UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2004
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
------- --------
Indicate by check mark whether the Registrant is an accelerated filer (as that
term is defined in Exchange Act Rule 12b-2).
Yes X No
------- --------
Class of Stock No. Shares Outstanding Date
-------------- ---------------------- ------------
Common 71,936,177 May 7, 2004
TABLE OF CONTENTS
PART I FINANCIAL INFORMATION
Item 1. Page
----
Condensed Consolidated Balance Sheets (unaudited) 3
Condensed Consolidated Statements of Operations (unaudited) 4-5
Condensed Consolidated Statements of Cash Flow (unaudited) 6-8
Notes to Condensed Consolidated Financial Statements (unaudited) 9
Item 2.
Management's Discussion and Analysis of Financial Condition 18
and Results of Operations
Item 3.
Quantitative and Qualitative Disclosures about Market Risks 23
Item 4.
Controls and Procedures 23
PART II
Item 2.
Changes in Securities and Use of Proceeds 24
Item 4.
Submission of Matters to a Vote of Security Holders 24
Item 6.
Exhibits and Reports on Form 8-K 25
Signatures 26
2
Item 1. FINANCIAL STATEMENTS
CEL-SCI CORPORATION
-------------------
CONDENSED CONSOLIDATED
BALANCE SHEETS
------------------------
(unaudited)
ASSETS
March 31, September 30,
2004 2003
------------ --------------
CURRENT ASSETS:
Cash and cash equivalents $ 1,924,687 $ 1,753,307
Interest and other receivables 50,218 47,051
Prepaid expenses and laboratory supplies 418,050 357,531
Deposits 14,828 14,828
Deferred financing costs -- 16,243
----------- ------------
Total current assets 2,407,783 2,188,960
RESEARCH AND OFFICE EQUIPMENT-
Less accumulated depreciation of $2,064,927
and $2,002,232 220,369 278,706
PATENT COSTS- less accumulated
amortization of $722,074 and $704,522 425,326 447,540
--------- --------
TOTAL ASSETS $ 3,053,478 $ 2,915,206
=========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 139,406 $ 481,985
Accrued expenses 41,444 99,172
Due to officer/shareholder and employees 299,715 227,115
Deposits held 3,000 3,000
Deferred rent -- 5,540
Note payable - Cambrex, net of discount -- 656,076
Note payable - Covance -- 184,330
----------- -----------
Total current liabilities 483,565 1,657,218
CONVERTIBLE NOTES, NET -- 32,882
----------- -----------
Total liabilities 483,565 1,690,100
STOCKHOLDERS' EQUITY
Common stock, $.01 par value; authorized,
100,000,000 shares; issued and outstanding,
65,523,908 and 61,166,345 shares at
March 31, 2004 and September 30, 2003,
respectively 655,239 611,663
Additional paid-in capital 90,779,688 87,167,091
Accumulated deficit (88,865,014) (86,553,648)
------------- -----------
Total stockholders' equity 2,569,913 1,225,106
------------ -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 3,053,478 $ 2,915,206
============= ============
See notes to condensed consolidated financial statements.
3
CEL-SCI CORPORATION
-------------------
CONDENSED CONSOLIDATED
STATEMENTS OF OPERATIONS
---------------------------------
(unaudited)
Six Months
Ended
March 31,
2004 2003
--------- ---------
REVENUES:
Grant revenue and other $ 172,449 $ 135,642
---------- ---------
EXPENSES:
Research and development 925,038 935,988
Depreciation and amortization 95,943 95,933
General and administrative 1,355,968 1,180,859
----------- ---------
Total Operating Expenses 2,376,949 2,212,780
----------- ----------
NET OPERATING LOSS (2,204,500) (2,077,138)
INTEREST INCOME 19,974 28,950
INTEREST EXPENSE (126,840) (666,858)
----------- ---------
NET LOSS (2,311,366) (2,715,046)
ACCRUED DIVIDENDS ON PREFERRED STOCK -- (3,921)
ACCRETION OF BENEFICIAL CONVERSION
FEATURE ON PREFERRED STOCK -- (68,301)
----------- -----------
NET LOSS ATTRIBUTABLE TO COMMON
STOCKHOLDERS $ (2,311,366) $(2,787,268)
============= ===========
NET LOSS PER COMMON SHARE (BASIC) $ (0.04) $ (0.06)
============== ===========
NET LOSS PER COMMON SHARE (DILUTED) $ (0.04) $ (0.06)
============== ===========
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING 64,082,658 44,852,886
============= ==========
See notes to condensed consolidated financial statements.
