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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2002
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 0-11503
CEL-SCI CORPORATION
Colorado 84-0916344
============ =================
State or other jurisdiction (IRS) Employer
incorporation 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 ____X_____ No __________
-
Class of Stock No. Shares Outstanding Date
- -------------- ---------------------- ----
Common 34,660,205 August 6, 2002
Page 1 of 20 pages
TABLE OF CONTENTS
PART I FINANCIAL INFORMATION
Item 1. Page
Condensed Consolidated Balance Sheets (unaudited) 3-4
Condensed Consolidated Statements of Operations (unaudited) 5-6
Condensed Consolidated Statements of Comprehensive Loss (unaudited) 7
Condensed Consolidated Statements of Cash Flow (unaudited) 8-9
Notes to Condensed Consolidated Financial Statements (unaudited) 10
Item 2.
Management's Discussion and Analysis of Financial Condition
and Results of Operations 16
Item 3.
Quantitative and Qualitative Disclosures about Market Risks 17
PART II
Item 2.
Changes in Securities and Use of Proceeds 18
Item 4.
Submission of Matters to a Vote of Security Holders 18
Item 6.
Exhibits and Reports on Form 8-K 19
Signatures 20
Item 1. FINANCIAL STATEMENTS
CEL-SCI CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
---------------
ASSETS
(unaudited)
June 30, September 30,
2002 2001
------------------------------------
CURRENT ASSETS:
Cash and cash equivalents $ 1,764,591 $ 1,783,990
Investments, net - 593,384
Interest and other receivables 57,768 40,376
Prepaid expenses 345,904 866,058
Current portion of deferred financing
costs 69,815 -
------------------------------------
Total Current Assets 2,238,078 3,283,808
RESEARCH AND OFFICE EQUIPMENT-
Less accumulated depreciation of
$1,986,374 and $1,864,182 513,126 620,608
DEPOSITS 139,828 139,828
PATENT COSTS- less accumulated
amortization of $668,937
and $623,235 465,121 464,676
------------------------------------
TOTAL ASSETS $ 3,356,153 $ 4,508,920
====================================
See notes to condensed consolidated financial statements.
CEL-SCI CORPORATION
-------------------
CONDENSED CONSOLIDATED BALANCE SHEETS
------------------------
(continued)
LIABILITIES AND STOCKHOLDERS' EQUITY
(unaudited)
June 30, September 30,
2002 2001
--------------- ----------------
CURRENT LIABILITIES:
Accounts payable $ 765,525 $ 476,509
Accrued interest on convertible notes 29,339 -
Accrued dividends 83,464 -
Current portion of note payable (See Note C) 1,046,500 -
--------------------------------
Total current liabilities 1,924,828 476,509
CONVERTIBLE NOTES (See Note C) 54,993 -
DEFERRED RENT 24,632 31,218
--------------- ----------------
Total liabilities 2,004,453 507,727
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Series E cumulative convertible redeemable
preferred stock $.01 par value, $1,000
liquidation value - authorized 6,288;
issued and outstanding, 1,942 and 5,863
shares at June 30, 2002 and September 30,
2001, respectively 19 59
Common stock, $.01 par value; authorized,
100,000,000 shares; issued and outstanding,
34,350,708 and 21,952,082 shares at June 30,
2002 and September 30, 2001, respectively 343,507 219,521
Additional paid-in capital 79,818,091 75,641,365
Unearned compensation - (19,636)
Net unrealized loss on investments - (210)
Accumulated deficit
(78,809,917) (71,839,906)
--------------- ----------------
TOTAL STOCKHOLDERS' EQUITY 1,351,700 4,001,193
----------- - ---------
$ 3,356,153 $ 4,508,920
============== ==============
See notes to condensed consolidated financial statements.
