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, 2011
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 has submitted electronically and
posted on its corporate Web site, if any, every Interactive Data File required
to be submitted and posted pursuant to Rule 405 of Regulation S-T (ss.232.405 of
this chapter) during the preceding 12 months (or for such shorter period that
the registrant was required to submit and post such files). Yes [ ] No [ ]
Indicate by check mark whether the Registrant is a large accelerated filer, and
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of "large accelerated filer," "accelerated filer" and "smaller
reporting company" in Rule 12b-2 of the Exchange Act. (Check One):
Large accelerated filer [ ] Accelerated filer [X]
Non-accelerated filer [ ] Smaller reporting company [ ]
(Do not check if a smaller reporting company)
Indicate by check mark whether the Registrant is a shell company (as defined in
Exchange Act Rule 12b-2 of the Exchange Act).
Yes [ ] No [X]
Class of Stock No. Shares Outstanding Date
-------------- ---------------------- ----
Common 207,940,300 May 10, 2011
TABLE OF CONTENTS
PART I FINANCIAL INFORMATION
Page
----
Item 1.
Condensed Consolidated Balance Sheets (unaudited) 3
Condensed Consolidated Statements of Operations (unaudited) 4-5
Condensed Consolidated Statements of Cash Flows (unaudited) 6
Notes to Condensed Consolidated Financial Statements (unaudited) 8
Item 2.
Management's Discussion and Analysis of Financial Condition 27
and Results of Operations
Item 3.
Quantitative and Qualitative Disclosures about Market Risks 32
Item 4.
Controls and Procedures 32
PART II
Item 1.
Legal Proceedings 33
Item 4.
Submission of Matters to a Vote of Security Holders 34
Item 6.
Exhibits 34
Signatures 35
CEL-SCI CORPORATION
-------------------
CONDENSED CONSOLIDATED BALANCE SHEETS
---------------------------------
(unaudited)
ASSETS March 31, September 30,
2011 2010
----------------- ----------------
CURRENT ASSETS
Cash and cash equivalents $ 17,741,339 $ 26,568,243
Receivables 169,397 -
Prepaid expenses 2,352,914 298,719
Inventory used for R&D and
manufacturing 1,474,020 1,476,234
Deferred rent - current portion 730,452 751,338
----------------- ----------------
Total current assets 22,468,122 29,094,534
RESEARCH AND OFFICE EQUIPMENT AND
LEASEHOLD IMPROVEMENTS--
Less accumulated depreciation of
$2,868,013 and $2,626,759 1,131,239 1,264,831
PATENT COSTS- less accumulated
amortization of $1,245,394 and
$1,205,690 390,441 356,079
RESTRICTED CASH - 21,357
DEFERRED RENT - net of current portion 6,781,005 7,068,184
----------------- ----------------
TOTAL ASSETS $ 30,770,807 $ 37,804,985
================= ================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 941,600 $ 1,497,383
Accrued expenses 12,251,364 223,696
Due to employees 64,009 45,808
Related party loan 1,104,057 1,104,057
Derivative instruments - current
portion 838,592 424,286
----------------- ----------------
Total current liabilities 15,199,622 3,295,230
Derivative instruments - net of
current portion 4,788,937 6,521,765
Deferred revenue 125,000 125,000
Deferred rent 6,765 8,225
----------------- ----------------
Total liabilities 20,120,324 9,950,220
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value;
authorized, 200,000 shares;
no shares issued and outstanding - -
Common stock, $.01 par value;
authorized, 450,000,000
shares; issued and outstanding,
207,935,328 and 204,868,853
shares at March 31, 2011 and
September 30, 2010, respectively 2,079,353 2,048,689
Additional paid-in capital 190,651,654 187,606,044
Accumulated deficit (182,080,524) (161,799,968)
----------------- ----------------
Total stockholders' equity 10,650,483 27,854,765
----------------- ----------------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $ 30,770,807 $ 37,804,985
================= ================
See notes to condensed consolidated financial statements.
3
CEL-SCI CORPORATION
-------------------
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
---------------------------------
(unaudited)
For the Six Months Ended
March 31,
2011 2010
------------------ ----------------
REVENUE:
Rent income $ - $ 60,600
Grant and other income 706,633 -
------------------ ----------------
Total revenue 706,633 60,600
EXPENSES:
Research and development, excluding
depreciation of $235,824 and
$203,429 included below 6,306,525 6,146,024
Depreciation and amortization 286,288 242,884
General and administrative 3,545,454 3,244,899
Foreign exchange gain (18,604) -
------------------ ----------------
Total expenses 10,119,663 9,633,807
------------------ ----------------
LOSS FROM OPERATIONS (9,413,030) (9,573,207)
OTHER EXPENSES (12,000,000) -
GAIN ON DERIVATIVE INSTRUMENTS 1,115,692 27,859,939
INTEREST INCOME 99,586 207,788
INTEREST EXPENSE (82,804) (79,522)
------------------ ----------------
NET (LOSS) INCOME BEFORE INCOME TAXES (20,280,556) 18,414,998
INCOME TAX PROVISION - -
------------------ ----------------
NET (LOSS) INCOME (20,280,556) 18,414,998
MODIFICATION OF WARRANTS (1,068,369) (1,432,456)
------------------ ----------------
NET (LOSS) INCOME AVAILABLE TO COMMON
SHAREHOLDERS $ (21,348,925) $ 16,982,542
================== ================
NET (LOSS) INCOME PER COMMON SHARE-BASIC $ (0.10) $ 0.09
================== ================
NET (LOSS) INCOME PER COMMON
SHARE-DILUTED $ (0.10) $ (0.01)
================== ================
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING-BASIC 206,090,265 199,516,156
================== ================
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING-DILUTED 206,090,265 253,593,416
================== ================
See notes to condensed consolidated financial statements.
4
CEL-SCI CORPORATION
-------------------
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
---------------------------------
(unaudited)
For the Three Months Ended
March 31,
2011 2010
------------------ ----------------
REVENUE:
Rent income $ - $ 30,600
Grant and other income 43,815 -
------------------ ----------------
Total revenue 43,815 30,600
EXPENSES:
Research and development, excluding
depreciation of
$119,633 and $103,845 included
below 3,042,097 3,340,897
Depreciation and amortization 145,141 123,303
General and administrative 1,994,803 1,886,758
Foreign exchange gain (41,230) -
------------------ ----------------
Total expenses 5,140,811 5,350,958
------------------ ----------------
LOSS FROM OPERATIONS (5,096,996) (5,320,358)
OTHER EXPENSES (12,000,000) -
GAIN ON DERIVATIVE INSTRUMENTS 3,062,087 4,519,672
INTEREST INCOME 46,707 97,569
INTEREST EXPENSE (41,402) (41,402)
FOREIGN EXCHANGE GAIN - -
------------------ ----------------
NET LOSS BEFORE INCOME TAXES (14,029,604) (744,519)
INCOME TAX PROVISION - -
------------------ ----------------
NET LOSS (14,029,604) (744,519)
MODIFICATION OF WARRANTS (1,068,369) (1,432,456)
------------------ ----------------
NET LOSS AVAILABLE TO COMMON
SHAREHOLDERS $ (15,097,973) $ (2,176,975)
================== ================
NET LOSS PER COMMON SHARE-BASIC $ (0.07) $ (0.01)
================== ================
NET LOSS PER COMMON SHARE-DILUTED $ (0.08) $ (0.03)
================== ================
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING-BASIC 207,089,841 204,173,750
================== ================
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING-DILUTED 229,343,923 258,251,010
================== ================
See notes to condensed consolidated financial statements.
5
CEL-SCI CORPORATION
-------------------
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
---------------------------------
(unaudited)
Six Months Ended March 31,
2011 2010
----------------- ----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
NET (LOSS) INCOME $ (20,280,556) $ 18,414,998
Adjustments to reconcile net (loss) income
to net cash used in operating activities:
Depreciation and amortization 286,288 242,884
Issuance of common stock, warrants and
stock options for services 132,946 1,062,670
Common stock contributed to 401(k) plan 71,090 50,826
Extension of options 135,988 212,444
Employee option cost 697,464 618,082
Gain on derivative instruments (1,115,692) (27,859,939)
Decrease in deferred rent asset 308,065 614,962
Amortization of loan premium - (3,282)
Loss on abandonment of patents - 5,381
Loss on retirement of equipment 237 -
Increase in prepaid expenses (2,054,195) (170,642)
Decrease (increase) in inventory for R&D
and manufacturing 2,214 (614,410)
Decrease in deposits - 1,574,950
Increase in receivables (169,397) -
Decrease in accounts payable (607,059) (138,575)
Increase in accrued expenses 12,027,668 15,344
Increase (decrease) in amount due to
employees 18,201 (3,720)
Increase in deferred revenue - 125,000
(Decrease) increase in deferred rent
liability (1,460) 41
----------------- ----------------
NET CASH USED IN OPERATING ACTIVITIES (10,548,198) (5,852,986)
----------------- ----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Decrease in restricted cash 21,357 47,236
Purchase of equipment (96,588) (138,215)
Patent costs (39,431) (2,050)
----------------- ----------------
NET CASH USED IN INVESTING ACTIVITIES (114,662) (93,029)
----------------- ----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options
and warrants 429,588 -
Proceeds from sale of stock 1,406,368 6,390,269
----------------- ----------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 1,835,956 6,390,269
----------------- ----------------
NET (DECREASE) INCREASE IN CASH AND CASH
EQUIVALENTS (8,826,904) 444,254
CASH AND CASH EQUIVALENTS:
Beginning of period 26,568,243 33,567,516
----------------- ----------------
End of period $ 17,741,339 $ 34,011,770
================= ================
(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,
2011 2010
----------------- ----------------
SUPPLEMENTAL INFORMATION ON NONCASH
TRANSACTIONS:
Patent costs included in accounts payable:
Increase in accounts payable $ (34,635) $ (5,440)
Increase in patent costs 34,635 5,440
----------------- ----------------
$ - $ -
================= ================
Equipment costs included in accounts
payable:
Increase in accounts payable $ (16,641) $ (71,235)
Increase in research and office equipment 16,641 71,235
----------------- ----------------
$ - $ -
================= ================
Exercise of derivative liability warrants:
Decrease in derivative liabilities $ 202,830 $ 5,221,246
Increase in additional paid-in capital (202,830) (5,221,246)
----------------- ----------------
$ - $ -
================= ================
Modification of warrants:
Increase in additional paid-in capital $ (1,068,369) $ (1,432,456)
Decrease in additional paid-in capital 1,068,369 1,432,456
----------------- ----------------
$ - $ -
================= ================
Adoption of ASC 815-40:
Increase in derivative liabilities $ - $ (6,186,343)
Increase in accumulated deficit - 6,186,343
----------------- ----------------
$ - $ -
================= ================
NOTE:
Cash expenditures for interest expense $ 82,804 $ 82,804
================= ================
See notes to condensed consolidated financial statements.