4
CEL-SCI CORPORATION
-------------------
CONDENSED CONSOLIDATED
STATEMENTS OF OPERATIONS
---------------------------------
(unaudited)
Three Months Ended March 31,
2004 2003
---------- --------
REVENUES:
Grant revenue and other $ 99,214 82,687
---------- --------
EXPENSES:
Research and development 556,690 424,681
Depreciation and amortization 48,016 48,507
General and administrative 708,528 482,403
---------- ---------
Total Operating Expenses 1,313,234 955,591
---------- ---------
NET OPERATING LOSS (1,214,020) (872,904)
INTEREST INCOME 8,747 11,643
INTEREST EXPENSE -- (170,920)
----------- --------
NET LOSS (1,205,273) (1,032,181)
ACCRUED DIVIDENDS ON PREFERRED STOCK -- (2,004)
ACCRETION OF BENEFICIAL CONVERSION
FEATURE ON PREFERRED STOCK -- (7,048)
----------- ----------
NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS $ (1,205,273) $(1,041,233)
============= ===========
NET LOSS PER COMMON SHARE (BASIC) $ (0.02) $ (0.02)
============ ===========
NET LOSS PER COMMON SHARE (DILUTED) $ (0.02) $ (0.02)
============ ============
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING 65,330,627 47,737,996
============ ============
See notes to condensed consolidated financial statements.
5
CEL-SCI CORPORATION
-------------------
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOW
---------------------------------
(unaudited)
Six Months Ended
March 31,
2004 2003
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
NET LOSS $(2,311,366) $(2,715,046)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 95,943 95,933
Issuance of common stock for services 155,909 427,434
Common stock contributed to 401(k) plan 13,932 22,124
Amortization of discount on note payable 30,916 37,500
Amortization of discount associated with
convertible notes 67,118 423,012
Amortization of deferred financing costs 16,243 158,334
Gain on sale of equipment -- (26,463)
Compensation expense related to variable
options 218,991 --
Impairment loss on abandonment of patents 25,720 8,432
Impairment loss on retired equipment -- 1,899
(Increase) decrease in receivables (3,167) 7,084
(Increase) decrease in prepaid expenses (60,519) 67,494
Decrease in deferred rent (5,540) (8,456)
(Decrease) increase in accrued expenses (55,938) 42,261
Increase in amount due to officer/shareholder
& employees 72,600 150,445
Decrease in accounts payable (349,079) (19,489)
---------- ---------
NET CASH USED IN OPERATING ACTIVITIES (2,088,237) (1,327,502)
---------- -----------
CASH FLOWS (USED IN) PROVIDED BY INVESTING
ACTIVITIES:
Purchase of equipment (4,358) --
Patent costs (30,255) (30,679)
---------- ---------
NET CASH (USED IN) PROVIDED BY INVESTING
ACTIVITIES (34,613) (30,679)
----------- ---------
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 340,000 395,000
Cash proceeds from exercise of warrants 291,222 22,950
Proceeds from short term loan -- 25,000
Payments on short term loan -- (25,000)
Payment of Cambrex note (686,992) (164,927)
Payment of Covance note (184,330) --
Cash proceeds from exercise of stock options 77,519 --
Proceeds from convertible notes 600,000
Transaction costs related to equity line of
credit and private placement (93,159) (90,910)
---------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES 2,294,230 762,113
---------- --------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 171,380 (596,068)
CASH AND CASH EQUIVALENTS:
Beginning of period 1,753,307 2,079,276
---------- ----------
End of period $ 1,924,687 1,483,208
=========== ==========
(continued)
See notes to condensed consolidated financial statements.
