option to purchase up to an additional 94,575 shares of common stock solely to cover over-allotments. The underwriter fully exercised this option on May 4, 2020 resulting in additional net proceeds to the Company of approximately $1.1 million.

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

Liquidity and Capital Resources

The Company’s lead investigational therapy, Multikine ® (Leukocyte Interleukin, Injection), is cleared for a Phase 3 clinical trial in advanced primary head and neck cancer by the regulators in twenty-four countries around the world, including the U.S.

Multikine (Leukocyte Interleukin, Injection) is the full name of this investigational therapy, which, for simplicity, is referred to in this report as Multikine. Multikine is the trademark that the Company has registered for this investigational therapy, and this proprietary name is subject to FDA review under the Company’s future anticipated regulatory submission for approval. Multikine has not been licensed or approved by the FDA or any other regulatory agency. Neither has its safety or efficacy been established for any use.

The Company also owns and is developing a pre-clinical technology called LEAPS (Ligand Epitope Antigen Presentation System).

All the Company’s projects are under development. Consequently, the Company cannot predict when it will be able to generate any revenue from the sale of any of its products.

Since inception, the Company has financed its operations through the sale of equity securities, convertible notes, loans and certain research grants. The Company’s expenses will continue to exceed its revenues as it continues the development of Multikine and brings other drug candidates into clinical trials. Until the Company becomes profitable, any or all of these financing vehicles or others may be utilized to assist in funding the Company’s capital requirements.

Capital raised by the Company has been expended primarily for patent applications, research and development, administrative costs, and the construction of the Company’s manufacturing and laboratory facilities. The Company does not anticipate realizing significant revenues until it enters into licensing arrangements for its technology and know-how or until it receives regulatory approval to sell its products (which could take several years). Thus, the Company has been dependent upon the proceeds from the sale of its securities to meet all its liquidity and capital requirements and anticipates having to do so in the future.

page break

The Company will be required to raise additional capital or find additional long-term financing to continue with its research efforts. The ability to raise capital may be dependent upon market conditions that are outside the control of the Company. The ability of the Company to complete the necessary clinical trials and obtain FDA approval for the sale of products to be developed on a commercial basis is uncertain. Ultimately, the Company must complete the development of its products, obtain the appropriate regulatory approvals and obtain sufficient revenues to support its cost structure. The Company is taking cost-cutting initiatives, as well as exploring other sources of funding, to finance operations over the next 12 months. However, there can be no assurance that the Company will be able to raise sufficient capital to support its operations.

Since the Company launched its Phase 3 clinical trial for Multikine, the Company has incurred expenses of approximately $58 million as of March 31, 2020 on direct costs for the Phase 3 clinical trial. The Company estimates it will incur additional expenses of approximately $3.2 million for the remainder of the Phase 3 clinical trial. It should be noted that this estimate is based only on the information currently available in the Company’s contracts with the Clinical Research Organizations responsible for managing the Phase 3 clinical trial and does not include other related costs, e.g., the manufacturing of the drug. This number may be affected by the rate of death accumulation in the study, foreign currency exchange rates, and many other factors, some of which cannot be foreseen today. It is therefore possible that the cost of the Phase 3 clinical trial will be higher than currently estimated.

The Company uses two CRO’s to manage the global Phase 3 study; ICON and Ergomed, which are both international leaders in managing oncology trials. As of September 2016, the study was fully enrolled with 928 patients.

Under a co-development agreement, Ergomed agreed to contribute up to $12 million towards the study where it will perform clinical services in exchange for a single digit percentage of milestone and royalty payments, up to a specified maximum amount. Approximately $11 million of these credits were realized as of March 31, 2020.

