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 March 31, 2003
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 50,998,098 May 7, 2003
Page 1 of 29 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) 8-10
Notes to Condensed Consolidated Financial Statements (unaudited) 11
Item 2.
Management's Discussion and Analysis of Financial Condition 20
and Results of Operations
Item 3.
Quantitative and Qualitative Disclosures about Market Risks 23
Item 4.
Controls and Procedures 24
PART II
Item 2.
Changes in Securities and Use of Proceeds 25
Item 4.
Submission of Matters to a Vote of Security Holders 25
Item 6.
Exhibits and Reports on Form 8-K 26
Signatures 27
Certifications 28-29
Item 1. FINANCIAL STATEMENTS
CEL-SCI CORPORATION
-------------------
CONDENSED CONSOLIDATED BALANCE SHEETS
------------------------
ASSETS
(unaudited)
March 31, September 30,
2003 2002
CURRENT ASSETS:
Cash and cash equivalents $1,483,208 $2,079,276
Interest and other receivables 24,393 31,477
Prepaid expenses 384,629 452,123
Deferred financing costs 231,818 176,995
------- -------
Total Current Assets 2,124,048 2,739,871
RESEARCH AND OFFICE EQUIPMENT-
Less accumulated depreciation
of $1,960,310 and $2,027,225 334,422 473,555
DEPOSITS 14,828 139,828
PATENT COSTS- less accumulated
amortization of
$670,236 and $641,711 426,756 418,004
------- -------
TOTAL ASSETS $2,900,054 $3,771,258
========== ===========
See notes to condensed consolidated financial statements.
CEL-SCI CORPORATION
-------------------
CONDENSED CONSOLIDATED BALANCE SHEETS
------------------------
(continued)
LIABILITIES AND STOCKHOLDERS' EQUITY
(unaudited)
March 31, September 30,
2003 2002
CURRENT LIABILITIES:
Accounts payable $750,146 $735,646
Accrued expenses 119,526 148,812
Due to officer/shareholder and employees 180,037 29,592
Note payable 782,589 1,135,017
-------- ---------
Total current liabilities 1,832,298 2,049,067
CONVERTIBLE DEBT, NET 281,490 639,288
DEFERRED RENT 12,276 20,732
-------- ----------
Total liabilities 2,126,064 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 March 31, 2003 and September 30, 2002,
respectively 1 12
Common stock, $.01 par value; authorized,
100,000,000 shares; issued and outstanding,
49,269,445 and 37,255,142 shares at March 31,
2003 and September 30, 2002, respectively 492,694 372,551
Additional paid-in capital 83,178,491 80,871,758
Accumulated deficit (82,897,196) (80,182,150)
----------- ----------
Total stockholders' equity 773,990 1,062,171
---------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $2,900,054 $ 3,771,258
========== ===========
See notes to condensed consolidated financial statements.
CEL-SCI CORPORATION
-------------------
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
---------------------------------
(unaudited)
Six Months Ended March 31,
2003 2002
REVENUES:
Grant revenue and other $ 135,642 $ 221,651
---------- ----------
EXPENSES:
Research and development 935,988 3,371,336
Depreciation and amortization 95,933 112,858
General and administrative 1,180,859 817,264
---------- ---------
Total Operating Expenses 2,212,780 4,301,458
---------- ---------
NET OPERATING LOSS (2,077,138) (4,079,807)
INTEREST INCOME 28,950 47,643
INTEREST EXPENSE (666,858) (826,368)
---------- ---------
NET LOSS (2,715,046) (4,858,532)
ACCRUED DIVIDENDS ON PREFERRED STOCK (3,921) (143,439)
ACCRETION OF BENEFICIAL CONVERSION
FEATURE ON PREFERRED STOCK (68,301) (1,008,465)
---------- ---------
NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS ($2,787,268) ($6,010,436)
========== ==========
NET LOSS PER COMMON SHARE (BASIC) ($0.06) ($0.25)
========== ==========
NET LOSS PER COMMON SHARE (DILUTED) ($0.06) ($0.25)
========== ==========
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING 44,852,886 23,975,508
========== ==========
See notes to condensed consolidated financial statements.
