CEL-SCI Corporation (CVM)

FORM 10-Q | Quarterly Report
Aug. 14, 2019 4:16 PM
|
About: CEL-SCI Corporation (CVM)View as PDF
CEL SCI CORP (Form: 10-Q, Received: 08/14/2019 16:19:42)
 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 (Mark One)
            QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended June 30, 2019
OR
         TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______________ to ______________.
 
Commission File Number 001-11889
CEL-SCI CORPORATION
 
Colorado
 
  84-0916344     
 State or other jurisdiction incorporation
 
 (IRS) Employer Identification Number
 
8229 Boone Boulevard, Suite 802
  Vienna, Virginia 22182
 Address of principal executive offices
  (703) 506-9460
 Registrant's telephone number, including area code
 
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) had been subject to such filing requirements for the past 90 days.
Yes                                                                            No
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes No
 
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check One):
 
Large accelerated filer
Accelerated filer
Non-accelerated filer
Smaller reporting company
 
 
Emerging growth company
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
 
Indicate by check mark whether the Registrant is a shell company (as defined in Exchange Act Rule 12b-2 of the Exchange Act). Yes            No
 
Class of Stock
 No. Shares Outstanding
Date
Common
34,805,299
August 13, 2019
   
Securities registered pursuant to Section 12(b) of the Act:
 
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock
CVM
NYSE American
 

 
 
 
TABLE OF CONTENTS
 
PART I FINANCIAL INFORMATION
 
Item 1.
 
Page
 
 
 
 
Condensed Balance Sheets at June 30, 2019 and September 30, 2018 (unaudited)
3
 
 
 
 
Condensed Statements of Operations for the nine months ended June 30, 2019 and 2018 (unaudited)
4
 
 
 
 
Condensed Statements of Operations for the three months ended June 30, 2019 and 2018 (unaudited)
5
 
 
 
 
Condensed Statements of Cash Flows for the nine months ended June 30, 2019 and 2018 (unaudited)
6
 
   
 
 
Notes to Condensed Financial Statements   (unaudited)
8
 
 
 
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
22
 
 
 
Item 3.
Quantitative and Qualitative Disclosures about Market Risks
24
 
 
 
Item 4.
Controls and Procedures
24
 
 
 
PART II
 
 
 
 
 
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
25
 
 
 
Item 6.
Exhibits
25
 
 
 
 
Signatures
26
 
 
 
2
 
 
CEL-SCI CORPORATION
CONDENSED BALANCE SHEETS
(UNAUDITED)
 
 
 
JUNE 30,
 
 
SEPTEMBER 30,
 
ASSETS
 
2019
 
 
2018
 
 
 
 
 
 
 
 
Current Assets:
 
 
 
 
 
 
     Cash and cash equivalents
  $ 9,485,495  
  $ 10,310,044  
     Receivables
    118,264  
    118,657  
     Prepaid expenses
    233,784  
    364,622  
     Inventory used for R&D and manufacturing
    754,825  
    645,238  
 
       
       
Total current assets
    10,592,368  
    11,438,561  
 
       
       
Plant, property and equipment, net
    15,948,864  
    16,218,851  
Patent costs, net
    272,488  
    258,093  
Deposits
    1,670,917  
    1,670,917  
 
       
       
Total Assets
  $ 28,484,637  
  $ 29,586,422  
 
       
       
 
       
       
 
       
       
LIABILITIES AND STOCKHOLDERS' EQUITY
       
       
 
       
       
Current Liabilities:
       
       
  Accounts payable
  $ 2,078,800  
  $ 5,743,913  
  Accrued expenses
    122,030  
    205,310  
  Due to employees
    761,027  
    764,941  
  Derivative instruments, current portion
    1,249,835  
    2,498,606  
  Other current liabilities
    16,009  
    14,029  
 
       
       
  Total current liabilities
    4,227,701  
    9,226,799  
 
       
       
  Derivative instruments, net of current portion
    9,482,995  
    6,818,458  
  Lease liability
    13,475,704  
    13,379,962  
  Deferred income
    126,849  
    126,795  
  Other liabilities
    25,084  
    33,492  
 
       
       
Total liabilities
    27,338,333  
    29,585,506  
 
       
       
Commitments and Contingencies
       
       
 
       
       
STOCKHOLDERS' EQUITY
       
       
  Preferred stock, $.01 par value-200,000 shares authorized;
       
       
    -0- shares issued and outstanding
    -  
    -  
  Common stock, $.01 par value - 600,000,000 shares authorized;
       
       
    34,066,914 and 28,034,487 shares issued and outstanding
       
       
    at June 30, 2019 and September 30, 2018, respectively
    340,669  
    280,346  
  Additional paid-in capital
    349,683,796  
    331,312,184  
  Accumulated deficit
    (348,878,161 )
    (331,591,614 )
 
       
       
Total stockholders' equity
    1,146,304  
    916  
 
       
       
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
  $ 28,484,637  
  $ 29,586,422  
 
See notes to condensed financial statements.
 
 
3
 
 
CEL-SCI CORPORATION
CONDENSED STATEMENTS OF OPERATIONS
NINE MONTHS ENDED JUNE 30, 2019 and 2018
(UNAUDITED)
 
 
 
2019
 
 
2018
 
 
 
 
 
 
 
 
Grant income
  $ 386,121  
  $ 297,045  
 
       
       
Operating Expenses:
       
       
  Research and development
    7,956,203  
    7,713,873  
  General and administrative
    6,981,079  
    5,823,694  
 
       
       
Total operating expenses
    14,937,282  
    13,537,567  
 
       
       
Operating loss
    (14,551,161 )
    (13,240,522 )
 
       
       
Other income
    54,575  
    52,984  
 
       
       
(Loss) gain on derivative instruments
    (3,316,384 )
    187,967  
 
       
       
Other non-operating gain (loss)
    1,877,197  
    (171,468 )
 
       
       
Interest expense, net
    (1,350,774 )
    (3,739,494 )
 
       
       
Net loss available to common shareholders
  $ (17,286,547 )
  $ (16,910,533 )
 
       
       
 
       
       
Net loss per common share
       
       
       Basic and Diluted
  $ (0.58 )
  $ (1.17 )
 
       
       
Weighted average common shares outstanding
       
       
       Basic and Diluted
    30,046,241  
    14,486,351  
 
See notes to condensed financial statements.
 
 
4
 
 
CEL-SCI CORPORATION
CONDENSED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2019 and 2018
(UNAUDITED)
 
 
 
2019
 
 
2018
 
 
 
 
 
 
 
 
Grant income
  $ 108,938  
  $ 86,459  
 
       
       
Operating Expenses:
       
       
  Research and development
    2,298,555  
    2,425,562  
  General and administrative
    3,020,482  
    1,748,971  
 
       
       
Total operating expenses
    5,319,037  
    4,174,533  
 
       
       
Operating loss
    (5,210,099 )
    (4,088,074 )
 
       
       
Other income
    18,448  
    17,711  
 
       
       
Loss on derivative instruments
    (7,905,519 )
    (8,618 )
 
       
       
Other non-operating gain (loss)
    1,455,844  
    (149,359 )
 
       
       
Interest expense, net
    (443,442 )
    (1,786,228 )
 
       
       
Net loss available to common shareholders
  $ (12,084,768 )
  $ (6,014,568 )
 
       
       
 
       
       
Net loss per common share
       
       
       Basic and Diluted
  $ (0.37 )
  $ (0.36 )
 
       
       
Weighted average common shares outstanding
       
       
       Basic and Diluted
    33,051,888  
    16,651,297  
 
See notes to condensed financial statements.
 