6
CEL-SCI CORPORATION
-------------------
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOW
---------------------------------
(unaudited)
(continued)
Six Months Ended
March 31,
2004 2003
-------- -------
SUPPLEMENTAL INFORMATION ON NONCASH TRANSACTIONS
Accrual of dividends on preferred stock:
Increase in accrued expenses $ -- $ 3,921
Decrease in additional paid-in capital -- (3,921)
--------- ----------
$ -- $ --
========= ==========
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) (970,000)
Increase in common stock 1,794 65,970
Increase in additional paid-in capital 98,206 904,030
---------- ---------
$ -- $ --
========== =========
Accretion for the beneficial conversion on
preferred stock:
Increase in additional paid-in capital $ -- $ 68,301
Decrease in additional paid-in capital -- (68,301)
---------- ----------
$ -- $ --
========== =========
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 $ -- $ 14,570
Increase in deferred financing costs -- (14,570)
----------- ---------
$ -- $ --
=========== =========
continued
7
CEL-SCI CORPORATION
-------------------
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOW
---------------------------------
(unaudited)
(continued)
Six Months Ended
March 31,
2004 2003
------- ------
Issuance of convertible debt with warrants and
beneficial conversion:
Decrease in convertible debt $ -- $ (600,000)
Increase in additional paid-in capital -- 600,000
--------- ----------
$ -- $ --
========= ==========
Deferred warrant costs on convertible notes:
Increase in deferred financing costs $ -- $ 107,677
Increase in additional paid-in capital -- (107,677)
---------- ----------
$ -- $ --
========== ==========
Interest expense paid for with common stock:
Decrease in accrued expenses $ (1,789) $ (10,229)
Increase in common stock 32 636
Increase in additional paid-in capital 1,757 9,593
--------- -----------
$ -- $ --
========== ==========
Patent costs included in accounts payable:
Increase in accounts payable $ 6,500 $ 19,419
Increase in patent costs (6,500) (19,419)
---------- -----------
$ -- $ --
========== ==========
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.
8
CEL-SCI CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE AND SIX MONTHS ENDED MARCH 31, 2004 AND 2003
(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/A 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 March 31, 2004 and the
results of operations for the three- and six-month periods 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- and six-month periods ended March 31,
2004 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
and six months ended March 31, 2004 the Company did not retire any
equipment. During the three and six months ended March 31, 2003, the
Company retired equipment with a net book value of $1,899.
9
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.
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 six months ended March 31, 2004 and
2003, the Company recorded patent impairment charges of $25,720 and $8,432
respectively for the net book value of patents abandoned during the period
and such amount is included in general and administrative expenses. During
the three months ended March 31, 2004 and 2003, the Company recorded
patent impairment charges of $-0- and $8,432 respectively. 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 and six months ended March 31, 2004 and 2003,
there were no components of comprehensive loss other than net loss and the
statement of comprehensive loss has been omitted.
Prepaid Expenses and Laboratory Supplies--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. These items are disposables and consumables and can be used
for both the manufacturing of MULTIKINE for clinical studies and in the
laboratory for quality control and bioassay use. They can be used in
training, testing and daily laboratory activities. Other prepaid expenses
are payments for services over a long period and are expensed over the
time period for which the service is rendered.
10
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 cashequivalents 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 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
11
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:
Six Months Ended
March 31, 2004 March 31, 2003
-------------- --------------
Net loss:
As reported $(2,311,366) $(2,715,046)
Deduct: Compensation expense for
stock-based performance awards
included in reported net loss,
net of related tax effects 218,991 --
Add: Total stock-based employee
compensation expense determined
under fair-value-based method for
all awards, net of related tax effects (772,952) (573,350)
---------- ----------
Pro forma net loss $(2,865,327) $(3,288,396)
============ ============
Net loss per common share, basic and diluted:
As reported $ (0.04) $ (0.06)
=========== ===========
Pro forma $ (0.04) $ (0.07)
=========== ===========
Three Months Ended
March 31, 2004 March 31, 2003
-------------- --------------
Net loss:
As reported $(1,205,273) $(1,032,181)
Deduct: Compensation expense for
stock-based performance
awards included in reported net loss,
net of related tax effects 198,883 --
Add: Total stock-based employee
compensation expense determined
under fair-value-based method for
all awards, net of related tax effects (566,214) (289,051)
---------- ---------
Pro forma net loss $(1,572,604) $(1,321,232)
=========== ===========
Net loss per common share, basic and diluted:
As reported $ (0.02) $ (0.02)
=========== ===========
Pro forma $ (0.02) $ (0.03)
=========== ===========
12
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.