CEL-SCI CORPORATION
-------------------
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
---------------------------------
(unaudited)
Nine Months Ended
June 30,
2002 2001
--------------------------
REVENUES:
Interest income $ 68,831 $ 368,657
Other income 307,974 182,529
---------------------------
TOTAL INCOME 376,805 551,186
EXPENSES:
Research and development 3,993,047 6,491,412
Depreciation and amortization 170,317 153,906
General and administrative 1,282,948 2,128,455
---------------------------
TOTAL OPERATING EXPENSES 5,446,312 8,773,773
---------------------------
OPERATING LOSS 5,069,507 8,222,587
INTEREST EXPENSE 1,900,504 -
---------------------------
NET LOSS 6,970,011 8,222,587
ACCRUED DIVIDENDS ON PREFERRED STOCK 177,464 -
ACCRETION OF BENEFICIAL CONVERSION
FEATURE ON PREFERRED STOCK 1,262,397 -
---------------------------
NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS $8,409,872 $8,222,587
===========================
LOSS PER COMMON SHARE (BASIC) $ 0.32 $ 0.39
===========================
LOSS PER COMMON SHARE (DILUTED) $ 0.32 $ 0.39
===========================
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 26,508,757 21,274,537
===========================
See notes to condensed consolidated financial statements.
CEL-SCI CORPORATION
-------------------
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
---------------------------------
(unaudited)
Three Months Ended
June 30,
2002 2001
------------------------------
REVENUES:
Interest income $ 21,188 $ 150,426
Other income 86,323 63,064
------------------------------
TOTAL INCOME 107,511 213,490
------------------------------
EXPENSES:
Research and development 621,711 1,562,651
Depreciation and amortization 57,459 53,972
General and administrative 465,684 642,022
------------------------------
TOTAL OPERATING EXPENSES 1,144,854 2,258,645
------------------------------
OPERATING LOSS 1,037,343 2,045,155
INTEREST EXPENSE 1,074,136 -
------------------------------
NET LOSS 2,111,479 2,045,155
ACCRUED DIVIDENDS ON PREFERRED STOCK 34,025 -
ACCRETION OF BENEFICIAL CONVERSION
FEATURE ON PREFERRED STOCK 253,932 -
------------------------------
NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS $ 2,399,436 $ 2,045,155
==============================
LOSS PER COMMON SHARE (BASIC) $ 0.08 $ 0.09
==============================
LOSS PER COMMON SHARE (DILUTED) $ 0.08 $ 0.09
==============================
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 31,575,255 22,696,735
==============================
See notes to condensed consolidated financial statements.
CEL-SCI CORPORATION
-------------------
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
---------------------------------
(unaudited)
Nine Months Ended
June 30,
-------------------------------------
2002 2001
NET LOSS $ 6,970,011 $ 8,222,587
OTHER COMPREHENSIVE LOSS -
Unrealized loss on investments - 35,231
-------------------------------------
COMPREHENSIVE LOSS $ 6,970,011 $ 8,257,818
=====================================
Three Months Ended
June 30,
------------------------------------
2002 2001
NET LOSS $ 2,111,479 $ 2,045,155
OTHER COMPREHENSIVE LOSS -
Unrealized gain on investments - 61,121
-------------------------------------
COMPREHENSIVE LOSS $ 2,111,479 $ 2,106,276
=====================================
See notes to condensed consolidated financial statements.
CEL-SCI CORPORATION
-------------------
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
---------------------------------
(unaudited)
Nine Months Ended
June 30,
2002 2001
----------------------------
CASH FLOWS FROM OPERATING ACTIIVITIES:
NET LOSS $(6,970,011) $(8,222,587)
Adjustments to reconcile net loss to net cash
used in operating activities: -
Depreciation and amortization 170,317 153,906
Issuance of common stock for services 386,540 -
Stock issued to 401(k) 58,579 76,246
Stock bonus granted to officer 75,071 -
Repriced options (593,472) -
Amortization of discount on note payable 187,500 -
R&D expenses paid with note payable 859,000 -
Amortization of discount associated with
convertible notes 1,434,993 -
Amortization of deferred financing costs 247,905 -
Impairment of patents 5,816 -
Realized gain on investments (2,758) (2,764)
Increase in deposits - (45,000)
Increase in receivables (17,392) (24,540)
Decrease in prepaid expenses 531,060 1,141,535
Decrease in advances - (11,871)
Decrease in deferred rent (6,586) -
Increase in accrued interest 29,339 -
Increase (decrease) in accounts payable 259,760 (420,525)
----------------------------
NET CASH USED IN OPERATING ACTIVITIES (3,340,300) (7,355,600)
----------------------------
CASH FLOWS PROVIDED BY (USED IN) INVESTING
ACTIVITIES:
Sales of investments 593,594 3,213,714
Purchase of research and office equipment (14,710) (143,290)
Patent costs (33,439) (33,311)
----------------------------
NET CASH PROVIDED BY INVESTING ACTIVITIES 545,445 3,037,113
----------------------------
CASH FLOWS PROVIDED BY (USED IN) FINANCING
ACTIVITIES:
Cash proceeds from issuance of common stock 150,000 -
Cash proceeds from drawdown on equity line,
net of costs 1,325,692 -
Cash proceeds from exercise of warrants 13,213 1,157
Proceeds from convertible notes 1,600,000 -
Transaction costs related to convertible
notes (309,410) -
----------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 2,775,456 1,157
----------------------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (19,399) (4,317,330)
EQUIVALENTS:
Beginning of period 1,783,990 6,909,263
----------------------------
End of period $1,764,591 $2,591,933
============================
(continued)
See notes to condensed consolidated financial statements.