7
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 condensed consolidated financial statements should be read in
conjunction with the condensed consolidated financial statements and notes
included in the Company's annual report on Form 10-K for the year ended
September 30, 2010.
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, 2011 and the
results of operations for the six and three-month periods then ended. The
condensed consolidated balance sheet as of September 30, 2010 is derived
from the September 30, 2010 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,
2011 and 2010 are not necessarily indicative of the results to be expected
for the entire year.
Certain items in the consolidated financial statements have been
reclassified to conform to the current presentation.
Significant accounting policies are as follows:
Research and Office Equipment and Leasehold Improvements - 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 term of the lease. Repairs and maintenance
which do not extend the life of the asset are expensed when incurred.
Depreciation and amortization expense for the six-month periods ended
March 31, 2011 and 2010 was $246,584 and $203,906, respectively.
Depreciation and amortization expense for the three-month periods ended
March 31, 2011 and 2010 was $125,013 and $104,036, respectively. During
the six months ended March 31, 2011 and 2010, equipment with a net book
value of $237 and $-0- was retired. During the three months ended March
31, 2011 and 2010, no equipment was retired.
Patents - Patent expenditures are capitalized and amortized using the
straight-line method over the shorter of the expected useful life or the
legal life of the patent (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,
8
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-month periods ended March 31, 2011
and 2010, the Company recorded patent impairment charges of $-0- and
$5,381, respectively. During the three-month periods ended March 31, 2011
and 2010, the Company recorded no patent impairment charges. For the
six-month periods ended March 31, 2011 and 2010, amortization of patent
costs totaled $39,704 and $38,978, respectively. For the three-month
periods ended March 31, 2011 and 2010, amortization of patent costs
totaled $20,128 and $19,267, respectively. The Company estimates that
amortization expense will be $78,100 for each of the next five years,
totaling $390,500.
Research and Development Costs - Research and development expenditures are
expensed as incurred. Total research and development costs, excluding
depreciation, were $6,306,525 and $6,146,024, respectively, for the six
months ended March 31, 2011 and 2010. Total research and development
costs, excluding depreciation, were $3,042,097 and $3,340,897,
respectively, for the three months ended March 31, 2011 and 2010.
Income Taxes - The Company has net operating loss carryforwards of
approximately $124 million. The Company uses the asset and liability
method of accounting for income taxes. Under the asset and liability
method, deferred tax assets and liabilities are recognized for future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective
tax bases and operating and tax loss carryforwards. Deferred tax assets
and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period
that includes the enactment date. The Company records a valuation
allowance to reduce the deferred tax assets to the amount that is more
likely than not to be recognized.
Derivative Instruments - The Company has entered into financing
arrangements that consist of freestanding derivative instruments or are
hybrid instruments that contain embedded derivative features. The Company
has also issued warrants to various parties in connection with work done
by these parties. The Company accounts for these arrangements in
accordance with Codification 815-10-50, "Accounting for Derivative
Instruments and Hedging Activities". The Company also accounts for
warrants in accordance with Codification 815-40-15, "Determining Whether
an Instrument (or Embedded Feature) is Indexed to an Entity's Own Stock".
In accordance with accounting principles generally accepted in the United
States ("GAAP"), derivative instruments and hybrid instruments are
recognized as either assets or liabilities in the balance sheet and are
measured at fair value with gains or losses recognized in earnings or
other comprehensive income depending on the nature of the derivative or
hybrid instruments. The Company determines the fair value of derivative
instruments and hybrid instruments based on available market data using
appropriate valuation models, giving consideration to all of the rights
and obligations of each instrument. The derivative liabilities are
remeasured at fair value at the end of each interim period as long as they
are outstanding.
9
Deferred rent (asset) - The deferred rent is discussed at Note I.
Long-term interest receivable on the deposit on the manufacturing facility
has been combined with the deferred rent (asset) for both periods for
comparability.
Stock-Based Compensation - The Company follows Codification 718-10-30-3,
"Share-Based Payment". This Codification applies to all transactions
involving issuance of equity by a company in exchange for goods and
services, including to employees. Compensation expense has been 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, 2011. For the six
months ended March 31, 2011 and 2010, the Company recorded $697,464 and
$618,082, respectively, in general and administrative expense for the cost
of employee options. For the three months ended March 31, 2011 and 2010,
the Company recorded $335,387 and $313,082, respectively, in general and
administrative expense for the cost of employee options. The Company's
options vest over a three-year period from the date of grant. After one
year, the stock is one-third vested, with an additional one-third vesting
after two years and the final one-third vesting at the end of the
three-year period. There were 18,794 and 394,000 options granted to
employees during the six-month periods ended March 31, 2011 and 2010,
respectively. There were 4,000 and 284,000 options granted to employees
during the three-month periods ended March 31, 2011 and 2010,
respectively. Options are granted with an exercise price equal to the
closing price of the Company's stock on the day before the grant. The
Company determines the fair value of the employee stock-based compensation
using the Black Scholes method of valuation.
The Company has Incentive Stock Option Plans, Non-Qualified Stock Option
Plans, a Stock Compensation Plan and Stock Bonus Plans. All Plans have
been approved by the stockholders. A summary chart and description of
activity for the quarter of the Plans follows in Note C. For further
discussion of the Stock Option Plans, Stock Compensation Plan and Stock
Bonus Plans, see Form 10-K for the year ended September 30, 2010. In some
cases these Plans are collectively referred to as the "Plans".
B. NEW ACCOUNTING PRONOUNCEMENTS
There are no significant new accounting pronouncements that would impact
the financial statements.
C. STOCKHOLDERS' EQUITY
Below is a chart of the stock options, stock bonuses and compensation
granted by CEL-SCI. Each option represents the right to purchase one share
of CEL-SCI's common stock at March 31, 2011:
10
Total Shares
Shares Reserved for Shares Remaining
Reserved Outstanding Issued as Options/Shares
Name of Plan Under Plans Options Stock Bonus Under Plans
------------ ----------- ------------ ----------- ----------
Incentive Stock Option Plans 17,100,000 10,593,041 N/A 5,920,225
Non-Qualified Stock Option
Plans 33,760,000 21,705,940 N/A 8,450,642
Stock Bonus Plans 11,940,000 N/A 7,502,500 4,435,741
Stock Compensation Plan 9,500,000 N/A 5,386,531 4,113,469
Options and stock to employees
During the six months ended March 31, 2011, 29,268 options were exercised
from the Company's option plans at prices ranging from $0.22 to $0.48. The
total intrinsic value of options exercised during the six months ended
March 31, 2011 was $10,944. The Company received a total of $13,056 from
the exercise of the options during the six months ended March 31, 2011.
During the three months ended March 31, 2011, no options were exercised
from the Company's option plans. During the six months ended March 31,
2010, 89,958 options were exercised from the Company's option plans. The
total intrinsic value of options exercised during the six months ended
March 31, 2010 was $32,999. The Company received a total of $36,330 from
the exercise of options during the six months ended March 31, 2010. During
the three months ended March 31, 2010, 57,333 options were exercised from
the Company's option plans. The total intrinsic value of options exercised
during the three months ended March 31, 2010 was $23,493. The Company
received a total of $13,773 from the exercise of options during the
quarter ended March 31, 2010.
During the six months ended March 31, 2011, 18,794 stock options were
granted at prices ranging from $0.63 to $0.85 with a fair value of $13,592
and 4,000 options expired. During the three months ended March 31, 2011,
4,000 stock options were granted at prices ranging from $0.63 to $0.83
with a fair value of $2,655 and 2,000 options expired. During the six
months ended March 31, 2010, 394,000 stock options were granted at prices
ranging from $0.63 to $1.93 with a fair value of $417,172 and 3,500
options expired. During the three months ended March 31, 2010, 284,000
stock options were granted at prices ranging from $0.63 to $0.95 with a
fair value of $229,176 and 3,500 options expired.
During the six and three months ended March 31, 2011, the Company extended
306,500 employee options. The options were due to expire from January 26,
2011 through December 3, 2011. All options were extended for an additional
three years from the current expiration date. The additional cost of
$105,802 was recorded as a debit to option expense and a credit to
additional paid-in capital. The value of the fully vested employee option
extension was determined using the Black Scholes method. During the six
and three months ended March 31, 2010, the Company extended 518,832
employee options. The options were due to expire from February 2, 2010
through December 8, 2010. All options were extended for an additional
three years from the current expiration date. The additional cost of
$212,444 was recorded as a debit to option expense and a credit to
additional paid-in capital. The value of the fully vested employee option
extension was determined using the Black Scholes method.
11
Options and Stock to Non-Employees
Options to non-employees are accounted for in accordance with Codification
505-50-05-5, "Equity Based Payments to Non-Employees". 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. There
were no options granted to non-employees during the six and three months
ended March 31, 2011. There were no options granted to non-employees
during the six and three months ended March 31, 2010.
