Attached files
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, 2019.
OR
(
) TRANSITION REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the
transition period from _________ to __________.
Commission
file number 1-11889
CEL-SCI CORPORATION
(Exact
name of registrant as specified in its charter)
|
COLORADO
|
84-0916344
|
|
(State or other
jurisdiction of incorporation or organization)
|
(I.R.S. Employer
Identification No.)
|
|
8229 Boone Blvd.,
Suite 802
Vienna,
Virginia
|
22182
|
|
(Address of
principal executive offices)
|
(Zip
Code)
|
Registrant's
telephone number, including area code: (703) 506-9460
Securities
registered pursuant to Section 12(b) of the Act:
|
Title of each
class
|
Trading
Symbol
|
Name of each
exchange on which
registered
|
|
Common
Stock
|
CVM
|
NYSE
American
|
Securities
registered pursuant to Section 12(g) of the Act: None
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 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.
|
Large accelerated
filer
|
☐
|
Accelerated
filer
|
☒
|
|
Non-accelerated
filer
|
☐
|
Smaller reporting
company
|
☒
|
|
|
Emerging Growth
Company
|
☐
|
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, 2019, as quoted on the
NYSE American, was $100,321,037.
As of
December 11, 2019, the Registrant had 35,379,956 issued and
outstanding shares of common stock.
Documents
Incorporated by Reference: None
PART I
ITEM
1.
BUSINESS
CEL-SCI
Corporation (CEL-SCI) is a clinical-stage biotechnology company
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 for patients who are
newly diagnosed with advanced primary squamous cell carcinoma of
the head and neck, for which CEL-SCI has received Orphan Drug
Status from the U.S. Food and Drug Administration, or FDA. The
study was fully enrolled with 928 patients in September 2016. The
study’s primary 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’s primary end-point is met will
occur when there are a total of 298 deaths in those two groups. If
the primary end-point of this global study is achieved, CEL-SCI
expects to use the results to support a Biologics License
Application, or BLA, to the FDA for Multikine for 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).
CEL-SCI’s
investigational immunotherapy, Multikine, is being used in a
different way than cancer immunotherapy 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 (i.e., as a
neoadjuvant). It is also
administered locally around the tumors and near the draining lymph
node. For example,
in the Phase 3 clinical trial,
Multikine was given locally for three weeks, five days per week 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 of this
neoadjuvant therapy and administration before weakening of the
immune system by surgery, chemotherapy and radiation will result in
improved outcomes and better overall survival rates for patients
suffering from head and neck cancer.
CEL-SCI
is also investigating a 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 a clinical-stage biotechnology company 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, CEL-2000 and CEL-4000, vaccine product
candidates under development for the potential treatment of
rheumatoid arthritis, and LEAPS-H1N1-DC, a product candidate under
development for the potential treatment of pandemic influenza in
hospitalized patients,
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 FDA, in connection with CEL-SCI’s
future anticipated regulatory submission for approval in the United
States. 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, and neither its safety nor
its efficacy been established.
Multikine is an
immunotherapy product candidate comprised of a patented defined
mixture of 14 human natural cytokines. Upon commercial approval,
CEL-SCI intends to manufacture it 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.
3
Multikine is
designed to be used in a different way than cancer immunotherapy is
generally being used. Generally, cancer immunotherapy is given to
patients who have already failed other treatments 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 this is the time when the immune system would be most
amenable to activation against the tumor. For example, during
the dosing phase of the ongoing Phase 3 clinical trial, Multikine
was injected locally around the tumor and near the adjacent
draining lymph nodes as a first line of treatment before surgery,
radiation and/or chemotherapy. The goal is to help the intact
immune system recognize and kill the tumor micro metastases that
usually cause recurrence of the cancer. In short, CEL-SCI believes
that the local administration and administration of Multikine and
its administration before weakening of the immune system by
surgery, 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).
4
SCCHN
represents one type of head and neck cancer, and CEL-SCI believes
that there is a large, unmet medical need among head and neck
cancer patients as a whole. 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 650,000 patients diagnosed worldwide each year,
of which approximately 60,000 patients diagnosed annually in the
United States and approximately 105,000 patients diagnosed annually
in Europe. Multikine investigational immunotherapy has been 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. The assessment of whether the primary study
endpoint was met can only be made when a certain number of events
(deaths) have occurred in these two main comparator groups of the
study.
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 SOC (Surgery + Radiotherapy or
Chemoradiotherapy) arm of the study over the control comparator
(SOC alone) arm. As the study was designed, the final determination
of whether this endpoint had been successfully reached can only be
determined when 298 events have 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 across 24
countries 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 Phase 3 study
protocol assumed an overall survival rate of about 55% at 3 years
for the SOC treatment group alone. An analysis conducted using the
Surveillance, Epidemiology, and End Results, or SEER U.S.
government data base for the same study population as CEL-SCI
enrolled in this Phase 3 study and covering the years 2011-2016
(when the patients were enrolled), shows that the standard of care
for these patients has not resulted in an improvement in survival.
In fact, the U.S. survival of the specific type of patients
enrolled in the Phase 3 study during the study years was only about
47% at 3 years and about 37% at 5 years. At this point, all
patients enrolled in the study are being followed-up as required by
the study protocol.
This
trial is currently 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 $55.8 million as of
September 30, 2019 on direct costs for the Phase 3 clinical trial.
CEL-SCI estimates it will incur additional expenses of
approximately $4.5 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 CROs responsible for managing the Phase 3 clinical trial
and does not include other related costs, e.g., preparations for
the potential commercial manufacture 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 may 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 in the Risk Factors
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, if approved, in
Israel and Turkey for treatment of head and neck cancer. 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.
5
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 by regulatory authorities in the
relevant countries. 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 3 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 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 by regulatory
authorities, 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.
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 conditions, allergies,
transplantation rejection and cancer, when it cannot do so on its
own. Intended to be 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.
6
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 and
Musculoskeletal and Skin Diseases, or NIAMS, which is part of the
U.S. 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 for a Phase 1 safety study, by funding IND enabling
studies and additional mechanism of action studies, among other
preclinical development activities. Work on CEL-4000 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., Jorge O. Galante Professor of Orthopedic
Surgery and Katalin Mikecz, MD, Ph.D. Professor of Orthopedic
Surgery & Biochemistry. The SBIR 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 May
2019, CEL-SCI announced that a newly discovered LEAPS conjugate
vaccine acts alone and can complement CEL-4000 therapeutically when
administered in combination to an animal model of Rheumatoid
Arthritis (RA). This new LEAPS conjugate appears to act on T cell
pathways by a new mechanism that is different from the pathways
used by the CEL-4000 vaccine. The data was presented at the
American Association of Immunologists 103th Annual Meeting
(Immunology 2019) by Daniel Zimmerman, Ph.D., CEL-SCI’s
Senior Vice President of Research, Cellular Immunology. The work
was performed in conjunction with researchers at Rush University
Medical Center, Chicago, Illinois and was funded by the SBIR Phase
2 Grant.
In July
2019, one of CEL-SCI’s collaborators from Rush, Dr. Adrienn
Markovics presented new LEAPS data at i-Chem2019, International
Conference on Immunity and Immunochemistry. Data presented was for
a new second RA vaccine discovered which acts alone and can
complement the existing CEL-4000 RA vaccine in an animal model of
RA. The combination of the two RA vaccines provided not only
broader epitope coverage, but also a greater therapeutic effect
than either vaccine alone. The LEAPS work was performed in
conjunction with researchers at CEL-SCI on CEL-4000 and a newly
discovered LEAPS conjugate, DerG-PG275Cit. Both vaccines were
evaluated alone and in combination in the model of proteoglycan
[PG] induced arthritis (PGIA) called recombinant PG G1
domain-induced arthritis (GIA), an autoimmune mouse model of
RA.
Prior
to the SBIR Phase 2 grant, CEL-SCI was awarded a Phase 1 SBIR grant
in the amount of $225,000 from NIAMS. This 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 these SBIR grants, 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 suggests that it could be used
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-a. The preclinical data for CEL-4000
indicates it could be used against rheumatoid arthritis where a Th1
signature cytokine (IFN-c) is dominant. CEL-2000 and CEL-4000 each
have the potential to become a personalized, disease-specific
therapy, that acts at an earlier step in the disease process than
current therapies, and which 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 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 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.
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 Phase 1 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.
Using
the LEAPS technology, CEL-SCI has also tested in preclinical
studies 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.
7
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.
Accordingly, 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 activity 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, once developed
and approved as safe and effective for humans, 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 2017, currently set to expire in 2025 and 2026). The
most recent patent issued in October 2017, 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. 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, August 2007, January 2019 and March 2019. The
LEAPS patents, which expire in 2021, 2022, 2021 and three in 2032,
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. One
issued U.S. application is a joint application with Northeast Ohio
Medical University (“Neoucom”) and CEL-SCI will share
the ability to use the patent, unless CEL-SCI licenses the rights
to the patent from Neoucom. In October 2017, a patent was issued in
Europe for LEAPS, which expires in 2029.
CEL-SCI
has four 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.
As of
December 12, 2019, there were no contested proceedings and/or third
party claims with respect to CEL-SCI’s patents or patent
applications.
8
MANUFACTURING FACILITY
Before
starting the Phase 3 clinical trial, for reasons related to
regulatory considerations, CEL-SCI built a dedicated manufacturing
facility to produce its investigational biological product
candidate Multikine. This facility produced multiple clinical lots
for the Phase 3 clinical trial and has also passed quality systems
review by a European Union Qualified Person on several occasions.
At the present time, while clinical supplies of Multikine are no
longer needed and commercial approval remains subject to the
completion of our Phase 3 trial and submission of marketing
applications to the FDA and other regulatory authorities, this
manufacturing facility is not actively engaged in the production of
any drug or biological products. CEL-SCI is currently preparing the
manufacturing facility for the potential commercial manufacture of
Multikine.
CEL-SCI’s
lease on the manufacturing facility expires on October 31,
2028. CEL-SCI completed
validation of its manufacturing facility in January 2010. See Item
2 of this report for more information concerning the terms of this
lease.
GOVERNMENT REGULATION
The FDA
and other regulatory authorities at federal, state and local levels
and in foreign countries extensively regulate, among other things,
the research, development, testing, manufacture, quality control,
import, export, safety, effectiveness, labeling, packaging,
storage, distribution, record keeping, approval, advertising,
promotion, marketing and post-approval monitoring and reporting of
biologics such as those CEL-SCI is developing. CEL-SCI, along with
third party contractors, will be required to navigate the various
preclinical, clinical and commercial approval requirements of the
governing regulatory agencies of the countries in which it wishes
to conduct studies or seek approval or licensure of its product
candidates. The process of obtaining regulatory approvals and the
subsequent compliance with appropriate federal, state, local, and
foreign statutes and regulations requires the expenditure of
substantial time and financial resources.
U.S. Food and Drug Administration Regulation of Biological
Products
In the
United States, the FDA regulates biological products under the
Federal Food, Drug, and Cosmetic Act, or FDCA, and the Public
Health Service Act, or PHSA, and their implementing regulations.
The process required by the FDA before biological product
candidates may be marketed in the United States generally involves
the following:
●
completion of
preclinical laboratory tests and animal studies performed in
accordance with the FDA’s Good Laboratory Practice, or GLP,
regulations;
●
submission to the
FDA of an investigational new drug application, or IND, which must
become effective before clinical trials may begin and must be
updated annually;
●
approval by an
independent Institutional Review Board, or IRB, or ethics committee
at each clinical site before the trial is initiated;
●
performance of
adequate and well-controlled human clinical trials in compliance
with Good Clinical Practice, or GCP, regulations to establish the
safety, purity and potency of the proposed biologic product
candidate for its intended purpose;
●
preparation of and
submission to the FDA of a Biologics License Application, or BLA,
after completion of clinical trials;
●
satisfactory
completion of an FDA Advisory Committee review, if
applicable;
●
a determination by
the FDA within 60 days of its receipt of a BLA to file the
application for review;
●
satisfactory
completion of an FDA pre-approval inspection of the manufacturing
facility or facilities at which the proposed product is produced to
assess compliance with current Good Manufacturing Practice, or
cGMP, requirements and to assure that the facilities, methods and
controls are adequate to preserve the biological product’s
continued safety, purity and potency, and of selected clinical
investigations to assess compliance with GCPs; and
●
FDA review and
approval of the BLA to permit commercial marketing of the product
for particular indications for use in the United
States.
9
Prior
to commencing the first clinical trial with a product candidate in
the U.S., CEL-SCI must submit an IND to the FDA. An IND is a
request for authorization from the FDA to administer an
investigational product to humans. The central focus of an IND
submission is on the general investigational plan and the
protocol(s) for human studies. The IND also includes results of
animal and in vitro studies assessing the toxicology,
pharmacokinetics, pharmacology, and pharmacodynamic characteristics
of the product; chemistry, manufacturing, and controls information;
and any available human data or literature to support the use of
the investigational product. An IND must become effective before
human clinical trials may begin. The IND automatically becomes
effective 30 days after receipt by the FDA, unless the FDA, within
the 30-day time period, raises safety concerns or questions about
the proposed clinical trial. In such a case, the IND may be placed
on clinical hold and the IND sponsor and the FDA must resolve any
outstanding concerns or questions before the clinical trial can
begin. Submission of an IND therefore may or may not result in FDA
authorization to commence a clinical trial.
Clinical trials
involve the administration of the investigational product to human
subjects under the supervision of qualified investigators in
accordance with GCPs, which include the requirement that all
research subjects provide their informed consent for their
participation in any clinical study. Clinical trials are conducted
under protocols detailing, among other things, the objectives of
the study, the parameters to be used in monitoring safety and the
effectiveness criteria to be evaluated. A separate submission to
the existing IND must be made for each successive clinical trial
conducted during product development and for any subsequent
protocol amendments. Furthermore, an independent IRB for each site
proposing to conduct the clinical trial must review and approve the
plan for any clinical trial and its informed consent form before
the clinical trial commences at that site, and must monitor the
study until completed. Regulatory authorities, the IRB or the
sponsor may suspend a clinical trial at any time on various
grounds, including a finding that the subjects are being exposed to
an unacceptable health risk. Some studies also include oversight by
an independent group of qualified experts organized by the clinical
study sponsor, known as a data safety monitoring board (DSMB) or
independent data monitoring committee (IDMC), which provides
recommendations for whether or not a study should move forward at
designated check points based on access to certain data from the
study and may suggest halting the clinical trial if it determines
that there is an unacceptable safety risk for subjects or other
grounds, such as no demonstration of efficacy. There are also
requirements governing the reporting of ongoing clinical studies
and clinical study results to public registries.
For
purposes of approval of a Biologics License Application, or BLA,
human clinical trials are typically conducted in three or four
sequential phases that may overlap.
● Phase
1 — The investigational product is initially introduced into
healthy human subjects or patients with the target disease or
condition. These studies are designed to test the safety, dosage
tolerance, absorption, metabolism and distribution of the
investigational product in humans, the side effects associated with
increasing doses.
● Phase 2 — The investigational
product is administered to a limited patient population with a
specified disease or condition to evaluate the preliminary
efficacy, optimal dosages and dosing schedule and to identify
possible adverse side effects and safety risks. Multiple Phase 2
clinical trials may be conducted to obtain information prior to
beginning larger and more expensive Phase 3 clinical
trials.
● Phase
3 — The investigational product is administered to an
expanded patient population to further evaluate dosage, to provide
statistically significant evidence of clinical efficacy and to
further test for safety, generally at multiple geographically
dispersed clinical trial sites. These clinical trials are intended
to establish the overall risk/benefit ratio of the investigational
product and to provide an adequate basis for product
approval.
● Phase 4 — In
some cases, the FDA may require, or companies may voluntarily
pursue, additional clinical trials after a product is approved to
gain more information about the product. FDA may also make these
so-called Phase 4 or post-marketing studies a condition to approval
of the BLA.