 
5
 
 
CEL-SCI CORPORATION
CONDENSED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED JUNE 30, 2019 and 2018
(UNAUDITED)
 
 
 
2019
 
 
2018
 
 
 
 
 
 
 
 
Net loss
  $ (17,286,547 )
  $ (16,910,533 )
  Adjustments to reconcile net loss to
       
       
    net cash used in operating activities:
       
       
      Depreciation and amortization
    513,028  
    485,710  
 Share-based payments for services
    688,070  
    349,319  
      Share-based payments for interest
    -  
    80,716  
      Equity based compensation
    2,626,311  
    2,193,402  
      Common stock contributed to 401(k) plan
    108,485  
    109,073  
      Shares issued for settlement of clinical research costs
    1,290,000  
    2,957,400  
      Loss on prepaid research and development
    -  
    471,157  
      Loss (gain) on derivative instruments
    3,316,384  
    (187,967 )
      Amortization of debt discount
    -  
    1,956,424  
      Inducement expense
    -  
    291,234  
      Capitalized lease interest
    95,742  
    125,044  
      (Increase)/decrease in assets:
       
       
      Receivables
    393  
    98,829  
      Prepaid expenses
    11,047  
    122,627  
      Inventory used for R&D and manufacturing
    (109,587 )
    44,364  
      Deposits
    -  
    150,000  
      Increase/(decrease) in liabilities:
       
       
      Accounts payable
    (3,567,182 )
    (1,960,438 )
      Accrued expenses
    (113,280 )
    (74,856 )
      Due to employees
    (3,914 )
    548,982  
      Other liabilities
    (2,544 )
    4,819  
 
       
       
Net cash used in operating activities
    (12,433,594 )
    (9,144,694 )
 
       
       
CASH FLOWS FROM INVESTING ACTIVITIES:
       
       
      Purchases of equipment
    (171,321 )
    (1,015 )
      Expenditures for patent costs
    (115,476 )
    (2,437 )
 
       
       
Net cash used in investing activities
    (286,797 )
    (3,452 )
 
       
       
CASH FLOWS FROM FINANCING ACTIVITIES:
       
       
     Proceeds from issuance of common stock and warrants
    -  
    7,091,536  
     Payments of stock issuance costs
    (90,224 )
    (94,773 )
     Proceeds from exercise of warrants
    11,657,590  
    2,133,677  
     Proceeds from exercise of options
    97,290  
    -  
     Proceeds from the purchase of stock by officers and directors
    234,997  
    -  
     Payments on obligations under capital lease
    (3,811 )
    (5,082 )
 
       
       
Net cash provided by financing activities
    11,895,842  
    9,125,358  
 
       
       
 NET DECREASE IN CASH AND CASH EQUIVALENTS
    (824,549 )
    (22,788 )
 
       
       
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD
    10,310,044  
    2,369,438  
 
       
       
CASH AND CASH EQUIVALENTS, END OF PERIOD
  $ 9,485,495  
  $ 2,346,650  
 
See notes to condensed financial statements.
 
 
6
 
 
CEL-SCI CORPORATION
CONDENSED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED JUNE 30, 2019 and 2018
 
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
 
 
 
2019
 
 
2018
 
Capitalizable patent costs included in current liabilities
  $ 30,000  
  $ 61,501  
Capital lease obligation included in accounts payable
  $ 434  
  $ 408  
Exercise of derivative liabilities
  $ 1,900,618  
  $ 784,119  
Stock issuance costs included in current liabilities
  $ 8,010  
  $ -  
Prepaid consulting services paid with issuance of common stock
  $ (119,791 )
  $ 113,786  
Notes payable converted into common shares
  $ -  
  $ 2,294,300  
 
       
       
 
       
       
 
       
       
  Cash paid for interest expense
  $ 1,355,676  
  $ 1,312,664  
 
See notes to condensed financial statements.
 
 
7
 
 
CEL-SCI CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
THREE MONTHS ENDED JUNE 30, 2019 AND 2018 (UNAUDITED)
 
A.
BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
Basis of Presentation
 
The accompanying condensed financial statements of CEL-SCI Corporation (the Company) are unaudited and certain information and footnote disclosures normally included in the annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been omitted pursuant to the rules and regulations of the Securities and Exchange Commission. While management of the Company believes that the disclosures presented are adequate to make the information presented not misleading, these interim condensed financial statements should be read in conjunction with the financial statements and notes included in the Company’s annual report on Form 10-K for the year ended September 30, 2018.
 
In the opinion of management, the accompanying unaudited condensed financial statements contain all accruals and adjustments (each of which is of a normal recurring nature) necessary for a fair presentation of the Company’s financial position as of June 30, 2019 and the results of its operations for the nine and three months then ended. The condensed balance sheet as of September 30, 2018 is derived from the September 30, 2018 audited financial statements. Significant accounting policies have been consistently applied in the interim financial statements. The results of operations for the nine and three months ended June 30, 2019 are not necessarily indicative of the results to be expected for the entire year.
 
The financial statements have been prepared assuming that the Company will continue as a going concern, but due to recurring losses from operations, which are expected for the foreseeable future, and future liquidity needs, there is substantial doubt about the Company’s ability to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. Refer to discussion in Note B.
 
Summary of Significant Accounting Policies:
 
Research and Office Equipment and Leasehold Improvements – The leased manufacturing facility is recorded at total project costs incurred and is depreciated over the 20-year useful life of the building. Research and office equipment is recorded at cost and depreciated using the straight-line method over estimated useful lives of five to seven years. Leasehold improvements are depreciated over the shorter of the estimated useful life of the asset or the term of the lease. Repairs and maintenance which do not extend the life of the asset are expensed when incurred. The fixed assets are reviewed on a quarterly basis to determine if any of the assets are impaired.
 
Patents - Patent expenditures are capitalized and amortized using the straight-line method over the shorter of the expected useful life or the legal life of the patent (17 years). In the event changes in technology or other circumstances impair the value or life of the patent, appropriate adjustment in the asset value and period of amortization is made. An impairment loss is recognized when estimated future undiscounted cash flows expected to result from the use of the asset, and from its disposition, are less than the carrying value of the asset. The amount of the impairment loss would be the difference between the estimated fair value of the asset and its carrying value.
 
Research and Development Costs - Research and development costs are expensed as incurred. Management accrues Clinical Research Organization (“CRO”) expenses and clinical trial study expenses based on services performed and relies on the CROs to provide estimates of those costs applicable to the completion stage of a study. Estimated accrued CRO costs are subject to revisions as such studies progress to completion. The Company charges revisions to estimated expense in the period in which the facts that give rise to the revision become known.
 
Income Taxes - The Company uses the asset and liability method of accounting for income taxes. Under the asset and liability method, deferred tax assets and liabilities are recognized for future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating and tax loss carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. The Company records a valuation allowance to reduce the deferred tax assets to the amount that is more likely than not to be recognized.   A full valuation allowance was recorded against the deferred tax assets as of June 30, 2019 and September 30, 2018.
 
 
8
 
 
On December 22, 2017, the “Tax Cuts and Jobs Act” (the “Tax Act"), was signed into law by the President of the United States (U.S.). The Tax Act includes significant changes to corporate taxation, including reduction of the U.S. corporate tax rate from 35% to 21%, effective January 1, 2018, limitation of the tax deduction for interest expense to 30% of earnings (except for certain small businesses), limitation of the deduction for net operating losses to 80% of current year taxable income and elimination of net operating loss carrybacks. The Company has accounted for the income tax effects of the Act in applying FASB ASC 740 to the current reporting period. Because the Company records a valuation allowance for its entire deferred income tax asset, there was no impact to the amounts reported in the Company’s financial statements resulting from the Tax Act.
 
Derivative Instruments – The Company has entered into financing arrangements that consist of freestanding derivative instruments that contain embedded derivative features. The Company accounts for these arrangements in accordance with Accounting Standards Codification ( ASC) 815, “Accounting for Derivative Instruments and Hedging Activities.” In accordance with accounting principles generally accepted in the United States (U.S. GAAP), derivative instruments and hybrid instruments are recognized as either assets or liabilities in the balance sheet and are measured at fair value with gains or losses recognized in earnings or other comprehensive income depending on the nature of the derivative or hybrid instruments. The Company determines the fair value of derivative instruments and hybrid instruments based on available market data using appropriate valuation models considering all the rights and obligations of each instrument. The derivative liabilities are re-measured at fair value at the end of each interim period.
 
