UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 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
of incorporation Identification Number
8229 Boone Boulevard, Suite 802
Vienna, Virginia 22182
-----------------------------
Address of principal executive offices
(703) 506-9460
-----------------------------
Registrant's telephone number, including area code
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports) and (2) had been subject to such filing
requirements for the past 90 days.
Yes X No
------- --------
Indicate by check mark whether the Registrant is an accelerated filer (as that
term is defined in Exchange Act Rule 12b-2).
Yes No X
------- --------
Class of Stock No. Shares Outstanding Date
-------------- ---------------------- ----
Common 65,287,630 February 10, 2004
TABLE OF CONTENTS
PART I FINANCIAL INFORMATION
Item 1. Page
Condensed Consolidated Balance Sheets (unaudited) 3
Condensed Consolidated Statements of Operations (unaudited) 4
Condensed Consolidated Statements of Cash Flow (unaudited) 5-7
Notes to Condensed Consolidated Financial Statements (unaudited) 8
Item 2.
Management's Discussion and Analysis of Financial Condition 16
and Results of Operations
Item 3.
Quantitative and Qualitative Disclosures about Market Risks 20
Item 4.
Controls and Procedures 20
PART II
Item 2.
Changes in Securities and Use of Proceeds 21
Item 6.
Exhibits and Reports on Form 8-K 22
Signatures 23
Item 1. FINANCIAL STATEMENTS
CEL-SCI CORPORATION
-------------------
CONDENSED CONSOLIDATED BALANCE SHEETS
------------------------
(unaudited)
ASSETS
December 31, September 30,
2003 2003
CURRENT ASSETS: -----------------------------
Cash and cash equivalents $ 2,449,088 $ 1,753,307
Interest and other receivables 16,108 47,051
Prepaid expenses 351,594 357,531
Deposits 14,828 14,828
Deferred financing costs - 16,243
Total Current Assets 2,831,618 2,188,960
RESEARCH AND OFFICE EQUIPMENT-
Less accumulated depreciation of $2,033,491
and $2,002,232 247,447 278,706
PATENT COSTS- less accumulated amortization
of $705,495 and $704,522 435,407 447,540
---------- ----------
TOTAL ASSETS $ 3,514,472 $2,915,206
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 265,115 $ 481,985
Accrued expenses 45,310 99,172
Due to officer/shareholder and employees 43,022 227,115
Deposits held 3,000 3,000
Deferred rent 2,223 5,540
Note payable - Cambrex, net of discount - 656,076
Note payable - Covance - 184,330
---------- ---------
Total current liabilities 358,670 1,657,218
CONVERTIBLE NOTES, NET - 32,882
---------- ---------
Total liabilities 358,670 1,690,100
STOCKHOLDERS' EQUITY
Common stock, $.01 par value; authorized,
100,000,000 shares; issued and
outstanding, 65,126,322 and 61,166,345
shares at December 31, 2003 and September
30, 2003, respectively 651,263 611,663
Additional paid-in capital 90,164,280 87,167,091
Accumulated deficit (87,659,741) (86,553,648)
----------- -----------
Total stockholders' equity 3,155,802 1,225,106
---------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 3,514,472 $2,915,206
=========== ===========
See notes to condensed consolidated financial statements.
CEL-SCI CORPORATION
-------------------
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
---------------------------------
(unaudited)
Three Months Ended
December 31,
2003 2002
-----------------------------
Grant revenue and other $ 73,235 $ 52,955
-------- ---------
EXPENSES:
Research and development 368,348 511,307
Depreciation and amortization 47,927 47,426
General and administrative 647,440 698,456
-------- ---------
Total Operating Expenses 1,063,715 1,257,189
--------- ---------
NET OPERATING LOSS (990,480) (1,204,234)
INTEREST INCOME 11,227 17,307
INTEREST EXPENSE (126,840) (495,938)
--------- ---------
NET LOSS (1,106,093) (1,682,865)
ACCRUED DIVIDENDS ON PREFERRED STOCK - (1,917)
ACCRETION OF BENEFICIAL CONVERSION
FEATURE ON PREFERRED STOCK - (61,253)
--------- ---------
NET LOSS ATTRIBUTABLE TO COMMON
STOCKHOLDERS $ (1,106,093) $(1,746,035)
============= ============
NET LOSS PER COMMON SHARE (BASIC) $ (0.02) $ (0.04)
============= ============
NET LOSS PER COMMON SHARE (DILUTED) $ (0.02) $ (0.04)
============= ============
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 62,848,255 42,030,495
============ ============
See notes to condensed consolidated financial statements.