Phase
1, Phase 2 and Phase 3 testing may not be completed successfully
within a specified period, if at all, and there can be no assurance
that the data collected will support FDA approval or licensure of
the product. Concurrent with clinical trials, companies may
complete additional animal studies and develop additional
information about the biological characteristics of the product
candidate, and must finalize a process for manufacturing the
product in commercial quantities in accordance with cGMP
requirements. The manufacturing process must be capable of
consistently producing quality batches of the product candidate
and, among other things, must develop methods for testing the
identity, strength, quality and purity of the final product.
Additionally, appropriate packaging must be selected and tested and
stability studies must be conducted to demonstrate that the product
candidate does not undergo unacceptable deterioration over its
shelf life.
BLA
Submission and Review by the FDA
Assuming successful
completion of all required testing in accordance with all
applicable regulatory requirements, the results of product
development, nonclinical studies and clinical trials are submitted
to the FDA as part of a BLA requesting approval to market the
product for one or more indications. The BLA must include all
relevant data available from pertinent preclinical and clinical
studies, including negative or ambiguous results as well as
positive findings, together with detailed information relating to
the product’s chemistry, manufacturing, controls, and
proposed labeling, among other things. Data can come from
company-sponsored clinical studies intended to test the safety and
effectiveness of a use of the product, or from a number of
alternative sources, including studies initiated by
investigators.
In most
cases, the submission of a BLA is subject to a substantial
application user fee. Under the goals and policies agreed to by the
FDA under the Prescription Drug User Fee Act, or PDUFA, for
original BLAs, the FDA’s goal is to review the BLA within ten
months after it accepts the application for filing, or, if the
product relates to an unmet medical need in a serious or
life-threatening indication and has received a priority review
designation, six months after the FDA accepts the application for
filing. The FDA does not always meet its PDUFA goal dates, and the
review process is often significantly extended by FDA requests for
additional information or clarification and a sponsor’s
process to respond to such inquiries. This FDA review typically
takes twelve months from the date the BLA is submitted to the FDA
(for a standard review) and eight months from the date the BLA is
submitted (for a priority review) because the FDA has approximately
two months after BLA submission to make a “filing”
decision.
10
After
filing the marketing application, the FDA reviews a BLA to
determine, among other things, whether a product is safe, pure and
potent and the facility in which it is manufactured, processed,
packed, or held meets standards designed to assure the
product’s continued safety, purity and potency. Before
approving a BLA, the FDA will typically inspect the facility or
facilities where the product is manufactured. The FDA will not
approve a biological product for marketing unless it determines
that the manufacturing processes and facilities are in compliance
with cGMP requirements and adequate to assure consistent production
of the product within required specifications. Additionally, before
approving a BLA, the FDA will typically inspect one or more
clinical sites to assure compliance with GCPs. If the FDA
determines that the data provided in the application, or the
manufacturing process or manufacturing facilities for the product
are not acceptable, it will outline the deficiencies in the
submission and often will request additional testing or
information. Notwithstanding the submission of any requested
additional information, the FDA ultimately may decide that the
application does not satisfy the regulatory criteria for approval.
The FDA also may refer applications for novel biologic candidates
which present difficult questions of safety or efficacy to an
advisory committee, typically a panel that includes clinicians and
other experts, for review, evaluation and a recommendation as to
whether the application should be approved and under what
conditions, if any. The FDA is not bound by recommendations of an
advisory committee, but it considers such recommendations when
making decisions on approval.
After
the FDA evaluates a BLA and conducts inspections of manufacturing
facilities where the biological product and/or its drug substance
will be produced, the FDA may issue an approval letter or a
Complete Response Letter. An approval letter authorizes commercial
marketing of the product with specific prescribing information for
specific indications. A Complete Response Letter indicates that the
review cycle of the application is complete but the application is
not ready for approval. A Complete Response Letter may request
additional information or clarification, including new clinical
studies. The FDA may delay or refuse approval of a BLA if
applicable regulatory criteria are not satisfied, require
additional testing or information and/or require post-marketing
testing and surveillance to monitor safety or efficacy of a
product. If a Complete Response Letter is issued, the applicant may
either resubmit the BLA, addressing all of the deficiencies
identified in the letter, or withdraw the application. Even if such
data and information are submitted, the FDA may decide that the
re-submitted BLA does not satisfy the criteria for
approval.
If a
product receives regulatory approval, such approval is limited to
the conditions of use (e.g., patient population, indication)
described in the application. Further, depending on the specific
risk(s) to be addressed, the FDA may require that
contraindications, warnings or precautions be included in the
product labeling, require that post-approval trials, including
Phase 4 clinical trials, be conducted to further assess a
product’s safety after approval, require testing and
surveillance programs to monitor the product after
commercialization, or impose other conditions, including
distribution and use restrictions or other risk management
mechanisms under a Risk Evaluation and Mitigation Strategy, or
REMS, plan if it determines that a REMS is necessary to ensure that
the benefits of the product outweigh its risks and to assure the
safe use of the biological product, which can materially affect the
potential market and profitability of the product. The REMS plan
could include medication guides, physician communication plans, or
elements to assure safe use, such as restricted distribution
methods, patient registries and other risk minimization tools. The
FDA also may condition approval on, among other things, changes to
proposed labeling or the development of adequate controls and
specifications. Once approved, the FDA may withdraw the product
approval if compliance with pre- and post-marketing regulatory
standards is not maintained or if problems occur after the product
reaches the marketplace. The FDA may prevent or limit further
marketing of a product based on the results of post- marketing
trials or surveillance programs. After approval, some types of
changes to the approved product, such as adding new indications,
manufacturing changes and additional labeling claims, are subject
to further testing requirements and FDA review and
approval.
Expedited
Review and Approval
A
sponsor may seek approval of its product candidate under programs
designed to accelerate the FDA’s review and approval of new
drugs and biological products that meet certain criteria.
Specifically, new drugs and biological products are eligible for
fast track designation if they are intended to treat a serious or
life-threatening condition and demonstrate the potential to address
unmet medical needs for the condition. For a fast track product,
the FDA may consider sections of the BLA for review on a rolling
basis before the complete application is submitted if relevant
criteria are met. A fast track designated product candidate may
also qualify for priority review, under which the FDA sets the
PDUFA target date for FDA action on the BLA at six months after the
FDA accepts the application for filing. Priority review is granted
where there is evidence that the proposed product would be a
significant improvement in the safety or effectiveness of the
treatment, diagnosis, or prevention of a serious condition. If
criteria are not met for priority review, the application is
subject to the standard FDA review period of 10 months after FDA
accepts the application for filing. Priority review designation
does not change the scientific/medical standard for approval or the
quality of evidence necessary to support approval.
Under
the accelerated approval program, the FDA may approve a BLA on the
basis of either a surrogate endpoint that is reasonably likely to
predict a clinical benefit, or on a clinical endpoint that can be
measured earlier than irreversible morbidity or mortality, that is
reasonably likely to predict an effect on irreversible morbidity or
mortality or other clinical benefit, taking into account the
severity, rarity, or prevalence of the condition and the
availability or lack of alternative treatments. Post-marketing
studies or completion of ongoing studies after marketing approval
are generally required to verify the biologic’s clinical
benefit in relationship to the surrogate endpoint or ultimate
outcome in relationship to the clinical benefit. In addition, the
Food and Drug Administration Safety and Innovation Act, or FDASIA,
which was enacted and signed into law in 2012, established the new
Breakthrough Therapy designation. A sponsor may seek FDA
designation of its product candidate as a breakthrough therapy if
the product candidate is intended, alone or in combination with one
or more other drugs or biologics, to treat a serious or
life-threatening disease or condition and preliminary clinical
evidence indicates that the therapy may demonstrate substantial
improvement over existing therapies on one or more clinically
significant endpoints, such as substantial treatment effects
observed early in clinical development. Sponsors may request the
FDA to designate a breakthrough therapy at the time of or any time
after the submission of an IND, but ideally before an end-of-phase
2 meeting with the FDA. If the FDA designates a breakthrough
therapy, it may take actions appropriate to expedite the
development and review of the application, which may include
holding meetings with the sponsor and the review team throughout
the development of the therapy; providing timely advice to, and
interactive communication with, the sponsor regarding the
development of the drug to ensure that the development program to
gather the nonclinical and clinical data necessary for approval is
as efficient as practicable; involving senior managers and
experienced review staff, as appropriate, in a collaborative,
cross-disciplinary review; assigning a cross-disciplinary project
lead for the FDA review team to facilitate an efficient review of
the development program and to serve as a scientific liaison
between the review team and the sponsor; and considering
alternative clinical trial designs when scientifically appropriate,
which may result in smaller trials or more efficient trials that
require less time to complete and may minimize the number of
patients exposed to a potentially less efficacious
treatment.
11
Fast Track
designation, priority review and breakthrough therapy designation
do not change the standards for approval but may expedite the
development or approval process.
Post-Approval
Requirements
All
therapeutic products manufactured or distributed pursuant to FDA
approval or licensure are subject to pervasive and continuing
regulation by the FDA, including, among other things, requirements
relating to record-keeping, reporting of adverse experiences,
periodic reporting, product sampling and distribution, and
advertising and promotion of the product. After approval, most
changes to the approved product, such as adding new indications or
other labeling claims, are subject to prior FDA review and
approval. There also are continuing, annual user fee requirements
under PDUFA for any marketed products and the establishments at
which such products are manufactured, as well as new application
fees for supplemental applications containing clinical data.
Biologic manufacturers and their subcontractors are required to
register their establishments with the FDA and certain state
agencies, and are subject to periodic unannounced inspections by
the FDA and certain state agencies for compliance with cGMP
requirements, which impose significant procedural and documentation
requirements. Changes to the manufacturing process are strictly
regulated, and, depending on the significance of the change, may
require prior FDA approval before being implemented. FDA
regulations also require investigation and correction of any
deviations from cGMP and impose reporting requirements on
manufacturers. Accordingly, manufacturers must continue to expend
time, money and effort in the area of production and quality
control to maintain compliance with cGMP and other aspects of
regulatory compliance. CEL-SCI cannot be certain that it, or
CEL-SCI’s present or future suppliers, will be able to comply
with the cGMP regulations and other FDA regulatory requirements. If
CEL-SCI is not able to comply with these requirements, the FDA may,
among other things, take enforcement action or seek sanctions
against use, impose restrictions on a product or its manufacturer,
require us to recall a product from distribution, or withdraw
approval of the BLA.
The FDA
may withdraw approval if compliance with regulatory requirements
and standards is not maintained or if problems occur after the
product reaches the market. Later discovery of previously unknown
problems with a product, including adverse events of unanticipated
severity or frequency, or with manufacturing processes, or failure
to comply with regulatory requirements, may result in revisions to
the approved labeling to add new safety information; imposition of
post-market studies or clinical studies to assess new safety risks;
or imposition of distribution restrictions or other restrictions
under a REMS program. Other potential consequences include, among
other things:
●
restrictions on the
marketing or manufacturing of the product, complete withdrawal of
the product from the market or product recalls;
●
fines, warning
letters or holds on post-approval clinical studies;
●
refusal of the FDA
to approve pending applications or supplements to approved
applications, or suspension or revocation of product license
approvals;
●
product seizure or
detention, or refusal to permit the import or export of
products;
●
injunctions or the
imposition of civil or criminal penalties; and
●
consent decrees,
corporate integrity agreements, debarment, or exclusion from
federal healthcare programs; or mandated modification of
promotional materials and labeling and the issuance of corrective
information.
The FDA
closely regulates the marketing, labeling, advertising and
promotion of drugs and biologics. A company can make only those
claims relating to safety and efficacy, purity and potency that are
approved by the FDA and in accordance with the provisions of the
approved label. The FDA and other agencies actively enforce the
laws and regulations prohibiting the promotion of unapproved, or
“off-label,” uses. Failure to comply with these
requirements can result in, among other things, adverse publicity,
warning letters, corrective advertising and potential civil and
criminal penalties. Physicians may prescribe legally available
products for uses that are not described in the product’s
labeling and that differ from those tested by us and approved by
the FDA. Such off-label uses are common across medical specialties.
Physicians may believe that such off-label uses are the best
treatment for many patients in varied circumstances. The FDA does
not regulate the behavior of physicians in their choice of
treatments. The FDA does, however, restrict manufacturer’s
communications on the subject of off-label use of their
products.
12
Orphan
Drug Designation
Under
the Orphan Drug Act, the FDA may grant orphan drug designation to
drugs or biologics intended to treat a rare disease or condition
that affects fewer than 200,000 individuals in the United States,
or if it affects more than 200,000 individuals in the United
States, there is no reasonable expectation that the cost of
developing and making the drug for this type of disease or
condition 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 receives the first FDA approval for the
indication for which it has orphan designation, the product is
entitled to orphan drug exclusivity, which means the FDA may not
approve any other application to market the same drug for the same
indication for a period of 7 years, except in limited
circumstances, such as a showing of clinical superiority over the
product with orphan exclusivity. Orphan drug exclusivity also could
block the approval of one of CEL-SCI’s products for seven
years if a competitor obtains approval of the same product before
CEL-SCI does, as defined by the FDA, for the same indication
CEL-SCI is seeking, or if CEL-SCI’s product candidate is
determined to be contained within the scope of the
competitor’s product for the same indication or disease. If
one of CEL-SCI’s products designated as an orphan drug
receives marketing approval for an indication broader than that
which is designated, it may not be entitled to orphan drug
exclusivity. Orphan drug status in the European Union has similar,
but not identical, requirements and benefits.
Orphan
drug designation must be requested before submitting a BLA to the
FDA for review and approval. After the FDA grants orphan drug
designation, the identity of the therapeutic agent and its
potential orphan use are disclosed publicly by the FDA. Orphan drug
designation does not convey any advantage in, or shorten the
duration of, the regulatory review and approval
process.
Other U.S. Health Care Laws
CEL-SCI’s
sales, promotion, medical education and other activities following
product approval will be subject to regulation by numerous
regulatory and law enforcement authorities in the United States in
addition to the FDA, including potentially the Federal Trade
Commission, the Department of Justice, the Centers for Medicare and
Medicaid Services, other divisions of the Department of Health and
Human Services and state and local governments. CEL-SCI’s
promotional and scientific/educational programs must comply with
the anti-kickback provisions of the Social Security Act, the
Foreign Corrupt Practices Act, the False Claims Act, the Physician
Payments Sunshine Act, the Veterans Health Care Act and similar
state laws.
Depending on the
circumstances, failure to meet these applicable regulatory
requirements can result in criminal prosecution, fines or other
penalties, exclusion from government health care programs,
injunctions, recall or seizure of products, total or partial
suspension of production, denial or withdrawal of pre-marketing
product approvals, private “qui tam” actions brought by
individual whistleblowers under the False Claims Act in the name of
the government or refusal to allow us to enter into supply
contracts, including government contracts.
Coverage, Pricing and Reimbursement in the U.S.
Sales
of pharmaceutical products depend significantly on the availability
of third-party coverage and reimbursement. Third-party payors
include government health administrative authorities, managed care
providers, private health insurers and other organizations. These
third-party payors are increasingly challenging the price and
examining the cost-effectiveness of medical products and services.
In addition, significant uncertainty exists as to the reimbursement
status of newly approved healthcare products and new drug classes,
including biological products such as CEL-SCI’s product
candidates. CEL-SCI may need to conduct expensive clinical studies
to demonstrate the comparative cost-effectiveness of its products.
The product candidates that CEL-SCI develops may not be considered
cost-effective. It is time consuming and expensive for us to seek
reimbursement from third- party payors. Reimbursement may not be
available or sufficient to allow CEL-SCI to sell its products on a
competitive and profitable basis.
13
The
United States and some foreign jurisdictions are considering or
have enacted a number of legislative and regulatory proposals to
change the healthcare system in ways that could affect
CEL-SCI’s ability to sell its products profitably. Among
policy makers and payors in the United States and elsewhere, there
is significant interest in promoting changes in healthcare systems
with the stated goals of containing healthcare costs, improving
quality and/or expanding access. In the United States, the
pharmaceutical industry has been a particular focus of these
efforts and has been significantly affected by major legislative
initiatives.