There were 277,169 and 77,169 shares of common stock issued to consultants
during the six and three months ended March 31, 2011 at a fair value of
$0.73 and $0.79, respectively, per share for a cost of $200,964 and
$60,964, respectively, of which $130,964 was expensed for the six months
ended March 31, 2011 and $95,192 was expensed for the three months ended
March 31, 2011. The remaining cost will be expensed over the term of the
contracts. Additionally, a portion of the cost of common stock issued in
previous quarters was expensed. The cost for the previously issued shares
for the six and three months ended March 31, 2011 was $1,982 and $-0-,
respectively. There were 370,758 and 266,566 shares of common stock issued
to consultants during the six and three months ended March 31, 2010 at a
cost for the six and three months ended March 31, 2010 of $409,562 and
$274,563, respectively. In addition, a portion of the cost of common stock
issued in previous quarters was expensed. This cost for the six and three
months ended March 31, 2010 was $291,174 and $116,579, respectively.
During the six months ended March 31, 2011, the Company extended 80,000
options issued to a consultant. The options were due in October 2010. All
options were extended for an additional five years from the current
expiration date. The additional cost of $30,816 was recorded as a debit to
stock-based compensation expense and a credit to additional paid-in
capital. The value of the fully vested option extension was determined
using the Black Scholes method. There was no extension of options issued
to consultants during the three months ended March 31, 2011. There was no
extension of options issued to consultants during the six and three months
ended March 31, 2010.
Derivative liabilities and warrants
Below is a chart showing the derivative liabilities and the number of
warrants outstanding at March 31, 2011:
Shares
Issuable
upon
Issue Exercise of Exercise Expiration Refer-
Warrant Date Warrant Price Date ence
------- ---- ------- ----- ---- ----
Series K 8/4/06 2,638,163 $ 0.40 2/4/12 1
Series N 8/18/08 3,890,782 0.40 8/18/14 1
Series A 6/24/09 1,303,472 0.50 12/24/14 1
C. Schleuning 7/8/09 167,500 0.50 01/08/15 1
(Series A)
Series B 9/4/09 500,000 0.68 9/4/14 1
12
Series C 8/20/09- 4,634,886 0.55 2/20/15 1
8/26/09
Series D 9/21/09 4,714,284 1.50 9/21/11 1
Series E 9/21/09 714,286 1.75 8/12/14 1
Series L 4/18/07 951,669 0.75 4/17/12 2
Series L (repriced) 4/18/07 1,000,000 0.56 4/17/13 2
Series M 4/18/07 1,221,668 2.00 4/17/12 2
Series M (modified) 4/18/07 6,000,000 0.60 7/31/14 2
Series O 3/6/09 7,500,000 0.25 3/6/16 3
Private Investors 8,609,375 0.47-
5/30/03- 1.25 5/30/13-
6/30/09 7/18/14 4
Warrants held by 6/24/09- 3,497,539 0.40- 12/24/14- 5
Officer and Director 7/6/09 0.50 1/6/15
1. Derivative Liabilities
The Company accounted for the Series K and A through E Warrants as
derivative liabilities in accordance with Codification 815-10,
"Accounting for Derivative Instruments and Hedging Activities". For the
six and three months ended March 31, 2011, the Company recorded a gain
of $516,116 and a gain of $1,646,488 on the Series A through E
derivative instruments, respectively. During the six and three months
ended March 31, 2011, the Company recorded a gain of $211,053 and a
gain of $501,251 on remaining Series K warrants, respectively. During
the six and three months ended March 31, 2010, the Company recognized a
gain of $4,240,952 and a gain of $933,788 on the remaining Series A
through E derivative instruments, respectively. During the six and
three months ended March 31, 2010, the Company recorded a gain of
$2,698,066 and a gain of $709,903, respectively, on the remaining
Series K warrants.
During the six months ended March 31, 2010, 1,015,454 Series K
warrants, on which the Company recognized a gain on exercise of
$428,769 and 8,813,088 Series A warrants, on which the Company
recognized a total gain of $8,433,451 were exercised. When the warrants
were exercised, the value of these warrants was converted from
derivative liabilities to equity. Series K warrants transferred to
equity totaled $944,274 and Series A warrants transferred to equity
totaled $4,276,972. During the three months ended March 31, 2010,
438,088 Series A warrants were exercised on which the Company
recognized a total gain of $142,241. When the warrants were exercised,
the value of these warrants was converted from derivative liabilities
to equity. Series A warrants transferred to equity totaled $173,222.
During the six and three months ended March 31, 2011, 757,331 and
582,331 Series C warrants were exercised. The Company recognized a gain
on exercise of $232,892 and $214,007, respectively. When the warrants
were exercised, the value of these warrants was converted from
derivative liabilities to equity. Series C warrants transferred to
equity totaled $202,830 and $141,215, respectively.
13
On October 1, 2009, the Company reviewed all outstanding warrants in
accordance with the requirements of Codification 815-40, "Determining
Whether an Instrument (or Embedded Feature) is Indexed to an Entity's
Own Stock". This topic provides that an entity should use a two-step
approach to evaluate whether an equity-linked financial instrument (or
embedded feature) is indexed to its own stock, including evaluating the
instrument's contingent exercise and settlement provisions. The warrant
agreements provide for adjustments to the purchase price for certain
dilutive events, which includes an adjustment to the number of
shares issuable upon the exercise of the warrant in the event that the
Company makes certain equity offerings in the future at a price lower
than the exercise prices of the warrant instruments. Under the
provisions of Codification 815-40, the warrants are not considered
indexed to the Company's stock because future equity offerings or sales
of the Company's stock are not an input to the fair value of a
"fixed-for-fixed" option on equity shares, and equity classification is
therefore precluded. Accordingly, effective October 1, 2009, 3,890,782
Series N warrants issued in August 2008 were determined to be subject
to the requirements of this topic and were valued using the
Black-Scholes formula as of October 1, 2009 at $6,186,343. Effective
October 1, 2009, the Series N warrants are recognized as a liability in
the Company's condensed consolidated balance sheet at fair value with a
corresponding adjustment to accumulated deficit and will be
marked-to-market each reporting period. The Series N warrants were
revalued on March 31, 2011 at $1,750,852, which resulted in a gain on
derivatives and a decrease in derivative liabilities of $155,631 and
$700,341 for the six and three months ended March 31, 2011 due to the
increase in the Company's stock price since September 30, 2010. During
the six and three months ended March 31, 2010, the Company recorded a
gain of $4,240,952 and $933,788, respectively, on the Series N
warrants.
See below for details of the balances of derivative instruments at
March 31, 2011 and September 30, 2010.
March 31, 2011 September 30, 2010
-------------- ------------------
Series K warrants $ 791,449 $ 1,002,502
2009 financings warrants
(Series A thru E) 3,085,228 4,037,066
2008 warrants reclassified
from equity to derivative
liabilities on October 1,
2009 (Series N) 1,750,852 1,906,483
--------- ---------
Total derivative liabilities $5,627,529 $6,946,051
========== ==========
2. Series L and M Warrants
On April 18, 2007, the Company completed a $15 million private
financing. Shares were sold at $0.75, a premium over the closing price
of the previous two weeks. The financing was accompanied by 10 million
warrants with an exercise price of $0.75 and 10 million warrants with
an exercise price of $2.00. The warrants are known as Series L and
Series M warrants, respectively.
14
In September 2008, 2,250,000 of the original Series L warrants were
repriced at $0.56 and extended for one year to April 17, 2013. The
increase in the value of the warrants of $173,187 was recorded as a
debit and a credit to additional paid-in capital in accordance with the
original accounting for the Series L warrants. As of March 31, 2011,
1,000,000 of the Series L warrants at the reduced exercise price of
$0.56 and 951,669 at the original exercise price of $0.75 remained
outstanding.
On March 12, 2010, the Company temporarily reduced the exercise price
of the Series M warrants, originally issued on April 18, 2007. The
exercise price was reduced from $2.00 to $0.75. At any time prior to
June 16, 2010 investors could have exercised the Series M warrants at a
price of $0.75 per share. For every two Series M warrants exercised
prior to June 16, 2010 the investor would have received one Series F
warrant. Each Series F warrant would have allowed the holder to
purchase one share of CEL-SCI's common stock at a price of $2.50 per
share at any time on or before June 15, 2014. After June 15, 2010 the
exercise price of the Series M warrants reverted back to $2.00 per
share. Any person exercising a Series M warrant after June 15, 2010
would not receive any Series F warrants. The Series M warrants expire
on April 17, 2012. An analysis of the modification to the warrants
determined that the modification increased the value of the warrants by
$1,432,456. This cost was recorded as a debit and a credit to
additional paid-in capital and is a deemed dividend. This cost is
included in modification of warrants and reduces the net loss available
to shareholders on the condensed, consolidated statements of
operations. There were no exercises of the Series M warrants at the
reduced price and the exercise price of the Series M warrants reverted
back to $2.00 on June 16, 2010.
On August 3, 2010, the Company's Board of Directors approved an
amendment to the terms of the Series M warrants held by an investor.
The investor was the owner of 8,800,000 warrants priced at $2.00 per
share. The investor may now purchase 6,000,000 shares of the Company's
common stock (reduced from 8,800,000) at a price of $0.60 per share. An
analysis of the modification to the warrants determined that the
modification increased the value of the warrants by $100,000. The
adjustment was recorded as a debit and a credit to additional paid-in
capital. As of March 31, 2011, all of these warrants remained
outstanding. In addition, 1,221,668 Series M warrants at the original
exercise price of $2.00 were outstanding as of March 31, 2011.
On February 1, 2011, 6,000,000 Series M warrants were extended for two
years. The warrants expire on July 31, 2014. The increase in the fair
value of the warrants was $661,457. This cost was recorded as a debit
and a credit to additional paid-in capital and is a deemed dividend.
This cost is included in modification of warrants and reduces the net
loss available to shareholders on the condensed, consolidated
statements of operations.