CEL-SCI CORPORATION
-------------------
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
---------------------------------
(unaudited)
Three Months Ended December 31,
2003 2002
-------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
NET LOSS $(1,106,093) $(1,682,865)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 47,927 47,426
Issuance of common stock for services 155,909 267,182
Common stock contributed to 401(k) plan 5,830 11,217
Amortization of discount on note payable 30,916 37,500
Amortization of discount associated with
convertible notes 67,118 320,810
Amortization of deferred financing costs 16,243 118,809
Gain on sale of equipment - (26,463)
Compensation expense related to variable
options 20,108 -
Impairment loss on abandonment of patents 25,720 -
Decrease in receivables 30,943 18,704
Decrease in prepaid expenses 5,937 54,324
Decrease in deferred rent (3,317) (4,228)
(Decrease) increase in accrued expenses (52,073) 19,964
(Decrease) increase in amount due to
officer/shareholder & employees (184,093) 79,609
(Decrease) increase in accounts payable (254,805) 34,925
---------- --------
NET CASH USED IN OPERATING ACTIVITIES
(1,193,730) (703,086)
---------- --------
CASH FLOWS (USED IN) PROVIDED BY INVESTING
ACTIVITIES:
Patent costs (10,000) (10,679)
---------- --------
NET CASH (USED IN) PROVIDED BY INVESTING
ACTIVITIES (10,000) (10,679)
---------- --------
CASH FLOWS PROVIDED BY (USED IN) FINANCING
ACTIVITIES:
Cash proceeds from issuance of common stock 2,549,970 -
Cash proceeds from drawdown on equity line - 287,636
Cash proceeds from exercise of warrants 291,222 22,950
Payment of Cambrex note (686,992) 25,000
Payment of Covance note (184,330) -
Cash proceeds from exercise of stock options 2,100 -
Transaction costs related to equity line of
credit and private placement (72,459) (33,000)
---------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES 1,899,511 302,586
---------- --------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 695,781 (411,179)
CASH AND CASH EQUIVALENTS:
Beginning of period 1,753,307 2,079,276
---------- ----------
End of period $2,449,088 $ 1,668,097
=========== ===========
(continued)
See notes to condensed consolidated financial statements.
CEL-SCI CORPORATION
-------------------
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
---------------------------------
(unaudited)
(continued)
Three Months Ended December 31,
2003 2002
-----------------------------
SUPPLEMENTAL INFORMATION ON NONCASH
TRANSACTIONS
Accrual of dividends on preferred stock:
Increase in accrued expenses $ - $ 1,917
Decrease in additional paid-in capital - (1,917)
--------- --------
$ - $ -
========= ========
Common stock issued in lieu of cash dividends:
Decrease in accrued expenses $ - $(53,692)
Increase in common stock - 496
Increase in additional paid-in capital - 53,196
--------- --------
$ - $ -
========= ========
Conversion of preferred stock into common stock:
Decrease in preferred stock $ - $ (11)
Increase in common stock - 9,206
Decrease in additional paid-in capital - (9,195)
--------- ---------
$ - $ -
========= ========
Conversion of convertible debt into common stock:
Decrease in convertible notes $(100,000) $(830,000)
Increase in common stock 1,794 55,528
Increase in additional paid-in capital 98,206 774,472
--------- ----------
$ - $ -
========= ==========
Accretion for the beneficial conversion on
preferred stock:
Increase in additional paid-in capital $ - $ 61,253
Decrease in additional paid-in capital - (61,253)
--------- ----------
$ - $ -
========= =========
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 included in accounts payable:
Increase in accounts payable $ 17,680 $ 4,000
Increase in deferred financing costs (17,680) (4,000)
--------- ---------
$ - $ -
========= =========
continued
CEL-SCI CORPORATION
-------------------
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOW
---------------------------------
(unaudited)
(continued)
Three Months Ended December 31,
2003 2002
----------------------------
Interest expense paid for with common stock:
Decrease in accrued expenses $ (1,789) $ (9,430)
Increase in common stock 32 573
Increase in additional paid-in capital 1,757 8,857
--------- ----------
$ - $ -
========= =========
Patent costs included in accounts payable:
Increase in accounts payable $ 30,255 $ 20,619
Increase in patent costs (30,255) (20,619)
--------- ---------
$ - $ -
========= =========
Cashless exercise of warrants:
Increase in common stock $ 3,698 $ -
Decrease in additional paid-in capital (3,698) -
--------- ---------
$ - $ -
========= =========
concluded
See notes to condensed consolidated financial statements.
