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, 2006
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 80,745,847 May 15, 2006
TABLE OF CONTENTS
PART I FINANCIAL INFORMATION
Item 1. Page
Condensed Consolidated Balance Sheet (unaudited) 3
Condensed Consolidated Statements of Operations (unaudited) 4-5
Condensed Consolidated Statement of Cash Flow (unaudited) 6-7
Notes to Condensed Consolidated Financial Statements (unaudited) 8
Item 2.
Management's Discussion and Analysis of Financial Condition 14
and Results of Operations
Item 3.
Quantitative and Qualitative Disclosures about Market Risks 18
Item 4.
Controls and Procedures 18
PART II
Item 2.
Changes in Securities and Use of Proceeds 19
Item 4.
Submission of Matters to a Vote of Security Holders 19
Item 5.
Other Information 19
Item 6.
Exhibits and Reports on Form 8-K 19
Signatures 20
2
Item 1. FINANCIAL STATEMENTS
CEL-SCI CORPORATION
-------------------
CONDENSED
CONSOLIDATED BALANCE SHEETS
------------------------
(unaudited)
ASSETS March 31, September 30,
2006 2005
--------------------------------
CURRENT ASSETS:
Cash and cash equivalents $ 1,736,813 $ 1,957,614
Interest and other receivables 21,936 21,164
Prepaid expenses and laboratory supplies 440,144 432,652
Deferred financing costs 5,000 --
----------- ----------
Total current assets 2,203,893 2,411,430
RESEARCH AND OFFICE EQUIPMENT-
Less accumulated depreciation of $1,738,288
and $1,690,788 134,635 181,541
PATENT COSTS- less accumulated amortization of
$855,448 and $816,169 518,059 484,553
DEPOSITS 14,828 14,828
------------ ----------
TOTAL ASSETS $ 2,871,415 $3,092,352
============ ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 197,254 $ 74,354
Accrued expenses 85,221 74,619
Due to employees 22,692 22,880
Derivative instruments - current portion 3,110 1,280
------------ ----------
Total current liabilities 308,277 173,133
Derivative instruments - noncurrent portion -- 811,180
Deposits held 3,000 3,000
------------ ----------
Total liabilities 311,277 987,313
STOCKHOLDERS' EQUITY
Common stock, $.01 par value; authorized,
200,000,000 shares; issued and outstanding,
79,059,181 and 74,494,206 shares at March 31,
2006 and September 30, 2005, respectively 790,592 744,942
Additional paid-in capital 103,096,943 100,359,296
Accumulated deficit (101,327,397) (98,999,199)
------------ ------------
Total stockholders' equity 2,560,138 2,105,039
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 2,871,415 $ 3,092,352
============= ============
See notes to condensed consolidated financial statements.
3
CEL-SCI CORPORATION
-------------------
CONDENSED CONSOLIDATED STATEMENTS OF
OPERATIONS
---------------------------------
(unaudited)
Six Months Ended
March 31,
2006 2005
------------------------------
REVENUES:
Grant revenue and other $ 66,662 $ 185,292
---------- ----------
EXPENSES:
Research and development excluding
depreciation of $37,021 and $63,099
included below 861,746 1,285,991
Depreciation and amortization 87,425 109,768
General and administrative 1,480,606 1,092,855
---------- -----------
Total Operating Expenses 2,429,777 2,488,614
---------- ----------
NET OPERATING LOSS (2,363,115) (2,303,322)
GAIN (LOSS) ON DERIVATIVE INSTRUMENTS 11,515 (107,855)
INTEREST INCOME 23,402 32,294
---------- ----------
NET LOSS $(2,328,198) $(2,378,883)
========== ===========
NET LOSS PER COMMON SHARE (BASIC) $ (0.03) $ (0.03)
========== ============
NET LOSS PER COMMON SHARE (DILUTED) $ (0.03) $ (0.03)
=========== ============
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING 76,677,015 72,232,732
========== ============
See notes to condensed consolidated financial statements.
