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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 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 60,321,122 August 5, 2003
Page 1 of 30 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 22
and Results of Operations
Item 3.
Quantitative and Qualitative Disclosures about Market Risks 26
Item 4.
Controls and Procedures
26
PART II
Item 2.
Changes in Securities and Use of Proceeds 27
Item 4.
Submission of Matters to a Vote of Security Holders 27
Item 6.
Exhibits and Reports on Form 8-K 27
Signatures 28
Certifications 29-30
Item 1. FINANCIAL STATEMENTS
CEL-SCI CORPORATION
-------------------
CONDENSED CONSOLIDATED BALANCE SHEETS
------------------------
ASSETS
(unaudited)
June 30, September 30,
2003 2002
--------------------------------
CURRENT ASSETS:
Cash and cash equivalents $ 1,707,182 $ 2,079,276
Interest and other receivables 36,142 31,477
Prepaid expenses 355,714 452,123
Deposits 14,828 139,828
Deferred financing costs 170,011 176,995
--------------------------------
Total Current Assets 2,283,877 2,879,699
RESEARCH AND OFFICE EQUIPMENT-
Less accumulated depreciation
of $1,963,548 and $2,027,225 303,774 473,555
PATENT COSTS- less accumulated
amortization of
$686,045 and $641,711 421,022 418,004
--------------------------------
TOTAL ASSETS $ 3,008,673 $ 3,771,258
================================
See notes to condensed consolidated financial statements.
CEL-SCI CORPORATION
-------------------
CONDENSED CONSOLIDATED BALANCE SHEETS
------------------------
(continued)
LIABILITIES AND STOCKHOLDERS' EQUITY
(unaudited)
June 30, September 30,
2003 2002
-------------------------------
CURRENT LIABILITIES:
Accounts payable $ 517,731 $ 735,646
Accrued expenses 111,159 148,812
Due to officer/shareholder and employees 203,003 29,592
Note payable - Cambrex, net of discount 637,566 1,135,017
Note payable - Covance 199,928 -
-------------------------------
Total current liabilities 1,669,387 2,049,067
CONVERTIBLE NOTES, NET 105,702 639,288
DEFERRED RENT 8,521 20,732
-------------------------------
Total liabilities 1,783,610 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, 39 and 1,192 shares
at June 30, 2003 and September 30, 2002,
respectively - 12
Common stock, $.01 par value; authorized,
100,000,000 shares; issued and outstanding,
58,445,795 and 37,255,142 shares at June 30,
2003 and September 30, 2002, respectively 584,458 372,551
Additional paid-in capital 85,531,055 80,871,758
Unearned compensation (230,690) -
Accumulated deficit (84,659,760) (80,182,150)
-------------------------------
Total stockholders' equity 1,225,063 1,062,171
-------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 3,008,673 $ 3,771,258
===============================
See notes to condensed consolidated financial statements.
CEL-SCI CORPORATION
-------------------
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
---------------------------------
(unaudited)
Nine Months Ended
June 30,
2003 2002
-------------------------------
REVENUES:
Grant revenue and other $ 197,520 $ 307,974
-------------------------------
EXPENSES:
Research and development 1,408,225 3,993,047
Depreciation and amortization 143,351 170,317
General and administrative 1,726,265 1,282,948
-------------------------------
Total Operating Expenses 3,277,841 5,446,312
-------------------------------
NET OPERATING LOSS (3,080,321) (5,138,338)
INTEREST INCOME 40,707 68,831
INTEREST EXPENSE (1,437,996) (1,900,504)
-------------------------------
NET LOSS (4,477,610) (6,970,011)
ACCRUED DIVIDENDS ON PREFERRED STOCK (5,844) (177,464)
ACCRETION OF BENEFICIAL CONVERSION
FEATURE ON PREFERRED STOCK (74,577) (1,262,397)
-------------------------------
NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS $(4,558,031) $(8,409,872)
===============================
NET LOSS PER COMMON SHARE (BASIC) $ (0.10) $ (0.32)
===============================
NET LOSS PER COMMON SHARE (DILUTED) $ (0.10) $ (0.32)
===============================
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING 47,914,264 26,508,757
===============================
See notes to condensed consolidated financial statements.