CEL-SCI CORPORATION
-------------------
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
---------------------------------
(unaudited)
Three Months Ended
March 31,
2003 2002
REVENUES:
Grant revenue and other $ 82,687 $ 70,744
----------- ----------
EXPENSES:
Research and development 424,681 933,120
Depreciation and amortization 48,507 56,332
General and administrative 482,403 252,642
------- ---------
Total Operating Expenses 955,591 1,242,094
------- ---------
NET OPERATING LOSS (872,904) (1,171,350)
INTEREST INCOME 11,643 22,306
INTEREST EXPENSE (170,920) (788,868)
--------- ---------
NET LOSS (1,032,181) (1,937,912)
ACCRUED DIVIDENDS ON PREFERRED STOCK (2,004) (62,023)
ACCRETION OF BENEFICIAL CONVERSION
FEATURE ON PREFERRED STOCK (7,048) (428,770)
-------- --------
NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS ($1,041,233) ($2,428,705)
========== ==========
NET LOSS PER COMMON SHARE (BASIC) ($0.02) ($0.10)
========== =========
NET LOSS PER COMMON SHARE (DILUTED) ($0.02) ($0.10)
========== =========
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING 47,737,996 25,178,159
========== ==========
See notes to condensed consolidated financial statements.
CEL-SCI CORPORATION
-------------------
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
---------------------------------
(unaudited)
Six Months Ended
March 31,
2003 2002
NET LOSS ($2,715,046) ($4,858,532)
OTHER COMPREHENSIVE LOSS -
Unrealized loss on investments - 210
---------- ----------
COMPREHENSIVE LOSS ($2,715,046) ($4,858,742)
========== ==========
Three Months Ended
March 31,
2003 2002
NET LOSS ($1,032,181) ($1,937,912)
OTHER COMPREHENSIVE LOSS -
Unrealized loss on investments - -
---------- ---------
COMPREHENSIVE LOSS ($1,032,181) ($1,937,912)
========== ==========
See notes to condensed consolidated financial statements.
CEL-SCI CORPORATION
-------------------
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
---------------------------------
(unaudited)
Six Months Ended March 31,
2003 2002
CASH FLOWS FROM OPERATING
ACTIVITIES:
NET LOSS $(2,715,046) $(4,858,532)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 95,933 112,858
Issuance of common stock for services 427,434 216,641
Common stock contributed to 401(k) plan 22,124 42,761
Stock bonus granted to officer - 75,071
Repriced options - (593,472)
Amortization of discount on note payable 37,500 112,500
R&D expenses paid with note payable - 859,000
Issuance of stock options for services
Amortization of discount associated with
convertible notes 423,012 589,824
Amortization of deferred financing costs 158,334 99,970
Gain on sale of equipment (26,463) -
Impairment loss on abandonment of patents 8,432 5,816
Impairment loss on retired equipment 1,899 -
Realized loss on investments - (2,758)
Decrease (increase) in receivables 7,084 (7,189)
Decrease in prepaid expenses 67,494 477,393
Decrease in deferred rent (8,456) (3,335)
Increase in accrued expenses 42,261 23,309
Increase in amount due to officer/shareholder
& employees 150,445 -
(Decrease) increase in accounts payable (19,489) 284,112
----------- ----------
NET CASH USED IN OPERATING ACTIVITIES (1,327,502) (2,566,031)
----------- -----------
CASH FLOWS (USED IN) PROVIDED BY INVESTING ACTIVITIES:
Sales of investments - 593,594
Purchase of research and office equipment - (14,606)
Patent costs (30,679) (5,039)
--------- ---------
NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES (30,679) 573,949
--------- ---------
CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES:
Cash proceeds from issuance of common stock - 150,000
Cash proceeds from drawdown on equity line 395,000 940,694
Cash proceeds from exercise of warrants 22,950 -
Proceeds from short term loan 25,000 -
Payments on short term loan (25,000) -
Payments on note payable (164,927) -
Proceeds from convertible notes 600,000 1,600,000
Transaction costs related to convertible notes (90,910) (276,410)
-------- ----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 762,113 2,414,284
-------- ----------
NET (DECREASE) INCREASE IN CASH AND
CASH EQUIVALENTS (596,068) 422,202
CASH AND CASH EQUIVALENTS:
Beginning of period 2,079,276 1,783,990
--------- ----------
End of period $1,483,208 $2,206,192
========== =============
(continued)
See notes to condensed consolidated financial statements.