3. Licensing Agreement Warrants
On March 6, 2009, the Company entered into a licensing agreement with
Byron Biopharma LLC ("Byron") under which the Company granted Byron an
exclusive license to market and distribute the Company's cancer drug
Multikine in the Republic of South Africa. Pursuant to the agreement
Byron will be responsible for registering the product in South Africa.
15
Once Multikine has been approved for sale, the Company will be
responsible for manufacturing the product, while Byron will be
responsible for sales in South Africa. Revenues will be divided equally
between the Company and Byron. To maintain the license Byron, among
other requirements, made a $125,000 payment to the Company on March 8,
2010. On March 30, 2009, and as further consideration for its rights
under the licensing agreement, Byron purchased 3,750,000 Units from the
Company at a price of $0.20 per Unit. Each Unit consisted of one share
of the Company's common stock and two warrants. Each warrant entitles
the holder to purchase one share of the Company's common stock at a
price of $0.25 per share. The warrants expire on March 6, 2016. The
shares of common stock included as a component of the Units were
registered by the Company under the Securities Act of 1933. The Company
filed a registration statement to register the shares issuable upon the
exercise of the warrants. The Units were accounted for as an equity
transaction using the Black Scholes method to value the warrants. The
fair value of the warrants was calculated to be $1,015,771. As of March
31, 2011, all warrants remain outstanding.
4. Private Investor Warrants
Between May 30, 2003 and June 30, 2009 CEL-SCI sold shares of its
common stock in private transactions. In some cases warrants were
issued as part of a financing. As of March 31, 2011, 8,609,375 warrants
remain outstanding. For further discussion of these warrants, see Form
10-K for the year ended September 30, 2010.
On February 1, 2011, 1,325,000 warrants were extended for three years.
The increase in the fair value of the warrants was $406,912. This cost
was recorded as a debit and a credit to additional paid-in capital and
is a deemed dividend. This cost is included in modification of warrants
and reduces the net loss available to shareholders on the condensed,
consolidated statements of operations.
5. Warrants held by Officer and Director
Between December 2008 and June 2009, Maximilian de Clara, the Company's
President and a director, loaned the Company $1,104,057. In accordance
with the loan agreement, the Company issued Mr. de Clara warrants which
entitle him to purchase 1,648,244 shares of the Company's common stock
at a price of $0.40 per share. The warrants are exercisable at any time
prior to December 24, 2014. As consideration for a further extension of
the note, Mr. de Clara received warrants which allow him to purchase
1,849,295 shares of the Company's common stock at a price of $0.50 per
share at any time prior to January 6, 2015. As of March 31, 2011, all
warrants remain outstanding. See Note E for additional information.
D. FAIR VALUE MEASUREMENTS
Effective October 1, 2008, the Company adopted the provisions of
Codification 820-10, "Fair Value Measurements", which defines fair value,
establishes a framework for measuring fair value and expands disclosures
about such measurements that are permitted or required under other
accounting pronouncements. While Codification 820-10 may change the method
16
of calculating fair value, it does not require any new fair value
measurements. The adoption of Codification 820-10 did not have a material
impact on the Company's results of operations, financial position or cash
flows.
In accordance with Codification 820-10, the Company determines fair value
as the price that would be received to sell an asset or paid to transfer a
liability in an orderly transaction between market participants at the
measurement date. The Company generally applies the income approach to
determine fair value. This method uses valuation techniques to convert
future amounts to a single present amount. The measurement is based on the
value indicated by current market expectations with respect to those
future amounts.
Codification 820-10 establishes a fair value hierarchy that prioritizes
the inputs used to measure fair value. The hierarchy gives the highest
priority to active markets for identical assets and liabilities (Level 1
measurement) and the lowest priority to unobservable inputs (Level 3
measurement). The Company classifies fair value balances based on the
observability of those inputs. The three levels of the fair value
hierarchy are as follows:
o Level 1 - Observable inputs such as quoted prices in active
markets for identical assets or liabilities
o Level 2 - Inputs other than quoted prices that are observable for
the asset or liability, either directly or indirectly. These include
quoted prices for similar assets or liabilities in active markets,
quoted prices for identical or similar assets or liabilities in
markets that are not active and amounts derived from valuation
models where all significant inputs are observable in active markets
o Level 3 - Unobservable inputs that reflect management's assumptions
For disclosure purposes, assets and liabilities are classified in their
entirety in the fair value hierarchy level based on the lowest level of
input that is significant to the overall fair value measurement. The
Company's assessment of the significance of a particular input to the fair
value measurement requires judgment and may affect the placement within
the fair value hierarchy levels.
The table below sets forth the assets and liabilities measured at fair
value on a recurring basis, by input level, in the condensed consolidated
balance sheet at March 31, 2011:
Quoted Prices in Significant
Active Markets for Other Significant
Identical Assets or Observable Unobservable
Liabilities (Level 1) Inputs (Level 2) Inputs (Level 3) Total
--------------------- ---------------- ---------------- -----
Derivative instruments $ - $ - $5,627,529 $5,627,529
============== =========== ========== ==========
The table below sets forth the assets and liabilities measured at fair
value on a recurring basis, by input level, in the condensed consolidated
balance sheet at September 30, 2010:
17
Quoted Prices in Significant
Active Markets for Other Significant
Identical Assets or Observable Unobservable
Liabilities (Level 1) Inputs (Level 2) Inputs (Level 3) Total
--------------------- ---------------- ---------------- -----
Derivative instruments $ - $ - $6,946,051 $6,946,051
============= =========== ========== ==========
The following sets forth the reconciliation of beginning and ending
balances related to fair value measurements using significant unobservable
inputs (Level 3) for the periods ended March 31, 2011 and 2010:
March 31,
2011 2010
---- ----
Beginning balance $6,946,051 $35,113,970
Transfers in - 6,186,343
Transfers out (202,830) (5,221,246)
Realized and unrealized (gains)
losses recorded in earnings (1,115,692) (27,859,939)
---------- ------------
Ending Balance $5,627,529 $ 8,219,128
========== =============
The fair values of the Company's derivative instruments disclosed above
are primarily derived from valuation models where significant inputs such
as historical price and volatility of the Company's stock as well as U.S.
Treasury Bill rates are observable in active markets.
E. LOANS FROM OFFICER
Between December 2008 and June 2009, Maximilian de Clara, the Company's
President and a director, loaned the Company $1,104,057. The loan from Mr.
de Clara bears interest at 15% per year and was secured by a lien on
substantially all of the Company's assets. The Company does not have the
right to prepay the loan without Mr. de Clara's consent. The loan was
initially payable at the end of March 2009, but was extended to the end of
June 2009. At the time the loan was due, and in accordance with the loan
agreement, the Company issued Mr. de Clara warrants which entitle Mr. de
Clara to purchase 1,648,244 shares of the Company's common stock at a
price of $0.40 per share. The warrants are exercisable at any time prior
to December 24, 2014. Pursuant to Codification section 470-50, the fair
value of the warrants issuable under the first amendment was recorded as a
discount on the note payable with a credit recorded to additional paid-in
capital. The discount was amortized from April 30, 2009, through June 27,
2009. Although the loan was to be repaid from the proceeds of the
Company's June 2009 financing, the Company's Directors deemed it
beneficial not to repay the loan and negotiated a second extension of the
loan with Mr. de Clara on terms similar to the June 2009 financing.
Pursuant to the terms of the second extension the note is now due on July
6, 2014, but, at Mr. de Clara's option, the loan can be converted into
shares of the Company's common stock. The number of shares which will be
issued upon any conversion will be determined by dividing the amount to be
converted by $0.40. As further consideration for the second extension, Mr.
de Clara received warrants which allow Mr. de Clara to purchase 1,849,295
shares of the Company's common stock at a price of $0.50 per share at any
time prior to January 6, 2015.
18
In accordance with Codification 470-50, the second amendment to the loan
was accounted for as an extinguishment of the first amendment debt. The
extinguishment of the loan required that the new loan be recorded at fair
value and a gain or loss was recognized, including the warrants issued in
connection with the second amendment. This resulted in a premium of
$341,454, which was amortized over the period from July 6, 2009, the date
of the second amendment, to October 1, 2009, the date at which the loan
holder could have demanded payment of the loan. During the six months
ended March 31, 2010, the Company amortized the remaining $3,282 in
premium on the loan. During the six months ended March 31, 2011 and 2010,
the Company paid $82,804 in interest expense to Mr. de Clara. During the
three months ended March 31, 2011 and 2010, the Company paid $41,402 in
interest expense to Mr. de Clara.
H. OPERATIONS, FINANCING
The Company has incurred significant costs since its inception in
connection with the acquisition of 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 stock, preferred stock and
promissory notes. The Company will be required to raise additional capital
or find additional long-term financing in order to continue with its
research efforts. There can be no assurance the Company will be successful
in raising additional funds. 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 Federal Drug Administration (FDA)
approval for the sale of products to be developed on a commercial basis is
uncertain. Ultimately, the Company must complete the development of its
products, obtain the appropriate regulatory approvals and obtain
sufficient revenues to support its cost structure. The Company believes
that it has sufficient funds to support its operations for more than the
next twelve months.
The Company has two partners who have agreed to participate in and pay for
part of the Phase III clinical trial for Multikine. Since the Company was
able to raise substantial capital during 2009, the Company completed the
preparations for the Phase III trial for Multikine. On December 29, 2010,
the Company announced that it had commenced the Phase III clinical trial
for Multikine. The net cost to the Company of the clinical trial is
estimated to be $25 - $26 million.
In November 2010, the Company received a $733,437 grant under The Patient
Protection and Affordable Care Act of 2010 (PPACA). The Company recognizes
revenue as the expenses are incurred. The amount of the grant earned
during the six and three months ended March 31, 2011 was $684,200 and
$43,815, respectively. The balance of the funds will be collected in
October 2011. The grant was related to three of the Company's projects
including the Phase III trial of Multikine. The PPACA provides small and
mid-sized biotech, pharmaceutical and medical device companies with up to
a 50% tax credit for investments in qualified therapeutic discoveries for
19
tax years 2009 and 2010, or a grant for the same amount tax-free. The tax
credit/grant program covers research and development costs from 2009 and
2010 for all qualified "therapeutic discovery projects." As of March 31,
2011, the Company has a receivable for grant funds earned but not yet
received of $112,060.