Foreign Regulation
In
addition to regulations in the United States, CEL-SCI will be
subject to a variety of foreign regulations governing clinical
trials and commercial sales and distribution of its products to the
extent CEL-SCI chooses to develop or sell any products outside of
the United States. The approval process varies from country to
country and the time may be longer or shorter than that required to
obtain FDA approval. The requirements governing the conduct of
clinical trials, product licensing, pricing and reimbursement vary
greatly from country to country.
ITEM
1B.
RISK
FACTORS
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, 2019, CEL-SCI
incurred net losses of approximately $354 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.
14
CEL-SCI’s financial statements include an explanatory
paragraph that expresses substantial doubt about its ability to
continue as a going concern, indicating the possibility that
CEL-SCI may not be able to operate in the future.
Primarily
as a result of CEL-SCI’s losses incurred to date,
CEL-SCI’s expected continued future losses, and limited cash
balances, CEL-SCI has included an explanatory paragraph in its
financial statements expressing substantial doubt about its ability
to continue as a going concern. CEL-SCI has included such an
explanatory paragraph on numerous occasions in the preceding years.
CEL-SCI’s ability to continue as a going concern is
contingent upon, among other factors, the sale of the shares of its
common stock or obtaining alternate financing.
CEL-SCI’s Independent Registered Public Accountants have
included in their report on CEL-SCI’s financial statements a
paragraph stating that we may be unable to continue as a going
concern.
As
a result of CEL-SCI’s recurring losses from operations,
CEL-SCI’s independent registered public accounting firm, BDO
USA, LLP, has issued a report in connection with their audit of
CEL-SCI’s financial statements for the year ended September
30, 2019, that included an explanatory paragraph referring to
CEL-SCI’s recurring losses from operations and expressing
substantial doubt in 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
CEL-SCI’s 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.
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, 2019, CEL-SCI had cash and cash equivalents of
approximately $8.4 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.
15
CEL-SCI
will need to raise additional funds in order to continue its
operations and 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 or
biologic 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 complex 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. 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.
Completion of modifications to its manufacturing facility may delay
submission of CEL-SCI’s Biologics License Application to the
FDA with respect to Multikine as a neoadjuvant treatment of
advanced head and neck cancer.
If
CEL-SCI’s ongoing Phase 3 clinical trial is successful, some
modifications to CEL-SCI’s manufacturing facility will have
to be made in order to prepare the facility to produce Multikine
for commercial purposes and before CEL-SCI’s Biologics
License Application (BLA) can be approved by the FDA. Although
these modifications are in process, they may not be completed prior
to the time CEL-SCI’s Phase 3 clinical trial ends, the BLA is
submitted and the FDA would seek to conduct a pre-approval
inspection of the manufacturing facility and its processes. In that
case, and assuming a positive outcome for CEL-SCI’s Phase 3
clinical trial, submission of CEL-SCI’s marketing application
to the FDA and/or the approval of such a BLA for Multikine as a
treatment for advanced head and neck cancer may be
delayed.
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.
16
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. 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 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 is able to commercialize
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, sale or administration to patients. 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.
17
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 and
commercialized, or clinical holds or suspension of the IND while
the candidates are still in clinical development;
●
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;
●
recalls
of approved products, withdrawal of BLA approvals or new 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.
Although
CEL-SCI has product liability insurance for Multikine in the amount
of $10 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.
18
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 of the products as demonstrated in clinical
trials;
●
the
timing of market introduction of such product as well as
competitive products;
●
the
clinical indications for which the biological product is
approved;
●
the
approval, availability, market acceptance and reimbursement for the
companion diagnostic, if appropriate or necessary;
●
acceptance
by physicians, major operators of cancer clinics and patients of
the biologic 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;
●
the
safety of such product 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.
19
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 CEL-SCI’s
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 its 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.
Under CEL-SCI’s 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 CEL-SCI’s business and financial
condition.
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 may therefore 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 CEL-SCI’s management and
direction, 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 its
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 its stockholders.
20
Risks Related to Clinical Development, Government Approvals and the
Marketing of Biopharmaceutical Products
CEL-SCI depends heavily on the success of Multikine, which is in
Phase 3 clinical development, while our other candidates are still
in preclinical phases. 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. If CEL-SCI is unable to advance its product
candidates in clinical development, obtain regulatory approval and
ultimately commercialize its product candidates, or experience
significant delays in doing so, CEL-SCI’s business will be
materially harmed.
CEL-SCI
currently has no products approved for sale and CEL-SCI cannot
guarantee that it will ever have marketable 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 in the future. 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 its lead investigational product Multikine, CEL-SCI may
experience delays in completion of this clinical trial and CEL-SCI
does not know whether the clinical trial will need to be
redesigned. In addition, CEL-SCI is in the early development stages
for the candidates designed using its LEAPS technology and have not
yet initiated any clinical studies for any of those product
candidates. 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.
21
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 ongoing Phase 3 clinical trial for Multikine for advanced head
and neck cancer. 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. 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 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.
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 (if
approved) 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 after they are
approved.
22
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 monitoring reporting;
●
product
advertising and promotion;
●
product
manufacturing, including compliance with 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.
CEL-SCI
and any of its third-party manufacturers or suppliers must
continually adhere to federal regulations setting forth human drug
and biologic manufacturing 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 inspection by regulators 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.
23
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 utility of an approved
prescribing 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 but not
limited to the following:
●
regulatory
authorities may withdraw approvals of such product or require
product recalls;
●
regulatory
authorities may require additional warnings on the label or impose
restrictions on product distribution or use;
●
regulatory authorities may require CEL-SCI
to conduct new post-marketing studies or clinical
trials;
●
CEL-SCI could
receive warning or untitled letters from the FDA or comparable
notice of violations from foreign regulatory
authorities;
●
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.
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
does not have the ability to independently conduct clinical trials.
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, including the
global Phase 3 trial for Multikine. 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 cGCP regulations. In addition, the
clinical trials must be conducted with product produced under cGMP
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.
24
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 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.
Biologics carry unique risks and uncertainties, which could have a
negative impact on future results of CEL-SCI’s
operations.
The
successful discovery, development, manufacturing and sale of
biological products like CEL-SCI’s candidates is a long,
expensive and uncertain process. There are unique risks and
uncertainties with biologics. For example, access to and supply of
necessary biological materials, such as cell lines, may be limited
and governmental regulations restrict access to and regulate the
transport and use of such materials. In addition, the development,
manufacturing and sale of biologics is subject to regulations that
are often more complex and extensive than the regulations
applicable to other pharmaceutical products. Manufacturing
biologics, especially in large quantities, is often complex and may
require the use of innovative technologies. Such manufacturing also
requires facilities specifically designed and validated for this
purpose and sophisticated quality assurance and quality control
procedures. Biologics are also frequently costly to manufacture
because production inputs are derived from living animal or plant
material, and some biologics cannot be made synthetically. Failure
to successfully discover, develop, manufacture and sell its
biological product candidates would adversely impact
CEL-SCI’s business and future results of
operations.
25
CEL-SCI faces substantial competition, which may result in others
discovering, developing or commercializing competing products
before or more successfully than CEL-SCI.
The
development and commercialization of new drug and biological
products is highly competitive. CEL-SCI faces competition with
respect to its current product candidates and expects to face
competition with respect to any product candidates that CEL-SCI may
seek to develop or commercialize in the future, from major
pharmaceutical companies, specialty pharmaceutical companies and
biotechnology companies worldwide. Potential competitors also
include academic institutions, government agencies and other public
and private research organizations that conduct research, seek
patent protection and establish collaborative arrangements for
research, development, manufacturing and
commercialization.
Many of
the companies against which CEL-SCI is competing or against which
CEL-SCI may compete in the future have significantly greater
financial resources and expertise in research and development,
manufacturing, nonclinical studies, conducting clinical trials,
obtaining marketing approvals and marketing approved products than
CEL-SCI. Mergers and acquisitions in the pharmaceutical and
biotechnology industries may result in even more resources being
concentrated among a smaller number of CEL-SCI’s competitors.
Smaller and early-stage companies may also prove to be significant
competitors, particularly through collaborative arrangements with
large and established companies. These third parties compete with
CEL-SCI in recruiting and retaining qualified scientific and
management personnel, establishing clinical trial sites and patient
registration for clinical trials, as well as in acquiring
technologies complementary to, or necessary for, CEL-SCI’s
programs.
CEL-SCI may be unable to successfully scale-up manufacturing of its
lead product candidate Multikine in sufficient quality and
quantity, which would delay or prevent CEL-SCI from commercializing
this product, if approved for marketing by the FDA or other
regulatory agencies.
In
order to commercialize its product candidates, CEL-SCI will need to
manufacture them in large quantities. At the present time, CEL-SCI
is not manufacturing Multikine while CEL-SCI completes the
follow-up phase of its Phase 3 clinical trial. CEL-SCI is planning
to increase the capacity of its proprietary facility to produce
commercial quantities of Multikine, if approved, and is currently
exploring options for implementing scale-up activities in
anticipation of study completion and submitting applications for
marketing approval, if supported by the Phase 3 data. CEL-SCI may
be unable to successfully increase the manufacturing capacity for
its lead product candidate Multikine in a timely or cost-effective
manner, or at all. In addition, quality issues may arise during
scale-up activities.
Further, in order
to release product and demonstrate stability of product candidates
for future commercial use, CEL-SCI’s analytical methods must
be validated in accordance with regulatory guidelines. CEL-SCI may
not be able to successfully validate, or maintain validation of,
its analytical methods during scale-up or demonstrate adequate
purity, stability or comparability of the biological product
candidates in a timely or cost-effective manner, or at all. Even if
CEL-SCI believes its manufacturing processes meets all of the
regulatory manufacturing requirements, the FDA will review those
processes and the manufacturing facility as part of the review of
the future BLA for Multikine, if submitted after completion the
ongoing Phase 3 trial in advanced head and neck cancer. If CEL-SCI
is unable to successfully scale up the manufacture of Multikine in
sufficient quality and quantity, or if CEL-SCI encounters
validation issues, the development, testing, and clinical trials of
future product candidates, may be delayed or infeasible, and
regulatory approval or commercial launch of any resulting product,
including Multikine, may be delayed or may not be successfully
achieved.
26
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.
Although
CEL-SCI does not currently have any products on the market, once
CEL-SCI begins commercializing its product candidates, CEL-SCI will
be subject to additional healthcare statutory and regulatory
requirements and oversight by federal and state governments as well
as foreign governments in the jurisdictions in which CEL-SCI
conducts its business. 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
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,
which also imposes 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
U.S. federal physicians payment transparency requirements,
sometimes called the “Sunshine Act” and its
implementing regulations, which requires certain manufacturers of
drugs, devices, biologicals and medical supplies that are
reimbursable under Medicare, Medicaid, or the Children’s
Health Insurance Program to report to the Centers for Medicare
& Medicaid Services, or CMS, information related to physician
payments and “other transfers of value” to physicians
and teaching hospitals (and, beginning in 2021, for transfers of
value to other healthcare providers), as well as the ownership and
investment interests held by physicians and their immediate family
members;
●
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;
●
the U.S. federal
laws that require pharmaceutical manufacturers to report certain
calculated product prices to the government or provide certain
discounts or rebates to government authorities or private entities,
often as a condition of reimbursement under federal healthcare
programs; and
●
state and foreign
laws that govern the privacy and security of health information in
certain circumstances, including state security breach notification
laws, state health information privacy laws and federal and state
consumer protection laws, many of which differ from each other in
significant ways and often are not preempted by HIPAA, thus
complicating compliance efforts.
27
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, couldlimit 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 approved products 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 and biologics. 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.
Moreover,
in some countries, particularly the countries of the European
Union, the pricing of prescription pharmaceuticals 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 product. To obtain
reimbursement or pricing approval in some countries, CEL-SCI may be
required to conduct a clinical trial that compares the
cost-effectiveness of its product candidate to other available
therapies. If reimbursement of its products is unavailable or
limited in scope or amount, or if pricing is set at unsatisfactory
levels, CEL-SCI’s business could be harmed, possibly
materially.
Even if any of CEL-SCI’s product candidates receives
marketing approval, it may fail to achieve the degree of market
acceptance by physicians, patients, third-party payors and others
in the medical community necessary for commercial
success.
If
any of CEL-SCI’s product candidates receives marketing
approval, it may nonetheless fail to gain sufficient market
acceptance by physicians, patients, third-party payors and others
in the medical community. If CEL-SCI’s product candidates do
not achieve an adequate level of acceptance, CEL-SCI may not
generate significant product revenues and CEL-SCI may not become
profitable. The degree of market acceptance of its product
candidates, including Multikine if approved for commercial sale,
will depend on a number of factors, including:
●
the
timing of CEL-SCI’s receipt of any marketing
approvals;
●
the
terms of any approvals and the countries in which approvals are
obtained;
●
the
efficacy and safety and potential advantages and disadvantages
compared to alternative treatments, including future alternative
treatments;
●
the
prevalence and severity of any side effects associated with
CEL-SCI’s product candidates;
●
the
indications for which its products are approved and the scope of
risk information required to be included in the product
labeling;
●
adverse
publicity about it’s products or favorable publicity about
competing products;
●
the
approval of other products for the same indications as
CEL-SCI’s products;
●
CEL-SCI’s
ability to offer CEL-SCI’s products for sale at competitive
prices;
●
the
convenience and ease of administration compared to alternative
treatments;
●
the
willingness of the target patient population to try new therapies
and of physicians to prescribe these therapies;
●
the
success of CEL-SCI’s physician education
programs;
●
the
strength of CEL-SCI’s marketing and distribution support;
and
●
the
availability of third-party coverage and adequate
reimbursement.
If
any product candidate CEL-SCI commercializes fails to achieve
market acceptance, it could have a material and adverse effect on
CEL-SCI’s business, financial condition, results of operation
and prospects.
28
CEL-SCI currently has no marketing and sales force. If CEL-SCI is
unable to establish effective sales or marketing capabilities or
enter into agreements with third parties to sell or market its
product candidates, CEL-SCI may not be able to effectively sell or
market its product candidates, if approved, or generate product
revenues.
CEL-SCI
currently has a no sales and marketing infrastructure due to the
fact that all of its product candidates are still in clinical
development. To achieve commercial success for any approved product
candidate for which CEL-SCI retains sales and marketing
responsibilities, CEL-SCI must build its sales, marketing,
managerial, and other non-technical capabilities or make
arrangements with third parties to perform these services. For
example, CEL-SCI has entered into agreements with certain foreign
distributors to commercialize Multikine, if approved, within their
respective territories. However, CEL-SCI may determine that there
is a need to building its own sales force in the United States for
the future marketing of Multikine, if approved, rather than seeking
a U.S. co-marketing partner or relying on a contracted sales force.
There are risks involved with either establishing its own sales and
marketing capabilities or entering into arrangements with third
parties to perform these services. For example, recruiting and
training a sales force is expensive and time consuming and could
delay any product launch. If the commercial launch of a product
candidate for which CEL-SCI recruits a sales force and establishes
marketing capabilities is delayed or does not occur for any reason,
CEL-SCI would have prematurely or unnecessarily incurred these
commercialization expenses. This may be costly, and its investment
would be lost if CEL-SCI cannot retain or reposition its sales and
marketing personnel.
Factors
that may inhibit CEL-SCI’s efforts to commercialize its
product candidates on its own include:
●
CEL-SCI’s
inability to recruit, hire, retain and incentivize adequate numbers
of effective sales and marketing personnel;
●
the
inability of sales personnel to obtain access to physicians or
persuade adequate numbers of physicians to use and administer
CEL-SCI’s future products;
●
the
lack of complementary products to be offered by sales personnel,
which may put CEL-SCI at a competitive disadvantage relative to
companies with more extensive product lines; and
●
unforeseen
costs and expenses associated with establishing an independent
sales and marketing organization.
If
CEL-SCI does not establish sales and marketing capabilities
successfully, either on its own or in collaboration with third
parties, CEL-SCI will not be successful in commercializing
Multikine, if approved, or any of its other product candidates that
receive marketing approval or any such commercialization may
experience delays or limitations.
