UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 2006
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______________ to ______________.
Commission File Number 0-11503
CEL-SCI CORPORATION
-----------------------------
Colorado 84-0916344
--------------------- ---------------------
State or other jurisdiction (IRS) Employer
incorporation Identification Number
8229 Boone Boulevard, Suite 802
Vienna, Virginia 22182
---------------------------------
Address of principal executive offices
(703) 506-9460
-------------------------------------------
Registrant's telephone number, including area code
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports) and (2) had been subject to such filing
requirements for the past 90 days.
Yes ____X_____ No __________
-
Indicate by check mark whether the Registrant is an accelerated filer (as that
term is defined in Exchange Act Rule 12b-2).
Yes _________ No _____X____
-
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 83,916,540 February 12, 2007
TABLE OF CONTENTS
PART I FINANCIAL INFORMATION
Item 1. Page
----
Condensed Consolidated Balance Sheet (unaudited) 3
Condensed Consolidated Statement of Operations (unaudited) 4
Condensed Consolidated Statement of Cash Flow (unaudited) 5
Notes to Condensed Consolidated Financial Statements (unaudited) 6
Item 2.
Management's Discussion and Analysis of Financial Condition 16
and Results of Operations
Item 3.
Quantitative and Qualitative Disclosures about Market Risks 21
Item 4.
Controls and Procedures 21
PART II
Item 2.
Changes in Securities and Use of Proceeds 22
Item 4.
Submission of Matters to a Vote of Security Holders 22
Item 5.
Other Information 22
Item 6.
Exhibits 22
Signatures 23
Item 1. FINANCIAL STATEMENTS
CEL-SCI CORPORATION
-------------------
CONDENSED CONSOLIDATED BALANCE SHEETS
------------------------
(unaudited)
ASSETS
December 31, September 30,
2006 2006
------------ -------------
CURRENT ASSETS:
Cash and cash equivalents $ 7,176,818 $ 8,080,365
Interest and other receivables 36,951 35,626
Prepaid expenses 187,537 526,498
Inventory used for R&D and manufacturing 379,858 390,644
Deposits 14,828 14,828
-------------- -------------
Total current assets 7,795,992 9,047,961
RESEARCH AND OFFICE EQUIPMENT-
Less accumulated depreciation of $1,788,430
and $1,773,102 118,924 92,117
PATENT COSTS- less accumulated
amortization of $917,288 and $896,407 519,308 513,199
-------------- -------------
TOTAL ASSETS $ 8,434,224 $ 9,653,277
============== =============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable $ 178,537 $ 98,056
Accrued expenses 88,551 74,894
Due to employees 28,016 17,425
Accrued interest on convertible debt 173,482 74,473
Derivative instruments - current portion 1,714,722 1,670,234
Deposits held 3,000 3,000
-------------- -------------
Total current liabilities 2,186,308 1,938,082
Derivative instruments - noncurrent portion 8,055,825 8,645,796
-------------- -------------
Total liabilities 10,242,133 10,583,878
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY (DEFICIT):
Preferred stock, $.01 par value; authorized,
100,000 shares; no shares issued and outstanding - -
Common stock, $.01 par value; authorized,
200,000,000 shares; issued and outstanding,
83,234,441 and 82,697,428 shares at December
31, 2006 and September 30, 2006, respectively 832,344 826,974
Additional paid-in capital 105,410,515 105,180,834
Accumulated deficit (108,050,768) (106,938,409)
-------------- -------------
Total stockholders' equity (deficit) (1,807,909) (930,601)
-------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY (DEFICIT) $ 8,434,224 $ 9,653,277
============== =============
See notes to condensed consolidated financial statements.
3
CEL-SCI CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
Three Months Ended December 31,
2006 2005
--------------------------------
REVENUE:
Grant revenue $ 13,862 $ 23,757
Rent income 6,090 6,090
Other income 841 -
-------------- --------------
Total Revenue 20,793 29,847
EXPENSES:
Research and development, excluding
depreciation of $20,493 and $18,511
included below 506,158 434,889
Depreciation and amortization 41,842 43,790
General and administrative 1,052,704 573,036
-------------- --------------
Total Expenses 1,600,704 1,051,715
-------------- --------------
LOSS FROM OPERATIONS (1,579,911) (1,021,868)
GAIN ON DERIVATIVE INSTRUMENTS 719,247 13,337
INTEREST INCOME 95,551 11,404
INTEREST EXPENSE (347,246) -
-------------- --------------
NET LOSS BEFORE INCOME TAXES (1,112,359) (997,127)
INCOME TAX PROVISION - -
-------------- --------------
NET LOSS $ (1,112,359) $ (997,127)
============== ==============
NET LOSS PER COMMON SHARE (BASIC) $ (0.01) $ (0.01)
============== ==============
NET LOSS PER COMMON SHARE (DILUTED) $ (0.01) $ (0.01)
============== ==============
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING 82,928,432 74,998,621
============== ==============
See notes to condensed consolidated financial statements.
4
CEL-SCI CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
(unaudited)
Three Months Ended December 31,
2006 2005
-------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
NET LOSS $ (1,112,359) $ (997,127)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 41,842 43,790
Penalty shares issued to nonemployees 110,325 -
Issuance of common stock and stock options
for services - 66,718
Common stock contributed to 401(k) plan 22,314 20,479
Employee option cost 30,984 51,798
Impairment loss on retired equipment - 645
Gain on derivative instruments (719,247) (13,337)
Amortization of discount on convertible debt 173,764 -
(Increase) decrease in receivables (1,325) 5,676
Decrease in prepaid expenses 338,961 4,766
Decrease in inventory for R&D and manufacturing 10,786 7,984
Increase in deferred financing costs - (5,000)
Increase in accounts payable 44,906 50,679
Increase in accrued expenses 13,657 2,771
Increase (decrease) in amount due to employees 10,591 (28)
Increase in accrued interest on convertible
debt 99,009 -
------------- --------------
NET CASH USED IN OPERATING ACTIVITIES (935,792) (760,186)
------------- --------------
CASH FLOWS USED IN INVESTING ACTIVITIES:
Purchase of equipment (47,769) (1,360)
Patent costs 8,587 (3,861)
------------- --------------
NET CASH USED IN INVESTING ACTIVITIES (39,182) (5,221)
------------- --------------
CASH FLOWS PROVIDED BY FINANCING ACTIVITIES:
Drawdown on equity line - 677,727
Proceeds from exercise of stock options 71,427 15,693
------------- --------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 71,427 693,420
------------- --------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (903,547) (71,987)
CASH AND CASH EQUIVALENTS:
Beginning of period 8,080,365 1,957,614
------------- --------------
End of period $ 7,176,818 $ 1,885,627
============= ==============
(continued)
See notes to condensed consolidated financial statements.