CEL-SCI CORPORATION
-------------------
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
---------------------------------
(unaudited)
(continued)
Six Months Ended March 31,
2003 2002
SUPPLEMENTAL INFORMATION ON NONCASH TRANSACTIONS
Accrual of dividends on preferred stock:
Increase in accrued expenses $ 3,921 $143,439
Decrease in additional paid-in capital (3,921) (143,439)
--------- ---------
$ - $ -
======== =========
Common stock issued in lieu of cash dividends:
Decrease in accrued expenses $(53,692) $(46,229)
Increase in common stock 496 $ 426
Increase in additional paid-in capital 53,196 45,803
--------- ---------
$ - $ -
========= =========
Conversion of preferred stock into common stock:
Decrease in preferred stock $ (11) $ (24)
Increase in common stock 9,206 21,929
Decrease in additional paid-in capital (9,195) (21,905)
-------- ---------
$ - $ -
========= =========
Conversion of convertible notes into common stock:
Decrease in convertible notes $(970,000) $(443,497)
Increase in common stock 65,970 8,332
Increase in additional paid-in capital 904,030 435,165
--------- --------
$ - $ -
========= =========
Changes in unearned compensation for variable options:
Decrease in additional paid-in capital $ - $ 18,234
Decrease in unearned compensation - (18,234)
--------- ---------
$ - $ -
========= =========
Accretion for the beneficial conversion on
preferred stock:
Increase in additional paid-in capital $ 68,301 $ 1,008,465
Decrease in additional paid-in capital (68,301) (1,008,465)
---------- -----------
$ - $ -
========== ============
Surrender of deposit and sale of equipment
to reduce note payable:
Decrease in deposits $ 125,000 $ -
Decrease in equipment, net 100,000 -
Decrease in note payable (225,000) -
---------- -----------
$ - $ -
========== ===========
Deferred financing costs for new convertible
notes included in
accounts payable:
Increase in accounts payable $ 14,570 $ -
Increase in deferred financing costs (14,570) -
---------- -----------
$ - $ -
========== ============
Issuance of convertible debt with warrants
and beneficial conversion:
Decrease in convertible debt $(600,000) $(1,600,000)
Increase in additional paid-in capital 600,000 1,600,000
---------- -----------
$ - $ -
=========== ===========
continued
CEL-SCI CORPORATION
-------------------
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
---------------------------------
(unaudited)
(continued)
Six Months Ended March 31,
2003 2002
Deferred warrant costs on convertible notes:
Increase deferred financing costs $107,677 $ -
Increase additional paid-in capital (107,677) -
-------- --------
$ - $ -
======== ========
Interest expense paid for with common stock:
Decrease in accrued expenses $ (10,229) $ -
Increase in common stock 636 -
Increase in additional paid-in capital 9,593 -
$ - $ -
Patent costs included in accounts payable:
Increase in accounts payable $ 19,419 $ 12,937
Increase in patent costs (19,419) (12,937)
--------- ---------
$ - $ -
========= ========
concluded
See notes to condensed consolidated financial statements.
CEL-SCI CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE AND SIX MONTHS ENDED MARCH 31, 2003 AND 2002
(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 March 31, 2003 and the
results of operations for the three and six-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 and six-month period ended March 31,
2003 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 March
31, 2002 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 AND SIX MONTHS ENDED MARCH 31, 2003 AND 2002
(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. During the three
and six month periods ended March 31, 2003, the Company retired equipment
with a net book value of $1,899 and such amount is included in general and
administrative expenses. There were no retirements of equipment during the
three and six month periods ended March 31, 2002.
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 six month periods ended March 31, 2003 and
2002, the Company recorded patent impairment charges of $8,432 and $5,816
respectively for the net book value of patents abandoned during the periods
and such amount is included in general and administrative expenses. During
the three month periods ended March 31, 2003 and 2002, the Company recorded
patent impairment charges of $8,432 and $0 respectively.
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
CEL-SCI CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE AND SIX MONTHS ENDED MARCH 31, 2003 AND 2002
(unaudited)
(continued)
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.
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
CEL-SCI CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE AND SIX MONTHS ENDED MARCH 31, 2003 AND 2002
(unaudited)
(continued)
December 15, 2002. The Company has provided the required interim
disclosures in Note D.