CEL-SCI’s business activities may be subject to the Foreign
Corrupt Practices Act and similar anti-bribery and anti-corruption
laws of other countries in which CEL-SCI operates or will operate
in the future.
CEL-SCI
has conducted and has ongoing studies in international locations,
and may in the future initiate additional studies in countries
other than the United States. Moreover, CEL-SCI has entered into
agreements with foreign distributors to commercialize Multikine, if
approved, in various territories outside of the United States. As a
result, CEL-SCI’s business activities may be subject to the
Foreign Corrupt Practices Act, or FCPA, and similar anti-bribery or
anti-corruption laws, regulations or rules of other countries in
which CEL-SCI operates. The FCPA generally prohibits offering,
promising, giving or authorizing others to give anything of value,
either directly or indirectly, to a non-U.S. government official in
order to influence official action or otherwise obtain or retain
business. The FCPA also requires public companies to make and keep
books and records that accurately and fairly reflect the
transactions of the corporation and to devise and maintain an
adequate system of internal accounting controls.
CEL-SCI’s
business is heavily regulated and therefore involves significant
interaction with public officials, including officials of non-U.S.
governments. Additionally, in many other countries, the healthcare
providers who prescribe biopharmaceuticals are employed by their
government, and the purchasers of biopharmaceuticals are government
entities; therefore, CEL-SCI’s dealings with these
prescribers and purchasers are subject to regulation under the
FCPA. Recently the SEC and Department of Justice have increased
their FCPA enforcement activities with respect to biotechnology and
pharmaceutical companies. There is no certainty that all of
CEL-SCI’s employees, agents or contractors conducting
business abroad will comply with all applicable laws and
regulations, particularly given the high level of complexity of
these laws. Violations of these laws and regulations could result
in fines, criminal sanctions against CEL-SCI, its officers or
employees, the closing of CEL-SCI’s facilities, requirements
to obtain export licenses, cessation of business activities in
sanctioned countries, implementation of compliance programs and
prohibitions on the conduct of CEL-SCI’s business. Any such
violations could include prohibitions on CEL-SCI’s ability to
offer its product candidates, if approved, in one or more countries
and could materially damage its reputation, its brand, its future
international marketing efforts, its ability to attract and retain
employees and its business, prospects, operating results and
financial condition.
29
Healthcare legislative reform measures may have a material adverse
effect on CEL-SCI’s business and results of
operations.
Existing
regulatory policies may change and additional government
regulations may be enacted that could prevent, limit or delay
regulatory approval of CEL-SCI’s product candidates. CEL-SCI
cannot predict the likelihood, nature or extent of government
regulation that may arise from future legislation or administrative
action, either in the United States or abroad. 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 and it may not achieve or
sustain profitability.
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, Congress passed the Patient Protection and Affordable
Care Act, as amended by the Health Care and Education
Reconciliation Act, or collectively, the Affordable Care Act, which
expanded healthcare coverage through Medicaid expansion and the
implementation of the individual mandate for health insurance
coverage and which included changes to the coverage and
reimbursement of drug products under federal healthcare programs.
The ACA contains a number of provisions that affect coverage and
reimbursement of drug and biological products and/or that could
potentially reduce the demand for pharmaceutical products such as
increasing drug rebates under state Medicaid programs for brand
name prescription drugs and extending those rebates to Medicaid
managed care and assessing a fee on manufacturers and importers of
brand name prescription drugs reimbursed under certain government
programs, including Medicare and Medicaid. Under the Trump
administration, there have been ongoing efforts to modify or repeal
all or certain provisions of the ACA. For example, tax reform
legislation was enacted at the end of 2017 that eliminates the tax
penalty established under the ACA for individuals who do not
maintain mandated health insurance coverage beginning in 2019. In a
May 2018 report, the Congressional Budget Office estimated that,
compared to 2018, the number of uninsured will increase by 3
million in 2019 and 6 million in 2028, in part due to the
elimination of the individual mandate. The ACA has also been
subject to judicial challenge. In December 2018, a federal district
court, in a challenge brought by a number of state attorneys
general, found the ACA unconstitutional in its entirety because,
once Congress repealed the individual mandate provision, there was
no longer a basis to rely on Congressional taxing authority to
support enactment of the law. Pending appeals, which could take
some time, the ACA is still operational in all
respects.
CEL-SCI’s
industry continues to face potential changes in the legal and
regulatory landscape on the federal, state and international
levels. Additional legislative actions to control U.S. healthcare
or other costs have passed. The Budget Control Act, as amended,
resulted in the imposition of 2% reductions in Medicare (but not
Medicaid) payments to providers in 2013 and will remain in effect
through 2027 unless additional Congressional action is taken. There
has also been increasing and considerable public and government
interest in the United States with respect to specialty drug
pricing practices, including proposed federal and state legislation
designed to bring more transparency to drug pricing, reduce the
cost of prescription drugs under Medicare, review the relationship
between pricing and manufacturer patient programs, put in place
limits and caps on pharmaceutical prices, request rebates for
certain pharmaceutical products, and reform government program
reimbursement methodologies for drugs. In addition, regional
healthcare authorities and individual hospitals are increasingly
using bidding procedures to determine what biopharmaceutical
products and which suppliers will be included in their prescription
drug and other healthcare programs. In markets outside of the
United States, reimbursement and healthcare payment systems vary
significantly by country, and many countries have instituted price
ceilings on specific products and therapies. For example, the
European Union provides options for its member states to restrict
the range of medicinal products for which their national health
insurance systems provide reimbursement and control the prices of
medicinal products for human use.
CEL-SCI
expects that current or future healthcare reform measures may
result in more rigorous coverage criteria and in additional
downward pressure on the price that it receives for any approved
product, including Multikine if it is approved for
commercialization. Any reduction in reimbursement from Medicare or
other government programs may result in a similar reduction in
payments from private payors. The implementation of cost
containment measures or other healthcare reforms may prevent
CEL-SCI from being able to generate revenue, attain profitability
or commercialize its product candidates.
Legislative
and regulatory proposals also have been made to expand
post-approval requirements and restrict sales and promotional
activities for biotechnology products. CEL-SCI cannot be sure
whether additional legislative changes will be enacted, or whether
FDA regulations, guidance or interpretations for biological
products will be changed, or what the impact of such changes on the
marketing approvals of its product candidates, if any, may be. In
addition, increased scrutiny by the U.S. Congress of the
FDA’s approval and decision-making processes may
significantly delay or prevent marketing approval, as well as
subject CEL-SCI to more stringent product labeling and
post-marketing testing and other requirements.
30
Foreign governments often impose strict price controls, which may
adversely affect CEL-SCI’s future profitability.
CEL-SCI
intends to seek approval to market its lead investigational
product, 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.
If CEL-SCI fails to comply with environmental, health and safety
laws and regulations, CEL-SCI could become subject to fines or
penalties or incur costs that could harm its business.
CEL-SCI
is subject to numerous environmental, health and safety laws and
regulations, including those governing laboratory procedures and
the handling, use, storage, treatment and disposal of hazardous
materials and wastes generated in its biologic manufacturing
facility. CEL-SCI cannot eliminate the risk of contamination or
injury from these materials. In the event of contamination or
injury resulting from its use of hazardous materials, including
radioactive materials used in its research laboratory, CEL-SCI
could be held liable for any resulting damages, and the amount of
the liability could exceed its resources. CEL-SCI also could incur
significant costs associated with civil or criminal fines and
penalties for failure to comply with such laws and
regulations.
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 CEL-SCI’s 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.
31
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.
32
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, 2019, there were outstanding warrants which allow
the holders to purchase 5,772,303 shares of common stock, with a
weighted average exercise price of $7.70 per share, and outstanding
options which allow the holders to purchase up to 6,218,216 shares
of common stock, with a weighted average exercise price of $5.54
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.
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.
33
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.
34
ITEM
1B.
UNRESOLVED
SEC COMMENTS
None
ITEM
2.
PROPERTIES
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 $1.8 million during the twelve months
ended September 30, 2019. 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 $43,000 per month as of September 30, 2019. 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 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, 2019.
ITEM
3.
LEGAL PROCEEDINGS
Not
applicable.
ITEM
4.
MINE
SAFETY DISCLOSURES
Not
applicable.
35
ITEM
5.
MARKET FOR CEL-SCI'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
As of
September 30, 2019, there were approximately 700 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
|
|
12/31/2017
|
$2.14
|
$1.60
|
|
3/31/2018
|
$2.50
|
$1.30
|
|
6/30/2018
|
$3.66
|
$0.83
|
|
9/30/2018
|
$4.44
|
$0.82
|
|
12/31/2018
|
$4.39
|
$2.60
|
|
3/31/2019
|
$3.55
|
$2.37
|
|
6/30/2019
|
$8.99
|
$3.77
|
|
9/30/2019
|
$9.93
|
$5.80
|
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.
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 is 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
has fully enrolled 928 patients in a Phase 3 clinical trial for its
lead investigational therapy, Multikine, in advanced primary head
and neck cancer. This study was cleared by the U.S. FDA as well as
twenty-three other countries.
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.
36
Results of Operations
During
the year ended September 30, 2019, grant income decreased by
approximately $14,000 compared to the year ended September 30,
2018. The income relates to a Phase 2 Small Business Innovation
Research (SBIR) grant in the amount of $1.5 million received in
September 2017 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 IND enabling studies, and additional mechanism of action
studies, among other preclinical development
activities.
During
the year ended September 30, 2019, research and development
expenses increased by approximately $1.7 million compared to the
year ended September 30, 2018. The majority of CEL-SCI’s
research and development expense relates to its on-going Phase 3
clinical trial. During the year ended September 30, 2019, research
and development expenses related to the Phase 3 study increased
approximately $0.6 million and stock-based compensation increased
by approximately $0.7 million compared to the prior year. Other
components of the increase includes approximately $0.4 million in
other research and development expenses as a result of CEL-SCI
preparing the manufacturing facility for the potential commercial
manufacture of Multikine.
During
the year ended September 30, 2019, general and administrative
expenses increased by approximately $1.7 million compared to the
year ended September 30, 2018. A major component of the increase is
an approximate $1.0 million increase in employee stock compensation
costs. Costs associated with employee stock options increased
approximately $1.7 million due to more options from option plans
approved by shareholders granted during the year ended September
30, 2019, compared to the number of options granted in the prior
year and a higher fair value of the options due to an increase in
the market price of the CEL-SCI’s common stock. These costs
were offset by a decrease of approximately $0.7 million in expenses
associated with CEL-SCI’s Incentive Stock Bonus
Plan, for
which the prior year costs were higher due to the achievement of
the second milestone under that plan during the year ended
September 30, 2018. Another component of the increase was an
approximate $0.7 million increase in public relations costs, of
which approximately $0.3 million was related to an increase in the
value of non-employee stock compensation costs for
consultants.
During
the years ended September 30, 2019 and 2018, CEL-SCI recorded
derivative losses of approximately $0.8 million and $8.6 million,
respectively. This variation was the result of the change in fair
value of the derivative liabilities during the period which was
caused by fluctuations in the share price of CEL-SCI’s common
stock.
Net
interest expense decreased approximately $2.4 million during the
year ended September 30, 2019 compared to the year ended September
30, 2018. The decrease was primarily due to interest incurred
relating to CEL-SCI’s convertible debt, all of which was
converted by September 30, 2018. Interest expense for the year
ended September 30, 2018 includes approximately $2.0 million
relating to the accrual of interest and the write-off of the
discount on notes payable, as well as approximately $0.3 million to
record the issuance of warrants granted to induce conversion.
Interest expense on CEL-SCI’s leased facility remained
relatively consistent at approximately $1.9 million during each
year.
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,
|
|
|
|
2019
|
2018
|
|
Multikine
|
$11,623,050
|
$10,082,972
|
|
LEAPS
|
1,036,237
|
831,559
|
|
Total
research and development
|
$12,659,287
|
$10,914,531
|
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, CEL-SCI is 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.
37
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 for CEL-SCI’s laboratory and
manufacturing 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 2019 and 2018, CEL-SCI raised net
proceeds of approximately $14.8 million and $21.4 million,
respectively, through a combination of the sale of common stock and
the exercise of warrants and options.
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
$1.8 million during the twelve months ended September 30, 2019. See
Item 2 of this report for more information concerning the terms of
this lease.
During
the year ended September 30, 2018, note holders converted all
outstanding Series MM and Series NN Notes (the 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. These Notes
were issued during the year ended September 30, 2017, bore interest
at 4% and were originally due on December 22, 2017.
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,
2019, 125,941 Series RR warrants had been exercised for total proceeds of approximately
$208,000.
On June
11, 2018, as an inducement to convert the Notes, 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. As of September 30, 2019, 32,752 Series UU warrants had been
exercised for total proceeds of
approximately $92,000.
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, 2019, 806,834 Series SS warrants had been exercised
for total proceeds of approximately $1.7 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, 2019, 1,316,171 Series
TT Warrants had been exercised for total proceeds of approximately
$2.9 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, were 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, were
exercisable on January 2, 2019 and expire on July 2, 2023. As of
September 30, 2019, 3,817,500 Series
VV Warrants had been exercised for total proceeds of approximately
$6.7 million and 195,000 Series WW Warrants had been exercised for
total proceeds of approximately $317,000.
38
The
following charts list the warrants that were exercised and the
proceeds received during the years ended September 30, 2019 and
2018.
Fiscal Year 2019
|
Warrants
|
Warrants Exercised
|
Exercise Price
|
Proceeds
|
|
Series
CC
|
403,017
|
$5.00
|
$2,015,085
|
|
Series
GG
|
200,000
|
$3.00
|
600,000
|
|
Series
HH
|
13,500
|
$3.13
|
42,188
|
|
Series
II
|
216,500
|
$3.00
|
649,500
|
|
Series
JJ
|
20,550
|
$3.13
|
64,219
|
|
Series
KK
|
213,870
|
$3.04
|
649,095
|
|
Series
NN
|
65,502
|
$2.52
|
165,065
|
|
Series
OO
|
10,000
|
$2.52
|
25,200
|
|
Series
PP
|
172,500
|
$2.30
|
396,750
|
|
Series
QQ
|
3,500
|
$2.50
|
8,750
|
|
Series
RR
|
98,254
|
$1.65
|
162,119
|
|
Series
SS
|
477,886
|
$2.09
|
998,782
|
|
Series
TT
|
737,188
|
$2.24
|
1,651,301
|
|
Series
UU
|
32,752
|
$2.80
|
91,706
|
|
Series
VV
|
3,817,500
|
$1.75
|
6,680,625
|
|
Series
WW
|
195,000
|
$1.63
|
316,875
|
|
|
6,677,519
|
|
$14,517,260
|
39
Fiscal Year 2018
|
|
Warrants
|
Exercise
|
|
|
|
Exercised
|
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
|
522,674
|
|
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, 2019 and 2018, 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 amounts due Ergomed. Under the Agreements,
CEL-SCI issued Ergomed shares of common stock in payment of amounts
CEL-SCI owed Ergomed for providing these services. 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, 2019 and 2018, CEL-SCI issued Ergomed 750,000
and 2,260,000 shares, respectively. On December 31, 2018, the
expiration date of the prior agreement, Ergomed returned 564,905
unsold shares for cancellation in accordance with the terms of the
previous agreement. The following table summarizes the Other
Non-Operating Gains (Loss) for the years ended September 30
relating to these agreements:
|
|
2019
|
2018
|
|
Amount
realized through the resale of shares
|
$3,945,528
|
$3,230,796
|
|
Fair
value of shares upon issuance
|
3,400,000
|
5,507,400
|
|
Other
non-operating gain (loss)
|
$545,528
|
$(2,276,604)
|
As of
September 30, 2019, Ergomed holds 198,000 shares for resale. As of
September 30, 2018, Ergomed held 918,900 shares.
