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 December 31, 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
of 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 47,498,271 February 5, 2003
Page 1 of 24 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
Condensed Consolidated Statements of Comprehensive Loss (unaudited) 6
Condensed Consolidated Statements of Cash Flow (unaudited) 7-9
Notes to Condensed Consolidated Financial Statements (unaudited) 10
Item 2.
Management's Discussion and Analysis of Financial Condition 17
and Results of Operations
Item 3.
Quantitative and Qualitative Disclosures about Market Risks 20
Item 4.
Controls and Procedures 20
PART II
Item 2.
Changes in Securities and Use of Proceeds 21
Item 4.
Submission of Matters to a Vote of Security Holders 21
Item 6.
Exhibits and Reports on Form 8-K 21
Signatures 22
Certifications 23-24
Item 1. FINANCIAL STATEMENTS
CEL-SCI CORPORATION
-------------------
CONDENSED CONSOLIDATED BALANCE SHEETS
------------------------
ASSETS
(unaudited)
December 31, September 30,
2002 2002
----------------------------------
CURRENT ASSETS:
Cash and cash equivalents $ 1,668,097 $ 2,079,276
Interest and other receivables 12,773 31,477
Prepaid expenses 397,799 452,123
Deferred financing costs 95,185 176,995
------------------------------
Total Current Assets 2,173,854 2,739,871
RESEARCH AND OFFICE EQUIPMENT-
Less accumulated depreciation
of $1,946,063 and $2,027,225 367,932 473,555
DEPOSITS 14,828 139,828
PATENT COSTS- less accumulated
amortization of
$657,730 and $641,711 433,960 418,004
-------------------------------
TOTAL ASSETS $ 2,990,574 $ 3,771,258
==============================
See notes to condensed consolidated financial statements.
CEL-SCI CORPORATION
-------------------
CONDENSED CONSOLIDATED BALANCE SHEETS
------------------------
(continued)
LIABILITIES AND STOCKHOLDERS' EQUITY
(unaudited)
December 31, September 30,
2002 2002
-------------------------------
CURRENT LIABILITIES:
Accounts payable $ 795,245 $ 735,646
Accrued expenses 101,515 148,812
Due to officer/shareholder and employees 109,200 29,592
Short-term loan 25,000 -
Note payable - Cambrex - 1,135,017
----------------------------
Total current liabilities 1,030,960 2,049,067
CONVERTIBLE NOTE PAYABLE - CAMBREX 947,517 -
OTHER CONVERTIBLE NOTES, NET 130,097 639,288
DEFERRED RENT 16,504 20,732
------------------------------
Total liabilities 2,125,078 2,709,087
STOCKHOLDERS' EQUITY
Series E cumulative convertible redeemable
preferred stock $.01 par value, $1,000
liquidation value - authorized 6,288;
issued and outstanding, 67 and 1,192
shares at December 31, 2002 and
September 30, 2002, respectively 1 12
Common stock, $.01 par value; authorized,
100,000,000 shares; issued and outstanding
46,741,331 and 37,255,142 shares at
December 31, 2002 and September 30, 2002,
respectively 467,413 372,551
Additional paid-in capital 82,263,097 80,871,758
Accumulated deficit (81,865,015) (80,182,150)
------------------------------
Total stockholders' equity 865,496 1,062,171
------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $2,990,574 $ 3,771,258
=============================
See notes to condensed consolidated financial statements.
CEL-SCI CORPORATION
-------------------
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
---------------------------------
(unaudited)
Three Months Ended
December 31,
2002 2001
REVENUES:
Grant revenue and other $ 52,955 $ 150,907
----------- ----------
EXPENSES:
Research and development 511,307 2,438,216
Depreciation and amortization 47,426 56,526
General and administrative 698,456 564,622
--------- ---------
Total Operating Expenses 1,257,189 3,059,364
--------- ---------
NET OPERATING LOSS 1,204,234 2,908,457
INTEREST INCOME 17,307 25,337
INTEREST EXPENSE 495,938 37,500
--------- ---------
NET LOSS 1,682,865 2,920,620
ACCRUED DIVIDENDS ON PREFERRED STOCK 1,917 81,416
ACCRETION OF BENEFICIAL CONVERSION FEATURE
ON PREFERRED STOCK 61,253 579,695
--------- ---------
NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS $ 1,746,035 $ 3,581,731
=========== ===========
NET LOSS PER COMMON SHARE (BASIC) $ 0.04 $ 0.16
=========== ===========
NET LOSS PER COMMON SHARE (DILUTED) $ 0.04 $ 0.16
=========== ===========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 42,030,495 22,799,002
========== ==========
See notes to condensed consolidated financial statements.