In April 2003, the FASB issued SFAS No. 149, "Amendment of SFAS No. 133 on
Derivative Instruments and Hedging Activities". The Statement amends and
clarifies accounting for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging
activities under SFAS 133. The amendments set forth in SFAS 149 improve
financial reporting by requiring that contracts with comparable
characteristics be accounted similarly. In particular, this Statement
clarifies under what circumstances a contract with an initial net
investment meets the characteristics of a derivative as discussed in
Statement 133. In addition, it clarifies when a derivative contains a
financing component that warrants special reporting in the statement of
cash flows. Statement 149 amends certain other existing pronouncements.
Those changes will result in more consistent reporting of contracts that
are derivatives in their entirety or that contain embedded derivatives that
warrant separate accounting. This Statement is effective for contracts
entered into or modified after June 30, 2003 and for hedging relationships
designated after June 30, 2003. Management does not expect that the
adoption of this pronouncement will have a material effect on the financial
position, results of operations or cash flows of the Company.
B. STOCKHOLDERS' EQUITY
During the six months ended March 31, 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 six-month period, 75,071 shares of common stock
were issued to an employee from the Company's stock bonus plan. Neither of
these transactions took place during the three month period ended March
31, 2002.
In addition, during the six-month periods ended March 31, 2003 and 2002,
the Company issued stock for services to both employees and outsiders with
a fair value of $427,434 and $216,641, respectively. During the three month
period ended March 31, 2003 and 2002, the stock issued for services had a
fair value of $160,252 and $110,764 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%. There were
67 shares of preferred stock remaining at March 31, 2003. During the six
months ended March 31, 2003, 1,016 preferred shares were converted into
927,501 shares of common stock.
CEL-SCI CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE AND SIX MONTHS ENDED MARCH 31, 2003 AND 2002
(unaudited)
(continued)
In addition, dividends were converted into an additional 49,558 shares of
common stock. There were no conversions of preferred shares during the
three months ended March 31, 2003 nor were there any dividends converted
into 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 March 31, 2003.
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 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 six-month period ending March 31, 2003,
150,000 warrants were exercised for proceeds of $22,950. As of March 31,
2003, 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 $33,137 is included in deferred
financing costs in the accompanying balance sheet as of March 31, 2003.
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 March 31, 2003, $880,000 of the notes had been
converted into 5,895,060 shares of common stock. In addition, $327,807 of
the discount had been amortized to interest expense. The Series G warrants
allow the holders to purchase up to 900,000 shares of the Company's common
stock at a price 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 $0.145. As of March 31, 2003,
all warrants remain outstanding.
CEL-SCI CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE AND SIX MONTHS ENDED MARCH 31, 2003 AND 2002
(unaudited)
(continued)
In January 2003, the Company sold convertible notes, plus Series H
warrants, to a group of private investors for $1,350,000 less transaction
costs of approximately $100,570, of which $90,094 is included in deferred
financing costs in the accompanying balance sheet as of March 31, 2003. The
first funds, totaling $600,000, were received in January and the balance of
$750,000 will be received when the registration statement filed with the
SEC to register shares associated with the Series H notes and warrants
becomes effective. The notes bear interest at 7% per year and will be due
and payable January 7, 2005. Interest will be payable quarterly beginning
on April 7, 2003. 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 March 31, 2003, none of the notes had been converted.
The Series H warrants allow the holders to purchase up to 1,100,000 shares
of the Company's common stock at a price equal to 110% of the conversion
price on such date, provided that that adjusted price is lower than the
warrant exercise price on that date. The warrant exercise price is
currently $0.25. See Note F for subsequent event disclosure.
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 through
January 10, 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, which extended the original maturity date from
January 2, 2003 to January 2, 2004, the remaining balance at March 31, 2003
is $782,589. 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 began accruing interest on November 16, 2002
and carries an interest rate of the prime rate plus 3%. Accrued interest at
March 31, 2003 totals $23,225. In addition, the agreement required 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. Pursuant to the agreement, the Company made payments during the
quarter ended March 31, 2003 totaling $164,927, which includes $150,000
paid in January 2003 and payments related to equity line draws of $14,927.
The payments on the note during the six month period ended March 31, 2003
totaled $389,927. As of March 31, 2003, there have been no conversions to
common stock.