Deferred Rent – Certain of the Company’s operating leases provide for minimum annual payments that adjust over the life of the lease.  The aggregate minimum annual payments are expensed on a straight-line basis over the minimum lease term. The Company recognizes a deferred rent liability for rent escalations when the amount of straight-line rent exceeds the lease payments, and reduces the deferred rent liability when the lease payments exceed the straight-line rent expense.  For tenant improvement allowances and rent holidays, the Company records a deferred rent liability and amortizes the deferred rent over the lease term as a reduction to rent expense.
 
Leases – Leases are categorized as either operating or capital leases at inception. Operating lease costs are recognized on a straight-line basis over the term of the lease. An asset and a corresponding liability for the capital lease obligation are established for the cost of capital leases. The capital lease obligation is amortized over the life of the lease. For build-to-suit leases, the Company establishes an asset and liability for the estimated construction costs incurred to the extent that it is involved in the construction of structural improvements or takes construction risk prior to the commencement of the lease. Upon occupancy of facilities under build-to-suit leases, the Company assesses whether these arrangements qualify for sales recognition under the sale-leaseback accounting guidance. If a lease does not meet the criteria to qualify for a sale-leaseback transaction, the established asset and liability remain on the Company's balance sheet.
 
Stock-Based Compensation – Compensation cost for all stock-based awards is measured at fair value as of the grant date in accordance with the provisions of ASC 718 “Compensation – Stock Compensation.” The fair value of stock options is calculated using the Black-Scholes option pricing model. The Black-Scholes model requires various judgmental assumptions including volatility and expected option life. The stock-based compensation cost is recognized on the straight-line allocation method as an expense over the requisite service or vesting period.
 
Equity instruments issued to non-employees are accounted for in accordance with ASC 505-50, “Equity-Based Payments to Non-Employees.” Accordingly, compensation is recognized when goods or services are received and is measured using the Black-Scholes valuation model. The Black-Scholes model requires various judgmental assumptions regarding the fair value of the equity instruments at the measurement date and the expected life of the options.
 
The Company has Incentive Stock Option Plans, Non-Qualified Stock Option Plans, a Stock Compensation Plan, Stock Bonus Plans and an Incentive Stock Bonus Plan. In some cases, these Plans are collectively referred to as the "Plans". All Plans have been approved by the stockholders.
 
The Company’s stock options are not transferable, and the actual value of the stock options that an employee may realize, if any, will depend on the excess of the market price on the date of exercise over the exercise price. The Company has based its assumption for stock price volatility on the variance of daily closing prices of the Company’s stock. The risk-free interest rate assumption was based on the U.S. Treasury rate at date of the grant with term equal to the expected life of the option. Forfeitures are accounted for when they occur. The expected term of options represents the period that options granted are expected to be outstanding and has been determined based on an analysis of historical exercise behavior. If any of the assumptions used in the Black-Scholes model change significantly, stock-based compensation expense for new awards may differ materially in the future from that recorded in the current period.
 
 
9
 
 
Vesting of restricted stock granted under the Incentive Stock Bonus Plan is subject to service, performance and market conditions and meets the classification of equity awards. These awards were measured at market value on the grant-dates for issuances where the attainment of performance criteria is likely and at fair value on the grant-dates, using a Monte Carlo simulation for issuances where the attainment of performance criteria is uncertain. The total compensation cost will be expensed over the estimated requisite service period.
 
New Accounting Pronouncements
 
In June 2018, the Financial Accounting Standards Board ("FASB") issued ASU 2018-07, Compensation—Stock Compensation (Topic 718 ), (“ASU 2018-7”), which expands the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees. An entity should apply the requirements of Topic 718 to nonemployee awards except for specific guidance on inputs to an option pricing model and the attribution of cost. Under current GAAP, non-employee share-based payment awards are measured at the fair value of the consideration received or the fair value of the equity instruments issued, whichever can be more reliably measured. Under ASU 2018-07, non-employee share-based payments would be measured at the grant-date fair value of the equity instruments an entity is obligated to issue when the good has been delivered or the service has been rendered and any other conditions necessary to earn the right to benefit from the instruments have been satisfied. Under current GAAP, the measurement date for equity classified non-employee share-based payment awards is the earlier of the date at which a commitment for performance by the counterparty is reached or the date at which the counterparty’s performance is complete. Under ASU 2018-07, equity-classified nonemployee share-based payment awards are measured at the grant date. The definition of the term grant date is amended to generally state the date at which a grantor and a grantee reach a mutual understanding of the key terms and conditions of a share-based payment award. The amendments in this Update are effective for public business entities for fiscal years beginning after December 15, 2018, including interim periods within that fiscal year. Early adoption is permitted, but no earlier than an entity’s adoption date of Topic 606. An entity should only remeasure liability-classified awards that have not been settled by the date of adoption and equity classified awards for which a measurement date has not been established through a cumulative-effect adjustment to retained earnings as of the beginning of the fiscal year of adoption. Upon transition, the entity is required to measure these non-employee awards at fair value as of the adoption date. The entity must not remeasure awards that are completed. The Company is currently evaluating the impact the adoption of the standard will have on the Company’s financial position and results of operations.
 
In February 2016, the FASB issued ASU 2016-02,  Leases , which will require most leases (except of leases with terms of less than one year) to be recognized on the balance sheet as an asset and a lease liability. Leases will be classified as an operating lease or a financing lease. Operating leases are expensed using the straight-line method whereas financing leases will be treated similarly to a capital lease under the current standard. The new standard will be effective for annual and interim periods, within those fiscal years, beginning after December 15, 2018, but early adoption is permitted. The new standard must be presented using the modified retrospective method beginning with the earliest comparative period presented.   As permitted by the guidance, the Company has an option to retain the original lease classification and historical accounting for initial direct costs for leases existing prior to the adoption date. Furthermore, the Company will not have to reassess contracts entered into prior to the adoption date for the existence of a lease. The Company also has an option not to restate prior periods for the impact of the adoption of the new standard and may instead recognize a cumulative-effect adjustment to beginning retained earnings as of October 1, 2019 for any prior period income statement effects identified. The Company is evaluating the effect that adoption of this new standard will have on the Company’s financial statements and related disclosures.
 
The Company has considered all other recently issued accounting pronouncements and does not believe the adoption of such pronouncements will have a material impact on its financial statements.
 
 
10
 
 
B.
OPERATIONS AND FINANCING
 
The Company has incurred significant costs since its inception for the acquisition of certain patented and unpatented proprietary technology and know-how relating to the human immunological defense system, patent applications, research and development, administrative costs, construction of laboratory facilities, and clinical trials.  The Company has funded such costs with proceeds from loans and the public and private sale of its common stock.  The Company will be required to raise additional capital or find additional long-term financing to continue with its research efforts.  The ability to raise capital may be dependent upon market conditions that are outside the control of the Company. The ability of the Company to complete the necessary clinical trials and obtain FDA approval for the sale of products to be developed on a commercial basis is uncertain. Ultimately, the Company must complete the development of its products, obtain the appropriate regulatory approvals and obtain sufficient revenues to support its cost structure. The Company is taking cost-cutting initiatives, as well as exploring other sources of funding, to finance operations over the next 12 months. The Company believes that there is a high likelihood that it will continue to receive funds from warrant exercises similar to the way it has received funds during the past 12 months. However, there can be no assurance that the Company will be able to raise sufficient capital to support its operations.
 
The Company is currently in the final stages of its large multi-national Phase 3 clinical trial for head and neck cancer with its partners TEVA Pharmaceuticals and Orient Europharma. To finance the study beyond the next twelve months, the Company plans to raise additional capital in the form of corporate partnerships, debt issuances and/or equity financings. The Company believes that it will be able to obtain additional financing because it has done so consistently in the past. However, there can be no assurance that the Company will be successful in raising additional funds on a timely basis or that the funds will be available to the Company on acceptable terms or at all.  If the Company does not raise the necessary amounts of money, it may have to curtail its operations until it can raise the required funding.
 