CEL-SCI CORPORATION
-------------------
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
---------------------------------
(unaudited)
Three Months Ended December 31,
2002 2001
NET LOSS $ 1,682,865 $ 2,920,620
OTHER COMPREHENSIVE LOSS -
Unrealized loss on investments - -
------------ ------------
COMPREHENSIVE LOSS $ 1,682,865 $ 2,920,620
============= ============
See notes to condensed consolidated financial statements.
CEL-SCI CORPORATION
-------------------
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
---------------------------------
(unaudited)
Three Months Ended December 31,
2002 2001
CASH FLOWS FROM OPERATING ACTIVITIES:
NET LOSS $ (1,682,865) $ (2,920,620)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 47,426 56,526
Issuance of common stock for services 267,182 105,877
Common stock contributed to 401(k) plan 11,217 22,431
Stock bonus granted to officer - 75,071
Repriced options - (206,568)
Amortization of discount on note payable 37,500 37,500
R&D expenses paid with note payable - 700,000
Issuance of stock options for services - 24,513
Amortization of discount associated with
convertible notes 320,810 -
Amortization of deferred financing costs 118,809 -
Gain on sale of equipment (26,463) -
Impairment loss on abandonment of patents - 5,816
Realized loss on investments - 2,710
Decrease in receivables 18,704 14,458
Decrease in prepaid expenses 54,324 502,950
Decrease in deferred rent (4,228) (1,400)
Increase in accrued expenses 19,964 74,500
Increase in amount due to officer/shareholder
& employees 79,609 -
Increase in accounts payable 34,925 480,535
-------- ------------
NET CASH USED IN OPERATING ACTIVITIES (703,086) (1,025,701)
--------- -----------
CASH FLOWS (USED IN) PROVIDED BY INVESTING ACTIVITIES:
Sales of investments - 590,885
Purchase of research and office equipment - (1,218)
Patent costs (10,679) (6,779)
-------- -------
NET CASH PROVIDED BY INVESTING ACTIVITIES (10,679) 582,888
-------- -------
CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES:
Cash proceeds from issuance of common stock - 150,000
Cash proceeds from drawdown on equity line 287,636 298,895
Cash proceeds from exercise of warrants 22,950 -
Short-term loan 25,000 -
Proceeds from convertible notes - 800,000
Transaction costs related to convertible notes (33,000) (114,500)
-------- ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES 302,586 1,134,395
-------- ---------
NET (DECREASE) INCREASE IN CASH AND CASH
EQUIVALENTS (411,179) 691,582
CASH AND CASH EQUIVALENTS:
Beginning of period 2,079,276 1,783,990
--------- ---------
End of period $ 1,668,097 $ 2,475,572
============= ============
(continued)
See notes to condensed consolidated financial statements.