CEL-SCI CORPORATION
-------------------
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
---------------------------------
(unaudited)
Three Months Ended
June 30,
2003 2002
-------------------------------
REVENUES:
Grant revenue and other $ 61,878 $ 86,323
-------------------------------
EXPENSES:
Research and development 472,237 621,711
Depreciation and amortization 47,418 57,459
General and administrative 545,406 465,684
-------------------------------
Total Operating Expenses 1,065,061 1,144,854
-------------------------------
NET OPERATING LOSS (1,003,183) (1,058,531)
INTEREST INCOME 11,757 21,188
INTEREST EXPENSE (771,138) (1,074,136)
-------------------------------
NET LOSS (1,762,564) (2,111,479)
ACCRUED DIVIDENDS ON PREFERRED STOCK (1,923) (34,025)
ACCRETION OF BENEFICIAL CONVERSION
FEATURE ON PREFERRED STOCK (6,276) (253,932)
-------------------------------
NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS $(1,770,763) $(2,399,436)
===============================
NET LOSS PER COMMON SHARE (BASIC) $ (0.03) $ (0.08)
===============================
NET LOSS PER COMMON SHARE (DILUTED) $ (0.03) $ (0.08)
===============================
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING 54,037,022 31,575,255
===============================
See notes to condensed consolidated financial statements.
CEL-SCI CORPORATION
-------------------
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
---------------------------------
(unaudited)
Nine Months Ended
June 30,
2003 2002
-------------------------------
NET LOSS $(4,477,610) $(6,970,011)
OTHER COMPREHENSIVE GAIN -
Unrealized gain on investments - 210
----------- -----------
COMPREHENSIVE LOSS $(4,477,610) $(6,969,801)
=========== ===========
Three Months Ended
June 30,
2003 2002
---------- ---------
NET LOSS $ (1,762,564) $ (2,111,479)
OTHER COMPREHENSIVE GAIN/LOSS -
Unrealized gain/loss on investments - -
------------ ------------
COMPREHENSIVE LOSS $ (1,762,564) $ (2,111,479)
============ ============
See notes to condensed consolidated financial statements.
CEL-SCI CORPORATION
-------------------
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
---------------------------------
(unaudited)
Nine Months Ended
June 30,
2003 2002
------------------------
CASH FLOWS FROM OPERATING
ACTIVITIES:
NET LOSS $(4,477,610) $(6,970,011)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 143,351 170,317
Issuance of common stock for services 783,822 386,540
Common stock contributed to 401(k) plan 31,149 58,579
Stock bonus granted to officer - 75,071
Repriced options - (593,472)
Amortization of discount on note payable 37,500 187,500
R&D expenses paid with note payable - 859,000
Issuance of stock options for services 465 -
Amortization of discount associated with
convertible notes 1,035,762 1,434,993
Amortization of discount associated with
Cambrex note 45,640
Amortization of deferred financing costs 250,759 247,905
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 gain on investments - (2,758)
Increase in receivables (4,665) (17,392)
Decrease in prepaid expenses 96,409 531,060
Decrease in deferred rent (12,211) (6,586)
Increase in accrued expenses 45,553 29,339
Increase in amount due to
officer/shareholder & employees 173,411 -
(Decrease) increase in accounts payable (38,143) 259,760
---------------------------------
NET CASH USED IN OPERATING ACTIVITIES (1,904,940) (3,344,339)
---------------------------------
CASH FLOWS (USED IN) PROVIDED BY INVESTING
ACTIVITIES:
Sales of investments - 593,594
Purchase of research and office equipment (285) (14,710)
Patent costs (46,979) (33,439)
---------------------------------
NET CASH (USED IN) PROVIDED BY INVESTING
ACTIVITIES (47,264) 545,445
---------------------------------
CASH FLOWS PROVIDED BY (USED IN) FINANCING
ACTIVITIES:
Cash proceeds from issuance of common stock 500,000 150,000
Cash proceeds from drawdown on equity line 725,000 1,325,692
Cash proceeds from exercise of warrants 131,882 13,213
Proceeds from short term loan 25,000 -
Payments on short term loan (25,000) -
Exercise of stock options 2,200 -
Payments on note payable (248,874) -
(continued)
See notes to condensed consolidated financial statements.