The financial statements have been prepared assuming the Company will continue as a going concern, but due to the Company’s recurring losses from operations and future liquidity needs, there is substantial doubt about the Company’s ability to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
 
Since the Company launched its Phase 3 clinical trial for Multikine, the Company has incurred expenses of approximately $54.7 million as of June 30, 2019 on direct costs for the Phase 3 clinical trial. The Company estimates it will incur additional expenses of approximately $5.6 million for the remainder of the Phase 3 clinical trial. It should be noted that this estimate is based only on the information currently available in the Company’s contracts with the Clinical Research Organizations responsible for managing the Phase 3 clinical trial and does not include other related costs, e.g., the manufacturing of the drug. This number may be affected by the rate of death accumulation in the study, foreign currency exchange rates, and many other factors, some of which cannot be foreseen today. It is therefore possible that the cost of the Phase 3 clinical trial will be higher than currently estimated.
 
Nine hundred twenty-eight (928) head and neck cancer patients have been enrolled and have completed treatment in the Phase 3 study. The study end point is a 10% increase in overall survival of patients between the two main comparator groups in favor of the group receiving the Multikine treatment regimen. The determination if the study end point has been met will occur when there are a total of 298 deaths in those two groups.
 
 
11
 
 
C.
STOCKHOLDERS’ EQUITY
 
The changes in stockholders’ equity during the nine months ended June 30, 2019 are as follows:
 
 
 
 
 
 
 
 
 
Additional
 
 
 
 
 
 
 
 
 
Common
 
 
Stock
 
 
Paid-In
 
 
Accumulated
 
 
 
 
 
 
 Shares
 
 
Amount
 
 
Capital
 
 
Deficit
 
 
Total
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
BALANCES AT OCTOBER 1, 2018
    28,034,487  
  $ 280,346  
  $ 331,312,184  
  $ (331,591,614 )
  $ 916  
Warrant exercises
    298,682  
    2,987  
    646,766  
    -  
    649,753  
401(k) contributions paid in common stock
    12,279  
    123  
    35,118  
    -  
    35,241  
 
       
       
       
       
       
Stock issued to nonemployees for services
    62,784  
    628  
    201,752  
    -  
    202,380  
Shares returned for settlement of clinical research costs
    (564,905 )
    (5,649 )
    5,649  
    -  
    -  
Equity based compensation - employees
    -  
    -  
    573,660  
    -  
    573,660  
Net income
    -  
    -  
    -  
    1,245,902  
    1,245,902  
 
       
       
       
       
       
BALANCES AT DECEMBER 31, 2018
    27,843,327  
    278,435  
    332,775,129  
    (330,345,712 )
    2,707,852  
 
       
       
       
       
       
Warrant exercises
    1,523,933  
    15,239  
    2,640,395  
    -  
    2,655,634  
401(k) contributions paid in common stock
    10,419  
    104  
    36,779  
    -  
    36,883  
Stock issued to nonemployees for services
    77,449  
    774  
    224,855  
    -  
    225,629  
Equity based compensation - employees
    (3,500 )
    (35 )
    530,865  
    -  
    530,830  
Shares issued for settlement of clinical research costs
    500,000  
    5,000  
    1,285,000  
    -  
    1,290,000  
Stock issuance costs
    -  
    -  
    (43,625 )
    -  
    (43,625 )
Net loss
    -  
    -  
    -  
    (6,447,681 )
    (6,447,681 )
 
       
       
       
       
       
BALANCES AT MARCH 31, 2019
    29,951,628  
    299,517  
    337,449,398  
    (336,793,393 )
    955,522  
 
       
       
       
       
       
Warrant exercises
    4,014,109  
    40,141  
    10,212,680  
    -  
    10,252,821  
401(k) contributions paid in common stock
    4,339  
    43  
    36,318  
    -  
    36,361  
Stock issued to nonemployees for services
    20,825  
    208  
    140,062  
    -  
    140,270  
Equity based compensation - employees
    (4,000 )
    (40 )
    1,521,861  
    -  
    1,521,821  
Option exercises
    42,770  
    428  
    96,862  
    -  
    97,290  
Purchase of stock by officers and directors
    37,243  
    372  
    234,625  
    -  
    234,997  
Stock issuance costs
    -  
    -  
    (8,010 )
    -  
    (8,010 )
Net loss
    -  
    -  
    -  
    (12,084,768 )
    (12,084,768 )
BALANCES AT JUNE 30, 2019
    34,066,914  
  $ 340,669  
  $ 349,683,796  
  $ (348,878,161 )
  $ 1,146,304  
 
 
12
 
 
The changes in stockholders’ deficit during the nine months ended June 30, 2018 are as follows:
 
 
 
 
 
 
 
 
 
Additional
 
 
 
 
 
 
 
 
 
 Common
 
 
Stock
 
 
Paid-In
 
 
Accumulated
 
 
 
 
 
 
 Shares
 
 
Amount
 
 
Capital
 
 
Deficit
 
 
Total
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
BALANCES AT OCTOBER 1, 2017
    11,903,133  
  $ 119,031  
  $ 296,298,401  
  $ (299,754,409 )
  $ (3,336,977 )
 
       
       
       
       
       
Sale of common stock
    1,289,478  
    12,895  
    2,437,105  
    -  
    2,450,000  
401(k) contributions paid in common stock
    18,984  
    190  
    35,690  
    -  
    35,880  
Stock issued to nonemployees for services
    13,705  
    137  
    25,270  
    -  
    25,407  
Equity based compensation - employees
    -  
    -  
    1,448,098  
    -  
    1,448,098  
Warrants issued with notes payable
    -  
    -  
    656,382  
    -  
    656,382  
Conversion of notes payable to common stock
    32,751  
    328  
    74,672  
    -  
    75,000  
Net loss
    -  
    -  
    -  
    (6,187,830 )
    (6,187,830 )
BALANCES AT DECEMBER 31, 2017
    13,258,051  
    132,581  
    300,975,618  
    (305,942,239 )
    (4,834,040 )
 
       
       
       
       
       
Sale of common stock
    2,501,145  
    25,011  
    4,652,130  
    -  
    4,677,141  
401(k) contributions paid in common stock
    25,901  
    259  
    36,261  
    -  
    36,520  
Stock issued to nonemployees for services
    124,082  
    1,241  
    227,254  
    -  
    228,495  
Equity based compensation - employees
    -  
    -  
    279,817  
    -  
    279,817  
Conversion of notes payable to common stock
    55,373  
    554  
    108,746  
    -  
    109,300  
Shares issued for settlement of clinical research costs
    660,000  
    6,600  
    1,240,800  
    -  
    1,247,400  
Stock issuance cost
    -  
    -  
    (94,773 )
    -  
    (94,773 )
Net loss
    -  
    -  
    -  
    (4,708,135 )
    (4,708,135 )
BALANCES AT MARCH 31, 2018
    16,624,552  
    166,246  
    307,425,853  
    (310,650,374 )
    (3,058,275 )
 
       
       
       
       
       
Warrant exercises
    1,117,644  
    11,177  
    2,906,619  
    -  
    2,917,796  
401(k) contributions paid in common stock
    39,862  
    399  
    36,274  
    -  
    36,673  
Stock issued to nonemployees for services
    81,604  
    816  
    208,387  
    -  
    209,203  
Equity based compensation - employees
    -  
    -  
    465,487  
    -  
    465,487  
Conversion of notes payable and interest to common stock
    1,106,806  
    11,068  
    2,179,648  
    -  
    2,190,716  
Shares issued for settlement of clinical research costs
    600,000  
    6,000  
    1,704,000  
    -  
    1,710,000  
Warrants issued with notes payable
    -  
    -  
    291,234  
    -  
    291,234  
Net loss
    -  
    -  
    -  
    (6,014,568 )
    (6,014,568 )
BALANCES AT JUNE 30, 2018
    19,570,468  
  $ 195,706  
  $ 315,217,502  
  $ (316,664,942 )
  $ (1,251,734 )
 