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
CEL-SCI CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE AND SIX MONTHS ENDED MARCH 31, 2003 AND 2002
(unaudited)
(continued)
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 six-month period ended March 31, 2003, the Company sold
2,075,107 shares of common stock to Paul Revere Capital for net proceeds of
$395,000. During the six-month period ended March 31, 2002, the Company
sold 1,072,311 shares of common stock for proceeds of $940,694 to Paul
Revere Capital. During the three-month period ended March 31, 2003 and
2002, 619,827 shares of common stock were sold for $107,364 and 794,627
shares of common stock were sold for $641,799, respectively.
D. EMPLOYEE OPTIONS
In October 1996, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation". 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 APB No. 25, "Accounting for Stock Issued to Employees, and
related Interpretations". If the Company had elected to recognize
compensation expense based on the fair value of the awards granted,
consistent with the provisions of SFAS No. 123, the Company's net loss and
net loss per common share would have been increased to the pro forma
amounts indicated below:
Six Months Ended
March 31, 2003 March 31, 2002
Net loss:
Net loss, as reported $(2,715,046) $(4,858,532)
Add: Reversal of compensation
expense for stock-based performance
awards included in reported net loss,
net of related tax effects 0 (593,472)
Add: Total stock-based
employee compensation expense
determined under fair-value-based
method for all awards, net of
related tax effects (573,350) (626,650)
---------- --------
Pro forma net loss $(3,288,396) $(6,078,654)
=========== ===========
CEL-SCI CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE AND SIX MONTHS ENDED MARCH 31, 2003 AND 2002
(unaudited)
(continued)
Net loss per common share, basic and diluted:
As reported $ (0.06) $ (0.25)
========== ==========
Pro forma $ (0.07) $ (0.30)
========== ==========
Three Months Ended
March 31, 2003 March 31, 2002
-------------- --------------
Net loss:
Net loss, as reported $(1,032,181) $(1,937,132)
Add: Reversal of compensation expense for
stock-based performance awards
included in reported net loss,
net of related tax effects 0 (386,904)
Add: Total stock-based
employee compensation expense
determined under fair-value-based
method for all awards, net of
related tax effects (289,051) (321,162)
-------- --------
Pro forma $(1,321,232) $(2,645,198)
=========== ===========
Net loss per common share:
As reported $ (0.02) $ (0.10)
=========== ===========
Pro forma $ (0.03) $ (0.12)
=========== ===========
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option -pricing model with risk volatilities
ranging from 90-103%, risk-free interest rate ranging from 4.10 to 6.69%
and the expected life of the options is 5 years.
CEL-SCI CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE AND SIX MONTHS ENDED MARCH 31, 2003 AND 2002
(unaudited)
(continued)
E. OPERATIONS AND FINANCING
The Company has incurred significant costs since its inception in
connection with the acquisition of an exclusive worldwide license to
certain patented and unpatented proprietary technology and know-how
relating to the human immunological defense system, patent applications,
research and development, administrative costs, construction of laboratory
facilities, and clinical trials. The Company has funded such costs with
proceeds realized from the public and private sale of its common and
preferred stock. The Company will be required to raise additional capital
or find additional long-term financing in order to continue with its
research efforts. The Company expects to receive additional funding from
private investors subsequent to March 31, 2003; however, there can be no
assurances that the Company will be able to raise additional capital or
obtain additional financing. To date, the Company has not generated any
revenue from product sales. The ability of the Company to complete the
necessary clinical trials and obtain FDA approval for the sale of products
to be developed on a commercial basis is uncertain. The Company plans to
seek continued funding of the Company's development by raising additional
capital. In fiscal year 2002 and for the six month period ended March 31,
2003, the Company reduced its discretionary expenditures. If necessary,
the Company plans to further reduce discretionary expenditures in fiscal
year 2003; however, such reductions would further delay the development of
the Company's products. It is the opinion of management that sufficient
funds will be available from external financing and additional capital
and/or expenditure reductions in order to meet the Company's liabilities
and commitments as they come due during fiscal year 2003. Ultimately, the
Company must complete the development of its products, obtain the
appropriate regulatory approvals and obtain sufficient revenues to support
its cost structure.
