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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 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 1-11889
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 _________ No _____X____
Class of Stock No. Shares Outstanding Date
-------------- ---------------------- ----
Common 72,276,231 February 10, 2005
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) 5-6
Notes to Condensed Consolidated Financial Statements (unaudited) 7
Item 2.
Management's Discussion and Analysis of Financial Condition 15
and Results of Operations
Item 3.
Quantitative and Qualitative Disclosures about Market Risks 20
Item 4.
Controls and Procedures 20
PART II
Item 2.
Changes in Securities and Use of Proceeds 21
Item 4.
Submission of Matters to a Vote of Security Holders 21
Item 6.
Exhibits and Reports on Form 8-K 21
Signatures 22
Item 1. FINANCIAL STATEMENTS
CEL-SCI CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
ASSETS
December 31, September 30,
2004 2004
------------ -------------
CURRENT ASSETS:
Cash and cash equivalents $ 3,290,032 $ 4,263,631
Interest and other receivables 15,672 21,256
Prepaid expenses and laboratory supplies 421,980 508,597
Deposits 14,828 14,828
--------- -----------
Total current assets 3,742,512 4,808,312
RESEARCH AND OFFICE EQUIPMENT-
Less accumulated depreciation of
$1,689,949 and $1,651,759 260,324 233,612
PATENT COSTS- less accumulated
amortization of $760,135 and $745,321 471,842 471,886
---------- ---------
TOTAL ASSETS $ 4,474,678 $ 5,513,810
=========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 215,240 $ 143,300
Accrued expenses 70,795 64,361
Due to officer/shareholder and employees 37,842 5,320
Deposits held 3,000 3,000
---------- ------------
Total current liabilities 326,877 215,981
---------- ------------
Total liabilities 326,877 215,981
STOCKHOLDERS' EQUITY
Common stock, $.01 par value; authorized,
100,000,000 shares; issued and outstanding,
72,269,231 and 72,147,367 shares at
December 31, 2004 and September 30, 2004,
respectively 722,692 721,474
Unearned compensation (10,354) (14,237)
Additional paid-in capital 95,385,503 95,343,962
Accumulated deficit (91,950,040) (90,753,370)
----------- -----------
Total stockholders' equity 4,147,801 5,297,829
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $4,474,678 $5,513,810
=========== ===========
See notes to condensed consolidated financial statements.
3
CEL-SCI CORPORATION
-------------------
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
---------------------------------
(unaudited)
Three Months Ended
December 31,
2004 2003
--------- --------
REVENUES:
Grant revenue and other $ 75,507 $ 73,235
--------- ---------
EXPENSES:
Research and development 701,104 368,348
Depreciation and amortization 56,679 47,927
General and administrative 532,214 647,440
--------- --------
Total Operating Expenses 1,289,997 1,063,715
--------- ----------
NET OPERATING LOSS (1,214,490) (990,480)
INTEREST INCOME 17,820 11,227
INTEREST EXPENSE - (126,840)
--------- ---------
NET LOSS (1,196,670) (1,106,093)
--------- ----------
NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS $(1,196,670) $(1,106,093)
=========== ===========
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 72,178,816 62,848,255
========= ==========
See notes to condensed consolidated financial statements.