During
the year ended September 30, 2019, CEL-SCI’s cash decreased
by approximately $1.9 million. Significant components of this
decrease include: Gross proceeds received of approximately $14.9
million from the combination of the sale of common stock to
officers and directors and the exercise of warrants and stock
options, offset by net cash used in operating activities of
approximately $16.3 million, purchases of capitalizable property,
equipment and patents of approximately $0.3 million, and
approximately $0.2 million for payments of stock issuance
costs.
Primarily
as a result of CEL-SCI’s losses incurred to date, its
expected continued future losses, and limited cash balances,
CEL-SCI has included a disclosure in its financial statements
expressing substantial doubt about its ability to continue as a
going concern. CEL-SCI has included such an explanatory paragraph
on numerous occasions in the preceding years.
40
Future Capital Requirements
CEL-SCI’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 $4.5 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 CROs 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. 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 4
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.
Management believes
that the following critical accounting policies affect the more
significant judgments and estimates used in the preparation of
CEL-SCI’s financial statements.
41
Share-based
Compensation—Share-based compensation cost to
employees 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 and expected option life. The
compensation cost is recognized as expense over the requisite
service or vesting period.
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 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.
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, 2019. 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, 2019.
42
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.
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, 2019 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. Based on the
evaluation of our controls and procedures as of September 30, 2019,
our Chief Executive Officer and Chief Financial Officer concluded
that as of such date, our disclosure controls and procedures were
effective. The effectiveness of our internal control over financial
reporting as of September 30, 2019 has been audited by BDO USA,
LLP, an independent registered public accounting firm, as stated in
its report which appears in this Annual Report on Form
10-K.
There
was no change in CEL-SCI’s internal control over financial
reporting that occurred during the fiscal year ended September 30,
2019 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.
43
ITEM
10.
DIRECTORS AND EXECUTIVE OFFICERS OF THE
REGISTRANT
Officers and Directors
|
Name
|
Age
|
Position
|
|
Geert R. Kersten, Esq.
|
61
|
Director, Chief Executive Officer and Treasurer |
|
Patricia B. Prichep
|
68
|
Senior Vice President of Operations and Corporate Secretary |
|
Dr. Eyal Talor
|
63
|
Chief Scientific Officer |
|
Dr. Daniel H. Zimmerman
|
78
|
Senior Vice President of Research, Cellular Immunology |
|
John Cipriano
|
77
|
Senior Vice President of Regulatory Affairs |
|
Dr. Peter R. Young
|
74
|
Director
|
|
Bruno Baillavoine
|
67
|
Director
|
|
Robert Watson
|
62
|
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.
44
Eyal Talor, Ph.D. joined CEL-SCI in October 1993.
In October 2009, Dr. Talor was promoted to Chief Scientific
Officer. Prior to this promotion, Dr. Talor was the Senior Vice
President of Research and Manufacturing. He is a clinical
immunologist with over 25 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 pre-clinical and
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 ten issued patents on
Multikine’s composition of matter and method of use in cancer
and two platform Peptide technologies, Antigen Directed Apoptosis
of T-cells (‘Adapt’) and LEAPS, for the treatment of
autoimmune diseases, asthma, allergy, transplantation rejection and
infectious diseases. 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 Johns Hopkins University, Baltimore, Maryland, USA. He
holds an 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, Pericles Consulting Holdings SAS. Pericles 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 and was appointed to the board in
2019. 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. in 2016. Mr.
Baillavoine remains a significant shareholder in CleanBay Inc.
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).
45
Robert
Watson has been a director of CEL-SCI since December 2017. Mr.
Watson is the President and CEO of Juvare, LLC (formerly
Intermedix, Inc.) since July 2017 . Immediately prior to joining
Intermedix, now Juvare, 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 million 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 May 20,
2019.
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.
46
ITEM 11.
EXECUTIVE
COMPENSATION
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.
47
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, 2019.
|
Name and
Principal
Position
|
Fiscal Year
|
Salary (1)
|
Bonus (2)
|
Stock Awards (3)
|
Option Awards
(4)
|
All Other
Compensation
(5)
|
Total
|
|
|
$
|
$
|
$
|
$
|
$
|
$
|
|
|
|
|
|
|
|
|
|
|
|
Geert R.
Kersten,
|
2019
|
511,387
|
--
|
16,500
|
3,922,841
|
55,631
|
4,506,359
|
|
Chief
Executive
|
2018
|
557,756
|
--
|
16,350
|
1,011,048
|
55,631
|
1,640,784
|
|
Officer and
Treasurer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Patricia B.
Prichep,
|
2019
|
285,964
|
--
|
14,679
|
1,956,794
|
9,031
|
2,266,467
|
|
Senior Vice
President
|
2018
|
162,374
|
--
|
14,679
|
424,557
|
9,031
|
610,641
|
|
of Operations
and
|
|
|
|
|
|
|
|
|
Secretary
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Eyal Talor,
Ph.D.,
|
2019
|
370,355
|
--
|
9,600
|
1,846,231
|
6,031
|
2,232,217
|
|
Chief Scientific
Officer
|
2018
|
264,927
|
--
|
9,600
|
681,389
|
6,031
|
961,946
|
|
|
|
|
|
|
|
|
|
|
Daniel Zimmerman,
Ph.D.,
|
2019
|
243,551
|
--
|
13,666
|
1,020,094
|
6,031
|
1,283,341
|
|
Senior Vice
President of
|
2018
|
276,159
|
--
|
13,666
|
240,677
|
6,031
|
536,534
|
|
Research,
Cellular
|
|
|
|
|
|
|
|
|
Immunology
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
John
Cipriano,
|
2019
|
202,651
|
--
|
--
|
998,005
|
31
|
1,200,686
|
|
Senior Vice
President of
|
2018
|
234,207
|
--
|
--
|
282,928
|
31
|
517,166
|
|
Regulatory
Affairs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
The dollar value of
base salary (cash and non-cash) earned. Each of these officers have
accepted to take less than their actual salary for the stated years
above. As of September 30, 2019, CEL-SCI owed back salaries to the
following employees:
|
Name
|
Salary
|
|
Geert
Kersten
|
$196,546
|
|
Patricia
Prichep
|
114,918
|
|
Eyal
Talor, Ph.D.
|
4,796
|
|
Daniel
Zimmerman, Ph.D.
|
5,194
|
|
John
Cipriano
|
17,811
|
(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.
48
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 2019 expenses for this plan were
approximately $148,000 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,
2019
|
Name
|
Fees
|
Stock Awards (1)
|
Option Awards
(2)
|
Total
|
|
Geert
Kersten
|
$40,000
|
-
|
3,922,841
|
$3,962,841
|
|
Peter R.
Young
|
50,000
|
-
|
771,852
|
821,852
|
|
Bruno
Baillavoine
|
45,000
|
-
|
771,852
|
816,852
|
|
Robert
Watson
|
45,000
|
-
|
771,852
|
816,852
|
(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.
Directors’
fees paid to Geert Kersten are included in the Executive
Compensation table.
Employment Contracts
Geert Kersten
On
August 31, 2019, CEL-SCI entered into a four-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, 2016, 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.
49
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, 2019, 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, 2016 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, 2019, 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, 2016, 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.
Compensation Committee Interlocks and Insider
Participation
CEL-SCI
has a compensation committee comprised of Mr. Bruno Baillavoine,
Dr. Peter Young and Mr. Robert Watson, all of whom are independent
directors.
During
the year ended September 30, 2019, 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.
50
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.
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.
51
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, 2019, to the persons
named below:
Options Granted
|
Name
|
Grant
Date
|
Options Granted
|
Price Per Share
|
Expiration
Date
|
|
|
|
|
|
|
|
Geert
Kersten
|
4/11/2019
|
813,180
|
$5.65
|
4/10/2029
|
|
Patricia
Prichep
|
4/11/2019
|
405,631
|
$5.65
|
4/10/2029
|
|
Eyal
Talor
|
4/11/2019
|
382,712
|
$5.65
|
4/10/2029
|
|
John
Cipriano
|
4/11/2019
|
206,880
|
$5.65
|
4/10/2029
|
|
Dan
Zimmerman
|
4/11/2019
|
211,459
|
$5.65
|
4/10/2029
|
|
Bruno
Baillavoine
|
4/11/2019
|
160,000
|
$5.65
|
4/10/2029
|
|
Peter
Young
|
4/11/2019
|
160,000
|
$5.65
|
4/10/2029
|
|
Robert
Watson
|
4/11/2019
|
160,000
|
$5.65
|
4/10/2029
|
52
The following table shows the outstanding options held by the
persons named below on September 30, 2019:
|
|
Shares
underlying unexercised
|
|
|
|
|
|
Option which
are:
|
Exercise
|
Expiration
|
|
|
Name
|
Exercisable
|
Unexercisable
|
Price
|
Date
|
|
|
|
|
|
|
|
Geert
R. Kersten
|
1,200
|
|
120.00
|
07/20/20
|
|
|
1,200
|
|
172.50
|
04/14/21
|
|
|
1,800
|
|
97.50
|
05/17/22
|
|
|
15,752
|
4,248
|
70.00
|
12/17/22
|
|
|
1,800
|
|
52.50
|
06/30/23
|
|
|
3,600
|
|
27.25
|
02/25/24
|
|
|
120,000
|
60,000
|
2.18
|
07/27/27
|
|
|
176,708
|
353,413
|
2.45
|
04/30/28
|
|
|
|
813,180
|
5.65
|
04/10/29
|
|
|
|
|
|
|
|
Patricia
B. Prichep
|
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
|
|
|
80,000
|
40,000
|
2.18
|
07/27/27
|
|
|
74,203
|
148,404
|
2.45
|
04/30/28
|
|
|
|
405,631
|
5.65
|
04/10/29
|
|
|
|
|
|
|
|
Eyal
Talor, Ph.D
|
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
|
|
|
80,000
|
40,000
|
2.18
|
07/27/27
|
|
|
64,645
|
129,289
|
2.45
|
04/30/28
|
|
|
33,334
|
66,666
|
3.55
|
09/20/28
|
|
|
|
382,712
|
5.65
|
04/10/29
|
|
|
|
|
|
|
|
Daniel
Zimmerman, Ph.D
|
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
|
|
|
4,000
|
|
11.75
|
07/21/26
|
|
|
4,000
|
2,000
|
1.87
|
06/28/27
|
|
|
13,334
|
6,666
|
1.59
|
09/17/27
|
|
|
42,066
|
84,128
|
2.45
|
04/30/28
|
|
|
|
211,459
|
5.65
|
04/10/29
|
|
|
|
|
|
|
|
John
Cipriano
|
600
|
|
120.00
|
07/20/20
|
|
|
600
|
|
172.50
|
04/14/21
|
|
|
900
|
|
97.50
|
05/17/22
|
|
|
900
|
|
57.50
|
06/30/23
|
|
|
1,800
|
|
27.25
|
02/25/24
|
|
|
60,000
|
30,000
|
2.18
|
07/27/27
|
|
|
49,449
|
98,898
|
2.45
|
04/30/28
|
|
|
|
206,880
|
5.65
|
04/10/29
|
|
|
|
|
|
|
53
Summary. The following shows certain information as of
September 30, 2019 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
|
89,895
|
N/A
|
213
|
|
Non-Qualified Stock
Option Plans
|
6,387,200
|
6,128,321
|
N/A
|
112,166
|
|
Stock Bonus
Plans
|
783,760
|
N/A
|
331,226
|
452,501
|
|
Stock Compensation
Plan
|
634,000
|
N/A
|
130,183
|
485,407
|
|
Incentive Stock
Bonus Plan
|
640,000
|
N/A
|
616,500
|
23,500
|
Of the
shares issued pursuant to CEL-SCI's Stock Bonus Plans, 248,904
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, 2019,
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
|
89,895
|
$36.26
|
213
|
|
Non-Qualified Stock
Option Plans
|
6,128,216
|
$5.09
|
112,166
|
54
ITEM
12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The
following table shows, as of December 1, 2019, 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
|
2,428,308
(3)
|
6.6%
|
|
|
|
|
|
Patricia
B. Prichep
8229
Boone Blvd., Suite 802
Vienna,
VA 22182
|
387,789
|
1.1%
|
|
|
|
|
|
Eyal
Talor, Ph.D.
8229
Boone Blvd., Suite 802
Vienna,
VA 22182
|
308,205
|
*
|
|
|
|
|
|
Daniel
H. Zimmerman, Ph.D.
8229
Boone Blvd., Suite 802
Vienna,
VA 22182
|
193,291
|
*
|
|
|
|
|
|
John
Cipriano
8229
Boone Blvd., Suite 802
Vienna,
VA 22182
|
197,357
|
*
|
|
Peter
R. Young, Ph.D.
208
Hewitt Drive, Suite 103-143
Waco,
TX 76712
|
86,892
|
*
|
|
|
|
|
|
Bruno
Baillavoine
8229
Boone Blvd., Suite 802
Vienna,
VA 22182
|
58,001
|
*
|
|
|
|
|
|
Robert
Watson
245 N.
Highland Ave. NE
Suite
230-296
Atlanta,
GA 30307
|
34,792
|
*
|
|
|
|
|
|
All
Officers and Directors
as a
Group (8 persons)
|
3,694,635
|
9.88%
|
|
|
|
|
* Less
than 1%
55
(1) Includes shares
issuable prior to February 28, 2020 upon the exercise of options or
warrants granted to the following persons:
|
Name
|
Options or
Warrants Exercisable Prior to February 28, 2020
|
|
Geert
R. Kersten, Esq.
|
1,320,884(3)
|
|
Patricia
B. Prichep
|
184,762
|
|
Eyal
Talor, Ph.D.
|
189,979
|
|
Daniel
Zimmerman, Ph.D.
|
80,200
|
|
John
Cipriano
|
114,249
|
|
Peter
R. Young, Ph.D.
|
65,801
|
|
Bruno
Baillavoine
|
55,001
|
|
Robert
Watson
|
33,334
|
(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
During
the year ended September 30, 2019, officers and a director of the
Company purchased 45,205 restricted shares of the Company’s
common stock at an aggregate market value of approximately
$292,000. During the year ended September 30, 2018, officers of the
Company purchased 463,855 restricted shares of the Company’s
common stock from the Company for an aggregate fair market value of
$385,000. The shares are subject to the conditions of Rule 144
under the Securities Act of 1933.
See
Note 13 to the financial statements included as part of this report
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, 2019. The
following table shows the aggregate fees billed to CEL-SCI for
these years by BDO USA, LLP:
|
|
Year Ended September
30,
|
|
|
|
2019
|
2018
|
|
|
|
|
|
Audit
Fees
|
$363,000
|
$445,000
|
|
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.
56
ITEM
15.
EXHIBITS
AND FINANCIAL STATEMENT SCHEDULES
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.
|
|
|
|
|
|
Amended
Articles (Name change only)
|
Incorporated
by reference to Exhibit 3(c) of CEL-SCI's report on Form 8-K dated
October 15, 2019.
|
|
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(d) of CEL-SCI’s report on Form 8-K
dated October 15, 2019.
|
||
|
|
|
|
|
|
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
|
||
57
|
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.
|
|
|
|
|
|
58
|
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.
|
||
59
|
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 (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.
|
|
|
|
|
|
|
Securities Purchase
Agreement
|
Incorporated by
reference to Exhibit 10.5 of CEL-SCI’s report on Form 8-K
dated August 31, 2018.
|
|
|
|
|
|
|
Securities Purchase
Agreement with Ergomed
|
Incorporated by
reference to Exhibit 10.6 of CEL-SCI’s report on Form 8-K
dated August 16, 2019.
|
|
|
|
|
|
|
2019 Non-Qualified
Stock Option Plan
|
Incorporated by
reference to Exhibit 10.7 of CEL-SCI’s report on Form 8-K
dated October 15, 2019.
|
|
|
|
|
|
|
2019 Stock
Compensation Plan
|
Incorporated by
reference to Exhibit 10.8 of CEL-SCI’s report on Form 8-K
dated October 15, 2019.
|
|
|
|
|
|
|
|
|
|
|
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 (*)
60
CEL-SCI
CORPORATION
Financial
Statements for the Years
Ended
September 30, 2019 and 2018, 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, 2019 and
2018:
|
|
|
|
|
|
Balance Sheets
|
F-4
|
|
Statements of Operations
|
F-5
|
|
Statements of Stockholders’ Equity
|
F-6
|
|
Statements of Cash Flows
|
F-7
|
|
Notes to Financial Statements
|
F-8
|
Report of Independent Registered Public Accounting
Firm
Shareholders
and Board of Directors
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, 2019 and 2018, the
related statements of operations, stockholders’ equity, 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, 2019 and 2018, 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.