CEL-SCI CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED DECEMBER 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,
2003.
In the opinion of management, the accompanying unaudited condensed
consolidated financial statements contain all accruals and adjustments
(each of which is of a normal recurring nature) necessary for a fair
presentation of the financial position as of December 31, 2003 and the
results of operations for the three-month period then ended. The condensed
consolidated balance sheet as of September 30, 2003 is derived from the
September 30, 2003 audited consolidated financial statements. Significant
accounting policies have been consistently applied in the interim
financial statements and the annual financial statements. The results of
operations for the three-month period ended December 31, 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.
Investments--Investments that may be sold as part of the liquidity
management of the Company or for other factors are classified as
available-for-sale and are carried at fair market value. Unrealized gains
and losses on such securities are reported as a separate component of
stockholders' equity. Realized gains and losses on sales of securities are
reported in earnings and computed using the specific identified cost
basis.
Research and Office Equipment--Research and office equipment is recorded
at cost and depreciated using the straight-line method over estimated
useful lives of five to seven years. Leasehold improvements are
depreciated over the shorter of the estimated useful life of the asset or
the terms of the lease. Repairs and maintenance are expensed when
incurred. During the three months ended December 31, 2003 and 2002, the
Company did not retire any equipment.
Research and Development Costs--Research and development (R&D)
expenditures are expensed as incurred. The Company has an agreement with
Cambrex Bio Science, an unrelated corporation for the production of
MULTIKINE, which is the Company's only product source. All production
costs of MULTIKINE are expensed to R&D immediately.
CEL-SCI CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED DECEMBER 31, 2003 AND 2002
(unaudited)
(continued)
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.
Patents--Patent expenditures are capitalized and amortized using the
straight-line method over 17 years. In the event changes in technology or
other circumstances impair the value or life of the patent, appropriate
adjustment in the asset value and period of amortization is made. An
impairment loss is recognized when estimated future undiscounted cash
flows expected to result from the use of the asset, and from disposition,
is less than the carrying value of the asset. The amount of the impairment
loss would be the difference between the estimated fair value of the asset
and its carrying value. During the three months ended December 31, 2003
and 2002, the Company recorded patent impairment charges of $25,720 and
$-0- 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, CEL-SCI expects that the amortization of
patent expenses will total approximately $240,000.
Net Loss per Common Share--Net loss per common share is computed by
dividing the net loss, after increasing the loss for the effect of any
accrued dividends on the preferred stock and the accretion of the
beneficial conversion feature related to the preferred stock, by the
weighted average number of common shares outstanding during the period.
Potentially dilutive common shares, including convertible preferred stock
and options to purchase common stock, were excluded from the calculation
because they are antidilutive.
Comprehensive Loss--SFAS 130, "Reporting Comprehensive Income,"
establishes standards for reporting and displaying comprehensive net
income or loss and its components in stockholders' equity. SFAS 130
requires the components of other comprehensive income or loss such as
changes in the fair value of available-for-sale securities and foreign
translation adjustments to be added to net income or loss to arrive at
comprehensive income or loss. Other comprehensive income or loss items
have no impact on the Company's net loss as presented on the statement of
operations. During the three months ended December 31, 2003 and 2002,
there were no components of comprehensive loss other than net loss and the
statement of comprehensive loss has been omitted.