CEL-SCI CORPORATION
-------------------
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
---------------------------------
(unaudited)
(continued)
Nine Months Ended
June 30,
2002 2001
-----------------------------
SUPPLEMENTAL INFORMATION ON NONCASH
TRANSACTIONS
Accrual of dividends on preferred stock:
Increase in current liabilities $ 177,464 $ -
Decrease in additional paid-in capital (177,464) -
-----------------------------
$ - $ -
=============================
Common stock issued in lieu of cash dividends:
Decrease in other current liabilities $ (94,000) $ -
Increase in common stock 867
Increase in additional paid-in capital 93,133 -
-----------------------------
$ - $ -
=============================
Conversion of preferred stock into common stock:
Decrease in preferred stock $ (40) $ -
Increase in common stock 35,899 -
Decrease in additional paid-in capital (35,859) -
-----------------------------
$ - $ -
=============================
Conversion of convertible notes into common stock:
Decrease in convertible notes $(1,380,000) $ -
Increase in common stock 50,557 -
Increase in additional paid-in capital 1,329,443 -
-----------------------------
$ - $ -
=============================
Changes in unearned compensation for variable options:
Decrease in additional paid-in capital $ 19,636 $ -
Decrease in unearned compensation (19,636) -
-----------------------------
$ - $ -
=============================
Accretion for the beneficial conversion on
preferred stock
Increase in additional paid-in capital $ 1,262,397 $ -
Decrease in additional paid-in capital (1,262,397) -
-----------------------------
$ - $ -
=============================
Deferred financing costs for new convertible
notes included in accounts payable
Increase in accounts payable $ 8,310 $ -
Increase in deferred financing costs (8,310) -
-----------------------------
$ - $ -
=============================
Interest expense paid for with common stock:
Decrease in accrued interest on convertible notes$ (766) -
Increase in common stock 13 -
Increase in additional paid-in-capital 753 -
-----------------------------
$ - $ -
=============================
Patents costs included in accounts payable:
Increase in accounts payable $ 20,947 $ -
Increase in patent costs (20,947) -
-----------------------------
$ - $ -
=============================
concluded
See notes to condensed consolidated financial statements.
CEL-SCI CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED JUNE 30, 2002 AND 2001
(unaudited)
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
------------------------------------------
Basis of Presentation
The accompanying condensed consolidated financial statements of CEL-SCI
Corporation and subsidiary (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,
interim consolidated financial statements should be read in conjunction
with the consolidated financial statements and notes included in the
Company's annual report on Form 10-K for the year ended September 30,
2001.
In the opinion of management, the accompanying unaudited condensed
consolidated financial statements contain all accruals and adjustments
(each of which is of a normal recurring nature) necessary for a fair
presentation of the financial position as of June 30, 2002 and the results
of operations for the three and nine-month periods then ended. The
condensed consolidated balance sheet as of September 30, 2001 is derived
from the September 30, 2001 audited consolidated financial statements.
Significant accounting policies have been consistently applied in the
interim financial statements and the annual financial statements. The
results of operations for the three and nine-month periods ended June 30,
2002 are not necessarily indicative of the results to be expected for the
entire year.