4
CEL-SCI CORPORATION
-------------------
CONDENSED CONSOLIDATED STATEMENTS OF
OPERATIONS
---------------------------------
(unaudited)
Three Months Ended
March 31,
2006 2005
----------------------------
REVENUES:
Grant revenue and other $ 36,815 $ 109,785
-------- ---------
EXPENSES:
Research and development, excluding
depreciation of $18,511 and $29,447
included below 426,857 584,887
Depreciation and amortization 43,635 53,089
General and administrative 907,570 560,641
--------- --------
Total Operating Expenses 1,378,062 1,198,617
---------- ---------
NET OPERATING LOSS (1,341,247) (1,088,832)
LOSS ON DERIVATIVE INSTRUMENTS (1,822) (75,082)
INTEREST INCOME 11,998 14,474
----------- ----------
NET LOSS $ (1,331,071) $(1,149,440)
============= ===========
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 78,392,835 72,287,847
============ ===========
See notes to condensed consolidated financial statements.
5
CEL-SCI CORPORATION
-------------------
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOW
---------------------------------
(unaudited)
Six Months Ended
March 31,
2006 2005
---------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
NET LOSS
$ (2,328,198) $(2,378,883)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 87,425 109,768
Issuance of common stock and stock options
for services 144,718 7,972
Common stock contributed to 401(k) plan 43,727 40,251
Decrease in unearned compensation -- 7,766
Impairment loss on abandonment of patents -- 3,716
Employee option cost 103,596 --
Impairment loss on retired equipment 645 267
(Gain) loss on derivative instruments (11,515) 107,855
Increase in receivables (772) (24,461)
(Increase) decrease in prepaid expenses (7,492) 85,301
Increase in deferred financing costs (5,000) --
Increase in accrued expenses 10,602 23,577
(Decrease) increase in amount due to employees (188) 21,848
Increase (decrease) in accounts payable 86,241 (29,525)
------------ --------
NET CASH USED FOR OPERATING ACTIVITIES
(1,876,211) (2,024,548)
------------ ----------
CASH FLOWS USED FOR INVESTING ACTIVITIES:
Purchase of equipment (1,885) (65,368)
Patent costs (36,126) (31,014)
------------ ----------
NET CASH USED FOR INVESTING ACTIVITIES (38,011) (96,382)
------------ ----------
CASH FLOWS PROVIDED BY FINANCING ACTIVITIES:
Private placement proceeds 1,000,000 --
Drawdown on equity line (net) 677,727 --
Proceeds from exercise of stock options 15,694 30,649
------------ ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES 1,693,421 30,649
------------ ---------
NET DECREASE IN CASH AND CASH EQUIVALENTS (220,801) (2,090,281)
CASH AND CASH EQUIVALENTS:
Beginning of period 1,957,614 4,263,631
----------- ----------
End of period $ 1,736,813 2,173,350
============ ==========
(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,
2006 2005
--------------------------------
SUPPLEMENTAL INFORMATION ON NONCASH
TRANSACTIONS:
Equipment costs included in accounts payable:
Increase in accounts payable $ -- $ 367
Increase in equipment -- (367)
---------- -----------
$ -- $ --
========== ===========
Patent costs included in accounts payable:
Increase in accounts payable $ 36,659 $ 4,440
Increase in patent costs (36,659) (4,440)
---------- ----------
$ -- $ --
========== ==========
Reclassification of derivative instruments:
Decrease in derivative instruments $ 797,835 $ --
Increase in additional paid-in capital (797,835) --
---------- ----------
$ -- $ --
========== ==========
Cost of new warrants and repricing of old
warrants on private placement:
Additional paid-in capital $ 315,108 $ --
Additional paid-in capital (315,108) --
---------- ----------
$ -- $ --
========== ==========
concluded
See notes to condensed consolidated financial statements.
7
CEL-SCI CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED MARCH 31, 2006 AND 2005
(unaudited)
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying condensed consolidated financial statements of CEL-SCI
Corporation and subsidiary (the Company) are unaudited and certain
information and footnote disclosures normally included in the annual
financial statements prepared in accordance with accounting principles
generally accepted in the United States of America have been omitted
pursuant to the rules and regulations of the Securities and Exchange
Commission. While management of the Company believes that the disclosures
presented are adequate to make the information presented not misleading,
interim consolidated financial statements should be read in conjunction
with the consolidated financial statements and notes included in the
Company's annual report on Form 10-K for the year ended September 30, 2005.