B. STOCKHOLDERS' EQUITY
During the six months ended March 31, 2004 and 2003, the Company issued
stock for services to both employees and nonemployees with a fair value of
$155,909 and $427,434, respectively. During the three months ended March
31, 2004 and 2003, the Company issued stock for services to both employees
and nonemployees with a fair value of $-0- 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 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 March 31, 2004. As all shares had been converted prior to the year
ended September 30, 2003, there was no accretion of the beneficial
conversion feature or accrual of preferred dividends for the three and six
months ended March 31, 2004.
13
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 six months ended
March 31, 2004, 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
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 March 31, 2004. As of March 31, 2004, 450,000 warrants had been
exercised and 450,000 warrants remain outstanding.
14
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 March 31, 2004. As of March 31,
2004, 550,000 warrants had been exercised and 550,000 warrants remain
outstanding.
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 ended September 30, 2003 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 six months ended March 31, 2004, the Company
recorded $9,943 in interest expense related to the note. During the six
months ending March 31, 2004, CEL-SCI paid $692,010 of principal plus
interest expense of $59,450 to Cambrex, thereby paying off the remaining
balance of the note.
15
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 six months ended March 31, 2004, the Company paid
the outstanding principal balance of $184,330 to Covance plus accrued
interest expense of $6,356. During the six months ended March 31, 2004,
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. Drawdowns totaling $340,000 were made
during the three and six months ended March 31, 2004 with associated costs
of $4,090. A total of 307,082 shares were issued to Rubicon in exchange
for the drawdowns.
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. As of
March 31, 2004, all warrants remain outstanding.
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.
16
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 March 31, 2004, no clinical trials have
been started by Eastern Biotech.
G. SUBSEQUENT EVENT
On May 4, 2004, the Company announced the completion of an offering of
6,402,439 shares of registered common stock at $0.82 per share to one
institutional investor. This sale resulted in gross proceeds of $5.25
million. The stock was offered pursuant to an existing shelf registration
statement and Wachovia Capital Markets, LLC acted as the placement agent
for the offering. The Company announced that it intends to use the
proceeds of the offering to advance the clinical development of MultikineR
for the treatment of cancer.
17
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 six months ended March 31, 2004, the Company recorded
$9,943 in interest expense related to the note. During the six months ending
March 31, 2004, 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
18
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. Drawdowns totaling $340,000 were made during the
three and six months ended March 31, 2004 with associated costs of $4,090. A
total of 307,082 shares were issued to Rubicon in exchange for the drawdowns.
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 six months ended March 31, 2004, 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
19
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 March 31, 2004, 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. As of March 31, 2004, all warrants remain
outstanding.
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 six
months ended March 31, 2004, the Company paid the outstanding principal balance
of $184,330 to Covance plus accrued interest expense of $6,356. During the six
months ended March 31, 2004, 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
March 31, 2004 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/A 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 by $16,527 and $36,807 during the three and
six months ended March 31, 2004, respectively, compared to the same periods of
the previous year, 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 awarded to the
Company in the amount of $134,000. The third grant, announced May 2003, was
awarded to the Company in the amount of $162,000. The fourth grant was awarded
to the Company in September 2003 for $104,000.
20
During the six month period ended March 31, 2004, research and development
expenses decreased by $10,950 compared to the same period in 2003. The six
months ended March 31, 2004 included a charge of $52,418 for options repriced in
2001, while the same period in 2003 did not have such a charge. This increase in
research and development expenses in 2004 was offset by a reversal of a
previously expensed disputed payable of $54,859; there was no corresponding
reversal in the six months ended March 31, 2003. After taking the above into
consideration, the six month period ended March 31, 2004 had a reduction of
approximately $10,000 in research and development expenses due to lower clinical
expenditures during the first fiscal quarter.
