CEL-SCI Corporation — Form 10-Q Summary
Reporting period: Fiscal first quarter ended December 31, 2017; filed February 12, 2018. Comparative income and cash flow figures are for the three months ended December 31, 2016.
Business context
CEL-SCI is a development-stage biotechnology company. Its lead candidate, Multikine, is in a multinational Phase 3 trial for head and neck cancer; its LEAPS technology is preclinical. The company reported no product-sales revenue and said it cannot predict when products may generate revenue.
Key financial metrics
| Metric | Quarter ended Dec. 31, 2017 | Prior-year quarter / comparison |
|---|---|---|
| Grant and other income | $113,897 | $17,258 |
| Research and development expense | $2.33 million | $3.55 million |
| General and administrative expense | $2.70 million | $1.41 million |
| Operating loss | $4.91 million | $4.94 million |
| Net loss (income) | $6.19 million loss | $3.52 million income |
| Basic and diluted loss (earnings) per share | $0.53 loss | $0.59 basic / $0.32 diluted earnings |
| Net cash used in operating activities | $2.61 million | $4.24 million |
| Cash and cash equivalents at period end | $2.14 million | $2.37 million at Sept. 30, 2017 |
No product revenue or gross margin was reported. Operating expenses exceeded grant and other income; accordingly, a product-sales margin is not applicable.
At December 31, 2017, current assets were $3.64 million and current liabilities were $10.60 million, implying negative working capital of approximately $6.95 million. Total liabilities were $27.01 million versus total assets of $22.17 million, leaving stockholders’ deficit of $4.83 million. The balance sheet included $874,593 of current notes payable and a $13.26 million lease liability; derivative liabilities totaled approximately $3.01 million.
Cash fell $226,704 during the quarter. Financing provided $2.39 million, primarily from common stock and warrants, while operating activities used $2.61 million. The filing states there is substantial doubt about the company’s ability to continue as a going concern, citing recurring losses, negative working capital, stockholders’ deficit and future liquidity needs.
Material changes versus the prior-year quarter
- R&D expense declined approximately $1.22 million, primarily because the Phase 3 study was fully enrolled.
- General and administrative expense rose approximately $1.29 million, mainly due to about $1.1 million more equity-based compensation under the 2014 Incentive Stock Bonus Plan and approximately $200,000 higher accounting fees.
- Derivative revaluation changed from an $8.93 million gain in the prior-year quarter to a $958,230 loss. This non-cash fair-value change was driven by fluctuations in CEL-SCI’s share price and was a major reason for the swing from net income to net loss.
- Net interest expense declined approximately $150,000; the filing cites a reduction related to the Ergomed financing arrangement, partly offset by about $590,000 in debt-discount amortization expense.
- Common shares issued and outstanding increased from 11,903,133 at September 30 to 13,258,051 at December 31, 2017. The quarter’s stock financing included 1,289,478 shares sold at $1.90 each, with an equal number of warrants exercisable at $2.09.
Outlook, risks and unusual items
- Funding and going concern: Management said additional capital or long-term financing is required to continue research, and that it was pursuing cost reductions and other funding sources for the next 12 months. It cautioned that financing may not be available on acceptable terms, or at all, and operations could be curtailed if funds are not raised.
- Phase 3 trial: 928 patients had enrolled and completed treatment. The primary endpoint is a 10% improvement in overall survival between the two main comparator groups; the endpoint assessment is triggered at 298 deaths in those groups. The company estimated approximately $12.2 million of additional direct trial expense, in addition to approximately $47.0 million incurred to date. The estimate excludes other related costs, including drug manufacturing, and could increase.
- Subsequent financing and dilution: On February 5, 2018, the company received commitments for approximately $4.88 million from a common-stock sale, with warrants to purchase up to 1,956,074 additional shares. On January 1, it also agreed to issue Ergomed 660,000 restricted shares toward amounts owed for clinical-trial services.
- Debt modification: In October 2017, holders extended the maturity of convertible notes to September 21, 2018 in exchange for 583,057 Series RR warrants. The company treated the modification as a troubled debt restructuring and recorded approximately $0.6 million of debt-discount amortization as interest expense during the quarter. The notes are secured by a first lien on company assets.
- Contingency: In arbitration against former CRO inVentiv, CEL-SCI seeks at least $50 million in damages. The arbitrator dismissed the professional-malpractice claim but denied other portions of inVentiv’s motion to dismiss. inVentiv asserts counterclaims seeking at least $24 million in aggregate damages and disgorgement; CEL-SCI says it considers them meritless but warns an adverse ruling could materially affect its business and liquidity.
- Other disclosures: Management reported disclosure controls were effective at December 31, 2017 and said it had made internal-control changes to address material weaknesses discussed in its 2017 Form 10-K. The filing says market-risk exposure was not significant.
Important facts for investors to verify
- Whether additional financing is secured and sufficient to fund operations and the full trial, given the going-concern warning and subsequent financing commitments.
- Actual Phase 3 completion costs, timing of the 298-death endpoint analysis, and whether the study meets its survival endpoint.
- Potential share dilution from outstanding warrants, convertible notes, equity compensation and the February 2018 financing.
- Cash obligations to Ergomed and other clinical-service providers, including the agreed 660,000-share payment, and the status and possible outcomes of the inVentiv arbitration and counterclaims.
- How much of reported earnings volatility reflects warrant fair-value changes rather than operating performance; the prior-year derivative gain materially affected the comparison.