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, 2006 and the results
of operations for the three and six-month periods then ended. The condensed
consolidated balance sheet as of September 30, 2005 is derived from the
September 30, 2005 audited consolidated financial statements. Significant
accounting policies have been consistently applied in the interim financial
statements and the annual financial statements. The results of operations
for the three and six-month periods ended March 31, 2006 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
8
the shorter of the estimated useful life of the asset or the term of the
lease. Repairs and maintenance are expensed when incurred. During the
six-month periods ended March 31, 2006 and 2005, the Company retired
equipment with a net book value of $645 and $267 respectively.
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, 2006 and 2005,
the Company recorded patent impairment charges of $-0- and $3,716,
respectively. 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.
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.
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.
9
Use of Estimates--The preparation of financial statements in conformity
with accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Asset Valuations and Review for Potential Impairments--The Company reviews
its fixed assets every fiscal quarter. This review requires that the
Company make assumptions regarding the value of these assets and the
changes in circumstances that would affect the carrying value of these
assets. If such analysis indicates that a possible impairment may exist,
the Company is then required to estimate the fair value of the asset and,
as deemed appropriate, expense all or a portion of the asset. The
determination of fair value includes numerous uncertainties, such as the
impact of competition on future value. The Company believes that it has
made reasonable estimates and judgments in determining whether its
long-lived assets have been impaired; however, if there is a material
change in the assumptions used in our determination of fair values or if
there is a material change in economic conditions or circumstances
influencing fair value, the Company could be required to recognize certain
impairment charges in the future.
Stock-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 encouraged but did 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 had 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 2004 the FASB issued SFAS No. 123R,
"Share-Based Payment". SFAS No. 123R requires companies to recognize
expense associated with share based compensation arrangements, including
employee stock options, using a fair value-based option pricing model. SFAS
No. 123R applies to all transactions involving issuance of equity by a
company in exchange for goods and services, including employees. Using the
modified prospective transition method of adoption, CEL-SCI reflects
compensation expense in the financial statements beginning October 1, 2005.
The modified prospective transition method does not require restatement of
prior periods to reflect the impact of SFAS No. 123R. As such, compensation
expense will be recognized for awards that were granted, modified,
repurchased or cancelled on or after October 1, 2005 as well as for the
portion of awards previously granted that vested during the period ended
March 31, 2006. For the six months ended March 31, 2006, the Company
recorded $103,596 in general and administrative expense for the cost of
employee options. The Company determines the fair value of the employee
10
compensation using the Black Scholes method of valuation. No corresponding
expense was recorded for the six months ended March 31, 2005 because the
statement did not require the cost to be recorded in that period. Under
SFAS 148, "Accounting for Stock-Based Compensation - Transition and
Disclosure", which was in effect during the six months ended March 31,
2005, the Company's net loss and net loss per common share would have been
increased to the pro forma amounts indicated below:
Three
Six Months Ended Months Ended
March 31, 2005 March 31, 2005
Net loss:
As reported and amended $(2,328,198) $(1,331,071)
Add: Total stock-based employee
compensation expense determined
under fair-value-based method for
all awards, net of related tax effects (274,840) (148,590)
----------- ------------
Pro forma net loss, as amended $(2,603,038) $(1,479,661)
=========== ============
Net loss per share, as reported
and amended $ 0.03 $ 0.02
=========== ===========
Pro forma net loss per share $ 0.03 $ 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.
B. NEW ACCOUNTING PRONOUNCEMENTS
In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error
Corrections--A replacement of APB Opinion No. 20 and FASB Statement No. 3".
The statement requires that retrospective application of a change in
accounting principle be limited to the direct effects of the change and is
part of a broader effort by the FASB to improve the comparability of
cross-border financial reporting by working with the International
Accounting Standards Board (IASB) toward development of a single set of
high-quality accounting standards. The Company does not believe that SFAS
No. 154 will have a material impact on its results of operations or cash
flows.
In March 2005, the FASB issued FIN No. 47, "Accounting for Conditional
Asset Retirement Obligations - an Interpretation of FASB Statement No.
143". The interpretation clarifies terms used in FASB Statement No. 143 and
is effective no later than the end of fiscal years ending after December
15, 2005. The Company does not believe that FIN No. 47 will have a material
impact on its results of operations or cash flows.