CEL-SCI CORPORATION
-------------------
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
---------------------------------
(unaudited)
(continued)
Three Months Ended December 31,
2002 2001
SUPPLEMENTAL INFORMATION ON NONCASH TRANSACTIONS
Accrual of dividends on preferred stock:
Increase in accrued expenses $ 1,917 $ 81,416
Decrease in additional paid-in capital (1,917) (81,416)
---------- -----------
$ - $ -
========== ==========
Common stock issued in lieu of cash dividends:
Decrease in accrued expenses $ (53,692) $ (13,336)
Increase in common stock 496 $ 1,222
Increase in additional paid-in capital 53,196 12,114
----------- ---------
$ - $ -
=========== ==========
Conversion of preferred stock into common stock:
Decrease in preferred stock $ (11) $ (10)
Increase in common stock 9,206 9,275
Decrease in additional paid-in capital (9,195) (9,265)
--------- ----------
$ - $ -
============ ===========
Conversion of convertible notes into common stock:
Decrease in convertible notes $ (830,000) $ -
Increase in common stock 55,528 -
Increase in additional paid-in capital 774,472 -
---------- -----------
$ - $ -
=========== ===========
Changes in unearned compensation for variable options:
Decrease in additional paid-in capital $ - $ 4,848
Decrease in unearned compensation - (4,848)
---------- ------------
$ - $ -
=========== ===========
Accretion for the beneficial conversion on preferred stock:
Increase in additional paid-in capital $ 61,253 $ 579,695
Decrease in additional paid-in capital (61,253) (579,695)
---------- ------------
$ - $ -
=========== ===========
Surrender of deposit and sale of equipment
to reduce note payable - Cambrex:
Decrease in deposits $ 125,000 -
Decrease in equipment, net 73,537 -
Decrease in note payable - Cambrex (198,537) -
----------- ---------
$ - $ -
=========== =========
Deferred financing costs for new convertible notes included in
accounts payable:
Increase in accounts payable $ - 71,110
Increase in deferred financing costs - (71,110)
---------- ---------
$ - -
=========== =========
Interest expense paid for with common stock:
Decrease in accrued expenses $ (9,430) -
Increase in common stock 573 -
Increase in additional paid-in capital 8,857 -
--------- -------
$ - $ -
========== =========
continued
CEL-SCI CORPORATION
-------------------
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
---------------------------------
(unaudited)
(continued)
Three Months Ended December 31,
2002 2001
Purchase of research and office equipment
included in accounts payable:
Increase in accounts payable $ - $ 11,437
Increase in research and office equipment - (11,437)
-------- ----------
$ - $ -
========= ==========
Deferred financing costs included in accounts payable:
Increase in accounts payable $ 4,000 $ -
Increase in deferred financing costs (4,000) -
---------- ---------
$ - $ -
========= ==========
Patent costs included in accounts payable:
Increase in accounts payable $ 20,619 $ 6,484
Increase in patent costs (20,619) (6,484)
---------- -----------
$ - $ -
========= ==========
concluded
See notes to condensed consolidated financial statements.
CEL-SCI CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED DECEMBER 31, 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, 2002.
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 December 31, 2002 and the results of operations for the
three-month period then ended. The condensed consolidated balance sheet as of
September 30, 2002 is derived from the September 30, 2002 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-month period ended December 31, 2002 are
not necessarily indicative of the results to be expected for the entire year.
Significant accounting policies are as follows:
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.
Reclassifications--Certain reclassifications have been made to the December 31,
2001 financial statements to conform with the current period presentation.
Cash and Cash Equivalents--For purposes of the statements of cash flows, cash
and cash equivalents consists principally of unrestricted cash on deposit and
short-term money market funds. The Company considers all highly liquid
investments with a maturity when purchased of less than three months to be cash
equivalents.
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.
CEL-SCI CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED DECEMBER 31, 2002 AND 2001
(unaudited)
(continued)
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.
Deferred Financing Costs--Deferred financing costs are capitalized and expensed
over the period the notes are outstanding or on a pro-rata basis as the notes
are converted.
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.
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 three
months ended December 31, 2001, 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 fiscal year 2002.
Convertible Notes--The Company initially offsets a portion of the convertible
notes issued with a discount representing the relative fair value of the
warrants and a beneficial conversion feature. This discount is amortized to
interest expense over the period the notes are outstanding. The fair value of
the warrants and the beneficial conversion discount are calculated based on
available market data using appropriate valuation models. These valuations
require that the Company make assumptions and estimates regarding the
convertible notes and warrants. Management uses its judgment, as well as outside
sources, to determine these assumptions and estimates.
Research and Development Grant Revenues--The Company's grant arrangements are
handled on a reimbursement basis. Grant revenues under the arrangements are
recognized as grant revenue when costs are incurred.
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.
Net Loss per Common 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.