During the six months ended March 31, 2020, the Company’s cash increased by approximately $5.9 million. Significant components of this increase include approximately $12.9 million in net proceeds from the sale of common stock through public offerings and approximately $2.1 million in proceeds from the exercise of warrants and options, offset by net cash used to fund the Company’s regular operations, including its Phase 3 clinical trial, of approximately $8.0 million, approximately $0.8 million of equipment and leasehold improvement expenditures and approximately $0.4 million in lease payments. During the six months ended March 31, 2019, the Company’s cash decreased by approximately $4.8 million. Significant components of this decrease include net cash used to fund the Company’s regular operations, including its Phase 3 clinical trial, of approximately $7.8 million and approximately $0.2 million to purchase long term assets. The decrease was offset by net proceeds from the exercise of warrants of approximately $3.3 million.

During the six months ended March 31, 2020, 695,000 warrants were exercised at a weighted average exercise price of $2.98 for total proceeds of approximately $2.1 million . These exercises include 562,100 warrants exercised during three months ended March 31, 2020 for proceeds of approximately $1.8 million. During the six months ended March 31, 2019, 1,822,615 warrants were exercised at a weighted average exercise price of $1.81 for proceeds of approximately $3.3 million. These exercises include 1,523,933 warrants exercised during the three months ended March 31, 2019 for proceeds of approximately $2.7 million.

The Company has entered into Securities Purchase Agreements with Ergomed plc, one of the Company’s Clinical Research Organizations responsible for managing the Company’s Phase 3 clinical trial, to facilitate a payment of amounts due Ergomed. Under the Agreements, the Company issued Ergomed shares of common stock and the net proceeds from the sales of those shares would reduce outstanding amounts due Ergomed. Upon issuance, the Company expenses the full value of the shares as Other non-operating loss and subsequently offsets the expense as amounts are realized through the sale of the Company’s shares by Ergomed and reduces accounts payable to Ergomed. During the six months ended March 31, 2020 and 2019, the Company realized approximately $1.7 million through the sale by Ergomed of 177,750 and 545,324 shares of the Company’s common stock, respectively, and the Company reduced accounts payable to Ergomed and credited Other operating gains by those amounts. For more information regarding the SPAs refer to Item 4 under Note C above.

page break

Current assets other than cash, remained constant at March 31, 2020 as compared to September 30, 2019. Receivables consist primarily of amounts due from the Company’s partners for reimbursed clinical study costs related to its Phase 3 clinical trial and amounts to be reimbursed for costs related to its Small Business Innovation Research (SBIR) grant. Prepaid expenses at March 31, 2020 were approximately $40,000 higher than the balances at September 30, 2019 due to the timing of payments and recognition of related expenses.

Supplies are purchased for use in the Company’s manufacturing and R&D efforts and vary with the study requirements. During the six months ended March 31, 2020, the supplies increased by approximately $67,000 in support of the work on modifications of the manufacturing facility to prepare the facility to produce Multikine for commercial purposes and before the Company’s Biologics License Application (BLA) can be submitted to the FDA.

Results of Operations and Financial Condition

During the six months ended March 31, 2020, research and development expenses increased by approximately $2.3 million, or 36%, compared to the six months ended March 31, 2019. Major components of this increase include approximately $1.2 million of costs incurred to prepare the manufacturing facility for the potential commercial manufacture of Multikine, $1.1 million increase in employee stock compensation expense, $0.5 million increase in depreciation expense resulting from the adoption of the new leasing standard and an increase in approximately $0.2 million in other miscellaneous research and development expenses. These increases were offset by a decrease of approximately $0.7 million in expenses related to the Company’s on-going Phase 3 clinical trial. During the three months ended March 31, 2020, research and development expenses increased by approximately $1.6 million, or 55%, compared to the three months ended March 31, 2019. Major components of this increase include approximately $0.6 million of costs incurred to prepare the manufacturing facility for the potential commercial manufacture of Multikine, $0.5 million increase in employee stock compensation expense, $0.3 million increase in depreciation expense resulting from adoption of the new leasing standard and an increase in approximately $0.2 million in other miscellaneous research and development expenses.