5
CEL-SCI CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
(unaudited)
Three Months Ended December 31,
2006 2005
-------------------------------
SUPPLEMENTAL INFORMATION ON NONCASH TRANSACTIONS:
Patent costs included in accounts payable:
Increase in accounts payable $ (35,576) $ (8,250)
Increase in patent costs 35,576 8,250
------------- -------------
$ - $ -
============= =============
Reclassification of derivative instruments:
Decrease in derivative instruments $ - $ 797,835
Increase in additional paid-in capital - (797,835)
------------- -------------
$ - $ -
============= =============
NOTE:
Interest expense paid during the quarter ended December 31, 2006 totaled
$74,473.
concluded
See notes to condensed consolidated financial statements.
6
CEL-SCI CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED DECEMBER 31, 2006 AND 2005
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying condensed consolidated financial statements of CEL-SCI
Corporation and subsidiary (the Company) are unaudited and certain
information and footnote disclosures normally included in the annual
financial statements prepared in accordance with accounting principles
generally accepted in the United States of America have been omitted
pursuant to the rules and regulations of the Securities and Exchange
Commission. While management of the Company believes that the disclosures
presented are adequate to make the information presented not misleading,
interim consolidated financial statements should be read in conjunction
with the consolidated financial statements and notes included in the
Company's annual report on Form 10-K for the year ended September 30,
2006.
In the opinion of management, the accompanying unaudited condensed
consolidated financial statements contain all accruals and adjustments
(each of which is of a normal recurring nature) necessary for a fair
presentation of the financial position as of December 31, 2006 and the
results of operations for the three month period then ended. The condensed
consolidated balance sheet as of September 30, 2006 is derived from the
September 30, 2006 audited consolidated financial statements. Significant
accounting policies have been consistently applied in the interim
financial statements and the annual financial statements. The results of
operations for the three month period ended December 31, 2006 are not
necessarily indicative of the results to be expected for the entire year.
Significant accounting policies are as follows:
Principles of Consolidation--The consolidated financial statements include
the accounts of CEL-SCI Corporation and its wholly owned subsidiary, Viral
Technologies, Inc. All intercompany transactions have been eliminated upon
consolidation.
Cash and Cash Equivalents--For purposes of the statements of cash flows,
cash and cash equivalents consists principally of unrestricted cash on
deposit and short-term money market funds. The Company considers all
highly liquid investments with a maturity when purchased of less than
three months to be cash equivalents.
Prepaid Expenses and Inventory--Prepaid expenses are those expenses which
benefit a substantial period of time. Inventory consists of bulk purchases
of laboratory supplies used on a daily basis in the lab and items that
will be used for future production. These items are disposables and
consumables and can be used for both the manufacturing of Multikine for
clinical studies and in the laboratory for quality control and bioassay
use. They can be used in training, testing and daily laboratory
activities.
7
CEL-SCI CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED DECEMBER 31, 2006 AND 2005
Research and Office Equipment--Research and office equipment is recorded
at cost and depreciated using the straight-line method over estimated
useful lives of five to seven years. Leasehold improvements are
depreciated over the shorter of the estimated useful life of the asset or
the term of the lease. Repairs and maintenance are expensed when incurred.
Depreciation expense for the three-month period ended December 31, 2006
and 2005 were $20,962 and $24,605 respectively.
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,
is less than the carrying value of the asset. The amount of the impairment
loss would be the difference between the estimated fair value of the asset
and its carrying value. During the three month periods ended December 31,
2006 and 2005, the Company recorded no patent impairment charges. For the
three-month period ended December 31, 2006 and 2005, amortization of
patent costs totaled $20,880 and $19,185 respectively.
Derivative Instruments--The Company enters into financing arrangements
that consist of freestanding derivative instruments or are hybrid
instruments that contain embedded derivative features. The Company
accounts for these arrangements in accordance with Statement of Financial
Accounting Standards No. 133, "Accounting for Derivative Instruments and
Hedging Activities", ("SFAS No. 133") AND Emerging Issues Task Force Issue
No. 00-19, "Accounting for Derivative Financial Instruments Indexed to,
and Potentially Settled in, a Company's Own Stock", ("EITF 00-19"), as
well as related interpretations of these standards. 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 statement of financial position 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. Embedded derivatives that are not clearly and closely
related to the host contract are bifurcated and recognized at fair value
with changes in fair value recognized as either a gain or loss in earnings
if they can be reliably measured. When the fair value of embedded
derivative features can not be reliably measured, the Company measures and
reports the entire hybrid instrument at fair value with changes in fair
value recognized as either a gain or loss in earnings. 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 and
precluding the use of "blockage" discounts or premiums in determining the
fair value of a large block of financial instruments. Fair value under
these conditions does not necessarily represent fair value determined
using valuation standards that give consideration to blockage discounts
and other factors that may be considered by market participants in
establishing fair value.
8
CEL-SCI CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED DECEMBER 31, 2006 AND 2005
Research and Development Grant Revenues--The Company's grant arrangements
are handled on a reimbursement basis. Grant revenues under the
arrangements are recognized as grant revenue when costs are incurred.
Research and Development Costs--Research and development (R&D)
expenditures are expensed as incurred. The Company has an agreement with
Cambrex Bio Science, an unrelated corporation, for the production of
Multikine(R), which is the Company's only product source. All production
costs of Multikine are expensed to R&D immediately. This agreement expired
on December 31, 2006.
Net Loss per Common Share--Net loss per common share is computed by
dividing the net loss by the weighted average number of common shares
outstanding during the period. Potentially dilutive common stock
equivalents, including convertible preferred stock, convertible debt and
options to purchase common stock, were excluded from the calculation
because they are antidilutive.
Concentration of Credit Risk--Financial instruments, which potentially
subject the Company to concentrations of credit risk, consist of cash and
cash equivalents. The Company maintains its cash and cash equivalents with
high quality financial institutions. At times, these accounts may exceed
federally insured limits. The Company has not experienced any losses in
such bank accounts. The Company believes it is not exposed to significant
credit risk related to cash and cash equivalents.