F. SUBSEQUENT EVENTS
The Company received two grants in April 2003 and one in May 2003. The
first, totaling $1.1 million and announced on April 4, 2003, was awarded
by the United States government to Northeastern Ohio Universities College
of Medicine and CEL-SCI Corporation. It is intended to support the
development of the Company's new compound, CEL-1000, as a possible
treatment for viral encephalitis, a potentially lethal inflammation of the
brain. The grant was awarded following a peer review process and will fund
pre-clinical studies leading up to toxicology studies. The grant is for a
period of three years. The second grant, announced on April 23, 2003, is a
Phase I Small Business Innovation Research (SBIR) grant from the National
Heart, Lung and Blood Institute (NHLBI), National Institutes of Health
(NIH), in the amount of $134,000 for the further development of a
potential treatment for autoimmune myocarditis, a heart disease. The work
will be done in conjunction with scientists at Johns Hopkins Medical
Institutions in Baltimore, Maryland. The third grant was announced on May
7, 2003. This grant for $162,000 is a Phase I SBIR grant from the National
Institutes of Allergy and Infectious Diseases (NIAID), NIH for the further
development of CEL-1000 against Herpes Simplex.
The Series H note and warrant agreement originally allowed the Company 90
days to have a registration statement to register the shares associated
with the notes and warrants go effective. On May 8, 2003, the Company and
the holders amended the note and warrant purchase agreement to extend the
registration statement filing period from 90 days to 180 days, thereby
curing the event of default.
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 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,
which extended the original maturity date from January 2, 2003 to January 2,
2004, the remaining balance at March 31, 2003 is $782,589. 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 began accruing
interest on November 16, 2002 and carries an interest rate of the prime rate
plus 3%. Accrued interest at March 31, 2003 totals $23,225. In addition, the
agreement required 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. Pursuant to the agreement, the Company made payments during the
quarter ended March 31, 2003 totaling $164,927, which includes $150,000 paid in
January 2003 and payments related to equity line draws of $14,927. As of March
31, 2003, there have been no conversions to common stock.
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%. During the six-month period ended
March 31, 2003, the Company sold 2,075,107 shares of common stock to Paul Revere
Capital for net proceeds of $395,000. During the six-month period ended March
31, 2002, the Company sold 1,072,311 shares of common stock for proceeds of
$940,694 to Paul Revere Capital. During the three-month period ended March 31,
2003 and 2002, 619,827 shares of common stock were sold for $107,364 and 794,627
shares of common stock were sold for $641,799, respectively.
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 and 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. As of November 30, 2002, all notes have been
converted into 6,592,461 shares of the Company's common stock.
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 March 31, 2003, 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 $33,137 is included in deferred financing costs in the
accompanying balance sheet as of March 31, 2003. 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 March 31, 2003, $880,000 of the notes had
been converted into 5,895,060 shares of common stock. In addition, $327,807 of
the discount had been amortized to interest expense.
In January 2003, the Company sold convertible notes, plus Series H warrants, to
a group of private investors for $1,350,000 less transaction costs of
approximately $100,570, of which $90,094 is included in deferred financing costs
in the accompanying balance sheet as of March 31, 2003. The first funds,
totaling $600,000 were received in January and the balance of $750,000 will be
received as soon as the registration statement filed with the SEC becomes
effective. The notes bear interest at 7% per year and will be due and payable
January 7, 2005. Interest will be payable quarterly. 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 March 31, 2003, none of the
notes had been converted. The Series H warrants allow the holders to purchase up
to 1,100,000 shares of the Company's common stock at a price equal to 110% of
the conversion price on such date, provided that that adjusted price is lower
than the warrant exercise price on that date. The warrant exercise price is
currently $0.25.
Results of Operations
Grant revenues and other was lower during the three and six months ended March
31, 2003 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 fiscal year 2002.
General and administrative expenses were higher because during the three and six
months ended March 31, 2002, there was a reversal of a 2001 fiscal year charge
of $593,472 resulting from a decline in the intrinsic value of the options
repriced to employees. Of this total, $386,904 of expense was reversed during
the three-month period ended March 31, 2002. Interest income during the three
and six months ended March 31, 2003 was less than it was during the same period
in fiscal year 2002 as a result of the Company's smaller cash position and lower
interest rates on interest bearing accounts. During the six months ended March
31, 2003 and 2002, the interest expense was $666,858 and $826,368, respectively.
During the three months ended March 31, 2003 and 2002 the interest expense was
$170,920 and $788,868, respectively. Interest expense for all periods presented
is primarily a noncash item incurred to account for amortization of the
discounts and deferred financing costs related to the issuance of the
convertible notes and for interest expense on 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 has provided the required interim
disclosures in Note D.