CEL-SCI CORPORATION
-------------------
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
---------------------------------
(unaudited)
(continued)
Nine Months Ended
June 30,
2003 2002
------------------------
Proceeds from convertible notes 600,000 1,600,000
Transaction costs related to convertible
notes (130,098) (309,410)
---------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 1,580,110 2,779,495
---------------------------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (372,094) (19,399)
CASH AND CASH EQUIVALENTS:
Beginning of period 2,079,276 1,783,990
---------------------------------
End of period $ 1,707,182 $ 1,764,591
=================================
SUPPLEMENTAL INFORMATION ON NONCASH TRANSACTIONS
Accrual of dividends on preferred stock:
Increase in accrued expenses $ 5,844 $ 177,464
Decrease in additional paid-in capital (5,844) (177,464)
---------------------------------
$ - $ -
=================================
Common stock issued in lieu of cash dividends:
Decrease in accrued expenses $ (53,692) $ (94,000)
Increase in common stock 2,460 867
Increase in additional paid-in capital 51,232 93,133
---------------------------------
$ - $ -
=================================
Conversion of preferred stock into common
stock:
Decrease in preferred stock $ (11) $ (40)
Increase in common stock 9,464 35,899
Decrease in additional paid-in capital (9,453) (35,859)
---------------------------------
$ - $ -
=================================
Conversion of convertible notes into common stock:
Decrease in convertible notes $(1,690,000) $(1,380,000)
Increase in common stock 101,632 50,557
Increase in additional paid-in capital 1,588,368 1,329,443
---------------------------------
$ - $ -
=================================
Changes in unearned compensation for variable
options:
Decrease in additional paid-in capital $ - $ 19,636
Decrease in unearned compensation - (19,636)
---------------------------------
$ - $ -
=================================
CEL-SCI CORPORATION
-------------------
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
---------------------------------
(unaudited)
(continued)
Nine Months Ended
June 30,
2003 2002
------------------------
Accretion for the beneficial conversion on
preferred stock:
Increase in additional paid-in capital $ 74,577 $ 1,262,397
Decrease in additional paid-in capital (74,577) (1,262,397)
---------------------------------
$ - $ -
=================================
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 $ 6,000 $ 8,310
Increase in deferred financing costs (6,000) (8,310)
---------------------------------
$ - $ -
=================================
Issuance of convertible notes with warrants and
beneficial conversion:
Decrease in convertible notes $ (479,349) $(1,600,000)
Increase in additional paid-in capital 479,349 1,600,000
---------------------------------
$ - $ -
=================================
continued
CEL-SCI CORPORATION
-------------------
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
---------------------------------
(unaudited)
(continued)
Nine Months Ended
June 30,
2003 2002
------------------------
Deferred warrant costs on convertible notes:
Increase deferred financing costs $ (107,677) $ -
Increase additional paid-in capital 107,677 -
---------------------------------
$ - $ -
=================================
Beneficial conversion feature on Cambrex note:
Decrease Cambrex note payable $ (106,717) $ -
Increase additional paid-in capital 106,717 -
---------------------------------
$ - $ -
=================================
Interest expense paid for with common stock:
Decrease in accrued expenses $ (34,807) $ (766)
Increase in common stock 1,965 13
Increase in additional paid-in capital 32,842 753
---------------------------------
$ - $ -
=================================
Patent costs included in accounts payable:
Increase in accounts payable $ 13,194 $ 20,947
Increase in patent costs (13,194) (20,947)
---------------------------------
$ - $ -
=================================
Equipment included in accounts payable:
Increase in accounts payable $ 962 $ -
Increase in equipment $ (962) $ -
---------------------------------
$ - $ -
=================================
Accounts payable converted to short-term note
payable:
Increase in note payable $ 199,928 $ -
Decrease in accounts payable $ (199,928) $ -
---------------------------------
$ - $ -
=================================
Change in unearned compensation for stock
issued to officers:
Increase in additional paid-in capital $ 230,690 $ -
Increase in unearned compensation $ (230,690) $ -
---------------------------------
$ - $ -
=================================
concluded
See notes to condensed consolidated financial statements.
CEL-SCI CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED JUNE 30, 2003 AND 2002
(unaudited)
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying condensed consolidated financial statements of the
Company 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 June 30, 2003 and the results
of operations for the three and nine-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 nine-month period ended June 30,
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 the Company and its wholly owned subsidiary, Viral
Technologies, Inc. All intercompany transactions have been eliminated upon
consolidation.