Income Taxes--Income taxes are accounted for using the asset and liability
method under which deferred tax liabilities or assets are determined based
on the difference between the financial statement and tax basis of assets
and liabilities (i.e., temporary differences) and are measured at the
enacted tax rates. Deferred tax expense is determined by the change in the
liability or asset for deferred taxes. The difference in the Company's
U.S. Federal statutory income tax rate and the Company's effective tax
rate is primarily attributable to the recording of a valuation allowance
due to the uncertainty of the amount of future tax benefits that will be
realized because it is more likely than not that future taxable income
will not be sufficient to realize such tax benefits.
Use of Estimates--The preparation of financial statements in conformity
with accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates. Accounting for
derivatives is based upon valuations of derivative instrument determined
using various valuation techniques including the Black-Scholes and
binomial pricing methodologies. The Company considers such valuations to
be significant estimates.
9
CEL-SCI CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED DECEMBER 31, 2006 AND 2005
Asset Valuations and Review for Potential Impairments--The Company reviews
its fixed assets every quarter. This review requires that the Company make
assumptions regarding the value of these assets and the changes in
circumstances that would affect the carrying value of these assets. If
such analysis indicates that a possible impairment may exist, the Company
is then required to estimate the fair value of the asset and, as deemed
appropriate, expense all or a portion of the asset. The determination of
fair value includes numerous uncertainties, such as the impact of
competition on future value. The Company believes that it has made
reasonable estimates and judgments in determining whether its long-lived
assets have been impaired; however, if there is a material change in the
assumptions used in our determination of fair values or if there is a
material change in economic conditions or circumstances influencing fair
value, the Company could be required to recognize certain impairment
charges in the future.
Stock-Based Compensation--In October 1996, the Financial Accounting
Standards Board (FASB) issued Statement of Financial Accounting Standards
No. 123, "Accounting for Stock-Based Compensation" (SFAS No. 123). This
statement encouraged but did not require companies to account for employee
stock compensation awards based on their estimated fair value at the grant
date with the resulting cost charged to operations. The Company had
elected to continue to account for its employee stock-based compensation
using the intrinsic value method prescribed in Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees and related
Interpretations". In December 2004 the FASB issued SFAS No. 123R,
"Share-Based Payment". SFAS No. 123R requires companies to recognize
expense associated with share based compensation arrangements, including
employee stock options, using a fair value-based option pricing model.
SFAS No. 123R applies to all transactions involving issuance of equity by
a company in exchange for goods and services, including employees. Using
the modified prospective transition method of adoption, the Company
reflects compensation expense in the financial statements beginning
October 1, 2005. The modified prospective transition method does not
require restatement of prior periods to reflect the impact of SFAS No.
123R. As such, compensation expense will be recognized for awards that
were granted, modified, repurchased or cancelled on or after October 1,
2005 as well as for the portion of awards previously granted that vested
during the period ended December 31, 2006. For the three months ended
December 31, 2006 and 2005, the Company recorded $30,984 and $51,798,
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 no options granted
during the three-month periods ended December 31, 2006 and 2005. Options
are granted with an exercise price equal to the closing bid price of the
Company's stock on the day before the grant. The Company determines the
fair value of the employee compensation using the Black Scholes method of
valuation. This method requires several assumptions, including the
following assumptions for the options vesting during the three months
ended December 31, 2006. No options vested during the three months ended
December 31, 2005.
10
CEL-SCI CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED DECEMBER 31, 2006 AND 2005
December 31, 2006
-----------------
Volatility 78%
Dividend yield 0%
Risk-free interest rate 5.08%
Expected average life 1 year
Exercise price per option $0.62
The Company has Incentive Stock Option Plans, Non-Qualified Stock Option
Plans, a Stock Compensation Plan and Stock Bonus Plans. All Stock Option
and Bonus Plans have been approved by the stockholders. A summary
description of these Plans follows. In some cases these Plans are
collectively referred to as the "Plans".
Incentive Stock Option Plan. The Incentive Stock Option Plans authorize
the issuance of shares of the Company's common stock to persons who
exercise options granted pursuant to the Plan. Only Company employees may
be granted options pursuant to the Incentive Stock Option Plan.
To be classified as incentive stock options under the Internal Revenue
Code, options granted pursuant to the Plans must be exercised prior to the
following dates:
(a) The expiration of three months after the date on which an option
holder's employment by the Company is terminated (except if such
termination is due to death or permanent and total disability);
(b) The expiration of 12 months after the date on which an option holder's
employment by the Company is terminated, if such termination is due to
the Employee's permanent and total disability;
(c) In the event of an option holder's death while in the employ of the
Company, his executors or administrators may exercise, within three
months following the date of his death, the option as to any of the
shares not previously exercised;
The total fair market value of the shares of Common Stock (determined at
the time of the grant of the option) for which any employee may be granted
options which are first exercisable in any calendar year may not exceed
$100,000.
Options may not be exercised until one year following the date of grant.
Options granted to an employee then owning more than 10% of the Common
Stock of the Company may not be exercisable by its terms after five years
from the date of grant. Any other option granted pursuant to the Plan may
not be exercisable by its terms after ten years from the date of grant.
11
CEL-SCI CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED DECEMBER 31, 2006 AND 2005
The purchase price per share of Common Stock purchasable under an option
is determined by the Committee but cannot be less than the fair market
value of the Common Stock on the date of the grant of the option (or 110%
of the fair market value in the case of a person owning more than 10% of
the Company's outstanding shares).
Non-Qualified Stock Option Plans. The Non-Qualified Stock Option Plans
authorize the issuance of shares of the Company's common stock to persons
that exercise options granted pursuant to the Plans. The Company's
employees, directors, officers, consultants and advisors are eligible to
be granted options pursuant to the Plans, provided however that bona fide
services must be rendered by such consultants or advisors and such
services must not be in connection with the offer or sale of securities in
a capital-raising transaction. The option exercise price is determined by
the Committee but cannot be less than the market price of the Company's
Common Stock on the date the option is granted.
The following table summarizes stock option activity for the three months
ended December 31, 2006.
