CEL-SCI Corporation — Form 10-Q Summary
Reporting period: First quarter of fiscal 2013, the three months ended December 31, 2012. The financial statements are unaudited. CEL-SCI is a clinical-stage biotechnology company; it reported no product-sales revenue. Its lead candidate, Multikine, was in a multinational Phase III head-and-neck cancer trial, and LEAPS remained preclinical.
Key financial results and position
| Metric | Quarter ended Dec. 31, 2012 | Comparable 2011 period / prior balance sheet |
|---|---|---|
| Grant and other income | $15,000 | $5,024 |
| Research and development expense | $2.925 million | $2.456 million |
| General and administrative expense | $2.001 million | $1.854 million |
| Operating loss | $5.044 million | $4.443 million |
| Gain on derivative instruments | $2.746 million | $956,470 |
| Net loss | $2.310 million | $3.581 million |
| Net loss per share | Basic: $0.01; diluted: $0.02 | Basic and diluted: $0.02 |
| Cash and cash equivalents | $10.736 million | $3.941 million at Sept. 30, 2012 |
| Total assets | $22.012 million | $16.067 million at Sept. 30, 2012 |
| Total liabilities | $10.390 million | $9.040 million at Sept. 30, 2012 |
Cash used in operating activities was $2.995 million, versus $2.612 million in the prior-year quarter. Investing activities used $16,218. Financing activities provided $9.806 million, principally from the December stock offering; cash increased $6.795 million. No meaningful product gross margin is reported because the company had no product sales.
At quarter-end, current assets were $13.597 million and current liabilities $1.783 million. The balance sheet included a $1.104 million related-party loan from the president, bearing 15% interest and secured by substantially all company assets. The loan maturity had been extended to July 2015. The prior senior secured convertible notes were fully repaid in March 2012. Derivative liabilities were $8.437 million, up from $6.984 million at September 30, 2012.
Material changes and notable items
- R&D expense increased about $469,000, primarily reflecting ongoing Phase III trial activity; G&A increased about $148,000, mainly due to higher public-relations costs.
- The lower net loss was substantially affected by the $2.746 million derivative gain, a noncash fair-value item driven by movements in CEL-SCI’s share price. Operating loss increased year over year.
- On December 4, 2012, CEL-SCI sold 35 million common shares for $10.5 million gross proceeds at $0.30 per share and issued Series R warrants to purchase up to 26.25 million additional shares at $0.40. Placement-agent cash commission was $682,500. Weighted-average shares outstanding increased to 283.1 million from 228.6 million.
- Employee and director stock-option compensation was $966,585; total reported stock-based compensation also included $107,818 for non-employees. The company adopted a new non-qualified option plan authorizing up to 20 million shares; options under that plan require shareholder approval before exercise.
- CEL-SCI dissolved its wholly owned Viral Technologies subsidiary on December 14, 2012, with no reported financial impact. It reported no subsequent events requiring disclosure.
Outlook, risks and contingencies
- Management said cash on hand and access to capital markets should support operations through fiscal year-end, but additional financing is required to continue research and fund the Phase III study beyond the next 12 months. Financing could involve partnerships, debt or equity; there is no assurance funds will be available on acceptable terms or at all. A shortfall could slow or delay the trial or curtail operations.
- The company estimated its share of Phase III trial costs, excluding portions paid by Teva Pharmaceuticals and Orient Europharma, at approximately $32 million; about $7.6 million had been paid by December 31, 2012. Thirty-eight of 48 planned sites had completed initiation visits, with patient screening/enrollment underway. Management cautioned that costs could exceed the estimate due to enrollment pace, foreign-exchange movements and other factors.
- Multikine was investigational and not approved by the FDA or other regulators; its safety and efficacy had not been established for any use. CEL-SCI said it could not predict when product revenue might begin and would remain dependent on external financing.
- The company maintained a 20-year lease for a 73,000-square-foot manufacturing facility, with escalating rent and related operating costs. A $1.671 million landlord deposit was recorded as a noncurrent asset and is returnable when the required minimum cash balance is met. The filing also identifies a $1.104 million related-party loan and substantial derivative liabilities.
- The filing describes a previously settled securities lawsuit, including the former $3 million cash payment and $9 million of securities; the preferred shares were redeemed and convertible notes repaid by March 2012. Management stated that approximately $5 million of fiscal 2012 settlement-related expenditures were nonrecurring.
Management concluded that disclosure controls were effective as of December 31, 2012 and reported no change in internal control over financial reporting during the quarter.
Investor verification points
- Confirm the Phase III trial’s remaining cost, enrollment progress, partner-funded portions and whether financing is sufficient to sustain the planned schedule.
- Assess dilution from the December share offering, Series R warrants, outstanding warrants and stock-option plans.
- Distinguish operating performance and cash burn from noncash derivative fair-value gains; verify the valuation inputs and liability balance.
- Review liquidity restrictions and obligations, including the manufacturing-facility deposit, long-term lease costs and 15% secured related-party loan.
- Track regulatory progress and remember that Multikine remains unapproved and has no established safety or efficacy for any use.