Prepaid Expenses--The majority of prepaid expenses consist of bulk
purchases of laboratory supplies used on a daily basis in the lab and
items that will be used for future production. The items in prepaid
expenses are expensed when used in production or daily activity as R&D
expenses.
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.
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, and those investments that are readily convertible to known
amounts of cash and are
CEL-SCI CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED DECEMBER 31, 2003 AND 2002
(unaudited)
(continued)
so close to maturity that they bear no interest rate risk, to be cash
equivalents.
Convertible Notes--Convertible debt issued by the Company is initially
offset by a discount representing the relative fair value of the warrants
and beneficial conversion feature. This discount is amortized to interest
expense over the period the debt is outstanding and accelerated pro-rata
as the notes are converted. The fair value of the warrants and beneficial
conversion discount are calculated based on available market data using
appropriate valuation models.
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.
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 its
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.
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". 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. 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:
CEL-SCI CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED DECEMBER 31, 2003 AND 2002
(unaudited)
(continued)
Three Months Ended
December 31, 2003 December 31, 2002
Net loss:
As reported $(1,106,093) $(1,682,865)
Deduct: Compensation expense for
stock-based performance awards
included in reported net loss,
net of related tax effects 20,108 -
Add: Total stock-based employee
compensation expense determined
under fair-value-based method for
all awards, net of related tax
effects (199,594) (284,299)
Pro forma net loss $(1,285,579) $(1,967,164)
============ ============
Net loss per common share,
basic and diluted:
As reported $ (0.02) $ (0.04)
=========== ============
Pro forma $ (0.02) $ (0.05)
=========== ============
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.
New Accounting Pronouncements--In January 2003, the FASB issued
Interpretation No. 46, "Consolidation of Variable Interest Entities",
(FIN46). FIN 46 provides guidance on the consolidation of certain entities
in which equity investors do not have the characteristics of a controlling
financial interest. Such entities are referred to as variable interest
entities. FIN 46 was effective immediately for variable interest entities
created or acquired after January 31, 2003 and was effective July 1, 2003
for variable interest entities created or acquired on or before January
31, 2003. In October 2003, the FASB issued Staff Position FIN 46.6, which
extended the effective date of FIN 46 for variable interest entities
acquired before February 1, 2003 to the first interim or annual period
ending after December 15, 2003. The Company adopted FIN 46 and the
implementation did not have a material effect on the Company's financial
position, results of operations or cash flows.
B. STOCKHOLDERS' EQUITY
During the three months ended December 31, 2003 and 2002, the Company
issued stock for services to both employees and nonemployees with a fair
value of $155,909 and $267,182, 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
CEL-SCI CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED DECEMBER 31, 2003 AND 2002
(unaudited)
(continued)
Preferred Stock. These investors also exchanged their Series A and Series
C warrants from prior offerings for new Series E warrants. The preferred
shares were 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 was 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 was convertible was $1.08. The Series E Preferred stock had no
voting rights and was redeemable at the Company's option at a price of
120% plus accrued dividends until August 2003, when the redemption price
was fixed at 100% and 39 shares of preferred stock were automatically
converted into 47,531 common shares. During the quarter ended December 31,
2002, 1,125 shares of preferred stock were converted into 920,601 shares
of common stock. In addition, dividends were converted into an additional
49,558 shares of common stock during the quarter ended December 31, 2002.
There were 67 shares of preferred stock outstanding at December 31, 2002.
As of August 17, 2003, all shares had been converted and no shares remain
outstanding at December 31, 2003. As all shares had been converted prior
to the quarter ended December 31, 2003, there was no accretion of the
beneficial conversion feature or accrual of preferred dividends.
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. 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 allowed 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 was 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 was 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 last adjustment to the warrant price was
on October 17, 2002, when the warrant price was reduced to $0.153. During
the three months ended December 31, 2003, the remaining 420,000 warrants
were exercised for stock in a cashless transaction that resulted in the
issuance of 369,796 shares of common stock.