Non-Qualified Stock Option Plan
Outstanding Exercisable
------------------------------------------- -------------------------------------------
Weighted Weighted
Average Average
Weighted Remaining Weighte Remaining
Number Average Contractual Aggregate Number Average Contractual Aggregate
of Exercise Term Intrinsic of Exercise Term Intrinsic
Shares Price (Years) Value Shares Price (Years) Value
-------------------------------------------- -----------------------------------------------
Outstanding 7,511,362 $0.66 5.15 $1,390,653 6,011,713 $0.68 4.81 $1,306,320
at October
1, 2006
Vested - 250,000 0.62
Granted - -
Exercised (324,666) 0.22 6.33 131,644 (324,666) 0.22 6.33 131,644
Forfeited - -
Expired - -
--------- ------- --------
Outstanding
at December
31, 2006 7,186,696 $0.65 4.81 1,100,337 5,937,047 $0.71 4.70 1,042,917
--------- ---------
12
Incentive Stock Option Plan
Outstanding Exercisable
------------------------------------------- -------------------------------------------
Weighted Weighted
Average Average
Weighted Remaining Weighte Remaining
Number Average Contractual Aggregate Number Average Contractual Aggregate
of Exercise Term Intrinsic of Exercise Term Intrinsic
Shares Price (Years) Value Shares Price (Years) Value
-------------------------------------------- -----------------------------------------------
Outstanding 4,326,933 $0.65 6.03 $1,047,933 3,810,267 $0.66 6.12 1,021,933
at October
1, 2006
Vested - -
Granted - -
Exercised - -
Forfeited - -
Expired - -
--------- ---------
Outstanding 4,326,933 $0.65 5.78 $ 871,533 3,810,267 $0.66 5.29 $ 865,133
at December
31, 2006
The total intrinsic value of options exercised during the three months
ended December 31, 2006 and 2005 was $131,644 and $19,260, respectively.
A summary of the status of the Company's non-vested options as of December
31, 2006 is presented below:
Weighted Average
Number of Grant Date
Shares Fair Value
-------------------------------------
Non-Qualified Stock Option Plan
Nonvested at October 1, 2006 1,499,649 $0.23
Vested (250,000) 0.62
Granted -
Forfeited -
Expired -
---------
Nonvested at December 31, 2006 1,249,649 0.27
13
Incentive Stock Option Plan
Nonvested at October 1, 2006 516,666 $0.46
Vested
Granted -
Forfeited -
Expired -
-------
Nonvested at December 31, 2006 516,666 $0.46
-------
Options to non-employees are accounted for in accordance with FASB's
Emerging Issues Task Force (EITF) Issue 96-18 Accounting for Equity
Instruments That Are Issued to Other Than Employees for Acquiring, or in
Conjunction with Selling, Goods or Services. Accordingly, compensation is
recognized when goods or services are received and is measured using the
Black-Scholes valuation model. The Black-Scholes model requires management
to make assumptions regarding the fair value of the options at the date of
grant and the expected life of the options. There were no option grants to
non-employees during the three months ended December 31, 2006. For the
three months ended December 31, 2005, common stock and options with a
value of $66,718 were issued for services.
B. NEW ACCOUNTING PRONOUNCEMENTS
In February 2006, the FASB issued SFAS No. 155, "Hybrid Instruments". The
statement amends SFAS No. 133 and SFAS No. 140, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities". The
statement also resolves issues addressed in Statement 133 Implementation
Issue No. D1, "Application of Statement 133 to Beneficial Interests in
Securitized Financial Assets." The statement: a) permits fair value
remeasurement for any hybrid financial instrument that contains an
embedded derivative that otherwise would require bifurcation, b) clarifies
which interest-only strips and principal-only strips are not subject to
the requirements of SFAS No. 133, c) establishes a requirement to evaluate
interests in securitized financial assets to identify interests that are
freestanding derivatives or that are hybrid financial instruments that
contain an embedded derivative requiring bifurcation, d) clarifies that
concentrations of credit risk in the form of subordination are not
embedded derivatives, and e) amends Statement 140 to eliminate the
prohibition on a qualifying special purpose entity from holding a
derivative financial instrument that pertains to a beneficial interest
other than another derivative financial instrument. The Company adopted
SFAS No. 155 on October 1, 2006. SFAS No. 155 does not have a material
impact on operations or cash flows because these instruments were
originally treated as hybrid instruments as permitted under FAS No. 133.
14
In July 2006, the FASB issued interpretation No. 48, "Accounting for
Uncertainty in Income Taxes" ("FIN 48") which clarifies the accounting for
income taxes by prescribing the minimum recognition threshold a tax
position is required to meet before being recognized in the financial
statements. FIN 48 also provides guidance on derecognition, measurement,
classification, interest and penalties, accounting in interim periods,
disclosure and transition. FIN 48 is effective for fiscal years beginning
after December 15, 2006. The Company does not expect the adoption of this
Interpretation to have a material impact on its financial statements.
In September 2006, FASB issued SFAS No. 157, "Fair Value Measurements".
The statement defines fair value, establishes a framework for measuring
fair value in GAAP and expands disclosures about fair value measurements.
The statement is effective for financial statements issued for fiscal
years beginning after November 15, 2007 and interim periods within those
fiscal years. The Company is evaluating whether this statement will affect
its current practice in valuing fair value of its derivatives each
quarter.
In September 2006, SAB No. 108 was issued by the Securities and Exchange
Commission. The interpretations in the SAB express the SEC staff's views
regarding the process of quantifying financial statement misstatements.
Beginning with annual financial statements covering fiscal years ending
after November 15, 2006, material misstatements in the current year may
result in the need to correct prior year financial statements, even if the
misstatement in the prior year or years is considered immaterial. SAB 108
does not require previously filed reports to be amended. Such correction
may be made the next time the company files the prior year financial
statements. The Company believes that there will be in impact on its
results of operations, cash flows or balance sheet because of this
interpretation.