CEL-SCI CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED DECEMBER 31, 2002 AND 2001
(unaudited)
(continued)
Stock Options--In October 1996, the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standards No. 123, Accounting for
Stock-Based Compensation (SFAS No. 123). This statement encourages but does not
require companies to account for employee stock compensation awards based on
their estimated fair value at the grant date with the resulting cost charged to
operations. The Company has elected to continue to account for its employee
stock-based compensation using the intrinsic value method prescribed in
Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees, and related Interpretations. Options to non-employees are accounted
for in accordance with FASB's Emerging Issues Task Force (EITF) Issue 96-18
Accounting for Equity Instruments That Are Issued to Other Than Employees for
Acquiring, or in Conjunction with Selling, Goods or Services. Accordingly,
compensation is recognized when goods or services are received and is measured
using the Black-Scholes valuation model. The Black-Scholes model requires
management to make assumptions regarding the fair value of the options at the
date of grant and the expected life of the options.
Asset Valuations and Review for Potential Impairments--The Company reviews its
fixed assets every fiscal quarter. This review requires that the Company make
assumptions regarding the value of these assets and the changes in circumstances
that would affect the carrying value of these assets. If such analysis indicates
that a possible impairment may exist, the Company is then required to estimate
the fair value of the asset and, as deemed appropriate, expense all or a portion
of the asset. The determination of fair value includes numerous uncertainties,
such as the impact of competition on future value. The Company believes that it
has made reasonable estimates and judgments in determining whether our
long-lived assets have been impaired; however, if there is a material change in
the assumptions used in our determination of fair values or if there is a
material change in economic conditions or circumstances influencing fair value,
the Company could be required to recognize certain impairment charges in the
future.
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.
New Accounting Pronouncements--In December 2002, the FASB issued SFAS No. 148,
"Accounting for Stock-Based Compensation - Transition and Disclosure" which
amends Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation". SFAS 148 provides alternative methods of transition
for a voluntary change to the fair value based method of accounting for
stock-based employee compensation and requires more prominent and more frequent
disclosures in the financial statements of the effects of stock-based
compensation. The provisions of SFAS 148 are effective for fiscal years ending
after December 15, 2002 and the interim disclosure provisions are effective for
interim periods beginning after December 15, 2002. The Company will provide the
required interim and annual disclosures beginning in the quarter ended March 31,
2003.
CEL-CI CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED DECEMBER 31, 2002 AND 2001
(unaudited)
(continued)
B. STOCKHOLDERS' EQUITY
During the three months ended December 31, 2001, 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 three-month period, 75,071 shares of common stock were issued to an
employee from the Company's stock bonus plan.
In addition, during the same periods in fiscal years 2002 and 2001, the Company
issued stock for services to both employees and outsiders with a fair value of
$267,182 and $105,877, respectively.
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 of the Company's
common stock for the 5 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 quarter ended
December 31, 2002, 1,125 shares of preferred stock were converted into 920,601
shares of common stock. In addition, dividends were converted into an additional
49,558 shares of common stock. There were 67 shares of preferred stock remaining
at December 31, 2002. During the quarter ended December 31, 2001, 1,016
preferred shares were converted into 927,501 shares of common stock. In
addition, dividends were converted into an additional 12,215 shares of common
stock.
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,
less transaction costs of $276,410. All of the deferred financing costs have
been expensed to interest expense at December 31, 2002. The notes bore interest
at 7% per year and were due and payable December 31, 2003. The notes were
secured by substantially all of the Company's assets and contained certain
restrictions, including limitations on such items as indebtedness, sales of
common stock and payment of dividends. The notes were 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
CEL-SCI CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED DECEMBER 31, 2002 AND 2001
(unaudited)
(continued)
the twenty trading days immediately prior to the closing date. In addition, the
notes were required to be redeemed by the Company at 130% upon certain
occurrences. As of November 30, 2002, all of the notes were converted into
6,592,461 shares of common stock. The Series F warrants allow the holders to
purchase up to 960,000 shares of the Company's common stock at a price equal to
110% of the closing price per share at any time prior to the date which is seven
years after the closing of the transaction. The warrant price is adjustable if
the Company sells any additional shares of its common stock or convertible
securities for less than fair market value or at an amount lower than the
exercise price of the Series F warrants. The warrant price is 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 warrant price is currently $0.153. During the three-month period
ending December 31, 2002, 150,000 warrants were exercised for proceeds of
$22,950. As of December 31, 2002, 705,500 warrants remain outstanding.