Reclassifications--Certain reclassifications have been made to the June
30, 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
NINE MONTHS ENDED JUNE 30, 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 nine months ended June 30, 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 nine months ended June 30, 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 nine months ended June 30, 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 period
and such amount is included in general and administrative expenses. During
the next five years, the Company expects that the amortization of patent
expenses will total approximately $277,000.
Convertible Notes--The Company initially offsets a portion of its
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
CEL-SCI CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED JUNE 30, 2003 AND 2002
(unaudited)
(continued)
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". 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. 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.
CEL-SCI CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED JUNE 30, 2003 AND 2002
(unaudited)
(continued)
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 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:
Nine Months Ended
June 30, 2003 June 30, 2002
------------- -------------
Net loss:
As reported $(4,477,610) $(6,970,011)
Add: Reversal of compensation
expense for stock-based performance
awards included in reported net loss,
net of related tax effects - (593,472)
Add: Total stock-based employee
compensation expense determined
under fair-value-based method for
all awards, net of related tax effects (747,195) (950,673)
---------- ----------
Pro forma net loss $(5,224,805) $(8,514,156)
=========== ===========
Net loss per common share, basic and diluted:
As reported $ (0.10) $ (0.32)
=========== ============
Pro forma $ (0.11) $ (0.38)
=========== ============
CEL-SCI CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED JUNE 30, 2003 AND 2002
(unaudited)
(continued)
Three Months Ended
June 30, 2003 June 30, 2002
------------- -------------
Net loss:
As reported $(1,762,564) $(2,111,479)
Add: Reversal of compensation
expense for stock-based performance
awards included in reported net loss,
net of related tax effects - -
Add: Total stock-based employee
compensation expense determined
under fair-value-based method for
all awards, net of related tax effects (173,845) (324,023)
----------- -----------
Pro forma net loss $(1,936,409) $(2,435,502)
=========== ===========
Net loss per common share, basic and diluted:
As reported $ (0.03) $ (0.08)
=========== ============
Pro forma $ (0.04) $ (0.09)
=========== ============
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 3.12 to 6.69%
and an expected option life of 5 years.
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.
CEL-SCI CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED JUNE 30, 2003 AND 2002
(unaudited)
(continued)
In May 2003, the FASB adopted SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and
Equity". This Statement establishes standards for how an issuer classifies
and measures certain financial instruments with characteristics of both
liabilities and equity. This Statement is effective for financial
instruments entered into or modified after May 31, 2003, and otherwise is
effective at the beginning of the first interim period beginning after
June 15, 2003. The Company does not expect that the adoption of this
pronouncement will have a material effect on its financial position,
results of operations or cash flows.
B. STOCKHOLDERS' EQUITY
During the nine months ended June 30, 2002, the Company issued 150,000
units at $1.00 to a private investor. Each unit consists of one share of
common stock and 1/2 warrant. Each warrant allows the holder to purchase
one share of common stock at $1.50 per share at any time prior to October
5, 2004. All of the warrants remain outstanding as of June 30, 2003. Also
during the nine-month period ended June 30, 2002, 75,071 shares of common
stock were issued to an employee from the Company's stock bonus plan. In
addition, during the nine months ended June 30, 2003 and 2002, the Company
issued stock for services to both employees and nonemployees with a fair
value of $1,014,512 and $386,540, respectively. During the three-month
period ended June 30, 2003 and 2002, the Company issued stock for services
with a fair value of $587,078 and $169,899. During the three-month period
ended June 30, 2003, $502,837 in common stock was issued to two officers
in lieu of six months salary . Of this amount, $230,690 is recorded in the
accompanying condensed consolidated balance sheet as of June 30, 2003 as
unearned compensation and the balance was expensed and is included in the
$587,078.
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
39 shares of preferred stock outstanding at June 30, 2003. During the nine
months ended June 30, 2003, 1,154 preferred shares were converted into
946,445 shares of common stock. In addition, dividends were converted into
an additional 49,558 shares of common stock. During the three months ended
June 30, 2003, 28 preferred shares were converted into 25,844 shares of
common stock. Dividends totaled $1,923 and $34,025 during the three months
ended June 30, 2003 and 2002 respectively. Dividends payable, a component
of accrued expenses, totaled $25,110 at June 30, 2003.