Principles of Consolidation
The consolidated financial statements include the accounts of CEL-SCI
Corporation and its wholly owned subsidiary, Viral Technologies, Inc. All
intercompany transactions have been eliminated upon consolidation.
Investments
Investments that may be sold as part of the liquidity management of the
Company or for other factors are classified as available-for-sale and are
carried at fair market value. Unrealized gains and losses on such
securities are reported as a separate component of stockholders' equity.
Realized gains and losses on sales of securities are reported in earnings
and computed using the specific identified cost basis.
Research and Office Equipment
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 terms of the lease. Repairs and
maintenance are expensed when incurred.
CEL-SCI CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED JUNE 30, 2002 AND 2001
(unaudited)
(continued)
Research and Development Costs
Research and development expenditures are expensed as incurred. The
Company has an agreement with an unrelated corporation for the production
of MULTIKINE, which is the Company's only product source.
Research and Development Grant Revenues
The Company's grant arrangements are handled on a reimbursement basis.
Grant revenues under the arrangements are recognized as other income when
costs are incurred.
Patents
Patent expenditures are capitalized and amortized using the straight-line
method over 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 disposition,
is 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. During the nine months ended June 30, 2002, the
Company recorded patent impairment charges of $5,816 for the net book
value of patents abandoned during the period and such amount is included
in general and administrative expenses. There were no impairment charges
for the corresponding period of 2001.
Loss per Share
Net loss per common share is computed by dividing the net loss, after
increasing the loss for the effect of any accrued dividends on the
preferred stock and the accretion of the beneficial conversion feature
related to the preferred stock, by the weighted average number of common
shares outstanding during the period. Potentially dilutive common shares,
including convertible preferred stock and options to purchase common
stock, were excluded from the calculation because they are antidilutive.
Prepaid Expenses
The majority of prepaid expenses consist of bulk purchases of laboratory
supplies to be consumed in the manufacturing of the Company's product for
clinical studies.
CEL-SCI CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED JUNE 30, 2002 AND 2001
(unaudited)
(continued)
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
Reclassifications
Certain reclassifications have been made to the June 30, 2001 financial
statements to conform with the current period presentation.
New Accounting Pronouncements
In April 2002, the Financial Accounting Standards Board issued SFAS No.
145, "Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB
Statement No. 13, and Technical Corrections". SFAS No. 145 requires the
classification of gains and losses from extinguishments of debt as
extraordinary items only if they meet certain criteria for such
classification in AAPB No. 30, "Reporting the Results of Operations,
Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual, and Infrequently Occurring Events and
Transactions". Any gain or loss on extinguishments of debt classified as
an extraordinary item in prior periods that does not meet the criteria
must be reclassified to other income or expense. These provisions are
effective for fiscal years beginning after May 15, 2002. Additionally,
SFAS No. 145 requires sale-leaseback accounting for certain lease
modifications that have economic effects similar to sale-leaseback
transactions. These lease provisions are effective for transactions
occurring after May 15, 2002. SFAS No. 145 will not have a material effect
on our consolidated financial position, results of operations or cash
flows.
In July 2002, the FASB issued Statement No. 146 (SFAS No. 146),
"Accounting for Costs Associated with Exit or Disposal Activities". SFAS
No. 146 replaces Emerging Issues Task Force Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to
Exit an Activity (including Certain Costs Incurred in a Restructuring)".
SFAS No. 146 requires companies to recognize costs associated with exit or
disposal activities when they are incurred rather than at the date of a
commitment to an exit or disposal plan. Examples of costs covered by the
standard include lease termination costs and certain employee severance
costs that are associated with a restructuring, discontinued operation,
plant closing, or other exit or disposal activity. SFAS No. 146 is to be
applied prospectively to exit or disposal activities initiated after
December 31, 2002. We do not expect the adoption of SFAS No. 146 to have a
material effect on our consolidated financial position, results or
operations or cash flows.
CEL-SCI CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED JUNE 30, 2002 AND 2001
(unaudited)
(continued)
B. STOCKHOLDERS' EQUITY
During the nine months ended June 30, 2002, the Company issued 150,000
units at $1.00 to a private investor. Each unit consists of one share of
common stock and 1/2 warrant. Each warrant allows the holder to purchase
one share of common stock at $1.50 per share at any time prior to October
5, 2004. Also during the nine month period, 75,071 shares of common stock
were issued to an employee from the Company's stock bonus plan.