11
In February 2006, the FASB issued SFAS No. 155, "Hybrid Instruments". The
statement amends SFAS No. 133 and SFAS No. 140, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities". The
statement also resolves issues addressed in Statement 133 Implementation
Issue No. D1, "Application of Statement 133 to Beneficial Interests in
Securitized Financial Assets." The statement: a) permits fair value
remeasurement for any hybrid financial instrument that contains an embedded
derivative that otherwise would require bifurcation, b) clarifies which
interest-only strips and principal-only strips are not subject to the
requirements of SFAS No. 133, c) establishes a requirement to evaluate
interests in securitized financial assets to identify interests that are
freestanding derivatives or that are hybrid financial instruments that
contain an embedded derivative requiring bifurcation, d) clarifies that
concentrations of credit risk in the form of subordination are not embedded
derivatives, and e) amends Statement 140 to eliminate the prohibition on a
qualifying special purpose entity from holding a derivative financial
instrument that pertains to a beneficial interest other than another
derivative financial instrument. CEL-SCI does not believe that SFAS No. 155
will have a material impact on its results of operations or cash flows.
FASB issued SFAS No. 156, "Accounting for Servicing of Financial Assets -
an amendment of FASB Statement No. 140". The statement requires: 1) an
entity to recognize a servicing asset or servicing liability each time it
undertakes an obligation to service a financial asset; 2) requires all
separately recognized servicing assets and servicing liabilities to be
initially measured at fair value; 3) permits an entity to choose either the
amortization method or the fair value measurement method for measuring the
asset or liability; 4) permits a one-time reclassification of available-
for-sale securities to trading securities; and 5) requires separate
presentation of servicing assets and servicing liabilities subsequently
measured at fair value in the statement of financial position. Since the
Company has no servicing assets or servicing liabilities, the Company
believes that there will be no impact on its results of operations or cash
flows. The statement is effective for fiscal years beginning after
September 15, 2006
C. STOCKHOLDERS' EQUITY
During the six months ended March 31, 2006, the Company issued stock and
stock options for services to a nonemployee with a fair value of $144,718.
During the three months ended March 31, 2005, the Company issued stock
or stock options for services to a nonemployee with a fair value of $7,972.
D. FINANCING TRANSACTIONS
In July and September 2002, the Company sold convertible notes, plus Series
G warrants, to a group of private investors. As of the year ended September
30, 2003, all of the notes had been converted into common stock. The Series
G warrants allow the holders to purchase up to 900,000 shares of the
Company's common stock. The warrant price was $0.145 as of March 31, 2006.
As of March 31, 2006, 621,648 warrants had been exercised and 278,352
12
warrants remain outstanding. In addition, 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. As of October 2, 2003, all
of the Series H notes had been converted into common stock. The Series H
warrant price was $0.25 as of March 31, 2006. As of March 31, 2006, 759,792
warrants had been exercised and 340,208 warrants remain outstanding. Both
the Series G and Series H warrants were exercised in a cashless
transaction.
During April 2006, all of the remaining Series G and H warrants were
converted into 618,560 shares of common stock in a cashless exercise.
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.
E. RESTATEMENT OF FINANCIAL STATEMENTS
Subsequent to the issuance of the Company's September 30, 2004 consolidated
financial statements, the Company determined that it had erroneously
accounted for certain financial instruments, including free-standing and
embedded derivatives within such instruments, issued by the Company from
fiscal year 1992 through November 2003. Specifically, the instruments
erroneously accounted for were: the Series E Preferred Stock, the Cambrex
Convertible Note Payable, Series F, G and H Convertible Debt, the equity
line of credit agreements, as well as Series I and J warrants and various
other warrants. The Company has concluded that these instruments were
either freestanding derivative instruments in their entirely, or contained
embedded derivatives, and should have been accounted for under SFAS No. 133
and EITF 00-19, as well as related interpretations of these standards. All
such derivatives were required to be recognized as either assets or
liabilities in the statement of financial position and measured at fair
value in the statement of operations. At March 31, 2006, the only remaining
instrument that needs this valuation is the Series E warrants, which expire
on August 16, 2006. For a further discussion of this restatement and an
assessment of each instrument, please see the Company's September 30, 2005
10-K, footnote 2.
F. PRIVATE PLACEMENT
In order to provide a possible source of funding for CEL-SCI's current
activities and for the development of its current and planned products,
CEL-SCI entered into an equity line of credit agreement with Jena Holdings
LLC on October 31, 2005.
