Business context and reporting period
CEL-SCI Corporation’s fiscal first quarter ended December 31, 2011. The company is a development-stage biotechnology business focused primarily on Multikine, an investigational therapy in a multinational Phase III head-and-neck cancer trial, and preclinical LEAPS technology. Multikine was not approved for sale; the company reported no product-sales revenue.
Financial performance and position
| Metric | Quarter ended Dec. 31, 2011 | Comparable 2010 period |
|---|---|---|
| Grant income and other | $5,024 | $662,818 |
| Research and development expense | $2.456 million | $3.264 million |
| General and administrative expense | $1.854 million | $1.573 million |
| Operating loss | $4.443 million | $4.316 million |
| Net loss | $3.581 million | $6.251 million |
| Net loss available to common shareholders | $4.157 million | $6.251 million |
| Basic and diluted loss per share | $0.02 | $0.03 |
| Cash used in operating activities | $2.612 million | $6.435 million |
The reported net loss includes a $956,470 gain from revaluing derivative instruments; this is a fair-value item, not operating revenue. The loss available to common shareholders also includes $250,000 associated with additional shares issued and a $325,620 warrant-modification charge. Operating margins are not meaningful given the absence of product sales.
At December 31, cash and cash equivalents were $3.462 million, down from $4.261 million at September 30, 2011. Current assets were $7.325 million and current liabilities $4.947 million, implying working capital of approximately $2.377 million. Total assets were $16.678 million; total liabilities were $8.566 million. Current liabilities included a $2.955 million convertible note and a $1.104 million related-party loan. The related-party loan bears 15% interest and is secured by substantially all company assets. Derivative liabilities totaled $6.471 million.
Financing activities provided $1.830 million net: $3.810 million from common-stock issuance, less $1.980 million of convertible-debt principal payments. The company reported 230.0 million common shares outstanding at quarter-end, versus 214.7 million at September 30.
Material changes versus the prior period
- Grant income fell by $657,794 as the company had substantially exhausted its PPACA grant; management said the final funds received in October related to amounts earned before September 30, 2011.
- R&D expense decreased by $808,243, principally reflecting lower activity-related spending; G&A expense increased by $280,413, primarily due to employee and director option costs.
- Operating loss widened by $127,242, despite lower total operating expenses, because grant income was sharply lower.
- Net loss narrowed by $2.670 million, largely reflecting the swing from a $1.946 million derivative loss in 2010 to a $956,470 derivative gain in 2011. Operating cash use also declined by $3.823 million year over year.
- The company raised $4.0 million gross in an October 2011 registered direct offering, issuing 13.33 million shares and warrants, and used cash to repay settlement-related convertible debt.
Outlook, risks, contingencies and unusual items
- Management said additional capital would be needed to continue research and planned to seek partnerships, debt and/or equity financing in fiscal 2012 to expand the Phase III trial and fund operations through December 2012. Management believed available cash and capital-market access would support operations for more than 12 months, but cautioned that financing was not assured.
- The filing states there is substantial doubt about the company’s ability to continue as a going concern because of recurring operating losses and future liquidity needs. If financing is unavailable, the company may slow or delay the Phase III trial or significantly curtail operations.
- The company estimated its net share of the Phase III trial cost at approximately $26 million and said two partners had agreed to fund part of the trial. Clinical completion, regulatory approval and eventual product revenue remain uncertain.
- Subsequent to quarter-end, CEL-SCI sold 16.0 million shares for $5.760 million gross in January 2012 and issued warrants for up to 12.0 million shares. In early February, it received $927,359 from exercise of expiring Series K warrants. These events provided cash but increased potential and actual share dilution.
- The settlement of a lawsuit required a $3.0 million cash payment and $9.0 million of securities, with assets pledged as collateral and restrictions on debt and certain payments while obligations remained outstanding. By February 6, 2012, the remaining convertible-note principal was $134,163; the company said it expected to pay this amount on March 1, 2012, completing the settlement and releasing the asset lien.
- The company leases a 73,000-square-foot manufacturing facility under a 20-year lease with annual base rent escalators of 3%. It paid a $1.671 million landlord deposit in August 2011 after falling below lease-required minimum cash balances; the deposit is returnable when lease requirements are met.
- Derivative liabilities are measured using Level 3 fair-value inputs and can create substantial noncash earnings volatility. The filing also reports a $7,955 patent impairment charge and substantial stock-based compensation expense.
Investor verification priorities
- Confirm post-quarter-end cash proceeds, the remaining settlement-note payment, and release of the lien on company assets.
- Assess cash burn, committed clinical-trial spending, landlord deposit restrictions and the actual financing runway against management’s outlook and the going-concern disclosure.
- Review Phase III enrollment, trial costs and partner funding, as well as the regulatory path and key clinical milestones.
- Track share issuance, warrant exercise and potential dilution, including the October 2011 and January 2012 offerings.
- Distinguish operating performance and cash generation from grant income and noncash derivative remeasurement gains or losses.