In July and September 2002, the Company sold convertible notes, plus Series G
warrants, to a group of private investors for $1,300,000 less transaction costs
of $177,370, of which $95,185 is included in deferred financing costs in the
accompanying balance sheet as of December 31, 2002. The notes bear interest at
7% per year and will be due and payable September 9, 2004. Interest is payable
quarterly beginning October 1, 2002. The notes are 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.
At the holders 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 15 trading days
immediately prior to the conversion date. If the Company sells any additional
shares of common stock, or any securities convertible into common stock at a
price below the then applicable conversion price, the conversion price will be
lowered to the price at which the shares were sold or the lowest price at which
the securities are convertible. As of December 31, 2002, $740,000 of the notes
had been converted into 4,850,896 shares of common stock. In addition, $177,463
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 signed a note with Cambrex to pay a total of $1,172,517 to Cambrex.
Pursuant to an amendment to the agreement in December 2002, the remaining
balance at December 31, 2002 is $947,517. Payment of $225,000 was made in
December 2002 by the sale of certain equipment with a net book value of $73,537
to Cambrex and the surrender of a security deposit held by Cambrex. The gain on
the sale of the equipment of $26,463 is included in Grant revenue and other on
CEL-SCI CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED DECEMBER 31, 2002 AND 2001
(unaudited)
(continued)
the income statement during the quarter ended December 31, 2002. Unpaid
principal began accruing interest on November 16, 2002 and carries an interest
rate of the Prime Rate plus 3%. This amendment extended the maturity date to
January 2, 2004. Prior to this amendment, the note was due January 2, 2003. In
addition, the agreement requires the Company to pay $150,000 on the note from
its next financing agreement and 10% of all other future financing transactions,
including draws on the equity line-of-credit. There are also conversion features
allowing Cambrex to convert either all or part of the note into shares of the
Company's common stock. The stock can be converted at a price no lower than
$0.22 per share.
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 three-month period ending December 31, 2002, the Company sold
1,455,280 shares of common stock to Paul Revere Capital for net proceeds of
$287,636. During the three-month period ending December 31, 2001, the Company
sold 277,684 shares of common stock for proceeds of $298,895 to Paul Revere
Capital.
D. SUBSEQUENT EVENT
In January 2003, CEL-SCI entered into an agreement to sell convertible notes,
plus Series H warrants, to a group of private investors for proceeds of
$1,350,000 less transaction costs. In January 2003, the Company received
proceeds of $600,000, less transaction costs of $53,260. In November, the
Company received a $25,000 advance from one of the investors, which was paid
back from the initial proceeds. The notes bear interest at 7% per year, are due
and payable on January 7, 2005 and are secured by substantially all of CEL-SCI's
assets. Interest is payable quarterly with the first interest payment due on
April 1, 2003. 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 $0.16. However, if CEL-SCI's common
stock trades for less than $0.21 per share for a period of 20 consecutive
trading days, the $0.16 minimum price will no longer be applicable.
CEL-SCI CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED DECEMBER 31, 2002 AND 2001
(unaudited)
(continued)
The Series H warrants allow the holders to purchase up to 1,100,000 shares of
CEL-SCI's common stock at a price of $0.25 per share at any time prior to
January 7, 2010. 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 25 days after a registration statement has been
declared effective; 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 has filed a registration statement with the Securities and Exchange
Commission in order to register the shares of common stock to be issued to the
Series H holders upon the conversion of the Series H notes or the exercise of
the Series H warrants. The remaining proceeds of $750,000 are expected to be
received upon the effective date of the registration statement.