Underlying share information for equity compensation plans as of June 30, 2019 is as follows:
 
Name of Plan
 
Total Shares Reserved Under Plans
 
 
Shares Reserved for Outstanding Options
 
 
Shares Issued
 
 
Remaining Options/Shares
Under Plans
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Incentive Stock Options Plans
    138,400  
    99,962  
    N/A  
    385  
Non-Qualified Stock Option Plans
    6,387,200  
    6,193,237  
    N/A  
    115,156  
Stock Bonus Plans
    783,760  
    N/A  
    327,267  
    456,460  
Stock Compensation Plan
    634,000  
    N/A  
    122,221  
    493,369  
Incentive Stock Bonus Plan
    640,000  
    N/A  
    616,500  
    23,500  
 
 
13
 
 
Underlying share information for equity compensation plans as of September 30, 2018 is as follows:
 
Name of Plan
 
Total Shares Reserved Under Plans
 
 
Shares Reserved for Outstanding Options
 
 
Shares Issued
 
 
Remaining Options/Shares Under Plans
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Incentive Stock Option Plans
    138,400  
    123,558  
    N/A  
    385  
Non-Qualified Stock Option Plans
    3,387,200  
    3,036,569  
    N/A  
    309,526  
Stock Bonus Plans
    783,760  
    N/A  
    297,230  
    486,497  
Stock Compensation Plan
    134,000  
    N/A  
    118,590  
    15,410  
Incentive Stock Bonus Plan
    640,000  
    N/A  
    624,000  
    16,000  
 
Stock option activity :
 
 
Nine Months Ended June 30,
 
 
 
 2019
 
 
 2018
 
Granted
    3,268,862  
    1,858,108  
Exercised
    42,770  
    -  
Expired
    29,322  
    26,395  
Forfeited
    63,698  
    1,393  
 
 
 
Three Months Ended June 30,
 
 
 
2019
 
 
2018
 
Granted
    3,268,362  
    1,847,808  
Exercised
    42,770  
    -  
Expired
    26,922  
    2,016  
Forfeited
    39,505  
    -  
 
During the quarter ended June 30, 2019, the Company adopted the 2019 Stock Compensation Plan, which authorized the issuance of up to 500,000 shares of common stock to officers, directors, employees and consultants.
 
Employee stock based compensation expense includes the expense related to options issued or vested and restricted stock. Non-employee expense includes the expense related to options and stock issued to consultants expensed over the period of their service contracts. Stock based compensation expense is included in general and administrative expenses on the statements of operations.
 
Non-employee stock based compensation expense includes the value of shares and options issued under consulting arrangements. At June 30, 2019 and September 30, 2018, approximately $88,000 and $207,000, respectively, are included in prepaid expenses.
 
 
14
 
 
Warrants and Non-Employee Options
 
The following chart represents the warrants and non-employee options outstanding at June 30, 2019:
 
Warrant
 
Issue Date
 
Shares Issuable upon Exercise
of Warrants
 
 
Exercise Price
 
Expiration Date
Series N
 
8/18/2008
    85,339  
  $ 3.00  
2/18/2020
Series V
 
5/28/2015
    810,127  
  $ 19.75  
5/28/2020
Series UU
 
6/11/2018
    163,544  
  $ 2.80  
6/11/2020
Series W
 
10/28/2015
    688,930  
  $ 16.75  
10/28/2020
Series X
 
1/13/2016
    120,000  
  $ 9.25  
1/13/2021
Series Y
 
2/15/2016
    26,000  
  $ 12.00  
2/15/2021
Series ZZ
 
5/23/2016
    20,000  
  $ 13.75  
5/18/2021
Series BB
 
8/26/2016
    16,000  
  $ 13.75  
8/22/2021
Series Z
 
5/23/2016
    264,000  
  $ 13.75  
11/23/2021
Series FF
 
12/8/2016
    68,048  
  $ 3.91  
12/1/2021
Series CC
 
12/8/2016
    611,463  
  $ 5.00  
12/8/2021
Series HH
 
2/23/2017
    6,500  
  $ 3.13  
2/16/2022
Series AA
 
8/26/2016
    200,000  
  $ 13.75  
2/22/2022
Series JJ
 
3/14/2017
    9,450  
  $ 3.13  
3/8/2022
Series LL
 
4/30/2017
    26,398  
  $ 3.59  
4/30/2022
Series MM
 
6/22/2017
    893,491  
  $ 1.86  
6/22/2022
Series NN
 
7/24/2017
    473,798  
  $ 2.52  
7/24/2022
Series OO
 
7/31/2017
    60,000  
  $ 2.52  
7/31/2022
Series II
 
3/14/2017
    95,000  
  $ 3.00  
9/14/2022
Series RR
 
10/30/2017
    495,326  
  $ 1.65  
10/30/2022
Series SS
 
12/19/2017
    514,476  
  $ 2.09  
12/18/2022
Series TT
 
2/5/2018
    760,758  
  $ 2.24  
2/5/2023
Series PP
 
8/28/2017
    112,500  
  $ 2.30  
2/28/2023
Series WW
 
7/2/2018
    1,950  
  $ 1.63  
6/28/2023
Series VV
 
7/2/2018
    90,000  
  $ 1.75  
1/2/2024
Consultants
 
7/28/17
    10,000  
  $ 2.18  
7/27/2027
 
 
15
 
 
1.
Derivative Liabilities
 
The table below presents the fair value of the warrant liabilities at the balance sheet dates:
 
 
 
June 30,
2019
 
 
September 30,
2018
 
Series S warrants
  $ -  
  $ 33  
Series V warrants
    1,249,835  
    770,436  
Series W warrants
    2,131,237  
    999,081  
Series Z warrants
    1,172,626  
    487,767  
Series ZZ warrants
    72,185  
    34,215  
Series AA warrants
    963,990  
    380,474  
Series BB warrants
    64,256  
    28,456  
Series CC warrants
    3,699,989  
    1,779,724  
Series DD warrants
    -  
    1,249,287  
Series EE warrants
    -  
    1,249,287  
Series FF warrants
    433,091  
    188,921  
Series GG warrants
    -  
    607,228  
Series HH warrants
    44,050  
    58,816  
Series II warrants
    660,020  
    660,135  
Series JJ warrants
    64,252  
    88,642  
Series KK warrants
    -  
    656,930  
Series LL warrants
    177,299  
    77,632  
Total warrant liabilities
  $ 10,732,830  
  $ 9,317,064  
 
The table below presents the gains/(losses) on the warrant liabilities for the nine months ended June 30:
 
 
 
2019 
 
 
2018 
 
Series S warrants
  $ 33  
  $ (756,261 )
Series V warrants
    (479,399 )
    22,842  
Series W warrants
    (1,132,156 )
    18,478  
Series Z warrants
    (684,859 )
    34,682  
Series ZZ warrants
    (37,970 )
    2,103  
Series AA warrants
    (583,516 )
    28,337  
Series BB warrants
    (35,800 )
    1,988  
Series CC warrants
    (2,007,287 )
    181,244  
Series DD warrants
    1,249,287  
    5,492  
Series EE warrants
    1,249,287  
    5,492  
Series FF warrants
    (244,170 )
    23,119  
Series GG warrants
    195,228  
    170,131  
Series HH warrants
    (22,859 )
    7,962  
Series II warrants
    (593,960 )
    250,578  
Series JJ warrants
    (32,954 )
    11,970  
Series KK warrants
    (55,622 )
    169,808  
Series LL warrants
    (99,667 )
    10,002  
Net (loss) gain on warrant liabilities
  $ (3,316,384 )
  $ 187,967  
 
 
16
 
 
The table below presents the gains/(losses) on the warrant liabilities for the three months ended June 30:
 
 
 