I. COMMITMENTS AND CONTINGENCIES
Lease Agreement - In August 2007, the Company leased a building near
Baltimore, Maryland. The building, which consists of approximately 73,000
square feet, was remodeled in accordance with the Company's specifications
so that it can be used by the Company to manufacture Multikine for the
Company's Phase III clinical trial and sales of the drug if approved by
the FDA. The lease is for a term of twenty years and required an annual
base rent payments of $1,575,000 during the first year of the lease. The
annual base rent escalates each year at 3%. The Company is also required
to pay all real and personal property taxes, insurance premiums,
maintenance expenses, repair costs and utilities. The lease allows the
Company, at its election, to extend the lease for two ten-year periods or
to purchase the building at the end of the 20-year lease. The lease
required the Company to pay $3,150,000 towards the remodeling costs, which
will be recouped by reductions in the annual base rent of $303,228 in
years six through twenty of the lease, subject to the Company maintaining
compliance with the lease covenants. On January 24, 2008, a second
amendment to the lease for the manufacturing facility was signed. In
accordance with the amendment, the Company was required to pay the
following: 1) an additional $518,790 for movable equipment, which
increased restricted cash, and 2) an additional $1,295,528 into the escrow
account to cover additional costs, which increased deferred rent. These
funds were transferred in early February 2008. In April 2008, an
additional $288,474 was paid toward the completion of the manufacturing
facility. The Company took possession of the manufacturing facility in
October of 2008. An additional $505,225 was paid for the completion of the
work on the manufacturing facility in October 2008. During the six and
three months ended March 31, 2010, an additional $32,059 was paid for
final completion costs. During the six and three months ended March 31,
2011, $21,177 of the remaining restricted funds was paid to the landlord
for a bonus on completion.
In December 2008, the Company was not in compliance with certain lease
requirements (i.e., failure to pay an installment of Base Annual Rent).
However, the landlord did not declare the Company to be in default under
the terms of the lease, but instead renegotiated the lease. In January
2009, as part of an amended lease agreement on the manufacturing facility,
the Company repriced the 3,000,000 warrants initially issued to the
landlord in July 2007 at $1.25 per share with an expiration date of July
12, 2013. These warrants were repriced at $0.75 per share and expire on
January 26, 2014. The cost of this repricing and extension of the warrants
was $70,515. In addition, 787,500 additional warrants were given to the
landlord of the manufacturing facility on the same date. These warrants
are exercisable at $0.75 per share and will expire on January 26, 2014.
The cost of these warrants was $45,207. All back rent was paid to the
landlord in early July 2009. During the three months ended June 30, 2009,
the Company issued the landlord an additional 2,296,875 warrants in
accordance with an amendment to the agreement. These warrants were issued
at a price of $0.75 and will expire between March 31, 2014 and June 30,
2014. These warrants were valued at $251,172 using the Black Scholes
method. These warrants are included in the private investor warrants in
the Stockholder Equity section (Note C, Reference 4). The Company is in
compliance with the lease and, in February 2010, received a refund of the
$1,575,000 additional deposit placed with the landlord in July 2008.
20
On January 28, 2009, the Company subleased a portion of the manufacturing
facility. The sublease commenced on February 2, 2009 and ended in July
2010. The Company received $10,300 per month in rent for the subleased
space.
The Company began amortizing the deferred rent on the building on October
7, 2008, the day that the Company took possession of the building. The
amortization of the deferred rent for the six months ended March 31, 2011
was $379,725 and for the three months ended March 31, 2011 was $187,835.
The amortization of the deferred rent for the six months ended March 31,
2010 was $406,061 and for the three months ended March 31, 2010 was
$203,118.
Equity Line of Credit - On December 30, 2008, the Company entered into an
Equity Line of Credit agreement as a source of funding for the Company.
The Equity Line was never utilized and the agreement ended in January
2011.
MLV Agreement - On December 10, 2010, the Company entered into a sales
agreement with McNicoll Lewis & Vlak, LLC (MLV) relating to shares of
common stock which have been registered by means of a shelf registration
statement filed in July 2009. The Company may offer and sell shares of its
common stock, having an aggregate offering price of up to $30 million from
time to time through MLV acting as agent and/or principal.
Sales of the Company's common stock, if any, may be made in sales deemed
to be "at-the-market" equity offerings as defined in Rule 415 promulgated
under the Securities Act of 1933, as amended, including sales made
directly on or through the NYSE Amex, the existing trading market for the
Company's common stock, sales made to or through a market maker other than
on an exchange or otherwise, in negotiated transactions at market prices
prevailing at the time of sale or at prices related to such prevailing
market prices, and/or any other method permitted by law. MLV will act as
sales agent on a best efforts basis. The Company is not required to sell
any shares to MLV and MLV is not required to sell any shares on the
Company's behalf or purchase any of our shares for its own account.
MLV will be entitled to a commission in an amount equal to the greater of
3% of the gross proceeds from each sale of the shares, or $0.025 for each
share sold, provided, that, in no event will MLV receive a commission
greater than 8.0% of the gross proceeds from the sale of the shares.
During the six months ended March 31, 2011, the Company sold 1,901,127
shares of common stock to MLV for $1,471,777, less commissions and fees of
$51,674. During the three months ended March 31, 2011, the Company sold
1,195,288 shares of common stock to MLV for $797,038, less commissions and
fees of $31,159.
On May 16, 2011, CEL-SCI entered into an Exchange Agreement (referred to
herein as the "Settlement Agreement") with thirteen hedge funds (the
"plaintiffs") to settle all claims arising from a lawsuit initiated by the
plaintiffs in October 2009 in the United States District Court for the
Southern District of New York (the "Court"). As previously disclosed by
21
CEL-SCI in its public filings, in August 2006 the plaintiffs (or their
predecessors) purchased from CEL-SCI Series K notes convertible into
CEL-SCI common stock and Series K warrants to purchase CEL-SCI common stock
under financing agreements which provided the Series K notes and warrants
with anti-dilution protection if CEL-SCI sold additional shares of common
stock, or securities convertible into common stock, at a price below the
then applicable conversion price of the notes or the exercise price of the
warrants. In their lawsuit, the plaintiffs alleged that a March 2009 drug
marketing and distribution agreement in which CEL-SCI sold units of common
stock and warrants to an unrelated third party triggered these
anti-dilution provisions, and that CEL-SCI failed to give effect to these
provisions. The plaintiffs sought $30 million in actual damages, $90
million in punitive damages, the issuance of additional shares of common
stock and warrants, and a reduction in the conversion price of the Series K
notes and the exercise price of the Series K warrants. CEL-SCI denied the
plaintiffs' allegations in the lawsuit and asserted that the 2009 agreement
was a strategic transaction which did not trigger the anti-dilution
provisions of the 2006 financing agreements.
Although the Company has vigorously defended the lawsuit and believes the
plaintiffs' claims are without merit, the Company believes that a
settlement of this lawsuit is in the best interests of the shareholders at
this time. The settlement was entered into to avoid the substantial costs
of further litigation and the risk and uncertainty that the litigation
entails. By ending this dispute, and ending the significant demands on the
time and attention of the Company's management necessary to respond to the
litigation, the Company is better able to focus on executing its ongoing
Phase III clinical trial with its novel and non-toxic cancer drug
Multikine.
Under the terms of the Settlement Agreement and its related agreements,
the plaintiffs and CEL-SCI will terminate the pending litigation and
release each other from all claims each may have against the other, with
certain customary exceptions. CEL-SCI agreed to make a $3 million cash
payment and issue $9 million of securities to the plaintiffs. These
securities consist of senior secured convertible promissory notes with an
aggregate principal amount of $4.95 million and shares of redeemable
Series A Convertible Preferred Stock with an aggregate stated value of
$4.05 million. The $3 million cash payment will be made at the closing
under the Settlement Agreement. The $9 million of securities will be
retired through nine equal monthly installment payments of approximately
$1 million each, plus interest on the notes and dividends on the shares at
the rate of 8% per annum, with payments beginning on June 1, 2011 (the
month of October requires no payment) and ending on March 1, 2012. As
these installments of the principal amount of the notes and the stated
value of the preferred shares are paid down, or as the notes or the
preferred shares are converted by the holders into common stock, the
initial $9 million due (plus interest and dividends) will be
proportionately reduced until the notes are fully paid or converted and
the preferred shares are fully redeemed or converted. CEL-SCI has pledged
all of its assets as collateral for the repayment of these obligations.
While the notes and preferred shares are outstanding, CEL-SCI is generally
prohibited from paying dividends, incurring new debt or making any
payments (other than interest) on existing debt, and is subject to certain
restrictions on the transfer of its assets. The $12 million has been
accrued for and included in the March 31, 2011 consolidated financial
statements.
22
The notes and the Series A preferred shares will be convertible, at the
option of the holder, into CEL-SCI common stock at a fixed price of $0.67
per share. The conversion price represents the most recent consolidated
closing sale price of the common stock on the NYSE AMEX at the time the
settlement agreement was signed by the parties. The plaintiffs have agreed
to restrictions on their ability to effect short sales of the common stock
based on the number of warrants and common shares they hold, but excluding
shares issuable upon the conversion of the notes and preferred shares. The
plaintiffs have further agreed to permit an independent accounting firm to
review their trading records every three months to confirm their compliance
with these restrictions.