During the three month period ended March 31, 2004, research and development
charges increased by $132,009. This increase was due to a charge of $52,418 for
options repriced in 2001, with no corresponding charge taken in the three month
period ended March 31, 2003. The remaining increase in research and development
costs was due to increased research and development costs related to the
L.E.A.P.S. technology, which is funded by various research grants and an
increase in FDA regulatory work and laboratory expenses.
During the six month period ended March 31, 2004, general and administrative
expenses increased by $175,109 compared to the same period in 2003. This
increase was primarily due to a charge of $146,465 for options repriced in 2001.
There was no corresponding charge taken in the six months ended March 31, 2003.
During the three month period ended March 31, 2004, general and administrative
expenses increased by $226,125. The three month period ended March 31, 2004
includes a charge of $146,465 for options repriced in 2001 with no corresponding
charge in the three month period ended March 31, 2003. The remaining increase in
general and administrative expenses can mostly be attributed to an increase in
accounting fees of $58,207.
Interest income during the three and six months ended March 31, 2004 was less
than it was during the three and six months ended March 31, 2003 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 and six
months ended March 31, 2004 and 2003 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. There is no interest
expense for the three months ended March 31, 2004 because all debt was either
paid or converted to common stock by December 2003.
Research and Development Expenses
During the six months ended March 31, 2004 and 2003 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
six month periods.
Six Months Ended Three Months Ended
March 31, March 31,
2004 2003 2004 2003
---- ---- ---- ----
MULTIKINE $747,357 $800,602 $465,661 $354,026
L.E.A.P.S. 177,684 135,386 91,029 70,655
-------- -------- -------- --------
TOTAL $925,038 $935,988 $556,690 $424,681
======== ======== ======== ========
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
21
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 April 30, 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.
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 six months ended March 31,
2004 and 2003, 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
22
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.
Prepaid Expenses and Laboratory Supplies--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.
These items are disposables and consumables and can be used for both the
manufacturing of MULTIKINE for clinical studies and in the laboratory for
quality control and bioassay use. They can be used in training, testing and
daily laboratory activities. Other prepaid expenses are payments for services
over a long period and are expensed over the time period for which the service
is rendered.
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 March 31, 2004. 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 March 31, 2004.
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 as of March 31, 2004, 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
23
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 during the three months ended March 31,
2004 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.
24
PART II
Item 2. Changes in Securities and Use of Proceeds
During the six months ended March 31, 2004, 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 4. Submission of Matters to a Vote of Security Holders
The annual meeting of the Company's shareholders was held on May 6, 2004.
At the meeting the following persons were elected as directors for the upcoming
year.
Name Votes For Votes Withheld
Maximilian de Clara 59,045,996 2,551,004
Geert Kersten 60,468,134 1,128,866
Alexander Esterhazy 60,640,061 956,939
C. Richard Kinsolving 60,657,411 939,589
Peter Young 60,686,717 910,283
At the meeting the following proposals were ratified by the shareholders.
1. The adoption of the Company's 2004 Incentive Stock Option Plan which
provides that up to 1,000,000 shares of common stock may be issued upon
the exercise of options granted pursuant to the Incentive Stock Option
Plan.
2. The adoption of the Company's 2004 Non-Qualified Stock Option Plan which
provides that up to 1,000,000 shares of common stock may be issued upon
the exercise of options granted pursuant to the Non-Qualified Stock Option
Plan.
3. The adoption of the Company's 2004 Stock Bonus Plan which provides that up
to 1,000,000 shares of common stock may be issued to persons granted stock
bonuses pursuant to the Stock Bonus Plan.
4. The adoption of the Company's Stock Compensation Plan which provides for
the issuance of up to 1,000,000 restricted shares of common stock to the
Company's directors, officers, employees and consultants for serviced
provided to the Company.
5. The adoption of an amendment to the Company's Articles of Incorporation
such that the Company would be authorized to issue 200,000,000 shares of
common stock.
25
6. The appointment of Deloitte & Touche, LLP as the Company's independent
accountants for the fiscal year ending September 30, 2004.