 2019
 
 
 2018
 
Series S warrants
  $ -  
  $ (768,188 )
Series V warrants
    (974,251 )
    26,389  
Series W warrants
    (1,748,184 )
    42,609  
Series Z warrants
    (799,690 )
    26,587  
Series ZZ warrants
    (50,608 )
    1,914  
Series AA warrants
    (676,784 )
    19,661  
Series BB warrants
    (43,536 )
    1,695  
Series CC warrants
    (2,346,985 )
    139,325  
Series DD warrants
    -  
    36  
Series EE warrants
    -  
    36  
Series FF warrants
    (278,773 )
    15,818  
Series GG warrants
    88,478  
    132,712  
Series HH warrants
    (33,501 )
    5,279  
Series II warrants
    (709,303 )
    199,970  
Series JJ warrants
    (48,880 )
    7,960  
Series KK warrants
    (169,089 )
    132,884  
Series LL warrants
    (114,413 )
    6,695  
Net loss on warrant liabilities
  $ (7,905,519 )
  $ (8,618 )
 
The Company reviews all outstanding warrants in accordance with the requirements of ASC 815. This topic provides that an entity should use a two-step approach to evaluate whether an equity-linked financial instrument (or embedded feature) is indexed to its own stock, including evaluating the instrument’s contingent exercise and settlement provisions. The warrant agreements provide for adjustments to the exercise price for certain dilutive events. Under the provisions of ASC 815, the warrants are not considered indexed to the Company’s stock because future equity offerings or sales of the Company’s stock are not an input to the fair value of a “fixed-for-fixed” option on equity shares, and equity classification is therefore precluded.
 
In accordance with ASC 815, derivative liabilities must be measured at fair value upon issuance and re-valued at the end of each reporting period through expiration. Any change in fair value between the respective reporting dates is recognized as a gain or loss.
 
Expiration of Derivative Liabilities
 
On December 10, 2018, 1,360,960 Series DD and 1,360,960 Series EE warrants, with an exercise price of $4.50, expired. The expiration dates of these warrants had been previously extended and such modifications were reflected in the fair value measurements of the warrants on the dates of modification.
 
On October 11, 2018, 327,729 Series S warrants, with an exercise price of $31.25, expired. The exercise price of these warrants had been previously repriced under temporarily revised terms. During the quarter ended June 30, 2018 and under the revised terms, 709,391 previously outstanding warrants were exercised for total proceeds of approximately $1.2 million,
 
2.
Securities Purchase Agreements
 
The Company has entered into several Securities Purchase Agreements (SPAs) with Ergomed plc, one of its Clinical Research Organizations responsible for managing the Phase 3 clinical trial, to facilitate a partial payment of amounts due Ergomed. Under the Agreements, the Company issued Ergomed shares of common stock as a forbearance fee in exchange for Ergomed’s agreement to provisionally forbear collection of the payables in an amount equal to the net proceeds from the sales of the shares issued to Ergomed. Upon issuance, the Company expenses the full value of the shares as Other Non-Operating Gain/Loss and subsequently offsets the expense as amounts are realized through the sale by Ergomed and reduces accounts payable to Ergomed. Any amounts received from the sale of the shares in excess of the payables will be applied towards the satisfaction of any future amounts owed.
 
 
17
 
 
On December 31, 2018, the prior SPA expired. Pursuant to that arrangement, Ergomed returned 564,905 unsold shares for cancellation. The par value of those shares was reclassed from Common Stock to Additional Paid-In Capital on the balance sheet.
 
On January 9, 2019, the Company entered into a new SPA under which it issued Ergomed 500,000 restricted shares of the Company’s common stock valued at approximately $1.3 million. This current SPA expires on December 31, 2019.
 
During the nine months ended June 30, 2019 and 2018, respectively, the Company decreased Accounts Payable by approximately $3.2 million and $2.8 million through the sale of 808,769 and 1,538,129 shares, respectively, by Ergomed.
 
The following table summarizes the Other Non-Operating Gains (Loss) for the nine and three months ended June 30, 2019 and 2018 relating to these agreements:
 
 
 
Nine Months Ended
 
 
Three Months Ended
 
 
 
6/30/2019
 
 
6/30/2018
 
 
6/30/2019
 
 
6/30/2018
 
Amount realized through the sale of shares
  $ 3,167,197  
  $ 2,785,932  
  $ 1,455,844  
  $ 1,560,641  
Fair value of shares upon issuance
    1,290,000  
    2,957,400  
    -  
    1,710,000  
Other non-operating gain (loss)
  $ 1,877,197  
  $ (171,468 )
  $ 1,455,844  
  $ ( 149,359 )
 
As of June 30, 2019, Ergomed holds 45,226 shares and may sell the shares or return the shares to the Company for cancellation until December 31, 2019.
 
3.
Incentive Stock Bonus Plan
 
During the nine and three months ended June 30, 2019, respectively, 7,500 and 4,000 shares of common stock issued from the 2014 Incentive Stock Bonus Plan were forfeited.
 
D.
FAIR VALUE MEASUREMENTS
 
In accordance with ASC 820-10, “Fair Value Measurements,” the Company determines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The Company generally applies the income approach to determine fair value. This method uses valuation techniques to convert future amounts to a single present amount. The measurement is based on the value indicated by current market expectations with respect to those future amounts.
  
ASC 820-10 establishes a fair value hierarchy that prioritizes the inputs used to measure fair value. The hierarchy gives the highest priority to active markets for identical assets and liabilities (Level 1 measurement) and the lowest priority to unobservable inputs (Level 3 measurement). The Company classifies fair value balances based on the observability of those inputs. The three levels of the fair value hierarchy are as follows:
 
● 
Level 1 – Observable inputs such as quoted prices in active markets for identical assets or liabilities
 
● 
Level 2 – Inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly. These include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active and amounts derived from valuation models where all significant inputs are observable in active markets
 
● 
Level 3 – Unobservable inputs that reflect management’s assumptions
 
For disclosure purposes, assets and liabilities are classified in their entirety in the fair value hierarchy level based on the lowest level of input that is significant to the overall fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement requires judgment and may affect the placement within the fair value hierarchy levels.
 
 
18
 
 
The table below sets forth the assets and liabilities measured at fair value on a recurring basis, by input level, in the condensed balance sheet at June 30, 2019:
 
 
 
Quoted Prices in Active Markets for Identical Assets or Liabilities
 (Level 1)
 
 
Significant Other Observable Inputs
 (Level 2)
 
 
Significant Unobservable Inputs
 (Level 3)
 
 
Total
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Derivative instruments
  $ -  
  $ -  
  $ 10,732,830  
  $ 10,732,830  
 
The table below sets forth the assets and liabilities measured at fair value on a recurring basis, by input level, in the condensed balance sheet at September 30, 2018:
 
 
 
Quoted Prices in Active Markets for Identical Assets or Liabilities
(Level 1)
 
 
Significant Other Observable Inputs
(Level 2)
 
 
Significant Unobservable Inputs
(Level 3)
 
 
Total
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Derivative instruments
  $ 33  
  $ -  
  $ 9,317,031  
  $ 9,317,064  
   
The following sets forth the reconciliation of beginning and ending balances related to fair value measurements using significant unobservable inputs (Level 3) for the three months ended June 30, 2019 and the year ended September 30, 2018:
 
 
 
Nine Months
 
 
Year Ended
 
 
 
Ended 
 
 
September 30, 
 
 
 
June 30, 2019
 
 
2018
 
 
 
 
 
 
 
 
Beginning balance
  $ 9,317,031  
  $ 2,020,629  
Issuances
    -  
    -  
Exercises
    (1,900,618 )
    (595,780 )
Realized and unrealized (gains) and losses
    3,316,417  
    7,892,182  
Ending balance
  $ 10,732,830  
  $ 9,317,031  
 
The fair values of the Company’s derivative instruments disclosed above under Level 3 are primarily derived from valuation models where significant inputs such as historical price and volatility of the Company’s stock, as well as U.S. Treasury Bill rates, are observable in active markets.
 