The parties' respective obligations under the Settlement Agreement,
including CEL-SCI's obligation to pay cash and issue notes and preferred
shares to the plaintiffs, are subject to obtaining the approval by the
Court of an order exempting the issuance to the plaintiffs of the notes and
preferred shares from registration under Section 3(a)(10) of the Securities
Act of 1933. This will permit the notes and preferred shares, and the
shares of common stock issuable upon conversion thereof, to be freely
tradable. After the Court order is obtained, the closing of the
transactions contemplated by the Settlement Agreement is subject to the
further condition, unless waived by the plaintiffs, that the common shares
issuable upon conversion of the notes and the preferred shares be approved
for listing on the NYSE AMEX. The Company expects that the Court order will
be obtained and the listing will be approved within approximately two
weeks.
The foregoing summary of the terms of the settlement is qualified in its
entirety by the detailed terms of the Settlement Agreement and the related
agreements and documents which are filed as exhibits to this Quarterly
Report on Form 10-Q.
J. EARNINGS PER SHARE
The Company's diluted earnings per share (EPS) are as follows for March
31, 2011 and 2010. For the six months ended March 31, 2011, the
computation of dilutive net loss per share excluded options and warrants
to purchase approximately 22,200,000 of common stock because their
inclusion would have an anti-dilutive effect.
Six Months Ended March 31, 2011
-------------------------------
Weighted average
Net Loss Shares EPS
-------- ------ ---
Basic Earnings per Share $(21,348,925) 206,090,265 $(0.10)
Note conversion -
Warrants and options convertible
into shares of common stock - -
------------ -----------
Dilutive EPS $(21,348,925) 206,090,265 $(0.10)
============= =========== =======
23
Six Months Ended March 31, 2010
-------------------------------
Weighted average
Net Loss Shares EPS
-------- ------ ---
Basic Earnings per Share $ 16,982,542 199,516,156 $0.09
Note conversion 82,804 2,760,142
Warrants and options convertible
into shares of common stock (18,997,719) 51,317,118
------------ -----------
Dilutive EPS $ (1,932,373) 253,593,416 $(0.01)
============= =========== =======
Three Months Ended March 31, 2011
---------------------------------
Weighted average
Net Loss Shares EPS
-------- ------ ---
Basic Earnings per Share $(15,097,973) 207,089,841 $(0.07)
Note conversion 41,402 2,760,142
Warrants and options convertible
into shares of common stock (2,848,080) 19,493,940
------------ -----------
Dilutive EPS $(17,904,651) 229,343,923 $(0.08)
============= =========== =======
Three Months Ended March 31, 2010
---------------------------------
Weighted average
Net Loss Shares EPS
-------- ------ ---
Basic Earnings per Share $(2,176,975) 204,173,750 $(0.01)
Note conversion 41,402 2,760,142
Warrants and options convertible
into shares of common stock (4,377,471) 51,317,118
------------ ----------
Dilutive EPS $(6,513,044) 258,251,010 $(0.03)
============ =========== =======
K. SUBSEQUENT EVENTS
On May 16, 2011, CEL-SCI entered into an Exchange Agreement (referred to
herein as the "Settlement Agreement") with thirteen hedge funds (the
"plaintiffs") to settle all claims arising from a lawsuit initiated by the
plaintiffs in October 2009 in the United States District Court for the
Southern District of New York (the "Court"). As previously disclosed by
CEL-SCI in its public filings, in August 2006 the plaintiffs (or their
predecessors) purchased from CEL-SCI Series K notes convertible into
24
CEL-SCI common stock and Series K warrants to purchase CEL-SCI common stock
under financing agreements which provided the Series K notes and warrants
with anti-dilution protection if CEL-SCI sold additional shares of common
stock, or securities convertible into common stock, at a price below the
then applicable conversion price of the notes or the exercise price of the
warrants. In their lawsuit, the plaintiffs alleged that a March 2009 drug
marketing and distribution agreement in which CEL-SCI sold units of common
stock and warrants to an unrelated third party triggered these
anti-dilution provisions, and that CEL-SCI failed to give effect to these
provisions. The plaintiffs sought $30 million in actual damages, $90
million in punitive damages, the issuance of additional shares of common
stock and warrants, and a reduction in the conversion price of the Series K
notes and the exercise price of the Series K warrants. CEL-SCI denied the
plaintiffs' allegations in the lawsuit and asserted that the 2009 agreement
was a strategic transaction which did not trigger the anti-dilution
provisions of the 2006 financing agreements.
Although the Company has vigorously defended the lawsuit and believes the
plaintiffs' claims are without merit, the Company believes that a
settlement of this lawsuit is in the best interests of the shareholders at
this time. The settlement was entered into to avoid the substantial costs
of further litigation and the risk and uncertainty that the litigation
entails. By ending this dispute, and ending the significant demands on the
time and attention of the Company's management necessary to respond to the
litigation, the Company is better able to focus on executing its ongoing
Phase III clinical trial with its novel and non-toxic cancer drug
Multikine.
Under the terms of the Settlement Agreement and its related agreements,
the plaintiffs and CEL-SCI will terminate the pending litigation and
release each other from all claims each may have against the other, with
certain customary exceptions. CEL-SCI agreed to make a $3 million cash
payment and issue $9 million of securities to the plaintiffs. These
securities consist of senior secured convertible promissory notes with an
aggregate principal amount of $4.95 million and shares of redeemable
Series A Convertible Preferred Stock with an aggregate stated value of
$4.05 million. The $3 million cash payment will be made at the closing
under the Settlement Agreement. The $9 million of securities will be
retired through nine equal monthly installment payments of approximately
$1 million each, plus interest on the notes and dividends on the shares at
the rate of 8% per annum, with payments beginning on June 1, 2011 (the
month of October requires no payment) and ending on March 1, 2012. As
these installments of the principal amount of the notes and the stated
value of the preferred shares are paid down, or as the notes or the
preferred shares are converted by the holders into common stock, the
initial $9 million due (plus interest and dividends) will be
proportionately reduced until the notes are fully paid or converted and
the preferred shares are fully redeemed or converted. CEL-SCI has pledged
all of its assets as collateral for the repayment of these obligations.
While the notes and preferred shares are outstanding, CEL-SCI is generally
prohibited from paying dividends, incurring new debt or making any
payments (other than interest) on existing debt, and is subject to certain
restrictions on the transfer of its assets. The $12 million has been
accrued for and included in the March 31, 2011 consolidated financial
statements.
25
The notes and the Series A preferred shares will be convertible, at the
option of the holder, into CEL-SCI common stock at a fixed price of $0.67
per share. The conversion price represents the most recent consolidated
closing sale price of the common stock on the NYSE AMEX at the time the
settlement agreement was signed by the parties. The plaintiffs have agreed
to restrictions on their ability to effect short sales of the common stock
based on the number of warrants and common shares they hold, but excluding
shares issuable upon the conversion of the notes and preferred shares. The
plaintiffs have further agreed to permit an independent accounting firm to
review their trading records every three months to confirm their compliance
with these restrictions.
The parties' respective obligations under the Settlement Agreement,
including CEL-SCI's obligation to pay cash and issue notes and preferred
shares to the plaintiffs, are subject to obtaining the approval by the
Court of an order exempting the issuance to the plaintiffs of the notes and
preferred shares from registration under Section 3(a)(10) of the Securities
Act of 1933. This will permit the notes and preferred shares, and the
shares of common stock issuable upon conversion thereof, to be freely
tradable. After the Court order is obtained, the closing of the
transactions contemplated by the Settlement Agreement is subject to the
further condition, unless waived by the plaintiffs, that the common shares
issuable upon conversion of the notes and the preferred shares be approved
for listing on the NYSE AMEX. The Company expects that the Court order will
be obtained and the listing will be approved within approximately two
weeks.
The foregoing summary of the terms of the settlement is qualified in its
entirety by the detailed terms of the Settlement Agreement and the related
agreements and documents which are filed as exhibits to this Quarterly
Report on Form 10-Q.
26
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 capital generated from the public and
private offerings of its common stock and convertible notes. In addition, the
Company has utilized short-term loans to meet its capital requirements. Capital
raised by the Company has been expended primarily to acquire an exclusive
worldwide license to use, and later purchase, certain patented and unpatented
proprietary technology and know-how relating to the human immunological defense
system. Capital has also been used for patent applications, debt repayment,
research and development, administrative costs, and the construction of the
Company's laboratory facilities. The Company does not anticipate realizing
significant revenues until it enters into licensing arrangements regarding its
technology and know-how or until it receives regulatory approval to sell its
products (which could take a number of years). As a result the Company has been
dependent upon the proceeds from the sale of its securities to meet all of its
liquidity and capital requirements and anticipates having to do so in the
future.
The Company will be required to raise additional capital or find additional
long-term financing in order to continue with its research efforts. The ability
of the Company to complete the necessary clinical trials and obtain Federal Drug
Administration (FDA) approval for the sale of products to be developed on a
commercial basis is uncertain. Ultimately, the Company must complete the
development of its products, obtain the appropriate regulatory approvals and
obtain sufficient revenues to support its cost structure. The Company believes
that, counting its cash on hand and access to capital through the MLV sales
agreement (see Note I to the accompanying financial statements), it has enough
capital to support its operations for more than the next twelve months. The cash
expenditure from the settlement will be dependent on the stock price during the
next 10 months. If the stock price remains above $0.67, the conversion price of
the settlement securities, it is likely that most of the settlement securities
will be converted into CEL-SCI common stock and will not result in the planned
cash payments. It would seem likely that a higher share price will therefore
reduce the Company's cash expenditures during the next 10 months by an amount
between $0 (below $0.67 during the next 10 months) and $9 million.
The Company has two partners who have agreed to participate in and pay for part
of the Phase III clinical trial for Multikine. On December 29, 2010, the Company
announced that it had commenced the Phase III clinical trial for Multikine.
During the first half of May 2011, the Phase III clinical trial commenced also
in India, Poland and Canada. The net cost to the Company of the Phase III
clinical trial is estimated to be $25 - $26 million.