During August 2001, three private investors exchanged shares of the
company's common stock and remaining Series D Warrants, which they owned,
for 6,288 shares of the Company's Series E Preferred Stock. These
investors also exchanged their Series A and Series C Warrants from prior
offerings for new Series E Warrants. The preferred shares are entitled to
receive cumulative annual dividends in an amount equal to $60 per share
and have liquidation preferences equal to $1,000 per share. Each Series E
Preferred share is convertible into shares of the Company's common stock
on the basis of one Series E Preferred share for shares of common stock
equal in number to the amount determined by dividing $1,000 by the lesser
of $5 or 93% of the average closing bid prices (Conversion Price) of the
Company's common stock for the five days prior to the date of each
conversion notice. The lowest price at which the Series E Preferred stock
can be converted is $1.08. The Series E Preferred stock has no voting
rights and is redeemable at the Company's option at a price of 120% plus
accrued dividends until August 2003 when the redemption price will be
fixed at 100%. During the nine month period ended June 30, 2002, 3,922
preferred shares were converted into 3,589,900 shares of common stock at
prices ranging from $1.08 to $1.16 per share. In addition, 86,668 shares
of common stock were issued at the same price in lieu of cash for
dividends on the preferred stock. As of June 30, 2002, 1,942 shares of
Preferred stock remained outstanding.
C. FINANCING TRANSACTIONS
----------------------
In December 2001, the Company agreed to sell redeemable convertible notes
and Series F warrants, to a group of private investors for proceeds of
$1,600,000. Pursuant to the agreement, the Company incurred total
transaction costs of $276,410 of which $28,505 is included in deferred
financing costs in the accompanying balance sheet as of June 30, 2002 and
is being amortized to interest expense over a two-year period. Additional
deferred financing costs associated with converted notes are amortized to
interest expense at the time the notes are converted. The notes will bear
interest at 7% per year and will be due and payable December 31, 2003.
Interest will be payable quarterly beginning July 1, 2002. At June 30,
2002, $29,339 in interest on the notes was carried on the balance sheet as
an other current liability and was charged to interest expense. The notes
will be secured by substantially all of the Company's assets and contain
certain restrictions, including limitations on such items as indebtedness,
sales of common stock and payment of dividends. The notes will be
convertible into shares of the Company's common stock at the holder's
option determinable by dividing each $1,000 of note principal by 76% of
the average of the three lowest daily trading prices of the Company's
common stock on the American Stock Exchange during the twenty trading days
immediately prior to the closing date. In addition, the notes are required
to be redeemed by the Company at 130% upon certain occurrences. Proceeds
of $800,000 were received on December 31, 2001 and the second half of the
proceeds was received in January 2002. The Series F warrants initially
allowed the holders to purchase up to 960,000 shares of the Company's
common stock at a price of $0.95 per share at any time prior to December
31, 2008. In accordance with the
CEL-SCI CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED JUNE 30, 2002 AND 2001
(unaudited)
(continued)
terms of the warrants, the exercise price was adjusted to $0.65 per share
on January 17, 2002. On April 17, 2002, the price was adjusted to $0.24.
In April, 34,500 warrants were exercised at $0.24. On July 17, 2002, the
price was adjusted to $.0.19. The warrant exercise price will be adjusted
every three months to an amount equal to 110% of the conversion price on
such date, provided that the adjusted price is lower than the warrant
exercise price on that date.
The entire balance of the convertible notes was initially offset by a
discount of $1,600,000 which represents the relative fair value of the
Series F warrants of $763,000 and a beneficial conversion discount of
$837,000. The discount on outstanding convertible notes will be amortized
to interest expense over a two-year period. Any unamortized discount
associated with the convertible notes is fully amortized to interest
expense upon redemption. As of June 30, 2002, $1,380,000 of the notes had
been converted into 5,055,693 shares of common stock. Also as of June 30,
2002, $1,434,993 of the discount had been amortized to interest expense.