4
CEL-SCI CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
(unaudited)
Three Months Ended
December 31,
2004 2003
---------------------------
CASH FLOWS FROM OPERATING
ACTIVITIES:
NET LOSS $ (1,196,670) $ (1,106,093)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 56,679 47,927
Issuance of common stock and stock options for
services - 155,909
Common stock contributed to 401(k) plan 19,517 5,830
Amortization of discount on note payable - 30,916
Amortization of discount associated with
convertible notes - 67,118
Amortization of deferred financing costs - 16,243
Compensation expense related to variable options - 20,108
Impairment loss on abandonment of patents 3,716 25,720
Impairment loss on retired equipment 95 -
Decrease in receivables 5,584 30,943
Decrease in prepaid expenses 86,617 5,937
Decrease in deferred rent - (3,317)
Increase (decrease) in accrued expenses 6,434 (52,073)
Increase (decrease) in amount due to
officer/shareholder & employees 32,522 (184,093)
Increase (decrease) in accounts payable 50,150 (254,805)
Decrease in unearned compensation 3,883 -
-----------------------------
NET CASH USED IN OPERATING ACTIVITIES (931,473) (1,193,730)
-----------------------------
CASH FLOWS (USED IN) PROVIDED BY INVESTING
ACTIVITIES:
Purchase of equipment (65,368) -
Patent costs - (10,000)
-----------------------------
NET CASH USED IN INVESTING ACTIVITIES (65,368) (10,000)
-----------------------------
CASH FLOWS PROVIDED BY (USED IN) FINANCING
ACTIVITIES:
Proceeds from issuance of common stock - 2,549,970
Proceeds from exercise of warrants - 291,222
Payment of Cambrex note - (686,992)
Payment of Covance note - (184,330)
Proceeds from exercise of stock options 23,242 2,100
Transaction costs related to equity line of
credit and private placement - (72,459)
-----------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 23,242 1,899,511
-----------------------------
NET (DECREASE) INCREASE IN CASH AND CASH
EQUIVALENTS (973,599) 695,781
CASH AND CASH EQUIVALENTS:
Beginning of period 4,263,631 1,753,307
-----------------------------
End of period $ 3,290,032 $ 2,449,088
=============================
(continued)
See notes to condensed consolidated financial statements.
5
CEL-SCI CORPORATION
-------------------
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
---------------------------------
(unaudited)
(continued)
Three Months Ended
December 31,
2004 2003
---------------------------
SUPPLEMENTAL INFORMATION ON NONCASH TRANSACTIONS
Conversion of convertible debt into common stock:
Decrease in convertible notes
$ - $ (100,000)
Increase in common stock - 1,794
Increase in additional paid-in capital - 98,206
----------- ------------
$ - $ -
=========== ============
Deferred financing costs included in accounts
payable
Increase in accounts payable
$ - $ 17,680
Increase in deferred financing costs - (17,680)
----------- ------------
$ - $ -
=========== ============
Interest expense paid for with common stock:
Decrease in accrued expenses
$ - $ (1,789)
Increase in common stock - 32
Increase in additional paid-in capital - 1,757
----------- ------------
$ - $ -
=========== ============
Patent costs included in accounts payable:
Increase in accounts payable
$ 21,790 $ 30,255
Increase in patent costs (21,790) (30,255)
----------- ------------
$ - $ -
=========== ============
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.
6
CEL-SCI CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED DECEMBER 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,
2004.
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, 2004 and the
results of operations for the three-month period then ended. The condensed
consolidated balance sheet as of September 30, 2004 is derived from the
September 30, 2004 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, 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.
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, 2004, the Company
retired equipment with a net book value of $95. During the three months
ended December 31, 2003 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.
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
7
CEL-SCI CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED DECEMBER 31, 2004 AND 2003
(unaudited)
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, 2004
and 2003, the Company recorded patent impairment charges of $3,716 and
$25,720 respectively for the net book value of patents abandoned during
the period and such amount is included in general and administrative
expenses. Based on current patent applications and issued patents, CEL-SCI
expects that the amortization of patent expenses will total approximately
$350,000 during the next five years.
Net Loss per Common Share--Net loss per common share is computed by
dividing the net loss by the weighted average number of common shares
outstanding during the period. Potentially dilutive common shares,
including convertible 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, 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.
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 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
8
CEL-SCI CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED DECEMBER 31, 2004 AND 2003
(unaudited)
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-Based Compensation--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:
Three Months Ended
December 31, 2004 December 31, 2003
----------------- -----------------
Net loss:
As reported $(1,196,670) $(1,106,093)
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 (126,250) (199,594)
--------------- --------------
Pro forma net loss $(1,322,920) $(1,285,579)
================ ==============
Net loss per common share, basic and diluted:
9
CEL-SCI CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED DECEMBER 31, 2004 AND 2003
(unaudited)
As reported $ (0.02) $ (0.02)
=============== ================
Pro forma $ (0.02) $ (0.02)
=============== ================
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.
a. New Accounting Pronouncements-- In November 2004, the Financial Accounting
Standards Board ("FASB") issued Statement of Financial Accounting
Standards ("SFAS") No. 151, "Inventory Costs, an amendment of ARB 43,
Chapter 4". This statement amends ARB 43, Chapter 4, to clarify
accounting for abnormal amounts of idle facility expense, freight,
handling costs and wasted material. SFAS No. 151 requires that those
items be recognized as current-period charges in all circumstances.