During the six-month period ended March 31, 2011, the Company's cash decreased
by $8,826,904, which includes approximately $2.4 million in prepayments for the
Phase III clinical trial which the Company expects to be used during fiscal year
2011, compared to an increase in cash of $444,254 during the six months ended
March 31, 2010. For the six months ended March 31, 2011 and 2010, cash used in
operating activities totaled $10,548,198 and $5,852,986, respectively. For the
six months ended March 31, 2011 and 2010, cash provided by financing activities
totaled $1,835,956 and $6,390,269, respectively. Cash used by investing
activities was $114,662 and $93,029, for the six months ended March 31, 2011 and
2010, respectively. The use of cash in investing activities consisted primarily
of purchases of equipment and legal costs incurred in patent applications.
27
In August 2007, the Company leased a building near Baltimore, Maryland. The
building, which consists of approximately 73,000 square feet, was remodeled in
accordance with the Company's specifications so that it can be used by the
Company to manufacture Multikine for the Company's Phase III clinical trial and
sales of the drug if approved by the FDA. The lease is for a term of twenty
years and required an annual base rent payments of $1,575,000 during the first
year of the lease. The annual base rent escalates each year at 3%. The Company
is also required to pay all real and personal property taxes, insurance
premiums, maintenance expenses, repair costs and utilities. The lease allows the
Company, at its election, to extend the lease for two ten-year periods or to
purchase the building at the end of the 20-year lease. The lease required the
Company to pay $3,150,000 towards the remodeling costs, which will be recouped
by reductions in the annual base rent of $303,228 in years six through twenty of
the lease. On January 24, 2008, a second amendment to the lease for the
manufacturing facility was signed. In accordance with the amendment, the Company
was required to pay the following: 1) an additional $518,790 for movable
equipment, which increased restricted cash, and 2) an additional $1,295,528 into
the escrow account to cover additional costs, which increased deferred rent.
These funds were transferred in early February 2008. In April 2008, an
additional $288,474 was paid toward the completion of the manufacturing
facility. The Company took possession of the manufacturing facility in October
of 2008. An additional $505,225 was paid for the completion of the work on the
manufacturing facility in October 2008. During the six months ended March 31,
2010, an additional $32,059 was paid for final completion costs. During the six
months ended March 31, 2011, the Company paid $21,177 as a bonus on completion
to the landlord.
In December 2008, the Company was not in compliance with certain lease
requirements (i.e., failure to pay an installment of Base Annual Rent). However,
the landlord did not declare the Company to be in default, but instead
renegotiated the lease. In January 2009, as part of an amended lease agreement
on the manufacturing facility, the Company repriced the 3,000,000 warrants
issued to the landlord in July 2007 at $1.25 per share which were to expire on
July 12, 2013. These warrants were repriced at $0.75 per share and expire on
January 26, 2014. The cost of this repricing and extension of the warrants was
$70,515. In addition, 787,500 additional warrants were given to the landlord on
the same date. The warrants are exercisable at a price of $0.75 per share and
will expire on January 26, 2014. The cost of these warrants was $45,207. During
the three months ended June 30, 2009, the Company issued the landlord an
additional 2,296,875 warrants in accordance with an amendment to the lease.
These warrants were issued at a price of $0.75 and will expire between March 31,
2014 and June 30, 2014. These warrants were valued at $251,172 using the Black
Scholes method. The Company is currently in compliance with the lease.
Regulatory authorities prefer to see biologics such as Multikine manufactured in
the same manufacturing facility for Phase III clinical trials and for the sale
of the product since this arrangement helps ensure that the drug lots used to
conduct the clinical trials will be consistent with those that may be
subsequently sold commercially. Although some biotech companies outsource their
manufacturing, this can be risky with biologics because biologics require
intense manufacturing and process control. With biologic products a minor change
in manufacturing and process control can result in a major change in the
biological activity of the final product. Good and consistent manufacturing and
process control is critical and is best assured if the product is manufactured
and controlled in the manufacturer's own facility by the Company's own specially
trained personnel.
28
On January 28, 2009, the Company subleased a portion of the manufacturing
facility. The sublease commenced on February 2, 2009 and ended July 2010. The
Company received $10,300 per month in rent for the subleased space.
Results of Operations and Financial Condition
During the six months ended March 31, 2011, revenue increased by $646,033
compared to the six months ended March 31, 2010. In November 2010, the Company
received a $733,437 grant under The Patient Protection and Affordable Care Act
of 2010 (PPACA). The grant was related to three of the Company's projects,
including the Phase III trial of Multikine. The PPACA provides small and
mid-sized biotech, pharmaceutical and medical device companies with up to a 50%
tax credit for investments in qualified therapeutic discoveries for tax years
2009 and 2010, or a grant for the same amount tax-free. The tax credit/grant
program covers research and development costs from 2009 and 2010 for all
qualified "therapeutic discovery projects." The Company recognizes revenue as
the expenses are incurred. The amount of the grant earned during the six and
three months ended March 31, 2011 was $684,200 and $43,815, respectively. During
the three months ended March 31, 2011, revenue increased by $13,215 compared to
the three months ended March 31, 2011. The Company no longer subleases a portion
of the manufacturing facility, but earns the revenue from the PPACA.
During the six and three month periods ended March 31, 2011, research and
development expenses increased by $160,501 and decreased by $298,800,
respectively, compared to the six and three-month periods ended March 31, 2010.
The Company is continuing the Phase III clinical trial and research and
development fluctuates based on the activity level of the clinical trial.
During the six and three-month periods ended March 31, 2011, general and
administrative expenses increased by $300,555 and $108,045, respectively,
compared to the six and three-month periods ended March 31, 2010. Fees for the
ongoing lawsuit described in Item 3 of the Company's report on Form 10-K have
fluctuated over the past year.
Interest income during the six and three months ended March 31, 2011 decreased
by $108,202 and $50,862, compared to the six and three-month period ended March
31, 2010, respectively. The decrease was due to the decrease in the funds
available for investment and lower interest rates.
The gain on derivative instruments of $1,115,692 and $3,062,087 for the six and
three months ended March 31, 2011 was the result of the change in fair value of
the derivative liabilities and Series K Warrants during the period. This gain
was caused by fluctuations in the share price of the Company's common stock.
The interest expense of $82,804 and $41,402 for the six and three months ended
March 31, 2011 was interest expense on the loan from the Company's president.
The interest expense of $79,522 and $41,402 for the six and three months ended
March 31, 2010 was interest on the loan from the Company's president, offset by
the final $3,282 in amortization of the loan premium in October, 2009.
On May 16, 2011, CEL-SCI entered into an Exchange Agreement (referred to herein
as the "Settlement Agreement") with thirteen hedge funds (the "plaintiffs") to
settle all claims arising from a lawsuit initiated by the plaintiffs in October
2009 in the United States District Court for the Southern District of New York
(the "Court"). As previously disclosed by CEL-SCI in its public filings, in
August 2006 the plaintiffs (or their predecessors) purchased from CEL-SCI Series
K notes convertible into CEL-SCI common stock and Series K warrants to purchase
29
CEL-SCI common stock under financing agreements which provided the Series K
notes and warrants with anti-dilution protection if CEL-SCI sold additional
shares of common stock, or securities convertible into common stock, at a price
below the then applicable conversion price of the notes or the exercise price of
the warrants. In their lawsuit, the plaintiffs alleged that a March 2009 drug
marketing and distribution agreement in which CEL-SCI sold units of common stock
and warrants to an unrelated third party triggered these anti-dilution
provisions, and that CEL-SCI failed to give effect to these provisions. The
plaintiffs sought $30 million in actual damages, $90 million in punitive
damages, the issuance of additional shares of common stock and warrants, and a
reduction in the conversion price of the Series K notes and the exercise price
of the Series K warrants. CEL-SCI denied the plaintiffs' allegations in the
lawsuit and asserted that the 2009 agreement was a strategic transaction which
did not trigger the anti-dilution provisions of the 2006 financing agreements.
Although the Company has vigorously defended the lawsuit and believes the
plaintiffs' claims are without merit, the Company believes that a settlement of
this lawsuit is in the best interests of the shareholders at this time. The
settlement was entered into to avoid the substantial costs of further litigation
and the risk and uncertainty that the litigation entails. By ending this
dispute, and ending the significant demands on the time and attention of the
Company's management necessary to respond to the litigation, the Company is
better able to focus on executing its ongoing Phase III clinical trial with its
novel and non-toxic cancer drug Multikine.
Under the terms of the Settlement Agreement and its related agreements, the
plaintiffs and CEL-SCI will terminate the pending litigation and release each
other from all claims each may have against the other, with certain customary
exceptions. CEL-SCI agreed to make a $3 million cash payment and issue $9
million of securities to the plaintiffs. These securities consist of senior
secured convertible promissory notes with an aggregate principal amount of $4.95
million and shares of redeemable Series A Convertible Preferred Stock with an
aggregate stated value of $4.05 million. The $3 million cash payment will be
made at the closing under the Settlement Agreement. The $9 million of securities
will be retired through nine equal monthly installment payments of approximately
$1 million each, plus interest on the notes and dividends on the shares at the
rate of 8% per annum, with payments beginning on June 1, 2011 (the month of
October requires no payment) and ending on March 1, 2012. As these installments
of the principal amount of the notes and the stated value of the preferred
shares are paid down, or as the notes or the preferred shares are converted by
the holders into common stock, the initial $9 million due (plus interest and
dividends) will be proportionately reduced until the notes are fully paid or
converted and the preferred shares are fully redeemed or converted. CEL-SCI has
pledged all of its assets as collateral for the repayment of these obligations.
While the notes and preferred shares are outstanding, CEL-SCI is generally
prohibited from paying dividends, incurring new debt or making any payments
(other than interest) on existing debt, and is subject to certain restrictions
on the transfer of its assets. The $12 million has been accrued for and included
in the March 31, 2011 consolidated financial statements.
The notes and the Series A preferred shares will be convertible, at the option
of the holder, into CEL-SCI common stock at a fixed price of $0.67 per share.