E.
RELATED PARTY TRANSACTIONS
 
During the quarter ended June 30, 2019, the Company received security purchase agreements from five officers and directors of the Company for the purchase of 30,612 restricted shares of the Company’s common stock. The shares were sold at the aggregate fair market value on the closing date of approximately $210,000. Also during the current quarter, the Company’s CEO purchased 6,631 shares of restricted common stock for $25,000.
 
F.
COMMITMENTS AND CONTINGENCIES
  
Clinical Research Agreements  
 
Under co-development and revenue sharing agreements with Ergomed, Ergomed agreed to contribute up to $12 million towards the Company’s Phase 3 Clinical Trial in the form of discounted clinical services in exchange for a single digit percentage of milestone and royalty payments, up to a specific maximum amount . The Company accounted for the co-development and revenue sharing agreements in accordance with ASC 808 “Collaborative Arrangements”. The Company determined the payments to Ergomed are within the scope of ASC 730 “Research and Development.” Therefore, the Company records the discount on the clinical services as a credit to research and development expense on its Statements of Operations. Since the inception of the agreement with Ergomed, the Company has incurred research and development expenses of approximately $30.3 million for Ergomed’s services. This amount is net of Ergomed’s discount of approximately $10.2 million. During the nine months ended June 30, 2019 and 2018, the Company recorded, net of Ergomed’s discount, approximately $2.2 million and $2.4 million, respectively, as research and development expense related to Ergomed’s services. During the three months ended June 30, 2019 and 2018, the Company recorded, net of Ergomed’s discount, approximately $0.7 million and $0.8 million, respectively, as research and development expense related to Ergomed’s services.
 
 
19
 
 
Lease Agreements
 
The Company leases a manufacturing facility near Baltimore, Maryland (the San Tomas lease). The building was remodeled in accordance with the Company’s specifications so that it can be used by the Company to manufacture Multikine for the Company’s Phase 3 clinical trial and sales of the drug if approved by the FDA. The lease is for a term of twenty years and requires annual base rent to escalate each year at 3%. The Company is required to pay all real estate and personal property taxes, insurance premiums, maintenance expenses, repair costs and utilities. The lease allows the Company, at its election, to extend the lease for two ten-year periods or to purchase the building at the end of the 20-year lease. The Company contributed approximately $9.3 million towards the tenant-directed improvements, of which $3.2 million is being refunded during years nine through twenty through reduced rental payments. The landlord paid approximately $11.9 million towards the purchase of the building, land and the tenant-directed improvements. The Company placed the building in service in October 2008.
 
The Company was deemed to be the owner of the building for accounting purpose under the build-to-suit guidance in ASC 840-40-55. In addition to tenant improvements the Company incurred, the Company also recorded an asset for tenant-directed improvements and for the costs paid by the lessor to purchase the building and to perform improvements, as well as a corresponding liability for the landlord costs. Upon completion of the improvements, the Company did not meet the “sale-leaseback” criteria under ASC 840-40-25, Accounting for Lease, Sale-Leaseback Transactions, and therefore, treated the lease as a financing obligation. Thus, the asset and corresponding liability were not de-recognized. As of June 30, 2019 and September 30, 2018, the leased building asset has a net book value of approximately $15.7 and $16.1 million, respectively, and the landlord liability has a balance of approximately $13.5 million and $13.4 million, respectively. The leased building is being depreciated using a straight-line method over the 20-year lease term to a residual value. The landlord liability is being amortized over the 20 years using the effective interest method. Lease payments allocated to the landlord liability are accounted for as debt service payments on that liability using the finance method of accounting per ASC 840-40-55.
 
The Company was required to deposit the equivalent of one year of base rent in accordance with the lease. When the Company meets the minimum cash balance required by the lease, the deposit will be returned to the Company. The approximate $1.7 million deposit is included in non-current assets at June 30, 2019 and September 30, 2018.
 
Approximate future minimum lease payments under the San Tomas lease as of June 30, 2019 are as follows:
 
Three months ending September 30, 2019   
  $ 453,000  
Year ending September 30,
       
 2020
    1,872,000  
 2021
    1,937,000  
 2022
    2,004,000  
 2023
    2,073,000  
 2024
    2,145,000  
 Thereafter
    9,540,000  
Total future minimum lease obligation
    20,024,000  
Less imputed interest on financing obligation
    (6,548,000 )
Net present value of lease financing obligation
  $ 13,476,000  
 
The Company subleases a portion of its rental space on a month-to-month term lease, which requires a 30-day notice for termination. The sublease rental income for the nine months ended June 30, 2019 and 2018 was approximately $55,000 and $53,000, respectively. The sublease rental income for each of the three months ended June 30, 2019 and 2018 was approximately $18,000.
 
The Company leases its research and development laboratory under a 60-month lease which expires February 28, 2022. The operating lease includes escalating rental payments. The Company is recognizing the related rent expense on a straight-line basis over the full 60-month term of the lease at the rate of approximately $13,000 per month. As of June 30, 2019 and September 30, 2018, the Company has recorded a deferred rent liability of approximately $14,000 and $12,000, respectively.
 
The Company leases its office headquarters under a 60-month lease which expires June 30, 2020. The operating lease includes escalating rental payments. The Company is recognizing the related rent expense on a straight-line basis over the full 60-month term of the lease at the rate approximately $8,000 per month. As of June 30, 2019 and September 30, 2018, the Company has recorded a deferred rent liability of approximately $9,000 and $14,000, respectively.
 
 
20
 
 
As of June 30, 2019, material contractual obligations, excluding the San Tomas lease, consisting of non-cancelable operating lease payments are as follows:
 
Three months ending September 30, 2019
 $66,000
Year ending September 30,
    
2020
  238,000
2021
  163,000
2022
      69,000
Total
 $536,000
 
The Company leases office equipment under a capital lease arrangement. The term of the capital lease is 60 months and expires on October 31, 2021. The monthly lease payment is $505. The lease bears interest at an annual interest rate of 6.25%.
 
G.
. PATENTS
 
During the nine months ended June 30, 2019 and 2018, no patent impairment charges were recorded. For the nine and three months ended June 30, 2019, amortization of patent costs totaled approximately $72,000 and $49,000, respectively. For the nine and three months ended June 30, 2018, amortization of patent costs totaled approximately $53,000 and $34,000, respectively. Approximate estimated future amortization expense is as follows:
 
Three months ending September 30, 2019
  $ 11,000  
Year ending September 30,
       
2020
    43,000  
2021
    40,000  
2022
    36,000  
2023
    26,000  
2024
    21,000  
Thereafter
    95,000  
Total
  $ 272,000  
 
H.
LOSS PER COMMON SHARE
  
In accordance with the contingently issuable shares guidance of FASB ASC Topic 260, Earnings Per Share , the calculation of diluted net earnings loss per share excludes the following securities because their inclusion would have been anti-dilutive as of June 30:
 
 
 
2019
 
 
2018
 
 
 
 
 
 
 
 
Options and Warrants
    7,742,857  
    12,567,982  
Unvested Restricted Stock
    552,000  
    312,000  
Total
    8,294,857  
    12,879,982  
 
I.
SUBSEQUENT EVENTS
 
Between July 1, 2019 and August 13, 2019, the Company received approximately $2.6 million through the exercise of options and warrants to purchase shares of the Company’s common stock.
 
 
21
 
 
ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
Liquidity and Capital Resources
 
The Company’s lead investigational therapy, Multikine ® (Leukocyte Interleukin, Injection), is cleared for a Phase 3 clinical trial in advanced primary head and neck cancer by the regulators in twenty-four countries, including the U.S.
 
Multikine (Leukocyte Interleukin, Injection) is the full name of this investigational therapy, which, for simplicity, is referred to in this report as Multikine. Multikine is the trademark that the Company has registered for this investigational therapy, and this proprietary name is subject to FDA review under the Company’s future anticipated regulatory submission for approval. Multikine has not been licensed or approved by the FDA or any other regulatory agency. Neither has its safety or efficacy been established for any use.
 
The Company also owns and is developing a pre-clinical technology called LEAPS (Ligand Epitope Antigen Presentation System).
 