13
Under the equity line of credit agreement, Jena Holdings LLC has agreed to
provide CEL-SCI with up to $5,000,000 of funding for a two year period
which will begin on the date that a registration statement filed by CEL-SCI
to register the shares to be sold to Jena Holdings LLC is declared
effective by the SEC. During this two year period, CEL-SCI may request a
drawdown under the equity line of credit by selling shares of its common
stock to Jena Holdings LLC, and Jena Holdings LLC will be obligated to
purchase the shares. 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. CEL-SCI may request a
drawdown once every 22 trading days, although CEL-SCI is under no
obligation to request any drawdowns under the equity line of credit.
During the 22 trading days following a drawdown request, CEL-SCI will
calculate the amount of shares it will sell to Jena Holdings LLC and the
purchase price per share. The purchase price per share of common stock will
be based on the daily volume weighted average price of CEL-SCI's common
stock during each of the 22 trading days immediately following the drawdown
date, less a discount of 11%. As consideration for extending the equity
line of credit, CEL-SCI granted Jena Holdings LLC warrants to purchase
271,370 shares of common stock at a price of $0.55 per share at any time
prior to October 24, 2010. CEL-SCI will be registering the shares of common
stock issuable to Jena Holdings under the equity line of credit, as well as
271,370 shares underlying the warrants that CEL-SCI granted to Jena
Holdings LLC. During the three-month period ended December 31, 2005, the
Company made drawdowns on the equity line of credit totaling $677,727,
selling 1,419,446 shares of common stock.
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, 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.
14
On July 18, 2005, CEL-SCI sold 1,250,000 shares of its common stock and
375,000 warrants to one investor for $500,000. Each warrant entitles the
holder to purchase one share of CEL-SCI's common stock at a price of $0.65
per share at any time prior to July 18, 2009. The shares of common stock
and warrants are "restricted" securities as defined in Rule 144 of the
Securities and Exchange Commission. The warrants were valued at $155,671.
On February 9, 2006, CEL-SCI sold 2,500,000 shares of its common stock and
750,000 warrants to one investor for $1,000,000. Each warrant entitles the
holder to purchase one share of CEL-SCI's common stock at a price of $0.56
per share at any time prior to February 9, 2011. The warrants were valued
at $238,986. In addition, 441,176 warrants previously issued to the
investor were repriced and extended for one year. The revaluing of the
warrants was valued at $76,122.
G. 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 2006. Ultimately, the Company must
complete the development of its products, obtain the appropriate regulatory
approvals and obtain sufficient revenues to support its cost structure.
H. 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
15
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 both products in accordance with the agreement.
16
CEL-SCI CORPORATION
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OFOPERATIONS
Liquidity and Capital Resources
The Company has had only limited revenues from operations since its inception in
March 1983. The Company has relied upon proceeds realized from the public and
private sale of its Common Stock and convertible notes as well as short-term
borrowings to meet its funding requirements. Funds raised by the Company have
been expended primarily in connection with the acquisition of exclusive rights
to certain patented and unpatented proprietary technology and know-how relating
to the human immunological defense system, the funding of Viral Technologies,
Inc.'s (VTI) research and development program (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.
In July and September 2002, the Company sold convertible notes, plus 900,000
Series G warrants, to a group of private investors. By June 2, 2003, all of the
notes had been converted into common stock. As of March 31, 2006, 621,648
warrants had been exercised and 278,352 warrants remain outstanding. In
addition, 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. By October 2, 2003, all of the Series H notes had been converted into
common stock. The Series H warrant price is currently $0.25. As of March 31,
2006, 759,792 warrants had been exercised and 340,208 warrants remain
outstanding.
During April 2006, all of the remaining Series G and H warrants were converted
into 618,560 shares of common stock in a cashless exercise.
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, 2006, all warrants remain
outstanding.
17
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 both products 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.
In order to provide a possible source of funding for CEL-SCI's current
activities and for the development of its current and planned products, CEL-SCI
entered into an equity line of credit agreement with Jena Holdings LLC on
October 31, 2005.
Under the equity line of credit agreement, Jena Holdings LLC has agreed to
provide CEL-SCI with up to $5,000,000 of funding for a two year period which
will begin on the date that a registration statement filed by CEL-SCI to
register the shares to be sold to Jena Holdings LLC is declared effective by the
SEC. During this two year period, CEL-SCI may request a drawdown under the
equity line of credit by selling shares of its common stock to Jena Holdings
LLC, and Jena Holdings LLC will be obligated to purchase the shares. 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. CEL-SCI may request a drawdown once every 22 trading days, although
CEL-SCI is under no obligation to request any drawdowns under the equity line of
credit.