The conversion price represents the most recent consolidated closing sale price
of the common stock on the NYSE AMEX at the time the settlement agreement was
signed by the parties. The plaintiffs have agreed to restrictions on their
ability to effect short sales of the common stock based on the number of
30
warrants and common shares they hold, but excluding shares issuable upon the
conversion of the notes and preferred shares. The plaintiffs have further agreed
to permit an independent accounting firm to review their trading records every
three months to confirm their compliance with these restrictions.
The parties' respective obligations under the Settlement Agreement, including
CEL-SCI's obligation to pay cash and issue notes and preferred shares to the
plaintiffs, are subject to obtaining the approval by the Court of an order
exempting the issuance to the plaintiffs of the notes and preferred shares from
registration under Section 3(a)(10) of the Securities Act of 1933. This will
permit the notes and preferred shares, and the shares of common stock issuable
upon conversion thereof, to be freely tradable. After the Court order is
obtained, the closing of the transactions contemplated by the Settlement
Agreement is subject to the further condition, unless waived by the plaintiffs,
that the common shares issuable upon conversion of the notes and the preferred
shares be approved for listing on the NYSE AMEX. The Company expects that the
Court order will be obtained and the listing will be approved within
approximately two weeks.
The foregoing summary of the terms of the settlement is qualified in its
entirety by the detailed terms of the Settlement Agreement and the related
agreements and documents which are filed as exhibits to this Quarterly Report on
Form 10-Q.
Research and Development Expenses
During the six and three-month periods ended March 31, 2011 and 2010, the
Company's research and development efforts involved Multikine and
L.E.A.P.S.(TM). The table below shows the research and development expenses
associated with each project during the six and three-month periods.
Six Months Ended March 31, Three Months Ended March 31,
-------------------------- ----------------------------
2011 2010 2011 2010
----- ---- ---- ----
MULTIKINE $6,032,691 $5,389,010 $2,957,571 $3,092,676
L.E.A.P.S 273,834 757,014 84,526 248,221
---------- ---------- ---------- ----------
TOTAL $6,306,525 $6,146,024 $3,042,097 $3,340,897
========== ========== ========== ==========
In January 2007, the Company received a "no objection" letter from the FDA
indicating that it could proceed with the Phase III protocol with Multikine in
head & neck cancer patients. The protocol for the Phase III clinical trial was
designed to develop conclusive evidence of the safety and efficacy of Multikine
in the treatment of advanced primary squamous cell carcinoma of the oral cavity.
The Company had previously received a "no objection" letter from the Canadian
Biologics and Genetic Therapies Directorate which enabled the Company to begin
its Phase III clinical trial in Canada. The Company's Phase III clinical trial
began in December 2010.
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
31
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 Estimates and Policies
Management's discussion and analysis of the Company's financial condition and
results of operations is based on its unaudited condensed consolidated financial
statements. The preparation of these financial statements is based on the
selection of accounting policies and the application of significant accounting
estimates, some of which require management to make judgments, estimates and
assumptions that affect the amounts reported in the financial statements and
notes. The Company believes some of the more critical estimates and policies
that affect its financial condition and results of operations are in the areas
of operating leases and stock-based compensation. For more information regarding
the Company's critical accounting estimates and policies, see Part II, Item 7 of
the Company's 2010 10-K report. The application of these critical accounting
policies and estimates has been discussed with the Audit Committee of the
Company's Board of Directors.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
The Company has a loan from the president that bears interest at 15%. The
Company does not believe that it has any significant exposures to market risk.
Item 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Under the direction and with the participation of the Company's management,
including the Company's Chief Executive and Chief Financial Officer, the Company
has conducted an evaluation of the effectiveness of the design and operation of
its disclosure controls and procedures as of March 31, 2011. The Company
maintains disclosure controls and procedures that are designed to ensure that
information required to be disclosed in its periodic reports with the Securities
and Exchange Commission is recorded, processed, summarized and reported within
the time periods specified in the SEC's rules and regulations, and that such
information is accumulated and communicated to the Company's management,
including its principal executive officer and principal financial officer, as
appropriate, to allow timely decisions regarding required disclosure. The
Company's disclosure controls and procedures are designed to provide a
reasonable level of assurance of reaching its desired disclosure control
objectives. Based on the evaluation, the Chief Executive and Chief Financial
Officer has concluded that the Company's disclosure controls and procedures were
effective as of March 31, 2011.
Changes in Internal Control over Financial Reporting
The Company's management, with the participation of the Chief Executive and
Chief Financial Officer, has evaluated whether any change in the Company's
internal control over financial reporting occurred during the first six months
of fiscal year 2011. There was no change in the Company's internal control over
financial reporting during the six months ended March 31, 2011.
32
PART II
Item 1. LEGAL PROCEEDINGS
On May 16, 2011, CEL-SCI entered into an Exchange Agreement (referred to herein
as the "Settlement Agreement") with thirteen hedge funds (the "plaintiffs") to
settle all claims arising from a lawsuit initiated by the plaintiffs in October
2009 in the United States District Court for the Southern District of New York
(the "Court"). As previously disclosed by CEL-SCI in its public filings, in
August 2006 the plaintiffs (or their predecessors) purchased from CEL-SCI Series
K notes convertible into CEL-SCI common stock and Series K warrants to purchase
CEL-SCI common stock under financing agreements which provided the Series K
notes and warrants with anti-dilution protection if CEL-SCI sold additional
shares of common stock, or securities convertible into common stock, at a price
below the then applicable conversion price of the notes or the exercise price of
the warrants. In their lawsuit, the plaintiffs alleged that a March 2009 drug
marketing and distribution agreement in which CEL-SCI sold units of common stock
and warrants to an unrelated third party triggered these anti-dilution
provisions, and that CEL-SCI failed to give effect to these provisions. The
plaintiffs sought $30 million in actual damages, $90 million in punitive
damages, the issuance of additional shares of common stock and warrants, and a
reduction in the conversion price of the Series K notes and the exercise price
of the Series K warrants. CEL-SCI denied the plaintiffs' allegations in the
lawsuit and asserted that the 2009 agreement was a strategic transaction which
did not trigger the anti-dilution provisions of the 2006 financing agreements.
Although the Company has vigorously defended the lawsuit and believes the
plaintiffs' claims are without merit, the Company believes that a settlement of
this lawsuit is in the best interests of the shareholders at this time. The
settlement was entered into to avoid the substantial costs of further litigation
and the risk and uncertainty that the litigation entails. By ending this
dispute, and ending the significant demands on the time and attention of the
Company's management necessary to respond to the litigation, the Company is
better able to focus on executing its ongoing Phase III clinical trial with its
novel and non-toxic cancer drug Multikine.
Under the terms of the Settlement Agreement and its related agreements, the
plaintiffs and CEL-SCI will terminate the pending litigation and release each
other from all claims each may have against the other, with certain customary
exceptions. CEL-SCI agreed to make a $3 million cash payment and issue $9
million of securities to the plaintiffs. These securities consist of senior
secured convertible promissory notes with an aggregate principal amount of $4.95
million and shares of redeemable Series A Convertible Preferred Stock with an
aggregate stated value of $4.05 million. The $3 million cash payment will be
made at the closing under the Settlement Agreement. The $9 million of securities
will be retired through nine equal monthly installment payments of approximately
$1 million each, plus interest on the notes and dividends on the shares at the
rate of 8% per annum, with payments beginning on June 1, 2011 (the month of
October requires no payment) and ending on March 1, 2012. As these installments
of the principal amount of the notes and the stated value of the preferred
shares are paid down, or as the notes or the preferred shares are converted by
the holders into common stock, the initial $9 million due (plus interest and
dividends) will be proportionately reduced until the notes are fully paid or
converted and the preferred shares are fully redeemed or converted. CEL-SCI has
pledged all of its assets as collateral for the repayment of these obligations.
33
While the notes and preferred shares are outstanding, CEL-SCI is generally
prohibited from paying dividends, incurring new debt or making any payments
(other than interest) on existing debt, and is subject to certain restrictions
on the transfer of its assets. The $12 million has been accrued for and included
in the March 31, 2011 consolidated financial statements.
The notes and the Series A preferred shares will be convertible, at the option
of the holder, into CEL-SCI common stock at a fixed price of $0.67 per share.
The conversion price represents the most recent consolidated closing sale price
of the common stock on the NYSE AMEX at the time the settlement agreement was
signed by the parties. The plaintiffs have agreed to restrictions on their
ability to effect short sales of the common stock based on the number of
warrants and common shares they hold, but excluding shares issuable upon the
conversion of the notes and preferred shares. The plaintiffs have further agreed
to permit an independent accounting firm to review their trading records every
three months to confirm their compliance with these restrictions.
The parties' respective obligations under the Settlement Agreement, including
CEL-SCI's obligation to pay cash and issue notes and preferred shares to the
plaintiffs, are subject to obtaining the approval by the Court of an order
exempting the issuance to the plaintiffs of the notes and preferred shares from
registration under Section 3(a)(10) of the Securities Act of 1933. This will
permit the notes and preferred shares, and the shares of common stock issuable
upon conversion thereof, to be freely tradable. After the Court order is
obtained, the closing of the transactions contemplated by the Settlement
Agreement is subject to the further condition, unless waived by the plaintiffs,
that the common shares issuable upon conversion of the notes and the preferred
shares be approved for listing on the NYSE AMEX. The Company expects that the
Court order will be obtained and the listing will be approved within
approximately two weeks.
The foregoing summary of the terms of the settlement is qualified in its
entirety by the detailed terms of the Settlement Agreement and the related
agreements and documents which are filed as exhibits to this Quarterly Report on
Form 10-Q.
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
None
Item 6.(a) Exhibits
Number Exhibit
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10 (aa) Exchange Agreement
31 Rule 13a-14(a) Certifications
32 Section 1350 Certifications
34
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, 2011 /s/ Geert Kersten
----------------------------------
Geert Kersten, Principal Executive
Officer*
* Also signing in the capacity of the Principal Accounting and Financial
Officer.
35