We also have
audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States) (“PCAOB”),
the Company's internal control over financial reporting as of
September 30, 2019, based on criteria established in Internal Control – Integrated
Framework (2013) issued by the Committee of Sponsoring
Organizations of the Treadway Commission (“COSO”) and
our report dated December 16, 2019, expressed an unqualified
opinion thereon.
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 forseeable 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 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.
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.
Potomac,
Maryland
December
16, 2019
F-2
Report of Independent Registered Public Accounting
Firm
Shareholders
and Board of Directors
CEL-SCI
Corporation
Vienna,
Virginia
Opinion on Internal Control over Financial Reporting
We have audited CEL-SCI Corporation’s (the
“Company’s”) internal control over financial
reporting as of September 30, 2019, based on criteria established
in Internal
Control – Integrated Framework (2013) issued by the Committee of Sponsoring
Organizations of the Treadway Commission (the “COSO
criteria”). In our opinion, the Company maintained, in all
material respects, effective internal control over financial
reporting as of September 30, 2019, based on the COSO
criteria.
We
also have audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States)
(“PCAOB”), the balance sheets of the Company as of
September 31, 2019 and 2018, the related consolidated statements of
operations, stockholders’ equity, and cash flows for each of
the years then ended, and the related notes (collectively referred
to as “the
financial statements”
) and our report dated December 16, 2019 expressed an unqualified
opinion thereon.
Basis for Opinion
The
Company’s management is responsible for maintaining effective
internal control over financial reporting and for its assessment of
the effectiveness of internal control over financial reporting,
included in the accompanying “Item 9A, Management’s
Report on Internal Control over Financial Reporting”. Our
responsibility is to express an opinion on the Company’s
internal control over financial reporting based on our audit. We
are a public accounting firm registered with the PCAOB and are
required to be independent with respect to the Company in
accordance with U.S. federal securities laws and the applicable
rules and regulations of the Securities and Exchange Commission and
the PCAOB.
We
conducted our audit of internal control over financial reporting in
accordance with the standards of the PCAOB. Those standards require
that we plan and perform the audit to obtain reasonable assurance
about whether effective internal control over financial reporting
was maintained in all material respects. Our audit included
obtaining an understanding of internal control over financial
reporting, assessing the risk that a material weakness exists, and
testing and evaluating the design and operating effectiveness of
internal control based on the assessed risk. Our audit also
included performing such other procedures as we considered
necessary in the circumstances. We believe that our audit provides
a reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial
Reporting
A
company’s internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally
accepted accounting principles. A company’s internal control
over financial reporting includes those policies and procedures
that (1) pertain to the maintenance of records that, in reasonable
detail, accurately and fairly reflect the transactions and
dispositions of the assets of the company; (2) provide reasonable
assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally
accepted accounting principles, and that receipts and expenditures
of the company are being made only in accordance with
authorizations of management and directors of the company; and (3)
provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the
company’s assets that could have a material effect on the
financial statements.
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.
|
|
/s/ BDO USA, LLP
|
Potomac,
Maryland
December
16, 2019
F-3
CEL-SCI
CORPORATION
BALANCE
SHEETS
SEPTEMBER
30, 2019 and 2018
|
ASSETS
|
2019
|
2018
|
|
|
|
|
|
Current
Assets:
|
|
|
|
Cash
and cash equivalents
|
$8,444,774
|
$10,310,044
|
|
Receivables
|
62,765
|
118,657
|
|
Prepaid
expenses
|
524,953
|
364,622
|
|
Inventory
used for R&D and manufacturing
|
782,363
|
645,238
|
|
|
|
|
|
Total
Current Assets
|
9,814,855
|
11,438,561
|
|
|
|
|
|
Plant,
property and equipment, net
|
15,825,636
|
16,218,851
|
|
Patent
costs, net
|
311,586
|
258,093
|
|
Deposits
|
1,670,917
|
1,670,917
|
|
|
|
|
|
Total
Assets
|
$27,622,994
|
$29,586,422
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
Current
Liabilities:
|
|
|
|
Accounts
payable
|
$1,586,478
|
$5,743,913
|
|
Accrued
expenses
|
34,432
|
205,310
|
|
Due
to employees
|
709,442
|
764,941
|
|
Derivative
instruments, current portion
|
674,442
|
2,498,606
|
|
Other
current liabilities
|
14,956
|
14,029
|
|
|
|
|
|
Total
Current Liabilities
|
3,019,750
|
9,226,799
|
|
|
|
|
|
Derivative
instruments, net of current portion
|
5,813,868
|
6,818,458
|
|
Lease
liability
|
13,508,156
|
13,379,962
|
|
Deferred
income
|
125,000
|
126,795
|
|
Other
liabilities
|
22,553
|
33,492
|
|
|
|
|
|
Total
Liabilities
|
22,489,327
|
29,585,506
|
|
|
|
|
|
Commitments
and Contingencies
|
|
|
|
|
|
|
|
STOCKHOLDERS'
EQUITY
|
|
|
|
Preferred
stock, $.01 par value- 200,000 shares authorized;
|
|
|
|
-0-
shares issued and outstanding
|
-
|
-
|
|
Common
stock, $.01 par value - 600,000,000 shares authorized;
|
|
|
|
35,231,776
and 28,034,487 shares issued and outstanding
|
|
|
|
at
September 30, 2019 and 2018, respectively
|
352,318
|
280,346
|
|
Additional
paid-in capital
|
358,507,603
|
331,312,184
|
|
Accumulated
deficit
|
(353,726,254)
|
(331,591,614)
|
|
|
|
|
|
Total
Stockholders' Equity
|
5,133,667
|
916
|
|
|
|
|
|
TOTAL
LIABILITIES AND STOCKHOLDERS' EQUITY
|
$27,622,994
|
$29,586,422
|
|
|
|
|
|
See
notes to financial statements.
|
||
F-4
|
CEL-SCI
CORPORATION
|
||
|
STATEMENTS
OF OPERATIONS
|
||
|
YEARS
ENDED SEPTEMBER 30, 2019 and 2018
|
||
|
|
|
|
|
|
2019
|
2018
|
|
|
|
|
|
Grant
income
|
$462,754
|
$476,556
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
Research
and development
|
12,659,287
|
10,914,531
|
|
General
& administrative
|
7,998,573
|
6,334,271
|
|
|
|
|
|
Total
operating expenses
|
20,657,860
|
17,248,802
|
|
|
|
|
|
Operating
loss
|
(20,195,106)
|
(16,772,246)
|
|
|
|
|
|
Other
income
|
73,022
|
70,896
|
|
|
|
|
|
Loss
on derivative instruments
|
(760,603)
|
(8,643,561)
|
|
|
|
|
|
Other
non-operating gain (loss)
|
545,528
|
(2,276,604)
|
|
|
|
|
|
Interest
expense, net
|
(1,797,481)
|
(4,215,690)
|
|
|
|
|
|
Net
loss
|
(22,134,640)
|
(31,837,205)
|
|
|
|
|
|
Modification
of warrants
|
-
|
(14,368)
|
|
|
|
|
|
Net
loss available to common shareholders
|
$(22,134,640)
|
$(31,851,573)
|
|
|
|
|
|
Net
loss per common share, basic and diluted
|
$(0.71)
|
$(1.87)
|
|
|
|
|
|
Weighted
average common shares outstanding, basic and diluted
|
31,174,394
|
17,004,722
|
See
notes to financial
statements.
F-5
|
CEL-SCI
CORPORATION
|
|||||
|
STATEMENTS
OF STOCKHOLDERS' EQUITY
|
|||||
|
YEARS
ENDED SEPTEMBER 30, 2019 and 2018
|
|||||
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
Common
|
Stock
|
Paid-In
|
Accumulated
|
|
|
|
Shares
|
Amount
|
Capital
|
Deficit
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE,
OCTOBER 1, 2017
|
11,903,133
|
$119,031
|
$296,298,401
|
$(299,754,409)
|
$(3,336,977)
|
|
|
|
|
|
|
|
|
Sale of common
stock
|
7,690,623
|
76,906
|
11,715,335
|
-
|
11,792,241
|
|
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
|
|
Purchase of
stock by officers and directors
|
463,855
|
4,639
|
380,361
|
-
|
385,000
|
|
Stock issuance
costs
|
-
|
-
|
(206,583)
|
-
|
(206,583)
|
|
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
|
|
|
|
|
|
|
|
|
Warrant
exercises
|
6,677,519
|
66,775
|
18,039,842
|
-
|
18,106,617
|
|
401(k)
contributions paid in common stock
|
30,996
|
310
|
143,568
|
-
|
143,878
|
|
Stock issued
to nonemployees for service
|
199,977
|
1,999
|
876,589
|
-
|
878,588
|
|
Equity based
compensation - employees
|
(7,500)
|
(75)
|
4,428,249
|
-
|
4,428,174
|
|
Option
exercises
|
65,997
|
660
|
149,822
|
-
|
150,482
|
|
Purchase of
stock by officers and directors
|
45,205
|
452
|
291,545
|
-
|
291,997
|
|
Stock issuance
costs
|
-
|
-
|
(132,345)
|
-
|
(132,345)
|
|
Shares issued
for settlement of clinical research costs
|
185,095
|
1,851
|
3,398,149
|
-
|
3,400,000
|
|
Net
loss
|
-
|
-
|
-
|
(22,134,640)
|
(22,134,640)
|
|
|
|
|
|
|
|
|
BALANCE,
SEPTEMBER 30, 2019
|
35,231,776
|
$352,318
|
$358,507,603
|
$(353,726,254)
|
$5,133,667
|
See
notes to financial statements.
F-6
|
CEL-SCI
CORPORATION
|
||
|
STATEMENTS
OF CASH FLOWS
|
||
|
YEARS
ENDED SEPTEMBER 30, 2019 and 2018
|
||
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL
SCHEDULE OF NON-CASH INVESTING AND FINANCING
ACTIVITIES:
|
|
|
|
|
|
|
|
|
2019
|
2018
|
|
Plant,
property and equipment purchases included in accounts
payable
|
$17,329
|
$-
|
|
Prepaid
consulting services paid with issuance of common stock
|
$22,563
|
$162,452
|
|
Notes
payable converted into common shares
|
$-
|
$2,294,300
|
|
Exercise
of derivative liabilities
|
$3,589,357
|
$1,379,899
|
|
Capital
lease obligation included in accounts payable
|
$441
|
$415
|
|
Stock
issuance costs included in current liabilities
|
$15,580
|
$46,599
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
paid for interest
|
$1,809,242
|
$1,750,897
|
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 Company
expects to use the results to support applications to regulatory
agencies around the world for worldwide commercial marketing
approvals for Multikine for neoadjuvant therapy in patients with
squamous cell carcinoma of the head and neck.
The Company’s
investigational immune therapy, Multikine, is being used in a
different way than other 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 at
the site of the tumors. For
example, in 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 of this
neoadjuvant therapy and administration before weakening of the
immune system by surgery, chemotherapy and radiation will result in
improved outcomes and better overall survival rates for patients
suffering from head and neck cancer.
The Company is also
investigating a different peptide-based immunotherapy as a vaccine
for Rheumatoid Arthritis. The Company 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 provides 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
2019 and 2018, the Company received net proceeds of approximately
$14.8 million and $21.4 million, respectively, through the sale of
stock and the exercise of warrants and options. 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 warrant exercises, 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.
F-8
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.
Since the Company
launched its Phase 3 clinical trial for Multikine, the Company has
incurred expenses of approximately $55.8 million as of September
30, 2019 on direct costs for the Phase 3 clinical trial. The
Company estimates it will incur additional expenses of
approximately $4.5 million for the remainder of the Phase 3
clinical trial. It should be noted that this estimate is
based only on the information currently available from the Clinical
Research Organizations responsible for managing the Phase 3
clinical trial and does not include other related costs, e.g., the
manufacturing of the drug. This number may be affected by 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’s primary 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 were paid to Lake
Whillans Litigation Finance. As a result of the arbitrator’s
ruling, during the year ended September 30, 2018, the Company wrote
off approximately $471,000, which will no longer be
realized.
3.
REVISION OF PRIOR PERIOD FINANCIAL STATEMENTS FOR CORRECTION OF
IMMATERIAL ERRORS-
In
November 2019, CEL-SCI discovered an error in the classification of
certain employee compensation on the statement of operations.
Costs associated with employees considered to be in the research
and development function of the business were incorrectly
classified as general and administrative costs. The total
amount of expenses recorded is not impacted by this error. This
misclassification has no impact on the earnings of CEL-SCI or its
financial position. The error does not impact total compensation
costs, total operating costs, net operating loss, net loss, net
loss per share, cash flows or stockholders’
deficit.
Employee
related expenses of approximately $1.5 million were incorrectly
recorded as general and administrative expenses and should have
been recorded as research and development expenses in the prior
year. Prior year amounts have been revised in the current
year financial statements to reflect this
change.
|
|
Year ended 9/30/2018
|
||
|
|
Originally Reported
|
Reclassification
|
Corrected
|
|
Operating
Expenses
|
|
|
|
|
Research
and development
|
$9,400,306
|
$1,514,225
|
$10,914,531
|
|
General
and administrative
|
7,848,496
|
(1,514,225)
|
6,334,271
|
|
Total
Operating Expenses
|
$17,248,802
|
$-
|
$17,248,802
|
4.
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.
F-9
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 12.
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, and considering 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 from the Company’s 2014 Incentive
Stock Bonus Plan, 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, 2019.
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, 2019 and 2018.
F-10
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.
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 15 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
over which options granted are expected to be outstanding and has
been determined using 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.
F-11
Reclassifications-
Approximately
$2.3 million loss on a financing transaction in the prior year was
reclassified from net interest expense to other non-operating loss
to conform with the current year presentation. The current year
statement of operations has been restated to reflect this
reclassification.
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 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 a right-of-use asset and a
lease liability. Leases will be classified as operating or
financing. 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 ASU
2016-02 is effective for fiscal years and interim periods, within
those fiscal years, beginning after December 15, 2018, but early
adoption is permitted. The Company is currently evaluating the
effect of the new standard on its financial statements and related
disclosures. In July 2018, the FASB issued ASU No. 2018-11, Leases
(Topic 842): Targeted Improvements which allows entities to
initially apply the new leases standard at the adoption date and
recognize a cumulative-effect adjustment to the opening balance of
retained earnings in the period of adoption. ASU 2016-02 also
requires expanded financial statement disclosures on leasing
activities. These changes will become effective for the Company on
October 1, 2019.
F-12
The new lease
guidance as codified in ASC 842, provides for several optional
practical expedients in transition. The Company will adopt the
following practical expedients:
●
The optional
transition method set forth in ASU 2018-11 noted above – Upon
adopting the standard effective October 1, 2019, the Company will
recognize a cumulative-effect adjustment to the opening balance of
retained earnings without recasting comparative
periods.
●
The election to
apply a “package of practical expedients,” which allows
management to not reassess whether any expired or existing
contracts are or contain leases under the new standard, or to
reassess prior conclusions on lease identification, lease
classification and the recording of initial direct costs. As
required, these practical expedients must be elected as a package
and must be applied to all leases.
●
The option not to
separate lease and non-lease components within the lease and
account for all lease components as a single lease
component.