CEL-SCI CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED JUNE 30, 2003 AND 2002
(unaudited)
(continued)
C. FINANCING TRANSACTIONS
In December 2001, the Company sold 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 June 30, 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 nine-month period ended June 30, 2003,
435,500 warrants were exercised for proceeds of $66,631. During the
three-month period ended June 30, 2003, 285,500 warrants were exercised
for proceeds of $43,682. As of June 30, 2003, 420,000 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. The notes bore interest at 7% per year and
were due and payable September 9, 2004. Interest was payable quarterly
beginning October 1, 2002. The notes were 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 were 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 was 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 June 30, 2003,all of the notes had
been converted into 8,354,193 shares of common stock. In addition, all of
the discount associated with the notes had been amortized to interest
expense. Interest totaling $20,695 was converted into 102,401 shares of
common stock during the nine months ended June 30, 2003. Of this amount,
$10,846 was converted into 68,418 shares of common stock during the three
months ended June 30, 2003. 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 June 30, 2003, 450,000
CEL-SCI CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED JUNE 30, 2003 AND 2002
(unaudited)
(continued)
warrants had been exercised and 450,000 warrants remain outstanding.
During the three and nine-month period ended June 30, 2003, 450,000
warrants were exercised for common stock for proceeds of $65,250,
In January 2003, the Company sold convertible notes, plus Series H
warrants to purchase 1,100,000 shares of common stock, to a group of
private investors for $1,350,000 less transaction costs of approximately
$130,098, of which $98,182 is included in deferred financing costs in the
accompanying balance sheet as of June 30, 2003. The first funds, totaling
$600,000, were received in January 2003 and the balance of $750,000 was
received on July 2, 2003. The notes bear interest at 7% per year. The
first notes will be due and payable January 7, 2005 and the second notes
will be due and payable July 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 defaults to 60% 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 in the event of default. On May 8, 2003, the Company signed an
amendment to the agreement that prevented the conversion price from
defaulting to 60%. In the agreement, the conversion price declines to 70%
of the average of the three lowest daily trading prices of the Company's
common stock if the price of the stock climbs over $0.50. 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
and during the quarter ended June 30, 2003, $300,000 of the notes had been
converted into 1,107,067 shares of common stock. In addition, 64,423
shares of common stock were issued for interest totaling $13,319. The
Series H warrant price as of June 30, 2003 is $0.25. No warrants had been
exercised through June 30, 2003. On May 30, 2003, the price of the
Company's stock rose above $0.50. In accordance with the agreement, the
discount percentage changed from 76% to 70%. This change increased the
discount on the debt that the Company recorded for the Series H
convertible notes by $67,669. Of this amount, $35,446 had been charged to
interest expense as of June 30, 2003.
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 June 30, 2003 is $698,642. 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 the income statement
during the nine months ended June 30, 2003. In addition, payments on the
note totaled $248,874 during the nine months ended June 30, 2003. Unpaid
principal began accruing interest on November 16, 2002 and carries an
interest rate of the Prime Rate plus 3%. The amendment extended the
maturity date to January 2, 2004. Prior to this amendment, the note was
due January 2, 2003. In addition, the
CEL-SCI CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED JUNE 30, 2003 AND 2002
(unaudited)
(continued)
amendment required the Company to pay $150,000 on the note from its next
financing agreement, which was paid in January 2003, 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 principal balance of the note and any accrued interest are
convertible into common stock at 90% of the three latest trading prices,
subject to a floor of $0.22 per share. This conversion feature has been
accounted for as a discount on the note totaling $106,717, of which
$45,640 has been amortized to interest expense during the three and
nine-month periods ended June 30, 2003. As of June 30, 2003, $37,192 is
included in accrued expenses as interest payable and none of the note has
been converted into common stock.