C. STOCKHOLDERS' EQUITY (DEFICIT)
During the three months ended December 31, 2006, the Company issued stock
to two nonemployees in accordance with their respective agreements with a
fair value of $110,325. This expense was recorded in general and
administrative expense. During the three months ended December 31, 2005,
the Company issued stock or stock options for services to a nonemployee
with a fair value of $66,718. The fair value of the options issued during
the three months ended December 31, 2005 was determined using the Black
Scholes method with the following assumptions:
December 31, 2005
Volatility 87%
Dividend yield 0%
Risk-free interest rate 4.33%
Expected average life 5 year
Exercise price per option $0.55
15
D. SERIES K CONVERTIBLE DEBT
In August 2006, the Company issued $8,300,000 in aggregate principal
amount of convertible notes (the "Series K Notes") together with warrants
to purchase 4,825,581 shares of the Company's common stock (the Series K
Warrants"). Additionally, in connection with issuance of the Series K
Notes and Series K Warrants, the placement agent received a fee of
$498,000 and 386,047 fully vested warrants (the "Placement Agent
Warrants") to purchase shares of the Company's common stock. Net proceeds
were $7,731,290, net of $568,710 in direct transaction costs, including
the placement agent fee.
The Series K Notes are convertible into 9,651,163 shares of the Company's
common stock at the option of the holder at any time prior to maturity at
a conversion price of $0.86 per share, subject to adjustment for certain
events. The Series K Warrants are exercisable over a five-year period from
February 4, 2007 through February 4, 2012 at $0.95 per share.
The Series K Notes bear interest at the greater of 8% or LIBOR plus 300
basis points, and are required to be repaid in thirty equal monthly
installments of $207,500 beginning on March 4, 2007 and continuing through
September 4, 2010. The remaining principal balance of $2,075,000 is
required to be repaid on August 4, 2011; however, holders of the Series K
Notes may require repayment of the entire remaining principal balance at
any time after August 4, 2010. Interest is payable quarterly beginning
September 30, 2006. Each payment of principal and accrued interest may be
settled in cash or in shares of common stock at the option of the Company.
The number of shares deliverable under the share-settlement option is
determined based on the lower of (a) $0.86 per share, as adjusted pursuant
to the terms of the Series K Notes or (b) 90% applied to the arithmetic
average of the volume-weighted-average trading prices for the twenty day
period immediately preceding each share settlement. The Company may not
make payments in shares if such payments would result in the cumulative
issuance of shares of its common stock exceeding 19.999% of the shares
outstanding on the day immediately preceding the issuance date of the
Series K Notes, unless prior approval is given by vote of at least a
majority of the shares outstanding. The Company received such approval on
November 17, 2006.
The Company is accounting for the Series K Warrants as derivative
liabilities in accordance with SFAS No. 133. A debt discount of $1,734,472
is being amortized to interest expense using the effective interest method
over the expected term of the Series K Notes. During the three month
period ended December 31, 2006, the Company recorded interest expense of
$173,764 in amortization of the debt discount. As of December 31, 2006,
the fair value of the Series K notes is $7,878,326 and the fair value of
the investor and placement agent warrants is $1,892,221. The Company
recorded a gain on derivative instruments of $719,247 during the three
months ended December 31, 2006.
16
E. OPERATIONS AND FINANCING
The Company has incurred significant costs since its inception in
connection with the acquisition of an exclusive worldwide license to
certain patented and unpatented proprietary technology and know-how
relating to the human immunological defense system, patent applications,
research and development, administrative costs, construction of laboratory
facilities and clinical trials. The Company has funded such costs with
proceeds realized from the public and private sale of its common and
preferred stock. The Company will be required to raise additional capital
or find additional long-term financing in order to continue with its
research efforts. To date, the Company has not generated any revenue from
product sales. The ability of the Company to complete the necessary
clinical trials and obtain FDA approval for the sale of products to be
developed on a commercial basis is uncertain. The Company plans to seek
continued funding of the Company's development by raising additional
capital. It is the opinion of management that sufficient funds will be
available from the Series K convertible debt, other external financing and
additional capital and/or expenditure reductions in order to meet the
Company's liabilities and commitments as they come due during fiscal years
2007 and 2008. Ultimately, the Company must complete the development of
its products, obtain the appropriate regulatory approvals and obtain
sufficient revenues to support its cost structure.
F. COMMITMENTS AND CONTINGENCIES
During fiscal year 2005 the Company was involved in a restatement of the
Company's prior years financials, a time when Deloitte & Touche LLP (D&T)
was the Company's auditor. For its work in the restatement D&T presented
the Company with an invoice of approximately $350,000 in October 2006. In
prior discussions with D&T the Company's Audit Committee had repeatedly
requested detailed information regarding this bill which D&T failed to
give. The Company's Audit Committee and Board of Directors are unable to
review the appropriateness of this invoice without the detailed
information that it has repeatedly requested. This invoice was not
included in the Company's liabilities because the Company does not believe
that it represents a real claim against the Company.
G. SUBSEQUENT EVENTS
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.
17
On January 22, 2007, the Company announced that it has signed
a letter of intent with a privately held real estate firm specialized in
the biomedical sector to acquire and build out to the Company's
specifications a turn-key cGMP (current good manufacturing practices) drug
manufacturing facility for the Company's cancer product. This
manufacturing facility is an integral part of moving Multikine into the
Phase III clinical trial and later commercialization. The commitment by
the real estate firm, subject to a final contract, is for $15 million. The
facility is expected to cost about $12-14 million, to be paid through a
long-term lease agreement.
On January 23, 2007, the Company entered into an agreement
with a public relations consulting firm. Per the terms of the agreement
the consultant received 200,000 shares of restricted stock on January 29,
2007. In addition, on April 1, 2007 and June 1, 2007 the consultant will
receive 105,000 and 85,000 shares of restricted stock, respectively.
18
CEL-SCI CORPORATION
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Liquidity and Capital Resources
The Company has had only limited revenues from operations since its inception in
March 1983. The Company has relied upon proceeds realized from the public and
private sale of its Common Stock and convertible notes as well as short-term
borrowings to meet its funding requirements. Funds raised by the Company have
been expended primarily in connection with the acquisition of an exclusive
worldwide license to, and later purchase of, certain patented and unpatented
proprietary technology and know-how relating to the human immunological defense
system, patent applications, the repayment of debt, the continuation of Company
sponsored research and development and administrative costs, and the
construction of laboratory facilities. Inasmuch as the Company does not
anticipate realizing significant revenues until such time as it enters into
licensing arrangements regarding its technology and know-how or until such time
it receives permission to sell its product (which could take a number of years),
the Company has been dependent upon the proceeds from the sale of its securities
to meet all of its liquidity and capital resource requirements.
During the three-month period ended December 31, 2006 and 2005, the Company used
cash totaling $903,547 and $71,987 respectively. Cash used in operating
activities totaled $935,792 and $760,186 for each of the three-month periods.