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 was in the principal
amount of $1,172,517 and represented the cost of the Company's use of the
Cambrex manufacturing facility for November and December 2001 and through
January 10, 2002. Pursuant to an amendment to the agreement in December 2002,
the remaining balance at December 31, 2002 is $947,517. This amendment extended
the maturity date to January 2, 2004. Prior to this amendment, the note was due
January 2, 2003. Payment of $225,000 was made in December 2002 by the sale of
certain equipment to Cambrex and the surrender of a security deposit held by
Cambrex. Unpaid principal will begin accruing interest on November 16, 2002 and
carries an interest rate of the Prime Rate plus 3%. Accrued interest at December
31, 2002 totals $8,587. In addition, the agreement requires the Company to pay
$150,000 on the note from its next financing agreement and 10% of all other
future financing transactions, including draws on the equity line-of-credit.
There are also conversion features allowing Cambrex to convert either all or
part of the note into shares of the Company's common stock. The stock can be
converted at a price no lower than $0.22 per share.
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 was 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 December 31, 2002, the warrant exercise price is $0.153.
In July and September 2002, the Company sold convertible notes, plus Series G
warrants, to a group of private investors for $1,300,000 less transaction costs
of $177,370, of which $95,185 is included in deferred financing costs in the
accompanying balance sheet as of December 31, 2002. The notes bear interest at
7% per year and will be due and payable September 9, 2004. Interest is payable
quarterly beginning October 1, 2002. The notes are 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.
At the holders 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 15 trading days
immediately prior to the conversion date. If the Company sells any additional
shares of common stock, or any securities convertible into common stock at a
price below the then applicable conversion price, the conversion price will be
lowered to the price at which the shares were sold or the lowest price at which
the securities are convertible. As of December 31, 2002, $740,000 of the notes
had been converted into 4,850,896 shares of common stock. In addition, $177,463
of the discount had been amortized to interest expense.
Results of Operations
Grant revenues and other was lower during the three months ending December 31,
2002 due to the winding down of the project for which the Company receives grant
money. Research and development expenses declined because the Company completed
its current production of MULTIKINE(TM) during the first quarter. This supply
will be used in future clinical trials. General and administrative expenses were
higher because during the three months ended December 31, 2001, there was a
reversal of a portion ($206,568) of a 2001 fiscal year charge of $593,472
resulting from a decline in the intrinsic value of the options repriced to
employees. Interest income during the three months ending December 31, 2002 was
less than it was during the same period in fiscal year 2001 as a result of the
Company's smaller cash position and lower interest rates on interest bearing
accounts. The interest expense of $495,938 is primarily a noncash item incurred
to account for amortization of the discount and deferred financing costs related
to the issuance of the convertible notes and the note payable to Cambrex.
New Accounting Pronouncements
In December 2002, the FASB issued Statement No. 148 (SFAS No. 148), "Accounting
for Stock-Based Compensation - Transition and Disclosure" which amends Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation". SFAS 148 provides alternative methods of transition for a
voluntary change to the fair value based method of accounting for stock-based
employee compensation and requires more prominent and more frequent disclosures
in the financial statements of the effects of stock-based compensation. The
provisions of SFAS 148 are effective for fiscal years ending after December 15,
2002 and the interim disclosure provisions are effective for interim periods
beginning after December 15, 2002. The Company will provide the required interim
and annual disclosures beginning in the quarter ended March 31, 2003.
Critical Accounting Policies
The Company's significant accounting policies are more fully described in Note A
to the financial statements. However certain accounting policies are
particularly important to the portrayal of financial position and results of
operations and require the application of significant judgments by management.
As a result, the condensed consolidated financial statements are subject to an
inherent degree of uncertainty. In applying those policies, management uses its
judgment to determine the appropriate assumptions to be used in the
determination of certain estimates. These estimates are based on the Company's
historical experience, terms of existing contracts, observance of trends in the
industry and information available from outside sources, as appropriate. Our
significant accounting policies include:
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.