On October 8, 2002, the Company signed an agreement with Covance AG
(Covance), a Swiss Corporation. Pursuant to the agreement, amounts owed to
Covance totaling $199,928 as of June 30, 2003 become a note payable. The
note is payable on January 2, 2004. Interest will be payable monthly at an
annual rate of 8%. Until the entire amount has been paid to Covance,
Covance is entitled to receive 2% of any draw-down of the Company's equity
credit line, 2% of any net funds received from outside financings of less
than $1 million, 3% of any net funds received from outside financings
greater than $1 million but less than $2 million and 4% of any net funds
received from outside financings greater than $2 million. During the three
months ended June 30, 2003, the Company paid $16,789 to Covance in
accordance with the agreement. During the nine months ended June 30, 2003,
the Company paid $39,430 to Covance in accordance with the agreement.
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 the Company 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 the Company maintains a balance greater than $1,000,000
in its bank account in any month, it may only draw down a maximum of
$235,000 per month. During the nine-month period ending June 30, 2003, the
Company sold 2,877,786 shares of common stock to Paul Revere Capital for
proceeds of $710,000, net of financing costs of $15,000. During the
nine-month period ending June 30, 2002, the Company sold 2,381,993 shares
of common stock for proceeds of $1,325,692, net of financing costs of
$2,212 to Paul Revere Capital. During the three-month period ended June
30, 2002, the Company sold 1,309,682 for proceeds of $384,998. During the
three-month period ended June 30, 2003, the Company sold 802,679 shares of
common stock for proceeds of $315,000, net of costs of $5,000 and sold
2,877,786 shares of common stock for proceeds of $710,000, net of costs of
$15,000 during the nine months ended June 30, 2003.
D. GRANTS
The Company received two grants in April 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
the Company. It is intended to support the development of the
Company's
CEL-SCI CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED JUNE 30, 2003 AND 2002
(unaudited)
(continued)
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, 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.
On May 7, 2003, the Company was awarded a Phase I SBIR grant from the
National Institutes of Allergy and Infectious Diseases (NIAID), National
Institutes of Health (NIH), in the amount of $162,000 for the further
development of CEL-1000 against herpes simplex. The work will be done in
collaboration with Northeast Ohio Universities College of Medicine.
E. MARKETING AGREEMENT
On May 30, 2003, the Company and Eastern Biotech signed an
agreement to develop both MultikineR and CEL-1000, and their derivatives
and improvements, in three Eastern European countries: Greece, Serbia and
Croatia. Eastern Biotech also has the exclusive right to sales in these
three countries. As part of the agreement, Eastern Biotech gained the
right to receive a 1% royalty on the future net sales of these two
products and their derivatives and improvements worldwide. Eastern Biotech
also purchased 1,100,000 shares of common stock and warrants, which allow
the holder to purchase up to 1,100,000 shares of the Company's common
stock at a price equal to $0.47. The Company received proceeds of $500,000
for these shares and warrants. The Company must register these shares
prior to September 30, 2003 or the royalty percentage will increase to 2%.
If Eastern Biotech does not meet certain clinical development milestones
within one year, they will lose the right to sell both products in these
three countries.
F. 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 June 30, 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 2002 and for the nine-month period ended June 30, 2003,
the Company reduced its discretionary expenditures. If
CEL-SCI CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED JUNE 30, 2003 AND 2002
(unaudited)
(continued)
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.
G. SUBSEQUENT EVENT
On July 2, 2003, the Company received the second tranche of the
convertible Series H notes, totaling $750,000, less transaction costs of
$86,621. On May 8, 2003, the Company signed an amendment to the agreement
that prevented the conversion price from defaulting to 60%. Additionally,
the Company signed an amendment related to these notes on July 2, 2003,
reiterating the May 8, 2003 amendment and set the due date of the second
tranche notes to July 2, 2005.
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. 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 June 30, 2003 is $698,642.
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 the income statement during the nine
months ended June 30, 2003. In addition, payments on the note totaled $248,874
during the nine months ended June 30, 2003. 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
required the Company to pay $150,000 on the note from its next financing
agreement, which was paid in January 2003, 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 principal balance of the note and
any accrued interest are convertible into common stock at 90% of the three
latest trading prices, subject to a floor of $0.22 per share. This conversion
feature has been accounted for as a discount on the note totaling $106,717 of
which $45,640 has been amortized to interest expense during the three and
nine-month periods ended June 30, 2003.As of June 30, 2003, $37,192 is included
in accrued expenses as interest payable, and none of the note has been converted
into common stock.