The Company
estimates the impact of adopting ASC 842 on October 1, 2019 will be
to record a $13.1 million right-to-use asset, to decrease property
and equipment by approximately $13.4 million and to increase lease
liabilities by approximately $0.3 million. This will result in an
approximate $0.6 million adjustment to opening retained earnings as
of October 1, 2019. Management is evaluating the appropriate lease
classification and expects to complete this evaluation by the end
of the first quarter of fiscal year 2020. The adoption of ASC 842
is not expected to result in significant changes to the
Company’s statements of operations or cash
flows.
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.
5.
WARRANTS
AND NON-EMPLOYEE OPTIONS
The following
warrants and non-employee options are outstanding at September 30,
2019:
|
Warrant
|
Issue
Date
|
Shares
Issuable upon Exercise
of
Warrants
|
Exercise
Price
|
Expiration
Date
|
|
Series
N
|
8/18/2008
|
85,339
|
$3.00
|
2/18/2020
|
|
Series
V
|
5/28/2015
|
810,127
|
$19.75
|
5/28/2020
|
|
Series
UU
|
6/11/2018
|
154,810
|
$2.80
|
6/11/2020
|
|
Series
W
|
10/28/2015
|
688,930
|
$16.75
|
10/28/2020
|
|
Series
X
|
1/13/2016
|
120,000
|
$9.25
|
1/13/2021
|
|
Series
Y
|
2/15/2016
|
26,000
|
$12.00
|
2/15/2021
|
|
Series
ZZ
|
5/23/2016
|
20,000
|
$13.75
|
5/18/2021
|
|
Series
BB
|
8/26/2016
|
16,000
|
$13.75
|
8/22/2021
|
|
Series
Z
|
5/23/2016
|
264,000
|
$13.75
|
11/23/2021
|
|
Series
FF
|
12/8/2016
|
68,048
|
$3.91
|
12/1/2021
|
|
Series
CC
|
12/8/2016
|
277,463
|
$5.00
|
12/8/2021
|
|
Series
HH
|
2/23/2017
|
6,500
|
$3.13
|
2/16/2022
|
|
Series
AA
|
8/26/2016
|
200,000
|
$13.75
|
2/22/2022
|
|
Series
JJ
|
3/14/2017
|
9,450
|
$3.13
|
3/8/2022
|
|
Series
LL
|
4/30/2017
|
26,398
|
$3.59
|
4/30/2022
|
|
Series
MM
|
6/22/2017
|
893,491
|
$1.86
|
6/22/2022
|
|
Series
NN
|
7/24/2017
|
473,798
|
$2.52
|
7/24/2022
|
|
Series
OO
|
7/31/2017
|
50,000
|
$2.52
|
7/31/2022
|
|
Series
RR
|
10/30/2017
|
457,116
|
$1.65
|
10/30/2022
|
|
Series
SS
|
12/19/2017
|
482,644
|
$2.09
|
12/18/2022
|
|
Series
TT
|
2/5/2018
|
559,689
|
$2.24
|
2/5/2023
|
|
Series
VV
|
7/2/2018
|
82,500
|
$1.75
|
1/2/2024
|
|
Consultants
|
7/28/17
|
10,000
|
$2.18
|
7/27/2027
|
F-13
The following
warrants and non-employee options were outstanding at September 30,
2018:
|
Warrant
|
Issue
Date
|
Shares Issuable upon Exercise of
Warrants
|
Exercise Price
|
Expiration Date
|
|
Series
S
|
10/11/13-
10/24/14
|
327,729
|
$31.25
|
10/11/2018
|
|
Series
DD
|
12/8/2016
|
1,360,960
|
$4.50
|
12/10/2018
|
|
Series
EE
|
12/8/2016
|
1,360,960
|
$4.50
|
12/10/2018
|
|
Series
N
|
8/18/2008
|
85,339
|
$3.00
|
2/18/2020
|
|
Series
V
|
5/28/2015
|
810,127
|
$19.75
|
5/28/2020
|
|
Series
UU
|
6/11/2018
|
187,562
|
$2.80
|
6/11/2020
|
|
Series
W
|
10/28/2015
|
688,930
|
$16.75
|
10/28/2020
|
|
Series
X
|
1/13/2016
|
120,000
|
$9.25
|
1/13/2021
|
|
Series
Y
|
2/15/2016
|
26,000
|
$12.00
|
2/15/2021
|
|
Series
ZZ
|
5/23/2016
|
20,000
|
$13.75
|
5/18/2021
|
|
Series
BB
|
8/26/2016
|
16,000
|
$13.75
|
8/22/2021
|
|
Series
Z
|
5/23/2016
|
264,000
|
$13.75
|
11/23/2021
|
|
Series
FF
|
12/8/2016
|
68,048
|
$3.91
|
12/1/2021
|
|
Series
CC
|
12/8/2016
|
680,480
|
$5.00
|
12/8/2021
|
|
Series
HH
|
2/23/2017
|
20,000
|
$3.13
|
2/16/2022
|
|
Series
AA
|
8/26/2016
|
200,000
|
$13.75
|
2/22/2022
|
|
Series
JJ
|
3/14/2017
|
30,000
|
$3.13
|
3/8/2022
|
|
Series
LL
|
4/30/2017
|
26,398
|
$3.59
|
4/30/2022
|
|
Series
MM
|
6/22/2017
|
893,491
|
$1.86
|
6/22/2022
|
|
Series
NN
|
7/24/2017
|
539,300
|
$2.52
|
7/24/2022
|
|
Series
OO
|
7/31/2017
|
60,000
|
$2.52
|
7/31/2022
|
|
Series
QQ
|
8/22/2017
|
3,500
|
$2.50
|
8/22/2022
|
|
Series
GG
|
2/23/2017
|
200,000
|
$3.00
|
8/23/2022
|
|
Series
II
|
3/14/2017
|
216,500
|
$3.00
|
9/14/2022
|
|
Series
RR
|
10/30/2017
|
555,370
|
$1.65
|
10/30/2022
|
|
Series
KK
|
5/3/2017
|
213,870
|
$3.04
|
11/3/2022
|
|
Series
SS
|
12/19/2017
|
960,530
|
$2.09
|
12/18/2022
|
|
Series
TT
|
2/5/2018
|
1,296,877
|
$2.24
|
2/5/2023
|
|
Series
PP
|
8/28/2017
|
172,500
|
$2.30
|
2/28/2023
|
|
Series
WW
|
7/2/2018
|
195,000
|
$1.63
|
6/28/2023
|
|
Series
VV
|
7/2/2018
|
3,900,000
|
$1.75
|
1/2/2024
|
|
Consultants
|
1/1/16
- 7/28/17
|
30,400
|
$2.18- $11.50
|
12/31/18-
7/27/27
|
F-14
1.
Warrant
Liabilities
Warrant liabilities
outstanding at September 30 are as follows:
|
|
2019
|
2018
|
|
Series S
warrants
|
$-
|
$33
|
|
Series V
warrants
|
674,442
|
770,436
|
|
Series W
warrants
|
1,193,507
|
999,081
|
|
Series Z
warrants
|
1,109,545
|
487,767
|
|
Series ZZ
warrants
|
77,638
|
34,215
|
|
Series AA
warrants
|
916,908
|
380,474
|
|
Series BB
warrants
|
63,966
|
28,456
|
|
Series CC
warrants
|
1,710,898
|
1,779,724
|
|
Series DD
warrants
|
-
|
1,249,287
|
|
Series EE
warrants
|
-
|
1,249,287
|
|
Series FF
warrants
|
446,185
|
188,921
|
|
Series GG
warrants
|
-
|
607,228
|
|
Series HH
warrants
|
45,657
|
58,816
|
|
Series II
warrants
|
-
|
660,135
|
|
Series JJ
warrants
|
66,599
|
88,642
|
|
Series KK
warrants
|
-
|
656,930
|
|
Series LL
warrants
|
182,965
|
77,632
|
|
|
|
|
|
Total warrant
liabilities
|
$6,488,310
|
$9,317,064
|
|
|
|
|
The (losses)/gains
on the warrant liabilities for the years ended September 30 are as
follows:
|
|
2019
|
2018
|
|
Series S
Warrants
|
$33
|
$(751,378)
|
|
Series V
warrants
|
95,994
|
(697,526)
|
|
Series W
warrants
|
(194,426)
|
(915,327)
|
|
Series Z
warrants
|
(621,778)
|
(410,551)
|
|
Series ZZ
warrants
|
(43,423)
|
(29,461)
|
|
Series AA
warrants
|
(536,434)
|
(315,387)
|
|
Series BB
warrants
|
(35,510)
|
(24,134)
|
|
Series CC
warrants
|
(1,198,836)
|
(1,385,504)
|
|
Series DD
warrants
|
1,249,287
|
(1,243,795)
|
|
Series EE
warrants
|
1,249,287
|
(1,243,795)
|
|
Series FF
warrants
|
(257,264)
|
(141,767)
|
|
Series GG
warrants
|
195,228
|
(408,555)
|
|
Series HH
warrants
|
(24,465)
|
(42,802)
|
|
Series II
warrants
|
(442,040)
|
(462,519)
|
|
Series JJ
warrants
|
(35,301)
|
(64,439)
|
|
Series KK
warrants
|
(55,622)
|
(449,470)
|
|
Series LL
warrants
|
(105,333)
|
(57,151)
|
|
Net loss on warrant
liabilities
|
$(760,603)
|
$(8,643,561)
|
F-15
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.
Exercise of Warrant Liabilities
The
following warrants recorded as liabilities were exercised during
the year ended September 30, 2019:
|
Warrants
|
Warrants Exercised
|
Exercise Price
|
Proceeds
|
|
Series
CC
|
403,017
|
$5.00
|
$2,015,085
|
|
Series
GG
|
200,000
|
$3.00
|
600,000
|
|
Series
HH
|
13,500
|
$3.13
|
42,188
|
|
Series
II
|
216,500
|
$3.00
|
649,500
|
|
Series
JJ
|
20,550
|
$3.13
|
64,219
|
|
Series
KK
|
213,870
|
$3.04
|
649,095
|
|
|
1,067,437
|
|
$4,020,087
|
The
following warrants recorded as liabilities were exercised during
the year ended September 30, 2018:
|
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
|
Expiration of Warrants
On December 10,
2018, 1,360,960 Series DD and 1,360,960 Series EE warrants with
exercise prices of $4.50 expired. The expiration dates of these
warrants had been previously extended and such modifications were
reflected in the fair value measurement of the warrants on the
dates of modification.
On October 11,
2018, 327,729 Series S warrants, with an exercise price of $31.25,
expired. The exercise price of these warrants had been previously
repriced under temporarily revised terms and such modifications
were reflected in the fair value measurement of the
warrants.
On October 17,
2017, 17,821 Series U warrants, with an exercise price of $43.75,
expired.
F-16
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 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 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.
During
the year ended September 30, 2019, 3,817,500 and 195,000 Series VV
and WW warrants were exercised, respectively, for total gross
proceeds of approximately $7.0 million. During the year ended
September 30, 2018 no Series VV or WW warrants were exercised. As
of September 30, 2019, 82,500 Series VV and 0 Series WW warrants
were outstanding.
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 8). The Series UU
warrants are exercisable at a fixed price of $2.80 per share and
expire on June 11, 2020. The
Company recognized an expense equal to the excess of the fair value
of the consideration transferred in the transaction over 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 for the
year ended September 30, 2018. The Series UU warrants qualify for
equity treatment in accordance with ASC 815.
During
the year ended September 30, 2019, 32,752 Series UU warrants were
exercised for total gross proceeds of approximately $0.1 million.
During the year ended September 30, 2018 no Series UU warrants were
exercised. As of September 30, 2019, 154,810 Series UU warrants
were outstanding.
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 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 years ended September 30, 2019 and 2018, 737,188 and 578,983,
respectively, Series TT warrants were exercised for total gross
proceeds of approximately $1.6 million and $1.3 million,
respectively. As of September 30, 2019, 559,689 Series TT warrants
were outstanding.
F-17
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. 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 years ended September 30, 2019 and 2018, 477,886 and 328,948,
respectively, Series SS warrants were exercised for total gross
proceeds of approximately $1.0 million and $0.7 million,
respectively. As of September 30, 2019, 482,644 Series SS warrants
were outstanding.
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 8.
During
the years ended September 30, 2019 and 2018, 98,254 and 27,687,
respectively, Series RR warrants were exercised for total gross
proceeds of approximately $160,000 and $50,000, respectively. As of
September 30, 2019, 457,116 Series RR warrants were
outstanding.
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 expiration date of the Series N warrants was extended to
February 18, 2020. The incremental cost of this extension was
approximately $14,000, which was recorded as a deemed dividend in
the financial statements for the year ended September 30,
2018.
Exercise of Equity Warrants
The
following equity warrants were exercised during the year ended
September 30, 2019.
|
Warrants
|
Warrants Exercised
|
Exercise Price
|
Proceeds
|
|
Series
NN
|
65,502
|
$2.52
|
$165,065
|
|
Series
OO
|
10,000
|
$2.52
|
25,200
|
|
Series
PP
|
172,500
|
$2.30
|
396,750
|
|
Series
QQ
|
3,500
|
$2.50
|
8,750
|
|
Series
RR
|
98,254
|
$1.65
|
162,119
|
|
Series
SS
|
477,886
|
$2.09
|
998,782
|
|
Series
TT
|
737,188
|
$2.24
|
1,651,301
|
|
Series
UU
|
32,752
|
$2.80
|
91,706
|
|
Series
VV
|
3,817,500
|
$1.75
|
6,680,625
|
|
Series
WW
|
195,000
|
$1.63
|
316,875
|
|
|
5,610,082
|
|
$10,497,173
|
F-18
The
following equity warrants 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,
2019 and 2018 the Company issued 199,977 and 356,197 shares,
respectively, of common stock to consultants of which 199,977 and
353,197 shares, respectively, were restricted shares. Under these
arrangements, the common stock was issued with stock prices ranging
between $0.85 and $8.76 per share. The weighted average grant price
was $4.25 and $1.95, respectively, for stock issued during the
years and September 30, 2019 and 2018.
During the years
ended September 30, 2019 and 2018, the Company recorded total
expense of approximately $856,000 and $531,000, respectively,
relating to these consulting agreements. At September 30, 2019 and
2018, approximately $230,000 and $207,000, respectively, are
included in prepaid expenses. During the year ended September 30,
2019, 10,000 options issued to consultants were exercised and
10,400 options expired. As of September 30, 2019, 10,000 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.
6.
PLANT,
PROPERTY AND EQUIPMENT
Plant, property and
equipment consisted of the following at September 30:
|
|
2019
|
2018
|
|
Leased
manufacturing facility
|
$21,183,756
|
$21,183,756
|
|
Research
equipment
|
3,320,358
|
3,162,151
|
|
Furniture
and equipment
|
125,872
|
124,369
|
|
Leasehold
improvements
|
149,239
|
131,910
|
|
|
24,779,225
|
24,602,186
|
|
|
|
|
|
Accumulated
depreciation and amortization
|
(8,953,589)
|
(8,383,335)
|
|
|
|
|
|
Net
plant, property and equipment
|
$15,825,636
|
$16,218,851
|
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 12, Commitments and
Contingencies–Lease Obligations, for additional information.
As of September 30, 2019 and 2018, accumulated depreciation on the
manufacturing building is approximately $5.6 million and $5.1
million, respectively. Depreciation expense for the years ended
September 30, 2019 and 2018 totaled approximately $588,000 and,
$575,000, 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.
F-19
7.
PATENTS
Patents consist of
the following at September 30:
|
|
2019
|
2018
|
|
Patents
|
$841,397
|
$742,698
|
|
Accumulated
amortization
|
(529,811)
|
(484,605)
|
|
|
|
|
|
Patents,
net
|
$311,586
|
$258,093
|
During the years
ended September 30, 2019 and 2018, there was no impairment of
patent costs. Amortization expense for the years ended September
30, 2019 and 2018 totaled approximately $45,000 and $75,000,
respectively. The total estimated future amortization is as
follows:
|
Years
ending September 30,
|
|
|
2020
|
51,000
|
|
2021
|
48,000
|
|
2022
|
44,000
|
|
2023
|
33,000
|
|
2024
|
26,000
|
|
Thereafter
|
110,000
|
|
|
$312,000
|
8.