SFAS No. 151 is effective for fiscal years beginning after June 15, 2005.
The Company does not believe that the adoption of SFAS No. 151 will have a
material effect on its financial position, results of operations or cash
flows.
In December 2004 the FASB issued SFAS No. 123R, "Share-Based Payment".
SFAS No. 123R requires companies to recognize compensation expense in an
amount equal to the fair value of the share-based payment (stock options
and restricted stock) issued to employees. SFAS No. 123R applies to all
transactions involving issuance of equity by a company in exchange for
goods and services, including employees. SFAS No. 123R is effective for
fiscal periods beginning after June 15, 2005. The Company has not
determined the impact of adopting SFAS No. 123R.
On December 16, 2004, the FASB issued SFAS No. 153, "Exchange of
Nonmonetary Assets", an amendment of Accounting Principles Board ("APB")
Opinion No. 29, which differed from the International Accounting Standards
Board's ("IASB") method of accounting for exchanges of similar productive
assets. Statement No. 153 replaces the exception from fair value
measurement in APB No. 29, with a general exception from fair value
measurement for exchanges of non-monetary assets that do not have
commercial substance. The Statement is to be applied prospectively and is
effective for nonmonetary asset exchanges occurring in fiscal periods
beginning after June 15, 2005. The Company does not believe that SFAS No.
153 will have a material impact on its results of operations or cash
flows.
B. STOCKHOLDERS' EQUITY
During the three months ended December 31, 2004, the Company did not issue
stock for services. During the three months ended December 31, 2003, the
Company issued stock for services to both employees and nonemployees with
a fair value of $155,909.
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
10
CEL-SCI CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED DECEMBER 31, 2004 AND 2003
(unaudited)
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. All warrants were exercised
during the year ended September 30, 2004.
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 December 31, 2004. As of December 31, 2004, 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
11
CEL-SCI CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED DECEMBER 31, 2004 AND 2003
(unaudited)
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, 2004. As of December 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. In December of 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%. In December of 2003, the Company paid the outstanding
principal balance of $184,330 to Covance plus accrued interest expense of
$6,356.
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 a 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
12
CEL-SCI CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED DECEMBER 31, 2004 AND 2003
(unaudited)
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 year ended September 30, 2004 with associated costs of $4,090.
A total of 307,082 shares were issued to Rubicon in exchange for the
drawdowns. During the three months ended December 31, 2004 and 2003, no
drawdowns were made.
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 and associated costs of $498,452. 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 intends to
use the proceeds of the offering to advance the clinical development of
Multikine for the treatment of cancer. In addition, 76,642 warrants were
issued to Wachovia at a price of $1.37 and the warrants expire May 4,
2009. The warrants were valued using the Black-Scholes valuation method
and an expense of $38,127 was recorded to additional paid-in capital as a
cost of equity related transaction during the year ended September 30,
2004.
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 991,003 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 December 31, 2004,
all warrants remain outstanding.
In connection with this private placement, the Company was required to
file a registration statement by December 31, 2003. The registration
statement was to have been declared effective by the SEC no later than
March 30, 2004. If the registration statement was declared effective later
than March 30, 2004, the Company was subject to paying liquidated damages
to the investors. In accordance with this agreement, the Company recorded
an expense of $76,499 during the year ended September 30, 2004.
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. 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 2005. Ultimately, the
Company must complete the development of its products, obtain the
13
CEL-SCI CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED DECEMBER 31, 2004 AND 2003
(unaudited)
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 did not meet certain clinical development
milestones within one year, it would lose the right to sell both products
in these three countries. As of June 1, 2004, Eastern Biotech lost its
exclusive right to market, distribute and sell Multikine in accordance
with the agreement.