In April 2001, the Company signed an equity line of credit agreement that
allowed the Company at its discretion to draw up to $10 million of funding prior
to June 22, 2003. During this period, the Company could 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 was obligated to purchase the
shares. The Company could request a drawdown once every 22 trading days,
although the Company was under no obligation to request drawdowns under the
equity line of credit. During the 22 trading days following a drawdown request,
the Company calculated the number of shares it would sell to Paul Revere Capital
Partners and the purchase price per share. The purchase price per share of
common stock was 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 nine-month period ending
June 30, 2003, the Company sold 2,877,786 shares of common stock to Paul Revere
Capital for proceeds of $710,000, net of financing costs of $15,000. During the
nine-month period ending June 30, 2002, the Company sold 2,381,993 shares of
common stock for proceeds of $1,325,692, net of financing costs of $2,212 to
Paul Revere Capital. During the three-month period ended June 30, 2002, the
Company sold 1,309,682 shares for proceeds of $384,998. During the three-month
period ended June 30, 2003, the Company sold 802,679 shares of common stock for
proceeds of $315,000, net of costs of $5,000 and sold 2,877,786 shares of common
stock for proceeds of $710,000, net of costs of $15,000 during the nine months
ended June 30, 2003.
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
bore interest at 7% per year, were due and payable on December 31, 2003 and were
secured by substantially all of the Company's assets. Interest was payable
quarterly except that the first interest payment was not due until July 1, 2002.
The notes were fully converted into 6,592,461 shares of common stock by the end
of November, 2002. At the holder's option the notes were convertible into shares
of the Company's common stock equal in number to the amount determined by
dividing each $1,000 of note principal to be converted by the Conversion Price.
The Conversion Price is 76% of the average of the three lowest daily trading
prices of the Company's common stock on the American Stock Exchange during the
20 trading days immediately prior to the conversion date. The Conversion Price
may not be less than $0.57. However, if the Company's common stock trades for
less than $0.57 per share for a period of 20 consecutive trading days, the $0.57
minimum price will no longer be applicable.
The Series F warrants initially allowed the holders to purchase up to 960,000
shares of the Company's common stock at a price of $0.95 per share at any time
prior to December 31, 2008. On January 17, 2002, the warrant exercise price, in
accordance with the terms of the warrants, was adjusted to $0.65 per share.
Every three months after January 17, 2002, the warrant exercise price will be
adjusted to an amount equal to 110% of the Conversion Price on such date,
provided that the adjusted price is lower than the warrant exercise price on
that date. As of June 30, 2003, the warrant exercise price is $0.153. During the
nine-month period ended June 30, 2003, 435,500 warrants were exercised for
proceeds of $66,631. During the three-month period ended June 30, 2003, 285,500
warrants were exercised for proceeds of $43,682. As of June 30, 2003, 420,000
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. The notes bore interest at 7% per year and were due and payable
September 9, 2004. Interest was payable quarterly beginning October 1, 2002. 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. At the holders' option the notes were
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 was 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 had sold 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 would have been lowered to the price at which the
shares were sold or the lowest price at which the securities are convertible. As
of June 2, 2003, all of the notes had been converted into 8,354,193 shares of
common stock. Interest totaling $20,692 was converted into 102,401 shares of
common stock during the nine months ended June 30, 2003. Of this amount, $10,846
was converted into 68,418 shares of common stock during the three months ended
June 30, 2003. 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 $0.153. As of June
30, 2003, 450,000 warrants had been exercised and 450,000 warrants remain
outstanding. During the three and nine-month period ended June 30, 2003, 450,000
warrants were exercised for common stock for proceeds of $65,250,
In January 2003, the Company sold convertible notes, plus Series H warrants to
purchase 1,100,000 shares of common stock, to a group of private investors for
$1,350,000 less transaction costs of approximately $130,098, of which $98,182 is
included in deferred financing costs in the accompanying balance sheet as of
June 30, 2003. The first funds, totaling $600,000, were received in January and
the balance of $750,000 was received on July 2, 2003. The notes bear interest at
7% per year. The first notes will be due and payable January 7, 2005 and the
second notes will be due and payable July 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. The conversion price defaults to 60% 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 in the event of default. On May 8, 2003, the Company signed
an amendment to the agreement that prevented the conversion price from
defaulting to 60%. In the agreement, the conversion price declines to 70% of the
average of the three lowest daily trading prices of the Company's common stock
if the price of the stock climbs over $0.50. 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 and during the quarter ended June 30,
2003, $300,000 of the notes had been converted into 1,107,067 shares of common
stock. In addition, 64,423 shares of common stock were issued for interest
totaling $13,319. The Series H warrant price is currently $0.25. No warrants had
been exercised through June 30, 2003. On May 30, 2003, the price of the
Company's stock rose above $0.50. In accordance with the agreement, the discount
percentage changed from 76% to 70%. This change increased the discount that the
Company recorded for the Series H convertible notes by $67,669. Of this amount,
$35,445 had been charged to interest expense as of June 30, 2003.
