CEL-SCI Corporation — Form 10-Q Summary
Reporting period: First quarter of fiscal 2016, the three months ended December 31, 2015. Comparisons are generally with the three months ended December 31, 2014; balance-sheet comparisons are with September 30, 2015.
Business context
CEL-SCI is a development-stage biotechnology company with no product-sales revenue to date. Its lead investigational therapy, Multikine, is in a multinational Phase 3 trial for advanced primary head and neck cancer; LEAPS remains preclinical. Multikine has not been approved, and its safety and efficacy have not been established.
Financial results and liquidity
| Metric | Q1 FY2016 | Prior comparable quarter or date |
|---|---|---|
| Grant and other income | $20,976 | $136,838 |
| Research and development expense | $5.141 million | $4.855 million |
| General and administrative expense | $621,169 | $5.221 million |
| Operating loss | $5.783 million | $9.996 million |
| Net income (loss) | $2.342 million | $(7.845) million |
| Net cash used in operations | $5.838 million | $5.439 million |
| Cash and cash equivalents | $10.422 million at Dec. 31 | $5.727 million at Sept. 30 |
| Total current assets / current liabilities | $13.703 million / $5.682 million | $8.833 million / $6.705 million at Sept. 30 |
| Total liabilities | $16.453 million | $20.533 million at Sept. 30 |
| Derivative liabilities | $10.624 million | $13.687 million at Sept. 30 |
Net income was driven by an $8.123 million noncash gain from revaluing derivative instruments, not product sales. Accordingly, the reported profit does not indicate operating profitability. No product-sales margin is available. The company raised $10.551 million net from stock and warrant issuance; this more than offset operating cash use, resulting in a $4.696 million increase in cash. The filing reports no material market-risk exposure, while noting derivative values fluctuate with the share price.
Material changes and financing
- On October 28, 2015, CEL-SCI completed an underwritten offering of 17.223 million common shares and an equal number of Series W warrants at a combined unit price of $0.67, raising approximately $10.6 million net. The warrants are exercisable at $0.67 through October 2020.
- Common shares issued and outstanding rose from 112.361 million at September 30 to 130.137 million at December 31; 133.205 million were reported outstanding on February 1, 2016.
- The $1.104 million related-party note bore 9% interest and was callable on notice. On January 13, 2016, the de Clara Trust demanded repayment. That day, the company sold the Trust 3 million shares and 3 million warrants for $1.11 million; the warrants are exercisable at $0.37 through January 2021. The Trust is controlled by the CEO, who is also a director.
- There is no formal earnings guidance. Management said cash on hand and access to capital markets should fund operations through year-end, but stated additional financing will be needed and may not be available on acceptable terms or on time.
Outlook, risks and unusual items
- At December 31, the Phase 3 trial had enrolled 668 of a planned 880 patients. The CROs were targeting full enrollment by summer 2016. The company had spent approximately $27.4 million on direct trial costs and estimated approximately $19.2 million in remaining cash costs, excluding portions paid by licensees; actual costs may be higher.
- Trial funding needs, enrollment pace, patient deaths, foreign exchange movements, regulatory approval and the ability to raise capital could affect development and operations. Failure to secure funds could delay or curtail the trial and other activities.
- G&A expense fell by approximately $4.6 million year over year, reflecting a $2.296 million gain from derecognizing litigation-related fees under a litigation-funding agreement and approximately $2.620 million of employee compensation expense recorded in the prior-year quarter for milestone-triggered restricted stock. Other G&A expenses increased by approximately $316,000.
- The company is pursuing arbitration against its former CRO, seeking at least $50 million and stating estimated damages exceed $150 million. The former CRO has counterclaims, including claims for at least $2 million, $1 million, $20 million and $1 million. CEL-SCI disputes the claims; an adverse outcome could materially affect its business and liquidity. A merits hearing was expected in spring 2016.
- Lake Whillans agreed to fund up to $5 million of arbitration expenses, repayable only from arbitration proceeds. Approximately $3.070 million remained committed at December 31. The arbitration outcome and any proceeds are uncertain.
- Management concluded disclosure controls were effective as of December 31, 2015 and reported no change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Subsequent financing, related-party note repayment and warrant terms, including the resulting dilution and current share count.
- Actual cash burn, access to financing, and whether management’s stated runway remains achievable.
- Phase 3 enrollment progress, trial costs, timing and any regulatory or clinical developments.
- Derivative-liability valuation and the extent to which future reported earnings may be affected by share-price changes.
- Status and potential financial impact of the former-CRO arbitration, counterclaims and litigation-funding arrangement.