Stock Options - In October 1996, the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standards No. 123, Accounting for
Stock-Based Compensation (SFAS No. 123). This statement encourages but does not
require companies to account for employee stock compensation awards based on
their estimated fair value at the grant date with the resulting cost charged to
operations. The Company has elected to continue to account for its employee
stock-based compensation using the intrinsic value method prescribed in
Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees, and related Interpretations. Options to non-employees are accounted
for in accordance with FASB's Emerging Issues Task Force (EITF) Issue 96-18
Accounting for Equity Instruments That Are Issued to Other Than Employees for
Acquiring, or in Conjunction with Selling, Goods or Services. Accordingly,
compensation is recognized when goods or services are received and is measured
using the Black-Scholes valuation model. The Black-Scholes model requires
management to make assumptions regarding the fair value of the options at the
date of grant and the expected life of the options.
Asset Valuations and Review for Potential Impairments - The Company reviews its
fixed assets every fiscal quarter. This review requires that the Company make
assumptions regarding the value of these assets and the changes in circumstances
that would affect the carrying value of these assets. If such analysis indicates
that a possible impairment may exist, the Company is then required to estimate
the fair value of the asset and, as deemed appropriate, expense all or a portion
of the asset. The determination of fair value includes numerous uncertainties,
such as the impact of competition on future value. The Company believes that it
has made reasonable estimates and judgments in determining whether our
long-lived assets have been impaired; however, if there is a material change in
the assumptions used in our determination of fair values or if there is a
material change in economic conditions or circumstances influencing fair value,
the Company could be required to recognize certain impairment charges in the
future.
Convertible Notes - The Company initially offsets a portion of the convertible
notes issued with a discount representing the relative fair value of the
warrants and a beneficial conversion feature. This discount is amortized to
interest expense over the period the notes are outstanding. The fair value of
the warrants and the beneficial conversion discount are calculated based on
available market data using appropriate valuation models. These valuations
require that the Company make assumptions and estimates regarding the
convertible notes and warrants. Management uses its judgment, as well as outside
sources, to determine these assumptions and estimates.
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.
Item 4. CONTROLS AND PROCEDURES
Geert R. Kersten, the Company's Chief Executive Officer and Chief Financial
Officer has evaluated the effectiveness of the Company's "disclosure controls
and procedures," as such term is defined in Rule 13a(c) of the Securities
Exchange Act of 1934 (the "Exchange Act"), as amended, within 90 days of the
filing date of this quarterly report on Form 10Q. Based upon his evaluation, the
Chief Executive Officer and Chief Financial Officer has concluded that the
Company's disclosure controls and procedures are effective to ensure that the
information required to be disclosed by the Company in the reports that it files
or submits under the Exchange Act is recorded, processed, summarized and
reported within the time periods specified in Securities and Exchange Commission
rules and forms. There were no significant changes in the Company's internal
controls or in other factors which could significantly affect these controls,
since the date the controls were evaluated. There were no significant
deficiencies or material weaknesses and, therefore, there were no corrective
actions taken.
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 did not file any reports on Form 8-K during the quarter ended
December 31, 2002.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CEL-SCI CORPORATION
Date: February 14, 2003 /s/ Geert R. Kersten
----------------------
Geert Kersten
Chief Executive Officer*
*Also signing in the capacity of the Chief Accounting Officer and Principal
Financial Officer.
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 December 31, 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: February 14, 2003 /s/ Geert R. Kersten
-------------------------
Geert Kersten
Chief Executive Officer*
*Also signing in the capacity of the Chief Financial Officer.
CERTIFICATION PURSUANT TO THE
SARBANES-OXLEY ACT
I, Geert R. Kersten, The Chief Executive and Financial Officer of CEL-SCI
Corporation, certify that:
1. I have reviewed this quarterly report on Form 10-Q of CEL-SCI Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. I am responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the
registrant and have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to me by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the Evaluation Date); and
c. presented in this quarterly report my conclusions about the
effectiveness of the disclosure controls and procedures based on my
evaluation as of the Evaluation Date;
5. I have disclosed, based on my most recent evaluation, to the registrant's
auditors and the audit committee of registrant's board of directors (or
persons performing the equivalent functions):
a. all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b. any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. I have indicated in this quarterly report whether there were significant
changes in internal controls or in other factors that could significantly
affect internal controls subsequent to the date of my most recent
evaluation, including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: February 14, 2003 /s/ Geert R. Kersten
----------------------
Geert R. Kersten
Chief Executive and Financial Officer