On October 8, 2002, the Company signed an agreement with Covance AG (Covance), a
Swiss Corporation. Pursuant to the agreement, amounts owed to Covance totaling
$199,928 as of June 30, 2003 become a note payable. The note is payable on
January 2, 2004. Interest will be payable monthly at an annual rate of 8%. Until
the entire amount has been paid to Covance, Covance is entitled to receive 2% of
any draw-down of the Company's equity credit line, 2% of any net funds received
from outside financings of less than $1 million, 3% of any net funds received
from outside financings greater than $1 million but less than $2 million and 4%
of any net funds received from outside financings greater than $2 million.
During the three months ended June 30, 2003, the Company paid $16,789 to Covance
in accordance with the agreement. During the nine months ended June 30, 2003,
the Company paid $39,430 to Covance in accordance with the agreement.
Results of Operations
Grant revenues and other declined during the nine months ending June 30, 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 nine months ended June
30, 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. The three-month periods ended June 30, 2003 and 2002, are comparable
as there was no reversal of compensation expense recorded in either three-month
period. Interest income during the three and nine-month periods ended June 30,
2003 was less than it was during the three and nine-month periods in fiscal year
2002 as a result of the Company's smaller cash position and lower interest rates
on interest bearing accounts. The interest expense for the nine months ended
June 30, 2003 and 2002 was $1,437,996 and $1,900,504 respectively. The interest
expense for the three months ended June 30, 2003 and 2002 was $771,138 and
$1,074,136 respectively. Interest expense for all periods presented is primarily
a noncash item recorded to account for amortization of the discount and deferred
financing costs related to the issuance of the convertible notes and for
interest expense related to 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 A.
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.
In May 2003, the FASB adopted SFAS No. 150 "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity". This Statement
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. This
Statement is effective for financial instruments entered into or modified after
May 31, 2003, and otherwise is effective at the beginning of the first interim
period beginning after June 15, 2003. The Company does not expect that the
adoption of this pronouncement will have a material effect on its financial
position, results of operations or cash flows.
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
Market risk is the potential change in an instrument's value caused by, for
example, fluctuations in interest and currency exchange rates. The Company has
no derivative financial instruments and holds no debt or equity securities.
Further, there is no exposure to risks associated with foreign exchange rate
changes because none of the operations of the Company are transacted in a
foreign currency. The interest rate risk in investments is considered immaterial
due to the fact that there are no investments held at June 30, 2003. The Company
has a note payable with an interest rate at prime plus 3%. This represents a
market risk if the prime interest rate rises. However, based on the Federal
Reserve Board's actions, the Company believes that a large increase in the prime
rate is unlikely in the near 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 the three months ended June 30, 2003, the Company issued 2,746,801 shares
of its common stock to officers, directors and employees in lieu of salaries.
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
None
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 June 30, 2003.
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: August 14, 2003 /s/ Geert Kersten
--------------------------
Geert Kersten
Chief Executive Officer*
*Also signing in the capacity of the Chief Accounting Officer and Principal
CERTIFICATION
In connection with the Quarterly Report of CEL-SCI Corporation (the "Company")
on Form 10-Q for the period ending June 30, 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: August 14, 2003 /s/ Geert Kersten
--------------------------
Geert Kersten
Chief Executive Officer*
*Also signing in the capacity of the Chief Financial Officer.
CERTIFICATION
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: August 14, 2003 /s/ Geert Kersten
--------------------------
Geert R. Kersten
Chief Executive and Financial Officer