The following is a tabulation of votes cast with respect to these proposals:
Votes
-------------------------------------- Broker
Proposal For Against Abstain Non-Votes
1. 17,845,678 3,853,813 247,537 39,649,972
2. 17,616,762 4,028,111 302,155 39,649,972
3. 17,770,557 3,912,746 263,725 39,649,972
4. 17,714,031 3,803,698 429,299 39,649,972
5. 57,432,535 3,984,936 179,529
6. 60,825,995 255,456 515,549
Item 6.
(a) Exhibits
Number Exhibit
31 Rule 13a-14(a) Certifications
32 Section 1350 Certifications
(b) Reports on Form 8-K
The Company did not file any reports on Form 8-K for the quarter ended March 31,
2004.
26
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CEL-SCI CORPORATION
Date: May 11, 2004 /s/ Geert Kersten
----------------------------
Geert Kersten
Chief Executive Officer*
*Also signing in the capacity of the Chief Accounting Officer and Principal
Financial Officer
EXHIBIT 31
CERTIFICATIONS
I, Geert Kersten, the Principal Financial Officer of CEL-SCI Corporation,
certifies that:
1. I have reviewed this quarterly report on Form 10-Q of CEL-SCI Corporation;
2. Based on my knowledge, this 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 report;
3. Based on my knowledge, the financial statements, and other financial
information included in this 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 report;
4. The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15 and 15d-15(e)) and internal control over financial
reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the
registrant and have:
a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this report is being prepared;
b) designed such internal control over financial reporting, or cause such
internal control over financial reporting to be designed under our supervision,
to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles;
c) evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this report our conclusions about the effectiveness
of the disclosure controls and procedures, as of the end of the period covered
by this report based on such evaluation; and
d) disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's most
recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an
annual report) that has materially affected, or is reasonably likely to
materially affect, the registrant's internal control over financial reporting;
and
5. The registrant's other certifying officer(s) and I have disclosed, based on
our most recent evaluation of the internal control over financial reporting, to
the registrant's auditors and the audit committee of the registrant's board of
directors (or persons performing the equivalent functions):
a) all significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant's ability to record, process,
summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other
employees who have significant role in the registrant's internal control over
financial reporting.
May 11, 2004 /s/ Geert Kersten
------------------------------
Geert Kersten
Principal Financial Officer
CERTIFICATIONS
I, Geert Kersten, the Chief Executive Officer of CEL-SCI Corporation, certifies
that:
1. I have reviewed this quarterly report on Form 10-Q of CEL-SCI Corporation;
2. Based on my knowledge, this 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 report;
3. Based on my knowledge, the financial statements, and other financial
information included in this 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 report;
4. The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15 and 15d-15(e)) and internal control over financial
reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the
registrant and have:
a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this report is being prepared;
b) designed such internal control over financial reporting, or cause such
internal control over financial reporting to be designed under our supervision,
to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles;
c) evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this report our conclusions about the effectiveness
of the disclosure controls and procedures, as of the end of the period covered
by this report based on such evaluation; and
d) disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's most
recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an
annual report) that has materially affected, or is reasonably likely to
materially affect, the registrant's internal control over financial reporting;
and
5. The registrant's other certifying officer(s) and I have disclosed, based on
our most recent evaluation of the internal control over financial reporting, to
the registrant's auditors and the audit committee of the registrant's board of
directors (or persons performing the equivalent functions):
a) all significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant's ability to record, process,
summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other
employees who have significant role in the registrant's internal control over
financial reporting.
May 11, 2004 /s/ Geert Kersten
------------------------------
Geert Kersten
Chief Executive Officer
Exhibit 32
In connection with the Quarterly Report of CEL-SCI Corporation (the
"Company") on Form 10-Q for the period ending March 31, 2004 as filed with the
Securities and Exchange Commission (the "Report"), Geert Kersten, the Chief
Executive and Principal Financial Officer of the Company, certifies, 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 his 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.
By: /s/ Geert Kersten
------------------------------
Geert Kersten
Chief Executive and Principal Financial Officer
May 11, 2004