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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 March 31, 2005
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 _________ No _____X____
-
Class of Stock No. Shares Outstanding Date
-------------- ---------------------- ----
Common 72,477,486 May 12, 2005
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) 6-7
Notes to Condensed Consolidated Financial Statements (unaudited) 8
Item 2.
Management's Discussion and Analysis of Financial Condition 16
and Results of Operations
Item 3.
Quantitative and Qualitative Disclosures about Market Risks 21
Item 4.
Controls and Procedures 21
PART II
Item 2.
Changes in Securities and Use of Proceeds 22
Item 4.
Submission of Matters to a Vote of Security Holders 22
Item 5. Other Information 23
Item 6.
Exhibits and Reports on Form 8-K 23
Signatures 24
2
Item 1. FINANCIAL STATEMENTS
CEL-SCI CORPORATION
-------------------
CONDENSED CONSOLIDATED BALANCE SHEETS
------------------------
(unaudited)
ASSETS
March 31, September 30,
2005 2004
---------------------------------
CURRENT ASSETS:
Cash and cash equivalents $ 2,173,350 $ 4,263,631
Interest and other receivables 45,717 21,256
Prepaid expenses and laboratory supplies 423,296 508,597
Deposits 14,828 14,828
Total current assets 2,657,191 4,808,312
RESEARCH AND OFFICE EQUIPMENT-
Less accumulated depreciation of $1,719,857
and $1,651,759 226,068 233,612
PATENT COSTS- less accumulated
amortization of $778,774 and $745,321 466,868 471,886
------------- ------------------
TOTAL ASSETS $ 3,350,127 $ 5,513,810
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 118,582 $ 143,300
Accrued expenses 87,938 64,361
Due to officer/shareholder and employees 27,168 5,320
Deposits held 3,000 3,000
------------- ------------------
Total current liabilities 236,688 215,981
------------- ------------------
Total liabilities 236,688 215,981
STOCKHOLDERS' EQUITY
Common stock, $.01 par value; authorized,
100,000,000
shares; issued and outstanding,
72,335,295 and 72,147,367 shares at
March 31, 2005 and September
30, 2004, respectively 723,353 721,474
Unearned compensation (6,471) (14,237)
Additional paid-in capital 95,420,955 95,343,962
Accumulated deficit (93,024,398) (90,753,370)
Total stockholders' equity 3,113,439 5,297,829
------------- ------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 3,350,127 $ 5,513,810
============= ==================
See notes to condensed consolidated financial statements.
3
CEL-SCI CORPORATION
-------------------
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
---------------------------------
(unaudited)
Six Months Ended
March 31,
2005 2004
---------------------------------
REVENUES:
Grant revenue and other
$ 185,292 $ 172,449
------------- ------------------
EXPENSES:
Research and development 1,285,991 925,038
Depreciation and amortization 109,768 95,943
General and administrative 1,092,855 1,355,968
------------- ------------------
Total Operating Expenses 2,488,614 2,376,949
------------- ------------------
NET OPERATING LOSS (2,303,322) (2,204,500)
INTEREST INCOME 32,294 19,974
INTEREST EXPENSE - (126,840)
------------- ------------------
NET LOSS
(2,271,028) (2,311,366)
------------- ------------------
NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS $(2,271,028) $(2,311,366)
============= ==================
NET LOSS PER COMMON SHARE (BASIC) $ (0.03) $ (0.04)
============= ==================
NET LOSS PER COMMON SHARE (DILUTED) $ (0.03) $ (0.04)
============= ==================
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 72,232,732 64,082,658
============= ==================
See notes to condensed consolidated financial statements.
4
CEL-SCI CORPORATION
-------------------
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
---------------------------------
(unaudited)
Three Months Ended
March 31,
2005 2004
---------------------------------
REVENUES:
Grant revenue and other 109,785 $ 99,214
------------- ------------------
EXPENSES:
Research and development 584,887 556,690
Depreciation and amortization 53,089 48,016
General and administrative 560,641 708,528
------------- ------------------
Total Operating Expenses 1,198,617 1,313,234
------------- ------------------
NET OPERATING LOSS (1,088,832) (1,214,020)
INTEREST INCOME 14,474 8,747
INTEREST EXPENSE - -
------------- ------------------
NET LOSS (1,074,358) (1,205,273)
------------- ------------------
NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS $ (1,074,358) $ (1,205,273)
============= ==================
NET LOSS PER COMMON SHARE (BASIC) $ (0.01) $ (0.02)
============= ==================
NET LOSS PER COMMON SHARE (DILUTED) $ (0.01) $ (0.02)
============= ==================
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 72,287,847 65,330,627
============= ==================
See notes to condensed consolidated financial statements.