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
CEL-SCI CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED DECEMBER 31, 2003 AND 2002
(unaudited)
(continued)
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 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 the year ended September 30,
2003, all of the notes had been converted into 8,354,198 shares of common
stock. In addition, all of the discount associated with the notes had been
amortized to interest expense. Interest totaling $21,472 was converted
into 109,428 shares of common stock during the year ended September 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 was $0.145
as of December 31, 2003. As of December 31, 2003, 450,000 warrants had
been exercised and 450,000 warrants remain outstanding.
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
$220,419. 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
bore interest at 7% per year. The first notes were due and payable January
7, 2005 and the second notes were due and payable July 7, 2005. Interest
was payable quarterly. 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 defaulted 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. 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. As of
October 2, 2003, all of the Series H notes had been converted into a total
of 3,183,358 shares of common stock and total interest of $32,914 had been
converted into 83,227 shares of common stock. The Series H warrant price
was $0.25 as of December 31, 2003. As of December 31, 2003, 550,000
warrants had been exercised and 550,000 warrants remain outstanding.
CEL-SCI CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED DECEMBER 31, 2003 AND 2002
(unaudited)
(continued)
In June 2000, the Company entered into an agreement with Cambrex Bio
Science, Inc. ("Cambrex") whereby Cambrex agreed to provide the Company
with a facility which allows the Company to manufacture MULTIKINE in
accordance with the Good Manufacturing Practices regulations of the FDA
for periodic manufacturing campaigns. Company personnel will staff this
facility. This agreement runs until December 31, 2006. On November 15,
2001, the Company signed an agreement for a manufacturing campaign with
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, payable on January 2, 2003, with Cambrex to pay
a total of $1,172,517. Unpaid principal began accruing interest on
November 16, 2002 and carried an interest rate of the Prime Rate plus 3%.
This note was later extended to January 2, 2004. There were 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 were convertible into common stock at
90% of the average of the closing prices of the common stock for the three
trading days immediately prior to the conversion date subject to a floor
of $0.22 per share. A beneficial conversion cost of $106,716 was recorded
during the year for the difference between the conversion price of the
stock and the market price of the stock. The balance of the beneficial
conversion cost was expensed to interest expense on the date the note was
paid. During the quarter ended December 31, 2003, the Company recorded
$9,943 in interest expense related to the note. During the quarter ending
December 31, 2003, CEL-SCI paid $692,010 of principal plus interest
expense of $59,450 to Cambrex, thereby paying off the remaining balance of
the note.
On October 8, 2002, CEL-SCI signed an agreement with Covance AG (Covance),
a Swiss Corporation. Pursuant to the agreement, amounts owed to Covance
totaling $199,928 became a note payable in June 2003, to be paid by
January 2, 2004. Interest on the note was payable monthly at an annual
rate of 8%. During the quarter ended December 31, 2003, the Company paid
the outstanding principal balance of $184,330 to Covance plus accrued
interest expense of $6,356. During the quarter ended December 31, 2003,
interest expense of $2,581 was recorded for the note.
In September 2003, the Company signed an equity line of credit agreement
with Rubicon Group for up to $10,000,000 of funding prior to December 29,
2005. During this twenty-four month period, the Company can request a
drawdown under the equity line of credit by selling shares of its common
stock to Rubicon Group, who will be obligated to purchase the shares
subject to certain volume restrictions. The Company can 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. The minimum amount
CEL-SCI can draw down at any one time is $100,000, and the maximum amount
CEL-SCI can draw down at any one time will be determined at the time of
the drawdown request using a formula contained in the equity line of
credit agreement. The Company is restricted from entering into any other
equity line of credit arrangement until the earlier of the expiration of
the agreement or two years from the date of registration. The Company
issued 395,726 warrants to the issuer at a price of $0.83 and the warrants
expire September 16, 2008. The warrants were valued using the
Black-Scholes valuation method and expenses of $40,600 were recorded to
additional paid-in capital as a cost of equity related transaction during
the year ended September 30, 2003. There have been no drawdowns on this
line of credit as of December 31, 2003.