All the Company’s projects are under development. Consequently, the Company cannot predict when it will be able to generate any revenue from the sale of any of its products.
 
Since inception, the Company has financed its operations through the sale of equity securities, convertible notes, loans and certain research grants. The Company’s expenses will continue to exceed its revenues as it continues the development of Multikine and brings other drug candidates into clinical trials. Until the Company becomes profitable, any or all of these financing vehicles or others may be utilized to assist in funding the Company’s capital requirements.
 
Capital raised by the Company has been expended primarily for patent applications, research and development, administrative costs, and the construction of the Company’s manufacturing and laboratory facilities. The Company does not anticipate realizing significant revenues until it enters into licensing arrangements for its technology and know-how or until it receives regulatory approval to sell its products (which could take several years). Thus, the Company has been dependent upon the proceeds from the sale of its securities to meet all its liquidity and capital requirements and anticipates having to do so in the future.
 
The Company will be required to raise additional capital or find additional long-term financing to continue with its research efforts. The ability to raise capital may be dependent upon market conditions that are outside the control of the Company. The ability of the Company to complete the necessary clinical trials and obtain FDA approval for the sale of products to be developed on a commercial basis is uncertain. Ultimately, the Company must complete the development of its products, obtain the appropriate regulatory approvals and obtain sufficient revenues to support its cost structure. The Company has been receiving millions of dollars from warrant exercises in the past 12 months. It has received approximately another $2.6 million since July 1, 2019. The Company is being funded through these warrant exercises. Should those warrant exercises stop, the Company will explore other sources of funding, to finance operations over the next 12 months. However, there can be no assurance that the Company will be able to raise sufficient capital to support its operations.
 
Since the Company launched its Phase 3 clinical trial for Multikine, the Company has incurred expenses of approximately $54.7 million as of June 30, 2019 on direct costs for the Phase 3 clinical trial. The Company estimates it will incur additional expenses of approximately $5.6 million for the remainder of the Phase 3 clinical trial. It should be noted that this estimate is based only on the information currently available from the Clinical Research Organizations responsible for managing the Phase 3 clinical trial and does not include other related costs, e.g., the manufacturing of the drug. This number may be affected by the rate of death accumulation in the study, foreign currency exchange rates, and many other factors, some of which cannot be foreseen today. It is therefore possible that the cost of the Phase 3 clinical trial will be higher than currently estimated.
 
The Company uses two CRO’s to manage the global Phase 3 study; ICON and Ergomed, who are both international leaders in managing oncology trials. As of September 2016, the study was fully enrolled with 928 patients.
 
Under a co-development agreement, Ergomed agreed to contribute up to $12 million towards the study where it will perform clinical services in exchange for a single digit percentage of milestone and royalty payments, up to a specified maximum amount. Approximately $10.2 million of these credits were realized as of June 30, 2019.
 
During the nine months ended June 30, 2019, the Company’s cash decreased by approximately $0.8 million.  Significant components of this decrease included net cash used to fund the Company’s regular operations, including its Phase 3 clinical trial, of approximately $12.4 million and approximately $0.3 million to purchase long term assets. The decrease was offset by net proceeds from the exercise of warrants of approximately $11.7 million and employee stock purchases of approximately $0.2 million.   During the nine months ended June 30, 2018, the Company’s cash remained constant. Cash used in operations of approximately $9.1 million was offset by approximately $9.1 million in cash provided by financing activities. Sources of financing during the nine months included approximately $7.0 million in proceeds from the issuance of common stock and warrants and $2.1 million in proceeds from the exercise of warrants.
 
During the nine months ended June 30, 2019, 5,836,724 warrants were exercised at a weighted average exercise price of $2.00 for proceeds of approximately $11.7 million. These exercises include 4,014,109 warrants exercised during the three months ended June 30, 2019 for proceeds of approximately $8.4 million. During the nine and three months ended June 30, 2018, 1,117,644 warrants were exercised at a weighted averaged exercise price of $1.91 for proceeds of approximately $2.1 million.
 
 
22
 
 
The Company has entered into several Securities Purchase Agreements (SPAs) with Ergomed plc, one of its Clinical Research Organizations responsible for managing the Phase 3 clinical trial, to facilitate a partial payment of amounts due Ergomed. Under the Agreements, the Company issued Ergomed shares of common stock in exchange for Ergomed’s agreement to provisionally forbear collection of the payables in an amount equal to the net proceeds from the sale of the shares issued to Ergomed. During the nine months ended June 30, 2019 and 2018, respectively, the Company decreased Accounts Payable by approximately $3.2 million and $2.8 million from the sale of 808,769 and 1,538,129 shares by Ergomed. As of June 30, 2019, Ergomed holds 45,226 shares and may sell the shares or return the shares to the Company for cancellation until December 31, 2019. For more information regarding the SPAs refer to Note C above.
 
Inventory at June 30, 2019 increased by approximately $110,000 as compared to September 30, 2018. In addition, receivables remained constant, and consist primarily of amounts due from the Company’s partners for reimbursed clinical study costs related to its Phase 3 clinical trial and amounts to be reimbursed for costs related to its Small Business Innovation Research (SBIR) grant.
 
Results of Operations and Financial Condition
 
During the nine months ended June 30, 2019, research and development expenses increased by approximately $0.2 million compared to the nine months ended June 30, 2018. During the three months ended June 30, 2019, research and development expenses decreased by approximately $0.1 million compared to the three months ended June 30, 2018. The majority of the Company’s research and development expense relates to its on-going Phase 3 clinical trial. The Company is continuing the Phase 3 clinical trial and research and development expenses fluctuate based on the activity level of the clinical trial.
 
During the nine and three months ended June 30, 2019, general and administrative expenses increased by approximately $1.2 million and $1.3 million compared to the nine and three months ended June 30, 2018. The increase over the nine month period is primarily due to an increase in public relations costs of approximately $0.8 million, of which approximately $0.3 million relates to equity based compensation. The increase in equity based public relations cost is primarily the result of the timing of the expense recognized with the timing of the services provided. In addition, the nine month period increase is due to an increase in employee stock based compensation of approximately $0.4 million as a result of employee stock options granted during the quarter ended June 30, 2019. The increase for the three months ended June 30, 2019 is primarily due to, the previously mentioned, employee stock based compensation from the grant of the employee stock options during the quarter ended June 30, 2019.
 
The loss on derivative instruments of approximately $3.3 million and $7.9 million for the nine and three months ended, respectively, is the result of the change in fair value of the derivative liabilities during the respective periods. The gain on derivative instruments of approximately $0.2 million for the nine months ended June 30, 2018 and the de minimus loss on derivative instruments for the three months ended June 30, 2018 were the result of the change in fair value of the derivative liabilities during the respective quarters. These changes were caused mainly by fluctuation in the share price of the Company’s common stock.
 
Other non-operating gain (loss) for the nine and three months ended June 30, 2019 and 2018 is a result of shares issued to Ergomed to facilitate partial payments of amounts due to Ergomed under the SPA mentioned above. For more information regarding the SPAs refer to Note C above.
 
Net interest expense decreased by approximately $2.4 million for the nine months ended June 30, 2019 compared to the nine months ended June 30, 2018. Net interest expense decreased by approximately $1.3 million for the three months ended June 30, 2019 compared to the three months ended June 30, 2018. The prior periods included interest expense and the amortization of a discount on the notes payable that were converted by September 30, 2018.
 
 
23
 
 
Research and Development Expenses
 
The Company’s research and development efforts involve Multikine and LEAPS. The table below shows the research and development expenses associated with each project.
 
 
 
Nine months ended June 30,
 
 
 Three months ended June 30,
 
 
 
2019
 
 
2018
 
 
2019
 
 
2018
 
MULTIKINE
  $ 7,389,101  
  $ 7,210,355  
  $ 2,131,154  
  $ 2,220,634  
LEAPS
    567,102  
    503,518  
    167,401  
    204,928  
TOTAL
  $