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) along with Series MM and Series NN warrants (See Note
5). 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. During the year
ended September 30, 2018, note holders converted the remaining
outstanding Notes with an aggregate principal amount of $2,294,300,
into 1,166,105 shares of common stock. 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.
F-20
As an inducement to
convert, on June 11, 2018, 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 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 excess of the fair value of the consideration
transferred in the transaction over 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 for the year ended September
30, 2018.
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 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.
Because the Company was experiencing financial
difficulties at the time of the October 2017 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.
During the year
ended September 30, 2018, the Company recorded approximately $2.0
million in interest expense relating to the amortization of the
debt discount.
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.
9.
INCOME
TAXES
At September 30,
2019 and 2018, the Company had net
deferred tax assets of $28.8million and $24.8 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. No limitations on NOL carryforwards relating to change
in ownership were imposed during the year ended September 30, 2019.
The Company’s Section 382 estimated analysis was
completed through September 30, 2018. If additional changes in
ownership occur after 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.
F-21
The Company had
federal NOL carryforwards of approximately $36.7 million and $18.6
million at September 30, 2019 and 2018, respectively. The NOL
carryforwards begin to expire during the year ended September 30,
2021 and become fully expired by the end of the fiscal year ended
2039. 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, 2019 and 2018. The R&D credit begins to
expire during the year ended September 30, 2020 and becomes fully
expired during the fiscal year ended 2029.
Significant components
of the Company’s deferred tax assets as of September
30, 2019 and 2018 are listed
below:
|
|
2019
|
2018
|
|
|
|
|
|
NOL
carryforwards
|
$9,698,000
|
$5,052,000
|
|
R&D
credit
|
1,221,000
|
1,221,000
|
|
Stock-based
compensation
|
3,165,000
|
3,097,000
|
|
Capitalized
R&D
|
14,777,000
|
15,518,000
|
|
Vacation
and other
|
544,000
|
544,000
|
|
Total
deferred tax assets
|
29,405,000
|
25,432,000
|
|
|
|
|
|
Fixed
assets and intangibles
|
(586,000)
|
(634,000)
|
|
Total
deferred tax liability
|
(586,000)
|
(634,000)
|
|
|
|
|
|
Net
deferred tax asset
|
28,819,000
|
24,798,000
|
|
Valuation
allowance
|
(28,819,000)
|
(24,798,000)
|
|
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:
|
|
2019
|
2018
|
|
|
|
|
|
Federal
Rate
|
21.00%
|
24.28%
|
|
Federal
rate change
|
(2.8)
|
(88.94)
|
|
State
tax rate, net of federal benefit
|
5.31
|
4.47
|
|
Net
operating loss – write-off
|
-
|
(161.21)
|
|
Other
adjustments
|
(4.77)
|
(5.95)
|
|
Permanent
differences
|
(0.57)
|
(5.79)
|
|
Change
in valuation allowance
|
(18.17)
|
233.14
|
|
|
|
|
|
Effective
tax rate
|
0.00%
|
0.00%
|
|
|
|
|
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.
F-22
10.
STOCK
COMPENSATION
The Company
recognized the following expenses for options issued or vested and
restricted stock awarded during the year:
|
|
Year
Ended September 30,
|
|
|
|
2019
|
2018
|
|
Employees
|
$4,428,174
|
$2,743,267
|
|
Non-employees
|
$856,025
|
$530,736
|
During the years
ended September 30, 2019 and 2018, non-employee stock compensation
excluded approximately $230,000 and $207,000, respectively, for
future services to be performed (Note 5).
During the years
ended September 30, 2019 and 2018 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.
|
|
2019
|
2018
|
|
Expected stock price
volatility
|
87.67 –
92.84%
|
89.90 –
94.32%
|
|
Risk-free interest
rate
|
1.62 –
2.82%
|
2.30 –
3.04%
|
|
Expected life of
options
|
9.67 – 9.68 Years
|
9.67 – 9.70 Years
|
|
Expected dividend
yield
|
-
|
-
|
Non-Qualified Stock Option
Plans – At September 30, 2019, the Company has
collectively authorized the issuance of 6,387,200 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.
F-23
Incentive Stock Option Plans
– At September 30, 2019, 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, 2019 is summarized as
follows:
Non-Qualified and Incentive Stock Option Plans
|
|
Outstanding
|
Exercisable
|
||||||
|
|
|
Weighted
|
Weighted Ave
|
|
|
Weighted
|
Weighted Ave
|
|
|
|
|
Average
|
Remaining
|
Aggregate
|
|
Average
|
Remaining
|
Aggregate
|
|
|
Number of
|
Exercise
|
Contractual
|
Intrinsic
|
Number of
|
Exercise
|
Contractual
|
Intrinsic
|
|
|
Shares
|
Price
|
Term (Years)
|
Value
|
Shares
|
Price
|
Term (Years)
|
Value
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
Vested
|
|
|
|
|
945,359
|
$2.56
|
|
|
|
Granted
|
3,271,362
|
$5.40
|
|
|
|
|
|
|
|
Exercised
(a)
|
65,997
|
$2.28
|
|
|
65,997
|
$2.28
|
|
|
|
Forfeited
|
82,461
|
$17.89
|
|
|
|
|
|
|
|
Expired
(b)
|
64,815
|
$71.86
|
|
|
64,815
|
$71.86
|
|
|
|
Cancelled
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
at September 30, 2019
|
6,218,216
|
$5.54
|
8.88
|
$29,562,594
|
1,392,241
|
$9.15
|
7.68
|
$7,869,555
|
(a)
Includes 10,000
stock options exercised by consultants
(b)
Includes 10,400
stock options to consultants
F-24
A summary of the
status of the Company’s non-vested options for the two years
ended September 30, 2019 is presented below:
|
|
Number of Options
|
Weighted Average Grant Date Fair Value
|
|
Unvested
at October 1, 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
|
|
Vested
|
(945,359)
|
|
|
Granted
|
3,271,362
|
|
|
Forfeited
|
(82,461)
|
|
|
Unvested
at September 30, 2019
|
4,825,975
|
$3.79
|
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, 2019 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, 2019 and 2018, the Company recorded expense relating to the
issuance of restricted stock pursuant to the plan of approximately
$0.3 million and $1.4 million, respectively. At September 30, 2019,
the Company has unrecognized compensation expense of approximately
$0.7 million which is expected to be recognized over a weighted
average period of 2.3 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, 2019 is presented below:
|
|
Number of
Shares
|
Weighted Average
Grant Date Fair Value
|
|
|
|
|
|
Unvested at
September 30, 2017
|
468,000
|
$13.75
|
|
Vested
|
(156,000)
|
|
|
Unvested at
September 30, 2018
|
312,000
|
$13.75
|
|
Forfeited
|
(7,500)
|
|
|
Vested
|
-
|
|
|
Unvested at
September 30, 2019
|
304,500
|
$13.75
|
Stock Bonus Plans – At
September 30, 2019, 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, 2019, the
Company has issued a total of 33,226 shares of common stock from
the Stock Bonus Plans.
Stock Compensation Plans
– At September 30, 2019, 634,000 shares were authorized for
use in the Company’s Stock Compensation Plans. During the
years ended September 30, 2019, and 2018, no shares were issued
from the Stock Compensation Plans to consultants for payment of
services. As of September 30, 2019, the Company has issued 130,183
shares of common stock from the Stock Compensation
Plans.
F-25
11.
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, 2019, 30,996 shares were
issued to the Company’s 401(k) plan for a cost of
approximately $144,000. 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.
12.
COMMITMENTS
AND CONTINGENCIES
Clinical Research Agreements
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 $30.9 million related to
Ergomed’s services. This amount is net of Ergomed’s
discount of approximately $10.5 million. During the years ended
September 30, 2019 and 2018, the Company recorded approximately
$2.8 million and $3.1 million, respectively, as research and
development expense related to Ergomed’s services. These
amounts were net of Ergomed’s discount of approximately $1.0
million during the years ended September 30, 2019 and
2018.
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.
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 building was placed in service in
October 2008.
F-26
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, 2019 and 2018, the leased building asset has a net
book value of approximately $15.6 million and $16.1 million,
respectively, and the landlord liability has a balance of $13.5
million and $13.4 million, respectively. The leased building 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, 2019 and
2018.
Approximate future
minimum lease payments under the San Tomas lease as of September
30, 2019 are as follows:
|
Years
ending September 30,
|
|
|
2020
|
$1,872,000
|
|
2021
|
1,937,000
|
|
2022
|
2,004,000
|
|
2023
|
2,073,000
|
|
2024
|
2,145,000
|
|
Thereafter
|
9,540,000
|
|
Total
future minimum lease obligation
|
19,571,000
|
|
Less:
imputed interest on financing obligation
|
(6,063,000)
|
|
Net
present value of lease financing obligation
|
$13,508,000
|
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, 2019 and 2018 was
approximately $73,000 and $71,000, 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, 2019 and 2018, the Company has recorded a deferred
rent liability of approximately $14,000 and $12,000,
respectively.
F-27
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, 2019 and 2018,
the Company has recorded a deferred rent liability of approximately
$7,000 and $14,000, 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%. Amortization of this capital lease is combined
with depreciation expense.
Approximate
future minimum annual lease payments due under non-cancelable
operating leases, excluding the San Tomas lease, for the years
ending after September 30, 2019 are as follows:
|
Years
ending September 30,
|
|
|
2020
|
$238,000
|
|
2021
|
163,000
|
|
2022
|
69,000
|
|
Total
future minimum lease obligation
|
$470,000
|
Rent expense, for
the years ended September 30, 2019 and 2018, excluding the rent
paid on the San Tomas lease, was approximately $253,000 for both
fiscal years.
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 $4.5 million for
the remainder of the Phase 3 clinical trial. It should be noted
that this estimate is based only on the information currently
available from the Clinical Research Organizations responsible for
managing the Phase 3 clinical trial and does not include other
related costs, e.g. the manufacturing of the drug.
13.
RELATED
PARTY TRANSACTIONS
On October 30,
2017, in consideration for an extension of the maturity date of the
Series MM and Series NN convertible notes, which had been issued in
the prior year, the Company issued a total of 583,057 Series RR
warrants to the note holders who agreed to the extension. Geert
Kersten, the Company’s Chief Executive Officer, a trust in
which Mr. Kersten holds a beneficial interest and Patricia B.
Prichep, the Company’s Senior Vice President of Operations
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. The terms of the related party notes and warrants
were identical to the other participants.
F-28
On June 11, 2018,
Mr. Kersten, the trust and Ms. Prichep converted the outstanding
notes payable balances of $250,000, $250,000 and $25,000,
respectively, into 147,929, 109,170 and 10,917 shares,
respectively, of common stock in accordance with the original
conversion terms, which were identical to those of the other
participants. To induce conversion of the Series MM and NN Notes,
all note holders, including Mr. Kersten, the trust 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 had 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. 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 for the year ended September 30, 2018. The
Series UU warrants qualified 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 in June 2018, 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, 2019 and
2018.
During the year
ended September 30, 2019, officers and a director of the Company
purchased 45,205 restricted shares of the Company’s common
stock at an aggregate market value of approximately $292,000.
During the year ended September 30, 2018, officers of the Company
purchased 463,855 restricted shares of the Company’s common
stock from the Company for an aggregate fair market value of
$385,000. The shares are subject to the conditions of Rule 144
under the Securities Act of 1933.
14.
STOCKHOLDERS’
EQUITY
Exercise of Warrants
During the years
ended September 30, 2019 and 2018, the Company received proceeds of
approximately $14.5 million and $9.4 million, respectively, from
the exercise of warrants, as detailed in Note 5. Upon exercise,
6,677,519 and 4,072,109 shares of common stock, respectively, were
issued during the years ended September 30, 2019 and
2018.
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 and 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 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.
F-29
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 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.
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 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 expire on December 18, 2022.
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.
Other Equity Transactions
The Company has
entered into Securities Purchase Agreements with Ergomed plc, one
of its Clinical Research Organizations responsible for managing the
Company’s Phase 3 clinical trial, to facilitate a partial
payment of the amounts due Ergomed. Under the Agreements, the
Company issued Ergomed shares of common stock that would reduce
Ergomed’s bills in an amount equal to the net proceeds from
the sales of the shares issued to 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. Any amounts received from the sale of
the shares in excess of the amounts due Ergomed will be applied
towards the satisfaction of any future amounts owed.
During the year
ended September 30, 2019 and 2018, the Company issued Ergomed
750,000 and 2,260,000 shares, respectively. On December 31, 2018,
the expiration date of the prior agreement, Ergomed returned
564,905 unsold shares for cancellation. The following table
summarizes the Other Non-Operating Gains (Loss) for the years ended
September 30 relating to these agreements:
|
|
2019
|
2018
|
|
Amount
realized through the resale of shares
|
$3,945,528
|
$3,230,796
|
|
Fair
value of shares upon issuance
|
3,400,000
|
5,507,400
|
|
Other
non-operating gain (loss)
|
$545,528
|
$(2,276,604)
|
As of September 30,
2019, Ergomed holds 198,000 shares for resale. As of September 30,
2018, Ergomed held 918,900 shares.
F-30
15.
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.
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,
2019:
|
|
Quoted Prices
in Active Markets for Identical Liabilities (Level 1)
|
Significant
Other Observable Inputs (Level 2)
|
Significant
Unobservable Inputs (Level 3)
|
Total
|
|
Derivative
Instruments
|
$-
|
$-
|
$6,488,310
|
$6,488,310
|
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 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:
|
|
2019
|
2018
|
|
Beginning
balance
|
$9,317,031
|
$2,020,629
|
|
Issuances
|
-
|
-
|
|
Exercises
|
(3,589,357)
|
(595,780)
|
|
N Net
realized and unrealized derivative loss (gain)
|
760,636
|
7,892,182
|
|
Ending
balance
|
$6,488,310
|
$9,317,031
|
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, 2019, the
Company’s Level 3 derivative instruments have a weighted
average fair value of $2.72 per share and a weighted average
exercise price of $15.17 per share. Fair values were determined
using a weighted average risk free interest rate of 1.85% and 103%
volatility. The instruments have a weighted average time to
maturity of 1.86 years. 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.
F-31
16.
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.
The following table
provides a reconciliation of the numerators and denominators of the
basic and diluted per-share computations:
|
|
Year
ended September 30,
|
|
|
|
2019
|
2018
|
|
Loss per share – basic and diluted
|
|
|
|
Net
loss available to common shareholders
|
$(22,134,640)
|
$(31,851,573)
|
|
Weighted
average shares outstanding
|
31,174,394
|
17,004,722
|
|
Basic
and diluted loss per common share
|
$(0.71)
|
$(1.87)
|
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:
|
|
2019
|
2018
|
|
Options and
Warrants
|
7,164,544
|
11,794,603
|
|
Unvested Restricted
Stock
|
304,500
|
312,000
|
|
Total
|
7,469,044
|
12,106,603
|
17.
SUBSEQUENT
EVENTS
In accordance with
ASC 855, “Subsequent
Events”, the Company has reviewed subsequent events
through the date of the filing and determined there are no
subsequent events that require disclosure.
F-32
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 16th day of December
2019.
|
|
CEL-SCI CORPORATION |
|
|
|
|
|
|
|
|
|
By:
|
/s/ Geert
Kersten
|
|
|
|
|
Geert
Kersten, 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 |
|
December 16,
2019
|
| Geert Kersten |
|
Accounting, Principal Financial
|
|
|
|
|
Officer and a
Director
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
/s/ Peter R.
Young
|
|
Director |
|
December 16, 2019 |
| Dr. Peter R. Young |
|
|
|
|
|
|
|
|
|
|
|
/s/ Bruno
Baillavoine
|
|
Director |
|
December 16, 2019 |
| Bruno Baillavoine |
|
|
|
|
|
|
|
|
|
|
|
/s/ Robert Watson
|
|
Director
|
|
December 16,
2019
|
|
Robert
Watson
|
|
|
|
|
|
|
|
|
|
|
F-33