During the six months ended March 31, 2020, general and administrative expenses increased by approximately $1.9 million, or 57%, compared to the six months ended March 31, 2019. Approximately $1.4 million of the change relates to an increase in employee stock compensation expense. The remaining increase consists of approximately $0.5 million in net other general and administrative account variations. During the three months ended March 31, 2020, general and administrative expenses increased by approximately $0.9 million, or 58%, compared to the three months ended March 31, 2019. Approximately $0.7 million of the change relates to an increase in employee stock compensation expense. The remaining increase consists of approximately $0.2 million in net other general and administrative account variations.

The approximate $2.3 million loss on derivative instruments for the six months ended March 31, 2020 varies significantly from the approximate $4.6 million gain on derivative instruments for the six months ended March 31, 2019. The variance is the result of the change in fair value of the derivative liabilities at the respective period ends. These changes were caused mainly by fluctuation in the share price of the Company’s common stock.

Other non-operating gain increased $1.3 million for the six months ended March 31, 2020 as compared to the six months ended March 31, 2019. This gain relates to the SPA described in Item 4 under Note C. The amount of the gain or loss is a result of the timing of shares issued to Ergomed and the subsequent re-sale of those shares. During each of the six-month periods ended March 31, 2020 and 2019, the Company realized approximately $1.7 million in value upon the resale of shares. Additionally, during the six months ended March 31, 2019, the Company issued 500,000 shares to Ergomed and recorded a non-operating loss equal to the fair value of those shares of approximately $1.3 million.

Net interest expense decreased by approximately $0.4 million for the six months ended March 31, 2020 compared to the six months ended March 31, 2019 and decreased by approximately $0.2 million for the three months ended March 31, 2020 compared to the three months ended March 31, 2019 The decrease is due to a reduction in the interest rate applied to the Company’s finance leases that were re-measured in connection with the adoption of ASC 842, Leases, effective October 1, 2019.

page break

Research and Development Expenses

The Company’s research and development efforts involve Multikine and LEAPS. The table below shows the research and development expenses associated with each project.

| | Six months ended March 31, — 2020 | 2019 | Three months ended March
31, — 2020 | 2019 |
| --- | --- | --- | --- | --- |
| MULTIKINE | $ 7,847,763 | $ 5,839,245 | $ 3,891,319 | $ 2,588,967 |
| LEAPS | 751,197 | 465,015 | 511,028 | 243,579 |
| TOTAL | $ 8,598,960 | $ 6,304,260 | $ 4,402,347 | $ 2,832,546 |

Clinical and other studies necessary to obtain regulatory approval of a new drug involve significant costs and require several years to complete. The extent of the Company’s clinical trials and research programs are primarily based upon the amount of capital available to the Company and the extent to which the Company has received regulatory approvals for clinical trials. The inability of the Company to conduct clinical trials or research, whether due to a lack of capital or regulatory approval, will prevent the Company from completing the studies and research required to obtain regulatory approval for any products which the Company is developing. Without regulatory approval, the Company will be unable to sell any of its products. Since all the Company’s projects are under development, the Company cannot predict when it will be able to generate any revenue from the sale of any of its products.

Critical Accounting Estimates and Policies

Management’s discussion and analysis of the Company’s financial condition and results of operations is based on its unaudited condensed financial statements. The preparation of these financial statements is based on the selection of accounting policies and the application of significant accounting estimates, some of which require management to make judgments, estimates and assumptions that affect the amounts reported in the financial statements and notes. The Company believes some of the more critical estimates and policies that affect its financial condition and results of operations are in the areas of operating leases and stock-based compensation. For more information regarding the Company’s critical accounting estimates and policies, see Part II, Item 7 of the Company’s Annual Report on Form 10-K/A for the year ended September 30, 2019. The application of these critical accounting policies and estimates has been discussed with the Audit Committee of the Company’s Board of Directors.

Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS

The Company does not believe that it has any significant exposures to market risk.