In April 2003, the FASB issued SFAS No. 149 "Amendment of SFAS No. 133 on
Derivative Instruments and Hedging Activities". The Statement amends and
clarifies accounting for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities under SFAS
133. The amendments set forth in SFAS 149 improve financial reporting by
requiring that contracts with comparable characteristics be accounted similarly.
In particular, this Statement clarifies under what circumstances a contract with
an initial net investment meets the characteristics if a derivative as discussed
in Statement 133. In addition, it clarifies when a derivative contains a
financing component that warrants special reporting in the statement of cash
flows. Statement 149 amends certain other existing pronouncements. Those changes
will result in more consistent reporting of contracts that are derivatives in
their entirety or that contain embedded derivatives that warrant separate
accounting. This Statement is effective for contracts entered into or modified
after June 30, 2003 and for hedging relationships designated after June 30,
2003. Management does not expect that the adoption of this pronouncement will
have a material effect on the financing position, results of operations or cash
flows of the Company.
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
The Company's Chief Executive Officer and Chief Financial Officer have 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 their evaluation, the Chief Executive Officer and
Chief Financial Officer have 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
During three months ended March 31, 2003 the Company issued 808,215 shares
of its common stock to officers, directors and employees in connection with its
salary reduction program. The issuance of these securities was exempt under
Section 4(2) of the Securities Act of 1933 as transactions by an issuer not
involving a public offering. At the time of issuance, the persons who acquired
these securities were all fully informed and advised about matters concerning
the Company, including the Company's business, financial affairs and other
matters. The shareholders acquired the securities for their own account. The
shares acquired by the shareholders were "restricted" securities as defined in
Rule 144 of the Securities and Exchange Commission. No underwriters were
involved with the issuance of these securities.
Item 4. Submission of Matters to a Vote of Security Holders
The annual meeting of the Company's shareholders was held on March 31, 2003.
At the meeting the following persons were elected as directors for the upcoming
year.
Name Votes For Votes Withheld
- ----------- ------------ ---------------
Maximilian de Clara 42,823,464 1,088,229
Geert R. Kersten 43,210,037 701,656
Alexander G. Esterhazy 43,210,594 701,099
C. Richard Kinsolving 43,210,664 701,029
Peter Young 43,210,914 700,779
At the meeting the following proposals were ratified by the shareholders.
1. The adoption of the Company's 2003 Incentive Stock Option Plan which
provides that up to 2,000,000 shares of common stock may be issued upon
the exercise of options granted pursuant to the Incentive Stock Option
Plan.
2. The adoption of the Company's 2003 Non-Qualified Stock Option Plan which
provides that up to 2,000,000 shares of common stock may be issued upon
the exercise of options granted pursuant to the Non-Qualified Stock Option
Plan.
3. The adoption of the Company's 2003 Stock Bonus Plan which provides that up
to 500,000 shares of common stock may be issued to persons granted stock
bonuses pursuant to the Stock Bonus Plan.
4. The approval of the issuance of such number of shares of common stock as
may be required by the terms of convertible securities and warrants issued
by the Company.
5. The appointment of Deloitte & Touche, LLP as the Company's independent
accountants for the fiscal year ending September 30, 2003.
The following is a tabulation of votes cast with respect to these proposals:
Votes
------------------------------------------ Broker
Proposal For Against Abstain Non-Votes
- --------------------------------------------------------------------------
1. 7,433,538 2,700,272 141,687 33,636,196
2. 7,354,332 2,717,278 203,887 33,636,196
3. 7,426,215 2,727,685 121,597 33,636,196
4. 8,058,730 1,979,153 237,614 33,636,196
5. 43,585,028 217,859 101,406 7,400
Item 6.
(a) Exhibits
No exhibits are filed with this report.
(b) Reports on Form 8-K
The Company filed one report on Form 8-K during the quarter ended March 31,
2003. The 8-K was filed on January 15, 2003, disclosing the terms of the sale of
the Series H convertible notes and Series H warrants.
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: May 19, 2003 /s/ Geert Kersten
----------------------------
Geert Kersten
Chief Executive Officer*
*Also signing in the capacity of the Chief 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 March 31, 2003 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: May 19, 2003 /s/ Geert 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: May 19, 2003 /s/ Geert R. Kersten
---------------------------
Geert R. Kersten
Chief Executive and Financial Officer