Cash provided by financing activities totaled $71,427 and $693,420,
respectively. For the three months ended December 31, 2006, the cash provided by
financing activities was from the exercise of employee stock options. For the
three months ended December 31, 2005, cash provided by financing activities was
from both the exercise of employee stock options ($15,693) and drawdowns on the
equity line of credit ($677,727).
In June 2000, the Company entered into an agreement with Cambrex Bio Science,
Inc. ("Cambrex") whereby Cambrex agreed to provide the Company with a facility
which allows the Company to manufacture Multikine in accordance with the Good
Manufacturing Practices regulations of the FDA for periodic manufacturing
campaigns. Company personnel will staff this facility. This agreement expired
December 31, 2006.
On December 1, 2003, the Company sold 2,994,964 shares of its common stock to a
group of private institutional investors for approximately $2,550,000, or $0.85
per share. As part of this transaction, the investors in the private offering
received warrants which allow the investors to purchase approximately 900,000
shares of the Company's common stock at a price of $1.32 per share at any time
prior to December 1, 2006. On December 1, 2006, 549,827 warrants expired leaving
441,176 warrants remaining that expire on December 1, 2007.
19
On May 4, 2004, the Company announced the completion of an offering of 6,402,439
shares of registered common stock at $0.82 per share to one institutional
investor. This sale resulted in gross proceeds of $5.25 million and associated
costs of $498,452. The stock was offered pursuant to an existing shelf
registration statement and Wachovia Capital Markets, LLC acted as the placement
agent for the offering. The Company intends to use the proceeds of the offering
to advance the clinical development of Multikine for the treatment of cancer. In
addition, 76,642 warrants were issued to Wachovia at a price of $1.37 and the
warrants expire May 4, 2009. The warrants were valued using the Black-Scholes
valuation method and an expense of $38,127 was recorded to additional paid-in
capital as a cost of equity related transaction during the fiscal year ended
September 30, 2004.
In order to provide a possible source of funding for CEL-SCI's current
activities and for the development of its current and planned products, CEL-SCI
entered into an equity line of credit agreement with Jena Holdings LLC on
October 31, 2005.
Under the equity line of credit agreement, Jena Holdings LLC has agreed to
provide CEL-SCI with up to $5,000,000 of funding for a two year period which
will begin on the date that a registration statement filed by CEL-SCI to
register the shares to be sold to Jena Holdings LLC is declared effective by the
SEC. During this two year period, CEL-SCI may request a drawdown under the
equity line of credit by selling shares of its common stock to Jena Holdings
LLC, and Jena Holdings LLC will be obligated to purchase the shares. The minimum
amount CEL-SCI can draw down at any one time is $100,000, and the maximum amount
CEL-SCI can draw down at any one time will be determined at the time of the
drawdown request using a formula contained in the equity line of credit
agreement. CEL-SCI may request a drawdown once every 22 trading days, although
CEL-SCI is under no obligation to request any drawdowns under the equity line of
credit.
During the 22 trading days following a drawdown request, CEL-SCI will calculate
the amount of shares it will sell to Jena Holdings LLC and the purchase price
per share. The purchase price per share of common stock will be based on the
daily volume weighted average price of CEL-SCI's common stock during each of the
22 trading days immediately following the drawdown date, less a discount of 11%.
As consideration for extending the equity line of credit, CEL-SCI granted Jena
Holdings LLC warrants to purchase 271,370 shares of common stock at a price of
$0.55 per share at any time prior to October 24, 2010. CEL-SCI will be
registering the shares of common stock issuable to Jena Holdings under the
equity line of credit, as well as 271,370 shares underlying the warrants that
CEL-SCI granted to Jena Holdings LLC. During the three-month periods ended
December 31, 2006 and 2005, the Company made no drawdowns on this line of
credit.
During the three-month period ended December 31, 2005, the Company made
drawdowns on a previous equity line of credit totaling $677,727, selling
1,419,446 shares of common stock. This equity line of credit expired on December
29, 2005.
On February 9, 2006, CEL-SCI sold 2,500,000 shares of its common stock and
750,000 warrants to one investor for $1,000,000. Each warrant entitles the
holder to purchase one share of CEL-SCI's common stock at a price of $0.56 per
share at any time prior to February 9, 2011. The warrants were valued at
$238,986. In addition, 441,176 warrants previously issued to the investor were
repriced and extended for one year. The revaluing of the warrants was valued at
$76,122. In addition, on May 18, 2006, 800,000 unregistered warrants were issued
20
to the same investor at a strike price of $0.82. These warrants were valued
using the Black Scholes method at $416,921 and expire in 5 years.
On April 17, 2006, 800,000 unregistered warrants were issued to an investor with
a strike price of $1.25 per share. These warrants were valued at $460,920 using
the Black Scholes method and expire in August of 2008. An additional 100,000
unregistered warrants were issued to a group of consultants on April 12, 2006.
These warrants were valued at $79,976 using the Black Scholes method and expire
in April 2009. Another consultant group was issued 375,000 unregistered shares
of CEL-SCI Corporation common stock and 375,000 unregistered warrants to
purchase additional shares at $0.73. These warrants expire March 31, 2007 and
were valued at $58,005 using the Black Scholes method.
In August 2006, the Company issued $8,300,000 in aggregate principal amount of
convertible notes (the "Series K Notes") together with warrants to purchase
4,825,581 shares of the Company's common stock (the Series K Warrants").
Additionally, in connection with issuance of the Series K Notes and Series K
Warrants, the placement agent received a fee of $498,000 and 386,047 fully
vested warrants (the "Placement Agent Warrants") to purchase shares of the
Company's common stock. Net proceeds were $7,731,290, net of $568,710 in direct
transaction costs, including the placement agent fee.
The Series K Notes are convertible into 9,651,163 shares of the Company's common
stock at the option of the holder at any time prior to maturity at a conversion
price of $0.86 per share, subject to adjustment for certain events. The Series K
Warrants are exercisable over a five-year period from February 4, 2007 through
February 4, 2012 at $0.95 per share.
The Series K Notes bear interest at the greater of 8% or LIBOR plus 300 basis
points, and are required to be repaid in thirty equal monthly installments of
$207,500 beginning on March 4, 2007 and continuing through September 4, 2010.