5
CEL-SCI CORPORATION
-------------------
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
---------------------------------
(unaudited)
Six Months Ended
March 31,
2005 2004
----------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
NET LOSS $ (2,271,028) $ (2,311,366)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 109,768 95,943
Issuance of common stock and stock options
for services 7,972 155,909
Common stock contributed to 401(k) plan 40,251 13,932
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 - 218,991
Impairment loss on abandonment of patents 3,716 25,720
Impairment loss on retired equipment 267 -
Increase in receivables (24,461) (3,167)
(Increase) decrease in prepaid expenses 85,301 (60,519)
Decrease in deferred rent - (5,540)
Increase (decrease) in accrued expenses 23,577 (55,938)
Increase (decrease) in amount due to
officer/shareholder & employees 21,848 72,600
Increase (decrease) in accounts payable (29,525) (349,079)
Decrease in unearned compensation 7,766 -
------------- -------------
NET CASH USED IN OPERATING ACTIVITIES (2,024,548) (2,088,237)
CASH FLOWS (USED IN) PROVIDED BY INVESTING
ACTIVITIES:
Purchase of equipment (65,368) (4,358)
Patent costs (31,014) (30,255)
------------- -------------
NET CASH USED IN INVESTING ACTIVITIES (96,382) (34,613)
------------- -------------
CASH FLOWS PROVIDED BY (USED IN) FINANCING
ACTIVITIES:
Proceeds from issuance of common stock - 2,549,970
Proceeds from drawdown on equity line - 340,000
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 30,649 77,519
Transaction costs related to equity line of
credit and private placement - (93,159)
------------- -------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 30,649 2,294,230
------------- -------------
NET (DECREASE) INCREASE IN CASH AND CASH
EQUIVALENTS (2,090,281) 171,380
CASH AND CASH EQUIVALENTS:
Beginning of period 4,263,631 1,753,307
------------- -------------
End of period $ 2,173,350 $ 1,924,687
============= =============
(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,
2005 2004
----------------------------
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
------------- -------------
$ - $ -
============= =============
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
------------- -------------
$ - $ -
============= =============
Equipment costs included in accounts payable:
Increase in accounts payable $ 367 $ -
Increase in research and office equipment (367) -
----------------------------
$ - $ -
============================
Patent costs included in accounts payable:
Increase in accounts payable $ 4,440 $ 6,500
Increase in patent costs (4,440) (6,500)
------------- -------------
$ - $ -
============= =============
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.
7
CEL-SCI CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED MARCH 31, 2005 AND 2004
(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 March 31, 2005 and the
results of operations for the six and three-month periods 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 six and three-month periods ended March 31,
2005 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 six month periods ended March 31, 2005 and 2004, the
Company retired equipment with a net book value of $267 and $-0-,
respectively. During the three months ended March 31, 2005 and 2004, the
Company retired equipment with a net book value of $172 and $-0-,
respectively.
8
CEL-SCI CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED MARCH 31, 2005 AND 2004
(unaudited)
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
MultikineR, 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, 2005 and
2004, the Company recorded patent impairment charges of $3,716 and
$25,720, respectively. During the three months ended March 31, 2005 and
2004, the Company recorded no patent impairment charges. These charges are
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 six-month and three-month periods ended March 31,
2005 and 2004, there were no components of comprehensive loss other than
net loss and the statement of comprehensive loss has been omitted.
9
CEL-SCI CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED MARCH 31, 2005 AND 2004
(unaudited)
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.
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.
10
CEL-SCI CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED MARCH 31, 2005 AND 2004
(unaudited)
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:
Six Months Ended
March 31, 2005 March 31, 2004
-------------- --------------
Net loss:
As reported $(2,271,028) $(2,311,366)
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 (274,840) (772,952)
-------------- --------------
Pro forma net loss $(2,545,868) $(2,865,327)
============== ==============
Net loss per common share, basic and diluted:
As reported $ (0.03) $ (0.04)
============== ===============
Pro forma $ (0.04) $ (0.04)
============== ===============
11
CEL-SCI CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED MARCH 31, 2005 AND 2004
(unaudited)
Three Months Ended
March 31, 2005 March 31, 2004
-------------- --------------
Net loss:
As reported $(1,074,358) $(1,205,273)
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 (148,590) (566,214)
-------------- --------------
Pro forma net loss $(1,222,948) $(1,572,604)
============== =============
Net loss per common share, basic and diluted:
As reported $ (0.01) $ (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.