On November 15, 2001, the Company signed an agreement with Cambrex
Bioscience, Inc. ("Cambrex") in which Cambrex provided manufacturing space
and support to the Company during November and December 2001 and January
2002. In exchange, the Company has signed a note with Cambrex to pay a
total of $1,159,000 to Cambrex. As shown in the condensed consolidated
balance sheet, this liability is recorded at June 30, 2002 along with an
unamortized discount of $112,500 representing imputed interest. The note
was payable on November 15, 2002. In December 2001, the note was amended
to extend the due date to January 2, 2003. Unpaid principal will begin
accruing interest on November 16, 2002 and carries an interest rate of the
Prime Rate plus 3%. The note is collateralized by certain laboratory
equipment.
In April 2001, the Company signed an equity line of credit agreement with
Paul Revere Capital with up to $10,000,000 of funding prior to June 22,
2003. During this twenty-four month period, the Company may request a
drawdown under the equity line of credit by selling shares of its common
stock to Paul Revere Capital Partners and they will be obligated to
purchase the shares. The Company may request a drawdown once every 22
trading days, although the Company is under no obligation to request any
drawdowns under the equity line of credit. If CEL-SCI maintains a balance
of less than $1,000,000 in its bank account in any month, it may draw down
the maximum amount allowable for such month under its equity line of
credit. If CEL-SCI maintains a balance greater than $1,000,000 in its bank
account in any month, it may only draw down a maximum of $235,000 per
month. During the nine month period ended June 30, 2002, 2,381,993 shares
of common stock were sold to Paul Revere Capital Partners for a total of
$1,325,692, net of financing costs of $2,212.
CEL-SCI CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED JUNE 30, 2002 AND 2001
(unaudited)
(continued)
D. SUBSEQUENT EVENT
----------------
In July 2002, CEL-SCI sold convertible notes, plus Series G warrants, to a
group of private investors for proceeds of $500,000, less financing costs
of $90,310. The notes bear interest at 7% per year, are due and payable on
July 12, 2004 and are secured by substantially all of CEL-SCI's assets.
Interest is payable quarterly with the first interest payment due on
October 1, 2002. If CEL-SCI fails to make any interest payment when due,
the notes will become immediately due and payable. At the holder's option
the notes are convertible into shares of CEL-SCI's common stock equal in
number to the amount determined by dividing each $1,000 of note principal
to be converted by the Conversion Price. The Conversion price is 76% of
the average of the three lowest daily trading prices of CEL-SCI's common
stock on the American Stock Exchange during the 15 trading days
immediately prior to the conversion date. If CEL-SCI sells any additional
shares of common stock, or any securities convertible into common stock at
a price below the then applicable Conversion Price or the market price of
its common stock, the Conversion price may be subject to adjustment. The
conversion price may not be less than $0.18. However, if CEL-SCI's common
stock trades for less than $0.18 per share for a period of 20 consecutive
trading days, the $0.18 minimum price will no longer be applicable.
CEL-SCI has filed a registration statement with the Securities and
Exchange Commission in order that the shares of common stock issued upon
the conversion of the notes or the exercise of the Series G warrants may
be resold in the public market. Upon the effective date of this
registration statement, the holders of the notes have agreed to purchase
an additional $800,000 of convertible notes from CEL-SCI. The additional
$800,000 of convertible notes will have the same terms as the notes sold
in July 2002.
The Series G warrants allow the holders to purchase up to 900,000 shares
of CEL-SCI's common stock at a price of $0.25 per share at any time prior
to July 12, 2009. If CEL-SCI sells any additional shares of common stock,
or any securities convertible into common stock, at a price below the then
applicable warrant exercise price or the market price of CEL-SCI's common
stock, the warrant exercise price and the number of shares of common stock
issuable upon the exercise of the warrant may be subject to adjustment.
In connection with the agreement, officers and directors of CEL-SCI may
not sell any shares of common stock until October 18, 2002; provided,
however, that such shares of common stock are registered pursuant to an
effective registration statement under the Securities Act of 1933, as
amended or can be sold pursuant to Rule 144 promulgated under the Act.