The remaining principal balance of $2,075,000 is required to be repaid on August
4, 2011; however, holders of the Series K Notes may require repayment of the
entire remaining principal balance at any time after August 4, 2010. Interest is
payable quarterly beginning September 30, 2006. Each payment of principal and
accrued interest may be settled in cash or in shares of common stock at the
option of the Company. The number of shares deliverable under the
share-settlement option is determined based on the lower of (a) $0.86 per share,
as adjusted pursuant to the terms of the Series K Notes or (b) 90% applied to
the arithmetic average of the volume-weighted-average trading prices for the
twenty day period immediately preceding each share settlement. The Company may
not make payments in shares if such payments would result in the cumulative
issuance of shares of its common stock exceeding 19.999% of the shares
outstanding on the day immediately preceding the issuance date of the Series K
Notes, unless prior approval is given by vote of at least a majority of the
shares outstanding. The Company received such approval on November 17, 2006.
The Company is accounting for the Series K Warrants as derivative liabilities in
accordance with SFAS No. 133. A debt discount of $1,734,472 is being amortized
to interest expense using the effective interest method over the expected term
of the Series K Notes. During the three month period ended December 31, 2006,
the Company recorded interest expense of $173,764 in amortization of the debt
discount. As of December 31, 2006, the fair value of the Series K notes is
21
$7,878,326 and the fair value of the investor and placement agent warrants is
$1,892,221. The Company recorded a gain on derivative instruments of
$719,247 during the three months ended December 31, 2006.
Results of Operations and Financial Condition
"Grant revenues and other" decreased by $9,895 during the three months ended
December 31, 2006, compared to the same period of the previous year, due to the
winding down of the work funded by the grants. The Company is continuing to
apply for grants to support its work. During the three-month period ended
December 31, 2006, research and development expenses increased by $71,269
compared to the three-month period ended December 31, 2005. This increase was
due to work on two new CEL-1000 projects and the use of lab supplies in the
preparation for the beginning of the Phase III trials on Multikine.
During the three-month period ended December 31, 2006, general and
administrative expenses increased by $479,668 compared to the three-month period
ended December 31, 2005. This change was primarily due to: 1) additional listing
fees from the American Stock Exchange (approximately $15,000), 2) shares issued
to 2 stockholders in accordance with their respective agreements (approximately
$110,300), 3) additional accounting fees for the valuation of the Series K Notes
and Warrants (approximately $43,900), 4) an increase in public relations costs
(approximately $305,000) for the cost of common stock issued to a public
relations consulting firm, and 5) annual meeting costs (approximately $23,000).
This was partially offset by lower salary costs as one employee was on leave for
a part of the quarter (approximately $13,600).
Interest income during the three months ended December 31, 2006 increased by
$84,147 compared to the three-month period ended December 31, 2005. The increase
was due to interest earned on the funds received from the Series K convertible
notes.
The increase in the gain on derivative instruments of $705,910 for the three
months ended December 31, 2006, was the result of the change in fair value of
the Series K Notes and Series K Warrants.
Research and Development Expenses
During the three-month period ended December 31, 2006 and 2005, 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 three-month period.
Three Months Ended December 31,
2006 2005
---- ----
MULTIKINE $ 428,321 $ 383,897
L.E.A.P.S 77,837 50,992
------------ ----------
TOTAL $ 506,158 $ 434,889
========== ==========
22
In January 2007, the US Food and Drug Administration (FDA) concurred with the
initiation of a global Phase III clinical trial in head and neck cancer patients
using Multikine. In August 2005, the Canadian regulatory agency, the Biologics
and Genetic Therapies Directorate, concurred with the initiation of a global
Phase III clinical trial in head and neck cancer patients using Multikine.
As of December 31, 2006 the Company was involved in a number of pre-clinical
studies with respect to its L.E.A.P.S. technology. The Company does not know
what obstacles it will encounter in future pre-clinical and clinical studies
involving its L.E.A.P.S. technology. Consequently, the Company cannot predict
with any certainty the funds required for future research and clinical trials
and the timing of future research and development projects. In April 2006 the
Company filed a provisional U.S. patent application covering CEL-1000 for the
prevention/treatment of bird flu and/or as an adjuvant to be included in a bird
flu vaccine.
Clinical and other studies necessary to obtain regulatory approval of a new drug
involve significant costs and require several years to complete. The extent of
the Company's clinical trials and research programs are primarily based upon the
amount of capital available to the Company and the extent to which the Company
has received regulatory approvals for clinical trials. The inability of the
Company to conduct clinical trials or research, whether due to a lack of capital
or regulatory approval, will prevent the Company from completing the studies and
research required to obtain regulatory approval for any products which the
Company is developing. Without regulatory approval, the Company will be unable
to sell any of its products.
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.
On January 22, 2007, the Company announced that it has signed a letter of intent
with a privately held real estate firm specialized in the biomedical sector to
acquire and build out to the Company's specifications a turn-key cGMP (current
good manufacturing practices) drug manufacturing facility for the Company's
cancer product. This manufacturing facility is an integral part of moving
Multikine into the Phase III clinical trial and later commercialization. The
commitment by the real estate firm, subject to a final contract, is for $15
million. The facility is expected to cost about $12-14 million, to be paid
through a long-term lease agreement.
Since all of the Company's projects are under development, the Company cannot
predict when it will be able to generate any revenue from the sale of any of its
products.
Critical Accounting Policies - The Company's significant accounting policies are
more fully described in Note A to the condensed consolidated financial
statements. However certain accounting policies are particularly important to
the portrayal of financial position and results of operations and require the
application of significant judgments by management. As a result, the condensed
consolidated financial statements are subject to an inherent degree of
23
uncertainty. In applying those policies, management uses its judgment to
determine the appropriate assumptions to be used in the determination of certain
estimates. These estimates are based on the Company's historical experience,
terms of existing contracts, observance of trends in the industry and
information available from outside sources, as appropriate. Our significant
accounting policies include:
Patents - Patent expenditures are capitalized and amortized using the
straight-line method over 17 years. In the event changes in technology or other
circumstances impair the value or life of the patent, appropriate adjustment in
the asset value and period of amortization is made. An impairment loss is
recognized when estimated future undiscounted cash flows expected to result from
the use of the asset, and from disposition, is less than the carrying value of
the asset. The amount of the impairment loss would be the difference between the
estimated fair value of the asset and its carrying value.
Derivative Instruments--The Company enters into financing arrangements that
consist of freestanding derivative instruments or are hybrid instruments that
contain embedded derivative features. The Company accounts for these
arrangements in accordance with Statement of Financial Accounting Standards No.