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.
12
CEL-SCI CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED MARCH 31, 2005 AND 2004
(unaudited)
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
the Company's 2006 fiscal year beginning October 1, 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 six months and three months ended March 31, 2005, the Company
did not issue stock for services. During the six and three months ended
March 31, 2004, the Company issued stock for services to both employees
and nonemployees with a fair value of $155,909. During the six months
ended March 31, 2005, the Company issued 15,000 options to a consultant
for a cost of $7,972.
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
13
CEL-SCI CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED MARCH 31, 2005 AND 2004
(unaudited)
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 March 31, 2005. As of March 31, 2005, 450,000 warrants had been
exercised and 450,000 warrants remain outstanding.
14
CEL-SCI CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED MARCH 31, 2005 AND 2004
(unaudited)
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, 2005. As of March 31, 2005, 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.
15
CEL-SCI CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED MARCH 31, 2005 AND 2004
(unaudited)
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
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
16
CEL-SCI CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED MARCH 31, 2005 AND 2004
(unaudited)
with associated costs of $4,090. A total of 307,082 shares were issued to
Rubicon in exchange for the drawdowns. During the six and three months
ended March 31, 2005, no drawdowns were made. During the six and three
months ended March 31, 2004, drawdowns totaling $340,000 were made, with
associated costs of $4,090. A total of 307,082 shares were issued to
Rubicon in exchange for the drawdowns.
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 March 31, 2005, 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
17
CEL-SCI CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED MARCH 31, 2005 AND 2004
(unaudited)
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
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.
G. SUBSEQUENT EVENT
On May 4, 2005, the Company filed a Form 8-K. The report disclosed that
BDO Seidman had been selected as the Company's new independent certified
public accountants.
18
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 (inactive since 2000), 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 has been
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
19
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. During the six and three months ended March 31,
2005, no drawdowns were made. During the six and three months ended March 31,
2004, drawdowns totaling $340,000 were made, 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. 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 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
20
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 March 31, 2005, 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
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, 2005, 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, 2005, 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 six months ended March 31, 2004, interest expense of $2,581 was recorded for
the note.
21
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 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 fiscal year ended
September 30, 2004.
Results of Operations
"Grant revenues and other" increased by $12,843 during the six months ended
March 31, 2005, compared to the same period of the previous year, due to higher
grant reimbursements in 2005. During the three months ended March 31, 2005,
grant revenues and other increased by $10,571 for the same reason.
During the six month period ended March 31, 2005, research and development
expenses increased by $360,953. 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 March 31, 2005, research and
development expenses increased by $28,197 compared to the same period in 2004,
also because of the increase in work related to the Phase III application for
Multikine.
During the six month period ended March 31, 2005, general and administrative
expenses decreased by $263,113. During the three month period ended March 31,
2005, general and administrative expenses decreased by $147,887 compared to the
same period in 2004. This decrease in both the six month and three month period
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. In addition,
the March 2004 general and administrative costs were increased by the
recognition of expense associated with options repriced in prior years. During
22
the six months ended March 31, 2004, the stock price was higher than the
repriced options, requiring the recording of an expense in general and
administrative expenses of $161,112.
Interest income during the six months ended March 31, 2005 increased by $12,320.
Interest income during the three months ended March 31, 2005 was higher than it
was during the three months ended March 31, 2004. Increases for both the six and
three month periods were 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 six
months ended March 31, 2004 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 six and three month periods ended March 31, 2005 and 2004, 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.
Six Months Ended Three Months Ended
March 31, March 31,
2005 2004 2005 2004
---- ---- ---- ----
MULTIKINE $1,096,242 $747,357 $481,537 $465,661
L.E.A.P.S. 189,749 177,684 103,218 91,029
------------ --------- --------- ----------
TOTAL $1,285,991 $925,038 $584,755 $556,690
========== ======== ======== ========
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 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. The Company met with FDA in April of 2005 to discuss the Phase
III trial. The meeting was very useful and productive, and the Company views it
as the start of a continuing dialogue with the Agency on this matter. It is
clear that the FDA recognizes the need for new and improved therapies for head
and neck cancer patients, and it appears to be amenable to new approaches. The
Company found the FDA's evaluation of the plan supportive and helpful. A number
of specific technical aspects of our development plan were discussed and the FDA
made several suggestions as to how the plan could be improved. In the coming
months the Company plans to provide additional information to the FDA and confer
with it to arrive at a final plan which would produce data supportive of a
biological license application. The Company is unable to estimate the future
costs of research and clinical trials involving Multikine since the Company has
not yet finalized the design of future clinical trials. Until the scope of these
23
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.