During the 22 trading days following a drawdown request, CEL-SCI will calculate
the amount of shares it will sell to Jena Holdings LLC and the purchase price
per share. The purchase price per share of common stock will be based on the
daily volume weighted average price of CEL-SCI's common stock during each of the
22 trading days immediately following the drawdown date, less a discount of 11%.
As consideration for extending the equity line of credit, CEL-SCI granted Jena
Holdings LLC warrants to purchase 271,370 shares of common stock at a price of
$0.55 per share at any time prior to October 24, 2010. CEL-SCI will be
registering the shares of common stock issuable to Jena Holdings under the
equity line of credit, as well as 271,370 shares underlying the warrants that
CEL-SCI granted to Jena Holdings LLC. During the three-month period ended
December 31, 2005, the Company made drawdowns on the equity line of credit
totaling $677,727, selling 1,419,446 shares of common stock. Subsequent to the
issuance of the Company's September 30, 2004 consolidated financial statements,
the Company determined that it had erroneously accounted for certain financial
18
instruments, including free-standing and embedded derivatives within such
instruments, issued by the Company from fiscal year 1992 through November 2003.
Specifically, the instruments erroneously accounted for were: the Series E
Preferred Stock, the Cambrex Convertible Note Payable, Series F, G and H
Convertible Debt, the equity line of credit agreements, as well as Series I and
J warrants and various other warrants. The Company has concluded that these
instruments were either freestanding derivative instruments in their entirely,
or contained embedded derivatives, and should have been accounted for under SFAS
No. 133 and EITF 00-19, as well as related interpretations of these standards.
All such derivatives were required to be recognized as either assets or
liabilities in the statement of financial position and measured at fair value in
the statement of operations. At December 31, 2005, the only remaining instrument
that needs this valuation is the Series E warrants, which expire on August 16,
2006. For a further discussion of this restatement and an assessment of each
instrument, please see the Company's September 30, 2005 10-K, footnote 2.
Subsequent to the issuance of the Company's September 30, 2004 consolidated
financial statements, the Company determined that it had erroneously accounted
for certain financial instruments, including free-standing and embedded
derivatives within such instruments, issued by the Company from fiscal year 1992
through November 2003. Specifically, the instruments erroneously accounted for
were: the Series E Preferred Stock, the Cambrex Convertible Note Payable, Series
F, G and H Convertible Debt, the equity line of credit agreements, as well as
Series I and J warrants and various other warrants. The Company has concluded
that these instruments were either freestanding derivative instruments in their
entirely, or contained embedded derivatives, and should have been accounted for
under SFAS No. 133 and EITF 00-19, as well as related interpretations of these
standards. All such derivatives were required to be recognized as either assets
or liabilities in the statement of financial position and measured at fair value
in the statement of operations. At March 31, 2006, the only remaining instrument
that needs this valuation is the Series E warrants, which expire on August 16,
2006. For a further discussion of this restatement and an assessment of each
instrument, please see the Company's September 30, 2005 10-K, footnote 2.
Results of Operations
"Grant revenues and other" decreased by $118,630 during the six months ended
March 31, 2006, compared to the same period of the previous year, due to the
winding down of the work funded by the grants in 2005. The Company is continuing
to apply for grants to support its work. The decrease during the three-month
period ended March 31, 2006 was $72,970 for the same reason.
During the six-month period ended March 31, 2006, research and development
expenses decreased by $424,245. During the three-month period ended March 31,
2006, research and development expenses decreased by $158,030. In the previous
year, expenses were higher because the Company was working on the Phase III
application for Multikine.
19
During the three and six-month periods ended March 31, 2006, general and
administrative expenses increased by $346,929 and $387,751, respectively. An
increase in public relations and corporate presentation expenses and the
employee stock option expense required by SFAS 123R was the cause of the
decrease.
Interest income during the six months ended March 31, 2006 decreased by $8,892.
The decrease was because the balances in the interest bearing accounts declined.
For the same reason, interest income during the three months ended March 31,
2006 decreased by $2,476.