CEL-SCI CORPORATION
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Liquidity and Capital Resources
The Company has had only limited revenues from operations since its inception in
March 1983. The Company has relied upon proceeds realized from the public and
private sale of its Common Stock and convertible notes as well as short-term
borrowings to meet its funding requirements. Funds raised by the Company have
been expended primarily in connection with the acquisition of exclusive rights
to certain patented and unpatented proprietary technology and know-how relating
to the human immunological defense system, the funding of Viral Technologies,
Inc.'s (VTI) research and development program, patent applications, the
repayment of debt, the continuation of Company-sponsored research and
development and administrative costs, and the construction of laboratory
facilities. Inasmuch as the Company does not anticipate realizing significant
revenues until such time as it enters into licensing arrangements regarding its
technology and know-how or until such time it receives permission to sell its
product (which could take a number of years), the Company is mostly dependent
upon short-term borrowings and the proceeds from the sale of its securities to
meet all of its liquidity and capital resource requirements.
In June 2000, the Company entered into an agreement with Cambrex Bioscience,
Inc. ("Cambrex") whereby Cambrex agreed to provide the Company with a facility
which will allow the Company to manufacture Multikine in accordance with the
Good Manufacturing Practices regulations of the FDA. Company personnel will
staff this facility. The Company has the right to extend the term of its
agreement with Cambrex until December 31, 2006. In November 2001, the Company
gave a promissory note to Cambrex. The promissory note is in the principal
amount of $1,159,000 and represents the cost of the Company's use of the Cambrex
manufacturing facility for November and December 2001 and through January 10,
2002. As shown in the condensed consolidated balance sheet, $1,159,000 of this
liability is recorded at June 30, 2002, along with an unamortized discount of
$112,500 representing imputed interest. The Company's need for MULTIKINE was
completed by January 10, 2002 and as a result the Company will not incur the
expense associated with the use of the Cambrex facility after that date. The
amount borrowed from Cambrex is due and payable on January 2, 2003. The Company
will evaluate its ability to pay off the note in January, 2003 from existing
capital resources and/or future financings and corporate partnerships. If the
Company should not be able to pay off the note, it will seek to have the note
extended. Beginning November 16, 2002, the note will bear interest at the prime
interest rate plus 3%, is adjusted monthly, and is secured by the equipment used
by the Company to manufacture MULTIKINE.
In April, 2001, the Company signed an equity line of credit agreement that
allows the Company at its discretion to draw up to $10 million of funding prior
to June 22, 2003. During this period, the Company may request a drawdown under
the equity line of credit by selling shares of its common stock to Paul Revere
Capital Partners and Paul Revere Capital Partners will be obligated to purchase
the shares. The Company may request a drawdown once every 22 trading days,
although the Company is under no obligation to request drawdowns under the
equity line of credit. During the 22 trading days following a drawdown request,
the Company will calculate the number of shares it will sell to Paul Revere
Capital Partners and the purchase price per share. The purchase price per share
of common stock will be based on the daily volume weighted average price of the
Company's common stock during each of the 22 trading days immediately following
the drawdown date, less a discount of 11%.
In December 2001 and January 2002, the Company sold convertible notes, plus
Series F warrants, to a group of private investors for $1,600,000. The notes
bear interest at 7% per year, are due and payable on December 31, 2003 and are
secured by substantially all of the Company's assets. Interest is payable
quarterly except that the first interest payment is not due until July 1, 2002.
If the Company fails to make any interest payment when due, the notes will
become immediately due and payable.
At the holder's option the notes are convertible into shares of the Company's
common stock equal in number to the amount determined by dividing each $1,000 of
note principal to be converted by the Conversion Price. The Conversion Price is
76% of the average of the three lowest daily trading prices of the Company's
common stock on the American Stock Exchange during the 20 trading days
immediately prior to the conversion date. The Conversion Price may not be less
than $0.57. However, if the Company's common stock trades for less than $0.57
per share for a period of 20 consecutive trading days, the $0.57 minimum price
will no longer be applicable.
The Series F warrants initially allowed the holders to purchase up to 960,000
shares of the Company's common stock at a price of $0.95 per share at any time
prior to December 31, 2008. On January 17, 2002, the warrant exercise price, in
accordance with the terms of the warrants, was adjusted to $0.65 per share.
Every three months after January 17, 2002, the warrant exercise price will be
adjusted to an amount equal to 110% of the Conversion Price on such date,
provided that the adjusted price is lower than the warrant exercise price on
that date. As of June 30, 2002, the warrant exercise price is $0.24.