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 and three months ended
March 31, 2005 and 2004, there were no components of comprehensive loss other
than net loss and the statement of comprehensive loss has been omitted.
24
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
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.
25
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
March 31, 2005. 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/Chief 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 March 31, 2005. Based upon his evaluation,
the Chief Executive Officer/Chief Financial Officer has concluded that as
of March 31, 2005, 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 six and three months ended March 31, 2005 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.
26
PART II
Item 2. Changes in Securities and Use of Proceeds
None
Item 4. Submission of Matters to a Vote of Security Holders
The annual meeting of the Company's shareholders was held on April 21, 2005.
At the meeting the following persons were elected as directors for the upcoming
year.
Name Votes For Votes Withheld
- ---- ---------- --------------
Maximilian de Clara 63,030,454 3,433,801
Geert Kersten 65,442,847 1,021,408
Alexander Esterhazy 64,815,982 1,648,273
C. Richard Kinsolving 65,523,972 940,283
Peter Young 65,552,502 911,753
At the meeting the following proposals were ratified by the shareholders.
1. The adoption of the Company's 2005 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 2005 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 2005 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 an amendment to the Company's Stock Compensation Plan. The
amendment provides for the issuance of up to 500,000 additional restricted
shares of common stock to the Company's directors, officers, employees and
consultants for services provided to the Company.
27
The following is a tabulation of votes cast with respect to these proposals:
Votes
--------------------------------------- Broker
Proposal For Against Abstain Non-Votes
1. 15,958,035 4,362,170 205,405 45,938,615
2. 15,734,614 4,432,769 358,227 45,938,615
3. 15,785,608 4,484,015 255,987 45,938,615
4. 15,356,880 4,983,113 185,617 45,938,615
Item 5. Other Information
On May 20, 2002, Phase II clinical trial results with the Company's
immunotherapy drug Multikine(R) were published in the Journal of Clinical
Oncology, the official journal of the American Society of Clinical Oncology
(ASCO). The title of the publication is: "Neoadjuvant Immunotherapy of Oral
Squamous Cell Carcinoma Modulates Intratumoral CD4/CD8 Ratio and Tumor
Microenvironment: A Multicenter Phase II Clinical Trial". In this publication
the authors describe a new mechanism of action by which Multikine is able to
marshal the immune system to fight head and neck cancer. In addition, the
authors suggest that the presence or absence of a cell surface marker on head
and neck cancer cells may help select the patients best suited for treatment
with Multikine.
The publication attributes the Multikine induced anti-tumor immune response to
the combined activity of the different cytokines in the product following the
local administration of Multikine for only 3 weeks. This combination of
different cytokines caused the induction, recruitment into the tumor bed, and
proliferation of anti-tumor T cells and other anti-tumor inflammatory cells,
leading to a massive anti-tumor immune response. Multikine induced a reversal of
the CD4/CD8 ratio in the tumor infiltrating cells, leading to a marked increase
in CD4 T cells in the tumor, which resulted in the prolongation of the
anti-tumor immune response and tumor cell destruction. The immune-mediated
processes continued long after the cessation of Multikine administration.
Multikine treatment of patients with advanced primary oral squamous cell
carcinoma resulted in an overall response rate of 42%, with 12% of the patients
having a complete response. A histopathology study showed that the tumor load in
Multikine treated patients was reduced by nearly 50% as compared to tumors from
control patients in the same study. These results were achieved with little to
no toxicity and without any reported severe adverse events associated with
Multikine treatment.
The tumors of all of the patients in this trial who responded to Multikine
treatment were devoid of the cell surface marker for HLA Class II. This finding,
if confirmed in the planned Phase III trial, may lead to the establishment of a
marker for selecting the patients best suited for treatment with Multikine.
28
Item 6.
(a) Exhibits
Number Exhibit
- ------ -------
31 Rule 13a-14(a) Certifications
32 Section 1350 Certifications
(b) Reports on Form 8-K
There was one report on Form 8-K for the quarter ended March 31, 2005. The
report disclosed that Deloitte and Touche, the Company's auditing firm, resigned
effective February 14, 2005. On May 4, 2005, the Company filed a Form 8-K. The
report disclosed that BDO Seidman had been elected as the Company's new
independent certified public accountants.
29
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CEL-SCI CORPORATION
/s/ Geert Kersten
Date: May 20, 2005 ---------------------------------
Geert Kersten
Chief Executive Officer*
*Also signing in the capacity of the Chief Accounting Officer and Principal
Financial Officer