The gain on derivative instruments of $11,515 for the six months ended March 31,
2006, compared to a loss of $107,855 for the same period of 2005 was the result
of an increase in the Company's stock price during the period. The loss on
derivative instruments of $1,822 during the three months ended March 31, 2006
compared to a loss of $75,082 for the same period in 2005 was the result of a
reclassification to equity of all derivative instruments except for the Series E
warrants on December 27, 2005.
Research and Development Expenses
During the six and three-month periods ended March 31, 2006 and 2005, 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 six and three-month periods.
Six Months Ended Three Months Ended
March 31, March 31,
------------------ -----------------------
2006 2005 2006 2005
---- ----- ---- ----
MULTIKINE $752,932 $1,096,242 $369,035 $481,537
L.E.A.P.S. 108,814 189,749 57,822 103,218
-------- ---------- -------- --------
TOTAL $861,746 $1,285,991 $426,857 $584,755
======== ========== ======== ========
In August 2005, the Canadian regulatory agency, the Biologics and Genetic
Therapies Directorate, concurred with the initiation of a global Phase III
clinical trial in head and neck cancer patients using Multikine. 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 and again in October 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
20
found the FDA's evaluation of the plan supportive and helpful. A number of
specific technical aspects of the Company's development plan were discussed and
the FDA made several suggestions as to how the plan could be improved. The
Company provided additional information to the FDA in 2005, and is waiting for
the FDA's response.. 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 trials
is known, the Company will not be able to price any future trials with clinical
trial organizations.
As of March 31, 2006 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.
In April 2006 the Company filed a provisional U.S. patent application covering
CEL-1000 for the prevention/treatment of bird flu and/or as an adjuvant to be
included in a bird flue vaccine.
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.
21
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 (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. Using the modified
prospective transition method of adoption, CEL-SCI reflects compensation expense
in the financial statements beginning October 1, 2005. The modified prospective
transition method does not require restatement of prior periods to reflect the
impact of SFAS No. 123R. As such, compensation expense will be recognized for
awards that were granted, modified, repurchased or cancelled on or after October
1, 2005 as well as for the portion of awards previously granted that vested
during the period ended March 31, 2006. For the six months ended March 31, 2006,
the Company recorded $103,596 in general and administrative expense for the cost
of employee options. The Company determines the fair value of the employee
compensation using the Black Scholes method of valuation. No corresponding
expense was recorded for the six months ended March 31, 2005 because the
statement did not require the cost to be recorded in that period.
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.
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
only one derivative financial instrument at March 31, 2006, the Series E
warrants, which will expire in August of 2006. Additionally, the Company is not
exposed to interest rate risks due to the fact the Company has no outstanding
debt as of March 31, 2006. 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.
22
Item 4. CONTROLS AND PROCEDURES
Geert Kersten, CEL-SCI's Chief Executive and Financial Officer, has evaluated
the effectiveness of CEL-SCI's disclosure controls and procedures as of March
31, 2006, and in his opinion CEL-SCI's disclosure controls and procedures ensure
that material information relating to CEL-SCI, including CEL-SCI's consolidated
subsidiary, is made known to him by others within those entities, particularly
during the period in which this report is being prepared, so as to allow timely
decisions regarding required disclosure. To the knowledge of Mr. Kersten there
have been no significant changes in CEL-SCI's internal controls or in other
factors that could significantly affect CEL-SCI's internal controls subsequent
to the date of evaluation, and as a result, no corrective actions with regard to
significant deficiencies or material weakness in CEL-SCI's internal controls
were required with the exception of accounting for certain derivatives under FAS
133 and EITF 00-19. Subsequent to September 30, 2005, CEL-SCI adopted additional
accounting policies and internal controls to address the issues raised by the
restatement of previously issued financial statements for the years ended
September 30, 2004 and 2003.
23
PART II
Item 2. Changes in Securities and Use of Proceeds
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6.
(a) Exhibits
Number Exhibit
31 Rule 13a-14(a) Certifications
32 Section 1350 Certifications
(b) Reports on Form 8-K
The Company filed two reports on Schedule 8-K during the quarter ended March 31,
2006. Both Schedule 8-K filings discussed the late filing of the Company's Form
10-K for the fiscal year ended September 30, 2005.
23
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CEL-SCI CORPORATION
Date: May 16, 2006 /s/ Geert Kersten
--------------------------------
Geert Kersten
Chief Executive Officer*
*Also signing in the capacity of the Chief Accounting Officer and Principal
Financial Officer
24