CEL-SCI Corporation — FY2018 Form 10-K
Reporting period: Fiscal year ended September 30, 2018. The company is a development-stage biotechnology business with no products approved for sale and no product-sale revenue.
Business context and reporting period
CEL-SCI’s lead candidate, Multikine, is an investigational immunotherapy being studied as a pre-surgery treatment for advanced head and neck cancer. Its global Phase 3 trial enrolled 928 patients by September 2016; patients were being followed until 298 deaths occur across the two principal comparison groups, when the primary overall-survival endpoint can be assessed. The filing does not report that the endpoint has been reached or disclose a final result. CEL-SCI also develops LEAPS candidates, including CEL-4000 for rheumatoid arthritis; a $1.5 million NIH Phase 2 SBIR grant supports work toward an IND application.
Financial results, cash flow and liquidity
| Metric | FY2018 | FY2017 |
|---|---|---|
| Grant income | $476,556 | None reported |
| Research and development expense | $9.40 million | $15.61 million |
| General and administrative expense | $7.85 million | $5.80 million |
| Operating loss | $16.77 million | $21.41 million |
| Derivative loss (gain) | $8.64 million loss | $11.01 million gain |
| Net interest expense | $6.49 million | $4.03 million |
| Net loss | $31.84 million | $14.36 million |
| Basic loss per share | $1.87 | $1.83 |
| Cash used in operating activities | $13.39 million | $13.79 million |
Cash and cash equivalents were $10.31 million at year-end, up from $2.37 million. Financing activities provided $21.39 million, including $11.60 million from stock and warrant-related issuances and $9.41 million from warrant exercises. CEL-SCI reported current assets of $11.44 million and current liabilities of $9.23 million; total liabilities were $29.59 million, including a $13.38 million manufacturing-facility lease liability and $9.32 million in derivative liabilities. Stockholders’ equity was $916. Product margins are not applicable because CEL-SCI had no product sales.
CEL-SCI says existing cash and investments, absent new financing or partnerships, are expected to fund its operating plan into the second half of fiscal 2019. Management also states that additional financing will be required to bring Multikine to market. The auditor’s report includes a going-concern explanatory paragraph, citing recurring losses and the need for additional capital.
Material changes versus FY2017
- Net loss more than doubled, chiefly as the prior-year $11.01 million derivative gain became an $8.64 million loss, alongside higher interest expense. Derivative revaluation is non-cash and driven in part by changes in CEL-SCI’s share price.
- Operating loss narrowed by $4.64 million as R&D expense fell $6.21 million following completion of trial enrollment. G&A expense rose $2.05 million, including higher compensation, stock-based compensation and public-relations costs.
- Cash increased by $7.94 million, while operating cash use remained substantial. Common shares outstanding at fiscal year-end rose to 28.03 million from 11.90 million a year earlier, reflecting equity financings, warrant exercises, note conversions and other share issuances.
- During FY2018, all outstanding Series MM and NN convertible notes were converted into common shares. No notes payable remained on the year-end balance sheet; derivative and lease liabilities remained significant.
Outlook, risks and unusual items
- CEL-SCI estimates approximately $8.4 million of additional direct CRO costs to complete the Phase 3 trial. This estimate excludes other related costs, including drug manufacturing, and could increase with event timing, foreign exchange or other factors.
- The company cautions that regulators could require another pivotal Phase 3 trial, which would entail substantial expense and could threaten its ability to continue operations. Multikine and LEAPS remain investigational; safety and efficacy are not established.
- CEL-SCI has no definitive marketing plan or pricing structure for Multikine if approved. It has entered territorial licensing arrangements, but approval, reimbursement, commercialization and partner performance are uncertain.
- On June 25, 2018, an arbitrator awarded CEL-SCI $2.92 million in its dispute with former CRO inVentiv, finding a material contract breach. Under CEL-SCI’s litigation-funding agreement, any award proceeds are payable to Lake Whillans; CEL-SCI also wrote off approximately $471,000 of a prepaid asset.
- NYSE American notified CEL-SCI of noncompliance with certain continued-listing standards. The exchange accepted a compliance plan and gave the company until January 14, 2019 to regain compliance; the filing warned of possible delisting proceedings if progress proved insufficient.
- Management reported that internal-control weaknesses related to lease accounting, impairment assessment and the financial close process had been remediated, and concluded controls were effective at September 30, 2018. The auditor did not audit internal control effectiveness.
Important facts for investors to verify
- Current Multikine trial event count, timing to the 298-event analysis, data integrity and whether results support the primary endpoint.
- Cash runway and financing needs against the trial’s remaining cost, lease obligations and ongoing operating cash burn; availability and terms of future financing.
- Potential dilution from outstanding options and warrants, future equity raises and the substantial increase in shares outstanding.
- Status of NYSE American listing compliance as of the stated January 14, 2019 deadline.
- Any proceeds or collection status of the inVentiv arbitration award, given the assignment of proceeds to the litigation funder.
- Regulatory feedback on whether the completed Phase 3 study can support a marketing application, and the scope and cost of any additional study requirements.