Results of Operations
Interest income during the nine months ending June 30, 2002 was less than it was
during the same period in 2001 as a result of the Company's smaller cash
position and lower interest rates on interest bearing accounts. Other income was
higher due to the receipt of grant money. Research and development expenses were
lower because of the conclusion of the manufacturing validation work at Cambrex
(see above). General and administrative expenses were lower because of the
Company's cost savings plan and the complete reversal of a 2001 fourth quarter
charge of $593,472 for variable options. The interest expense of $1,900,504 is a
noncash item incurred to account for the issuance of the convertible debt and
the Cambrex note.
Interest income during the three months ending June 30, 2002 was less than it
was during the same quarter in 2001 as a result of the Company's smaller cash
position and lower rates on interest bearing accounts. Other income was higher
due to the receipt of grant money. Research and development expenses were
significantly lower because of the conclusion of the manufacturing validation
work at Cambrex (see above). General and administrative expenses were
significantly lower because of the Company's cost savings plan. The interest
expense of $1,074,136 is a noncash item incurred to account for the issuance of
the convertible debt and the Cambrex note.
New Accounting Pronouncements
In April 2002, the Financial Accounting Standards Board issued SFAS No. 145,
"Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No.
13, and Technical Corrections". SFAS No. 145 requires the classification of
gains and losses from extinguishments of debt as extraordinary items only if
they meet certain criteria for such classification in AAPB No. 30, "Reporting
the Results of Operations, Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual, and Infrequently Occurring Events and
Transactions". Any gain or loss on extinguishments of debt classified as an
extraordinary item in prior periods that does not meet the criteria must be
reclassified to other income or expense. These provisions are effective for
fiscal years beginning after May 15, 2002. Additionally, SFAS No. 145 requires
sale-leaseback accounting for certain lease modifications that have economic
effects similar to sale-leaseback transactions. These lease provisions are
effective for transactions occurring after May 15, 2002. SFAS No. 145 will not
have a material effect on our consolidated financial position, results of
operations or cash flows.
In July 2002, the FASB issued Statement No. 146 (SFAS No. 146), "Accounting for
Costs Associated with Exit or Disposal Activities". SFAS No. 146 replaces
Emerging Issues Task Force Issue No. 94-3, "Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an Activity (including
Certain Costs Incurred in a Restructuring)". SFAS No. 146 requires companies to
recognize costs associated with exit or disposal activities when they are
incurred rather than at the date of a commitment to an exit or disposal plan.
Examples of costs covered by the standard include lease termination costs and
certain employee severance costs that are associated with a restructuring,
discontinued operation, plant closing, or other exit or disposal activity. SFAS
No. 146 is to be applied prospectively to exit or disposal activities initiated
after December 31, 2002. We do not expect the adoption of SFAS No. 146 to have a
material effect on our consolidated financial position, results or operations or
cash flows.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
The Company's cash flow and earnings are subject to fluctuations due to changes
in interest rates in its investment portfolio of debt securities, to the fair
value of equity instruments held, and, to an immaterial extent, to foreign
currency exchange rates. The Company maintains an investment portfolio of
various issuers, types and maturities. These securities are generally classified
as available-for-sale and, consequently, are recorded on the balance sheet at
fair value with unrealized gains or losses reported as a separate component of
stockholders' equity. Other-than-temporary losses are recorded against earnings
in the same period the loss was deemed to have occurred. The Company does not
currently hedge this exposure and there can be no assurance that
other-than-temporary losses will not have a material adverse impact on the
Company's results of operations in the future.
PART II
Item 2. Changes in Securities and Use of Proceeds
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 6.
(a) Exhibits
No exhibits are filed with this report.
(b) Reports on Form 8-K
The Company filed no reports on Form 8-K during the quarter ended
June 30, 2002.
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of CEL-SCI Corporation (the
"Company") on Form 10-Q for the period ending June 30, 2002 as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), I, Geert
Kersten, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002, that to the best of my knowledge:
(1) The Report fully complies with the requirements of section 13(a) or 15(d)
of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material
respects, the financial condition and results of the Company.
Date: August 14, 2002 /s/ Geert Kersten
____________________________
Geert Kersten
Chief Executive Officer*
*Also signing in the capacity of the Chief Financial Officer.