CEL-SCI CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED DECEMBER 31, 2003 AND 2002
(unaudited)
(continued)
D. PRIVATE PLACEMENT
On December 1, 2003, the Company sold 2,994,964 shares of its common stock
to a group of private institutional investors for approximately
$2,550,000, or $0.85 per share. As part of this transaction, the investors
in the private offering received warrants which allow the investors to
purchase approximately 900,000 shares of the Company's common stock at a
price of $1.32 per share at any time prior to December 1, 2006.
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. 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 2003, the Company reduced its discretionary
expenditures. If necessary, the Company plans to further reduce
discretionary expenditures in fiscal year 2004; 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 2004. 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. MARKETING AGREEMENT
On May 30, 2003, the Company and Eastern Biotech signed an agreement to
develop both MULTIKINE 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. Because the Company did not register these
shares prior to September 30, 2003, the royalty percentage increased to
2%. If Eastern Biotech does not meet certain clinical development
milestones within one year, it will lose the right to sell both products
in these three countries. As of December 31, 2003, no clinical trials have
been started by Eastern Biotech.
CEL-SCI CORPORATION
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OFOPERATIONS
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 Bio Science,
Inc. ("Cambrex") whereby Cambrex agreed to provide the Company with a facility
which allows the Company to manufacture MULTIKINE in accordance with the Good
Manufacturing Practices regulations of the FDA for periodic manufacturing
campaigns. Company personnel will staff this facility. This agreement runs until
December 31, 2006. On November 15, 2001, the Company signed an agreement for a
manufacturing campaign with 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, payable on January 2, 2003, with
Cambrex to pay a total of $1,172,517. Unpaid principal began accruing interest
on November 16, 2002 and carried an interest rate of the Prime Rate plus 3%.
This note was later extended to January 2, 2004. There were 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 were convertible into common stock at 90% of the average of the closing
prices of the common stock for the three trading days immediately prior to the
conversion date subject to a floor of $0.22 per share. A beneficial conversion
cost of $106,716 was recorded during the year for the difference between the
conversion price of the stock and the market price of the stock. The balance of
the beneficial conversion cost was expensed to interest expense on the date the
note was paid. During the quarter ended December 31, 2003, the Company recorded
$9,943 in interest expense related to the note. During the quarter ending
December 31, 2003, CEL-SCI paid $692,010 of principal plus interest expense of
$59,450 to Cambrex, thereby paying off the remaining balance of the note.
In September 2003, the Company signed an equity line of credit agreement with
Rubicon Group for up to $10,000,000 of funding prior to December 29, 2005.
During this twenty-four month period, the Company can request a drawdown under
the equity line of credit by selling shares of its common stock to Rubicon
Group, who will be obligated to purchase the shares subject to certain volume
restrictions. The Company can 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. The minimum amount CEL-SCI can draw down at any one time
is $100,000, and the maximum amount CEL-SCI can draw down at any one time will
be determined at the time of the drawdown request using a formula contained in
the equity line of credit agreement. The Company is restricted from entering
into any other equity line of credit arrangement until the earlier of the
expiration of the agreement or two years from the date of registration. The
Company issued 395,726 warrants to the issuer at a price of $0.83 and the
warrants expire September 16, 2008. The warrants were valued using the
Black-Scholes valuation method and expenses of $40,600 were recorded to
additional paid-in capital as a cost of equity related transaction during the
year ended September 30, 2003. There have been no drawdowns on this line of
credit as of December 31, 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 and
later reduced further to $0.153. During the quarter ended December 31, 2003, all
remaining warrants were exercised.
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. By
June 2, 2003, all of the notes had been converted into 8,354,198 shares of
common stock. In addition, interest totaling $21,472 was converted into 109,428
shares of common stock. As of December 31, 2003, 450,000 warrants had been
exercised and 450,000 warrants remain outstanding.