14
CEL-SCI CORPORATION
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Liquidity and Capital Resources
The Company has had only limited revenues from operations since its inception in
March 1983. The Company has relied upon proceeds realized from the public and
private sale of its Common Stock and convertible notes as well as short-term
borrowings to meet its funding requirements. Funds raised by the Company have
been expended primarily in connection with the acquisition of exclusive rights
to certain patented and unpatented proprietary technology and know-how relating
to the human immunological defense system, the funding of Viral Technologies,
Inc.'s (VTI) research and development program, patent applications, the
repayment of debt, the continuation of Company-sponsored research and
development and administrative costs, and the construction of laboratory
facilities. Inasmuch as the Company does not anticipate realizing significant
revenues until such time as it enters into licensing arrangements regarding its
technology and know-how or until such time it receives permission to sell its
product (which could take a number of years), the Company is mostly dependent
upon short-term borrowings and the proceeds from the sale of its securities to
meet all of its liquidity and capital resource requirements.
In June 2000, the Company entered into an agreement with Cambrex 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 three months ended December 31, 2003, the Company
recorded $9,943 in interest expense related to the note. During the three months
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
15
year ended September 30, 2003. During the three months ended December 31, 2004
and 2003, there were no drawdowns made on the line of credit.
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. All remaining warrants were exercised during
the three months ended December 31, 2003.
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, 2004, 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. 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
16
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, 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 December 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
three months 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 three months 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 did not meet certain clinical development milestones within one year, it
would lose the right to sell both products in these three countries. As of June
1, 2004 no clinical trials had been started by Eastern Biotech and in accordance
with the agreement, Eastern Biotech lost its exclusive right to market,
distribute and sell Multikine in the countries.
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 and associated
costs of $498,452. 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 intends to use the proceeds of the offering
to advance the clinical development of MultikineR for the treatment of cancer.
In addition, 76,642 warrants were issued to Wachovia at a price of $1.37 and the
warrants expire May 4, 2009. The warrants were valued using the Black-Scholes
valuation method and an expense of $38,127 was recorded to additional paid-in
capital as a cost of equity related transaction during the fiscal year ended
September 30, 2004.
Results of Operations
"Grant revenues and other" increased by $2,272 during the three months ended
December 31, 2004, compared to the same period of the previous year, due to
higher grant reimbursements in 2004.
During the three month period ended December 31, 2004, research and development
expenses increased by $332,756 compared to the same period in 2003. The increase
in research and development expense was due to an increase in work related to
the Company's Phase III application for Multikine.
During the three month period ended December 31, 2004, general and
administrative expenses decreased by $115,226 compared to the same period in
17
2003. This decrease was mostly due to a decrease in business development
expenses, filing fees and legal fees, as the Company's foremost efforts were
focused on the submission of the Phase III clinical trial application for
Multikine to the FDA.
Interest income during the three months ended December 31, 2004 was higher than
it was during the three months ended December 31, 2003 as a result of higher
balances in interest bearing accounts. Interest expense decreased to zero 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 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 month periods ended December 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 the three-month periods.
Three Months Ended
December 31,
--------------------
2004 2003
------- --------
MULTIKINE $614,573 $281,693
L.E.A.P.S. 86,531 86,655
-------- --------
TOTAL $701,104 $368,348
======== ========
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. On January 4, 2005, the Company announced that it had
submitted a Phase III clinical trial protocol to the U.S. Food and Drug
Administration ("FDA") for the use of its investigational immunotherapy drug
Multikine(R) in the treatment of advanced primary squamous cell carcinoma of the
oral cavity. Additional information in support of and to provide the rationale
for the Phase III trial (final reports of clinical trials conducted with
Multikine to date and manufacturing and testing information) was included with
this submission. It is the Company's intention to meet with FDA in 2005 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. 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 December 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.
18
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, 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 and Warrants - 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.
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
19
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. Additionally, the Company is not exposed to
interest rate risks due to the fact the Company has no outstanding debt as of
December 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 all investments have maturities of 3
months or less.
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, as of December 31, 2004. Based
upon his evaluation, he has concluded that as of December 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 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
December 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, no corrective actions were taken.
PART II
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 during the quarter ended
December 31, 2004.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CEL-SCI CORPORATION
Date: February 14, 2005 /s/ Geert Kersten
---------------------------
Geert Kersten
Chief Executive Officer*
*Also signing in the capacity of the Chief Accounting Officer and Principal
Financial Officer