Item 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Under the direction and with the participation of the Company’s management, including the Company’s Chief Executive and Chief Financial Officer, the Company has conducted an evaluation of the effectiveness of the design and operation of its disclosure controls and procedures as of March 31, 2020. The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in its periodic reports with the Securities and Exchange Commission is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and regulations, and that such information is accumulated and communicated to the Company’s management, including its principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure. The Company’s disclosure controls and procedures are designed to provide a reasonable level of assurance of reaching its desired disclosure control objectives. Due to the material weakness outlined below, CEL-SCI’s Chief Executive and Principal Financial and Accounting Officer has concluded that CEL-SCI’s disclosure controls and procedures were not effective as of March 31, 2020.

page break

Management’s Report on Internal Control over Financial Reporting

CEL-SCI’s management is responsible for establishing and maintaining adequate internal control over financial reporting and for the assessment of the effectiveness of internal control over financial reporting. As defined by the Securities and Exchange Commission, internal control over financial reporting is a process designed by, or under the supervision of CEL-SCI’s Chief Executive and Principal Financial and Accounting Officer and implemented by CEL-SCI’s Board of Directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of CEL-SCI’s financial statements in accordance with U.S. generally accepted accounting principles.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Geert Kersten, CEL-SCI’s Chief Executive and Principal Financial and Accounting Officer, evaluated the effectiveness of CEL-SCI’s internal control over financial reporting as of March 31, 2020 based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, or the COSO Framework. Management’s assessment included an evaluation of the design of CEL-SCI’s internal control over financial reporting and testing of the operational effectiveness of those controls.

On December 20, 2019, CEL-SCI discovered an error in the EDGAR filed Form 10-K report. The Company’s complete Statements of Cash Flows for the years ended September 30, 2019 and 2018 were not included, in their entirety, in the EDGAR filed Form 10-K report filed on December 16, 2019 with the SEC. However, the entire Statements of Cash Flows were included in the Interactive Data Files (“XBRL”) which were filed on December 16, 2019. The omission of the Statements of Cash Flows was the result of a failure of the Company to perform an adequate review of the EDGAR Form 10-K proof to ensure that the filing was accurate and complete. The failure of the Company to perform an adequate review of the EDGAR Form 10-K proof is a control deficiency that constitutes a material weakness.

To remediate this material weakness, the Company will change certain control activities to include the following:

●

The Company will compare the final EDGAR proofs with the Company reports that are provided to the EDGAR filing service to ensure that the EDGAR proofs are accurate and complete.

Based on the evaluation of CEL-SCI’s internal control over financial reporting as of March 31, 2020, and the material weakness identified above, Mr. Kersten concluded that as of such date, CEL-SCI's internal control over financial reporting was not effective.

Changes in Internal Control over Financial Reporting

Other than the improvement noted in the preceding section, there were no other changes in the Company’s internal control over financial reporting that occurred during the quarter ended March 31, 2020 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting

page break

PART II

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

During the six months ended March 31, 2020 the Company issued 32,939 restricted shares of common stock to consultants for investor relations services.

The Company relied upon the exemption provided by Section 4(a)(2) of the Securities Act of 1933 with respect to the issuance of these shares. The individuals who acquired these shares were sophisticated investors and were provided full information regarding the Company’s business and operations. There was no general solicitation in connection with the offer or sale of these securities. The individuals who acquired these shares acquired them for their own accounts. The certificates representing these shares bear a restricted legend which provides they cannot be sold except pursuant to an effective registration statement or an exemption from registration. No commission or other form of remuneration was given to any person in connection with the issuance of these shares.

Item 6. Exhibits

Number Exhibit

Rule 13a-14(a) Certifications

Section 1350 Certifications

page break

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

| /s/ Geert
Kersten |
| --- |
| Geert
Kersten |
| Principal
Executive Officer* |

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

page break

AI assistant

CEL SCI CORP Interim / Quarterly Report 2020

34401_10-q_2020-05-08_0a988886-ff71-4c12-8e7b-48bf358578ae.zip

AI assistant

CEL SCI CORP — Interim / Quarterly Report 2020

34401_10-q_2020-05-08_0a988886-ff71-4c12-8e7b-48bf358578ae.zip

More from CEL SCI CORP

CEL SCI CORP Interim / Quarterly Report 2020