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 $220,419. The first funds,
totaling $600,000, were received in January and the balance of $750,000 was
received on July 2, 2003. The notes bore interest at 7% per year. The first
notes were due and payable January 7, 2005 and the second notes were due and
payable July 7, 2005. Interest was payable quarterly. 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. 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. The Series H
warrant price is currently $0.25. No warrants had been exercised through June
30, 2003. 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. 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. By October 2, 2003, all of the Series H notes had
been converted into a total of 3,183,358 shares of common stock and total
interest of $32,914 had been converted into 83,227 shares of common stock. The
Series H warrant price is currently $0.25. As of December 31, 2003, 550,000
warrants had been exercised and 550,000 warrants remain outstanding.
On December 1, 2003, the Company sold 2,994,964 shares of its common stock to a
group of private institutional investors for approximately $2,550,000, or $0.85
per share. As part of this transaction, the investors in the private offering
received warrants which allow the investors to purchase approximately 900,000
shares of the Company's common stock at a price of $1.32 per share at any time
prior to December 1, 2006.
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 became a note payable. The note was payable on January 2, 2004.
Interest on the note was payable monthly at an annual rate of 8%. During the
quarter ended December 31, 2003, the Company paid the outstanding principal
balance of $184,330 to Covance plus accrued interest expense of $6,356. During
the quarter ended December 31, 2003, interest expense of $2,581 was recorded for
the note.
On May 30, 2003, the Company and Eastern Biotech signed an agreement to develop
both MULTIKINE 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. Because the Company did not register these shares
prior to September 30, 2003, the royalty percentage increased to 2%. If Eastern
Biotech does not meet certain clinical development milestones within one year,
it will lose the right to sell both products in these three countries. As of
December 31, 2003 no clinical trials have been started by Eastern Biotech.
There have been no material changes to the contractual obligations discussed in
the Company's September 30, 2003 Form 10K other than those changes in notes
payable, convertible debt and interest and dividends discussed above in this
section.
Results of Operations
"Grant revenues and other" increased during the three months ended December 31,
2003 due to the four grants received during fiscal year 2003. The Company
received two grants in April 2003, one grant in May 2003, and one grant in
September 2003. The first grant, totaling $1,100,000, was awarded by the United
States government to Northeastern Ohio Universities College of Medicine and the
Company. The second grant, announced in April 2003 was in the amount of
$134,000. The third grant was announced May 2003 in the amount $162,000. The
fourth grant, awarded in September 2003 was for $104,000. Research and
development expenses declined due to 1) the reversal of a disputed payable of
$54,859 and 2) a decrease in expenses for clinical trials. The Company completed
its MULTIKINE clinical trial in Hungary during the three months ended December
31, 2002 and the Company did not have a comparable expense during the quarter
ended December 31, 2003. General and administrative expenses declined due to
lower costs for public relations and travel expenses. Interest income during the
three months ended December 31, 2003 was less than it was during the three
months ended December 31, 2002 as a result of the lower interest rates on
interest bearing accounts. Interest expense decreased significantly as a result
of the conversion of the remaining convertible debt on October 2, 2003. Interest
expense for the three months ended December 31, 2003 and December 31, 2002 is
primarily a noncash item incurred to account for interest and amortization of
the discounts and deferred financing costs related to the convertible debt, the
note payable to Covance AG and the convertible debt payable to Cambrex
Biosciences, Inc.
Research and Development Expenses
During the three months ended December 31, 2003 and 2002 the Company's
research and development efforts involved MULTIKINE and L.E.A.P.S.. The table
below shows the research and development expenses associated with each project
during these three month periods.
Three Months Ended December 31,
2003 2002
MULTIKINE $281,693 $446,576
L.E.A.P.S. 86,655 64,731
---------- --------
TOTAL $368,348 $511,307
The Company believes that it has compiled sufficient data and clinical
information to justify a phase III clinical trial which would be designed to
prove the clinical benefit from MULTIKINE as an addition to established
anti-cancer therapies. It is the Company's intention to meet with FDA in 2004 to
discuss such a trial. The Company is unable to estimate the future costs of
research and clinical trials involving MULTIKINE since the Company has not yet
met with the FDA to discuss the design of future clinical trials and until the
scope of these trials is known, the Company will not be able to price any future
trials with clinical trial organizations.
