CEL-SCI Corporation — FY2011 Form 10-K
Reporting period: Fiscal year ended September 30, 2011. The filing also provides fourth-quarter results for the three months ended September 30, 2011. CEL-SCI is a development-stage biotechnology company; it reported no product sales.
Business context
The company’s lead candidate, Multikine, was in a global Phase III trial for previously untreated advanced head and neck cancer. The trial began in December 2010; 35 of 48 planned sites had completed initiation visits, with screening or enrollment underway at several sites. CEL-SCI also pursued early-stage LEAPS programs, including pandemic influenza and rheumatoid arthritis candidates. None of its candidates was approved for sale.
Financial results and liquidity
| Metric | FY2011 | FY2010 |
|---|---|---|
| Revenue (grant income and other) | $956,154 | $153,300 |
| Research and development expense | $11,745,629 | $11,911,626 |
| General and administrative expense | $6,664,883 | $6,285,810 |
| Operating loss | $17,985,674 | $18,560,253 |
| Net income (loss) | $(25,712,343) | $10,483,429 |
| Net income (loss) available to common shareholders | $(26,780,712) | $8,950,973 |
| Basic loss (income) per share | $(0.13) | $0.04 |
| Cash and cash equivalents at year-end | $4,260,594 | $26,568,243 |
| Working capital | $1,796,349 | $25,799,304 |
| Total assets | $18,625,440 | $37,804,985 |
| Total liabilities | $9,546,616 | $9,950,220 |
FY2011 operating cash outflow was $22,555,411; investing cash outflow was $318,110, and financing provided $565,872. Cash declined by $22,307,649. The filing does not report meaningful product gross margins because there were no product sales.
FY2011 revenue included a $733,437 federal research grant and $221,530 from a Phase III trial partner. R&D expense was broadly flat year over year; G&A rose $379,073, primarily due to legal fees. CEL-SCI recorded $4,432,148 of gains on derivative instruments, which are non-operating fair-value changes and can fluctuate with the stock price.
Liquidity weakened substantially: working capital fell by about $24.0 million and cash by about $22.3 million from FY2010. The balance sheet included a $1,670,917 manufacturing-facility lease deposit as a non-current asset. Current liabilities were $7,224,569, including a $4,999,000 convertible note; the filing separately describes settlement notes with $4.95 million principal. The company also owed $1,104,057 on a related-party loan bearing 15% interest, secured by substantially all assets. Total reported liabilities include derivative liabilities, which are valuation-sensitive.
Changes, unusual items, and outlook
- FY2011 net loss contrasted with FY2010 net income, which was materially supported by a $28.8 million derivative gain. FY2011 also included a $12 million charge for settling litigation; cash settlement payments and legal defense costs were significant.
- The settlement involved $3 million cash and $9 million of securities. The preferred shares were redeemed during FY2011; convertible notes remained, with approximately $4.95 million principal scheduled for repayment in installments through March 2012 at 8% interest. The notes were convertible at $0.67 per share, secured by company assets, and imposed restrictions on dividends, additional debt, and asset transfers. The filing reports the first two installment payments were made after year-end.
- In October 2011, CEL-SCI raised $4 million in a stock offering at $0.30 per share and issued warrants covering 12 million shares at $0.40. The offering also triggered additional warrant and share adjustments. The company terminated its MLV at-the-market sales agreement in December 2011.
- Management expected to seek additional partnership, debt, or equity financing in FY2012, and said it believed it could fund operations at the current rate through December 2012 and expand the Phase III trial. It cautioned that funding was not assured and operations or the trial could be curtailed if capital was unavailable. Estimated net company cost of the Phase III trial was approximately $26 million.
- The auditor’s report included a going-concern explanatory paragraph citing recurring operating losses and substantial doubt about continued operations without additional capital. Management likewise stated that additional financing was required. CEL-SCI reported that its disclosure controls and internal control over financial reporting were effective as of September 30, 2011.
- Other material commitments included $33.35 million of future operating lease payments, principally for the manufacturing facility, and approximately $26 million of contingent vendor obligations associated with the Phase III trial. The filing reports no legal proceedings outstanding after the settlement.
Investor facts to verify
- Cash runway and subsequent cash usage, including settlement-note repayments and the timing and terms of new financing.
- Actual Phase III enrollment, site activity, trial spending, partner contributions, and whether the trial’s estimated $26 million net cost changes.
- Outstanding debt, collateral and covenant restrictions, related-party loan terms, and potential dilution from convertible notes, warrants, options, and subsequent offerings.
- Whether reported derivative gains and losses are non-cash fair-value effects, and how they affect comparisons of reported net income or loss.
- Trial outcome and regulatory progress: Multikine’s Phase III endpoint requires a 10% overall-survival improvement versus standard care; prior Phase II findings were preliminary and based on small samples.