As of January 31, 2004 the Company was involved in a number of
pre-clinical studies with respect to its L.E.A.P.S. technology. As with
MULTIKINE, the Company does not know what obstacles it will encounter in future
pre-clinical and clinical studies involving its L.E.A.P.S. technology.
Consequently, the Company cannot predict with any certainty the funds required
for future research and clinical trials and the timing of future research and
development projects.
Clinical and other studies necessary to obtain regulatory approval of a
new drug involve significant costs and require several years to complete. The
extent of the Company's clinical trials and research programs are primarily
based upon the amount of capital available to the Company and the extent to
which the Company has received regulatory approvals for clinical trials. The
inability of the Company to conduct clinical trials or research, whether due to
a lack of capital or regulatory approval, will prevent the Company from
completing the studies and research required to obtain regulatory approval for
any products which the Company is developing. Without regulatory approval, the
Company will be unable to sell any of its products.
Since all of the Company's projects are under development, the Company
cannot predict when it will be able to generate any revenue from the sale of any
of its products.
New Accounting Pronouncements
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities", (FIN46). FIN 46 provides guidance on the
consolidation of certain entities in which equity investors do not have the
characteristics of a controlling financial interest. Such entities are referred
to as variable interest entities. FIN 46 was effective immediately for variable
interest entities created or acquired after January 31, 2003 and was effective
July 1, 2003 for variable interest entities created or acquired on or before
January 31, 2003. In October 2003, the FASB issued Staff Position FIN 46.6,
which extended the effective date of FIN 46 for variable interest entities
acquired before February 1, 2003 to the first interim or annual period ending
after December 15, 2003. The Company adopted FIN 46 and the implementation did
not have a material effect on the Company's 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.
Comprehensive Loss - SFAS 130, "Reporting Comprehensive Income," establishes
standards for reporting and displaying comprehensive net income or loss and its
components in stockholders' equity. SFAS 130 requires the components of other
comprehensive income or loss such as changes in the fair value of
available-for-sale securities and foreign translation adjustments to be added to
net income or loss to arrive at comprehensive income or loss. Other
comprehensive income or loss items have no impact on the Company's net loss as
presented on the statement of operations. During the three months ended December
31, 2003 and 2002, there were no components of comprehensive loss other than net
loss and the statement of comprehensive loss has been omitted.
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 discount. This discount is
amortized to interest expense over the period the notes are outstanding and is
accelerated pro-rata as the notes are converted. 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.
Additionally, the Company is not exposed to interest rate risks due to the fact
the Company has no outstanding debt as of December 31, 2003. 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 December 31, 2003.
Item 4. CONTROLS AND PROCEDURES
The Company's Chief Executive Officer and Principal Financial Officer has
evaluated the effectiveness of the Company's "disclosure controls and
procedures," as such term is defined in Rule 13a(c) of the Securities Exchange
Act of 1934 (the "Exchange Act"), as amended. Based upon his evaluation, the
Chief Executive Officer and Principal Financial Officer has concluded that the
Company's disclosure controls and procedures are effective as of December 31,
2003 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. During the quarter ended
December 31, 2003 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, no corrective actions were
taken.
PART II
Item 2. Changes in Securities and Use of Proceeds
During the three months ended December 31, 2003, the Company issued 145,659
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 6.
(a) Exhibits
Number Exhibit
- ------ -------
31 Rule 13a-14(a) Certifications
32 Section 1350 Certifications
(b) Reports on Form 8-K
On December 3, 2003 the Company filed a report on Form 8-K which disclosed the
sale of 2,994,964 shares of common stock, plus warrants for the purchase of an
additional 900,000 shares, to a group of private investors for $2,550,000.
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
/s/ Geert Kersten
Date: February 12, 2004 ----------------------------
Geert Kersten
Chief Executive Officer*
*Also signing in the capacity of the Chief Accounting Officer and Principal
Financial Officer