133, "Accounting for Derivative Instruments and Hedging Activities", ("SFAS No.
133") AND Emerging Issues Task Force Issue No. 00-19, "Accounting for Derivative
Financial Instruments Indexed to, and Potentially Settled in, a Company's Own
Stock", ("EITF 00-19"), as well as related interpretations of these standards.
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 statement of financial position 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. Embedded
derivatives that are not clearly and closely related to the host contract are
bifurcated and recognized at fair value with changes in fair value recognized as
either a gain or loss in earnings if they can be reliably measured. When the
fair value of embedded derivative features can not be reliably measured, the
Company measures and reports the entire hybrid instrument at fair value with
changes in fair value recognized as either a gain or loss in earnings. 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 and
precluding the use of "blockage" discounts or premiums in determining the fair
value of a large block of financial instruments. Fair value under these
conditions does not necessarily represent fair value determined using valuation
standards that give consideration to blockage discounts and other factors that
may be considered by market participants in establishing fair value.
Stock Options and Warrants - In October 1996, the Financial Accounting Standards
Board (FASB) issued Statement of Financial Accounting Standards No. 123,
Accounting for Stock-Based Compensation (SFAS No. 123). This statement
encourages but does not require companies to account for employee stock
compensation awards based on their estimated fair value at the grant date with
the resulting cost charged to operations. The Company had elected to continue to
account for its employee stock-based compensation using the intrinsic value
method prescribed in Accounting Principles Board Opinion No. 25, Accounting for
Stock Issued to Employees, and related Interpretations. Options to non-employees
are accounted for in accordance with FASB's Emerging Issues Task Force (EITF)
Issue 96-18 Accounting for Equity Instruments That Are Issued to Other Than
Employees for Acquiring, or in Conjunction with Selling, Goods or Services.
24
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. The Company
determines the fair value of the employee compensation using the Black Scholes
method of valuation. Using the modified prospective transition method of
adoption, the Company reflects compensation expense in the financial statements
beginning October 1, 2005. The modified prospective transition method does not
require restatement of prior periods to reflect the impact of SFAS No. 123R. As
such, compensation expense will be recognized for awards that were granted,
modified, repurchased or cancelled on or after October 1, 2005 as well as for
the portion of awards previously granted that vested during the period ended
June 30, 2006. For the three months ended December 31, 2006 and 2005, the
Company recorded $30,984 and $51,798 in general and administrative expense for
the cost of employee options. The Company determines the fair value of the
employee compensation using the Black Scholes method of valuation.
Concentration of Credit Risk--Financial instruments, which potentially subject
the Company to concentrations of credit risk, consist of cash and cash
equivalents. The Company maintains its cash and cash equivalents with high
quality financial institutions. At times, these accounts may exceed federally
insured limits. The Company has not experienced any losses in such bank
accounts. The Company believes it is not exposed to significant credit risk
related to cash and cash equivalents.
Income Taxes--Income taxes are accounted for using the asset and liability
method under which deferred tax liabilities or assets are determined based on
the difference between the financial statement and tax basis of assets and
liabilities (i.e., temporary differences) and are measured at the enacted tax
rates. Deferred tax expense is determined by the change in the liability or
asset for deferred taxes. The difference in the Company's U.S. Federal statutory
income tax rate and the Company's effective tax rate is primarily attributable
to the recording of a valuation allowance due to the uncertainty of the amount
of future tax benefits that will be realized because it is more likely than not
that future taxable income will not be sufficient to realize such tax benefits.
Asset Valuations and Review for Potential Impairments - The Company reviews its
fixed assets every fiscal quarter. This review requires that the Company make
assumptions regarding the value of these assets and the changes in circumstances
that would affect the carrying value of these assets. If such analysis indicates
that a possible impairment may exist, the Company is then required to estimate
the fair value of the asset and, as deemed appropriate, expense all or a portion
of the asset. The determination of fair value includes numerous uncertainties,
such as the impact of competition on future value. The Company believes that it
has made reasonable estimates and judgments in determining whether our
long-lived assets have been impaired; however, if there is a material change in
the assumptions used in our determination of fair values or if there is a
material change in economic conditions or circumstances influencing fair value,
the Company could be required to recognize certain impairment charges in the
future.
Inventory-- Inventory consists of bulk purchases of laboratory supplies used on
a daily basis in the lab and items that will be used for future production. The
items in inventory are expensed when used in production or daily activity as R&D
expenses. These items are disposables and consumables and can be used for both
the manufacturing of Multikine for clinical studies and in the laboratory for
quality control and bioassay use. They can be used in training, testing and
daily laboratory activities.
25
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
As of December 31, 2006 the Company had outstanding Series K Notes and Series K
Warrants which were classified as derivative financial instruments. Interest on
the Series K Notes is tied to the 6-month LIBOR. Should the 6-month LIBOR
increase, interest payments on the Series K debt may increase as well. The
interest rate risk on investments is considered immaterial due to the fact that
all investments have maturities of three months or less.
Item 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Geert Kersten, CEL-SCI's Chief Executive and Financial Officer, has evaluated
the effectiveness of CEL-SCI's disclosure controls and procedures as of December
31, 2006, and in his opinion CEL-SCI's disclosure controls and procedures ensure
that material information relating to CEL-SCI, including CEL-SCI's consolidated
subsidiary, is made known to him by others within those entities, particularly
during the period in which this report is being prepared, so as to allow timely
decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting
To the knowledge of Mr. Kersten there have been no significant changes in
CEL-SCI's internal controls or in other factors that could significantly affect
CEL-SCI's internal controls subsequent to the date of evaluation, and as a
result, no corrective actions with regard to significant deficiencies or
material weakness in CEL-SCI's internal controls were required.
26
PART II
Item 2. Changes in Securities and Use of Proceeds
During the three months ended December 31, 2006 the Company issued 172,500
shares of its common stock to two investors in accordance with the terms of
their agreements with the Company. The Company relied upon the exemption
provided by Section 4(2) of the Securities Act of 1933 for the issuance of these
shares.
Item 4. Submission of Matters to a Vote of Security Holders
See Item 4 of the Company's report on Form 10-K for the year ended
September 30, 2006.
Item 5. Other Information
None
Item 6. (a) Exhibits
Number Exhibit
31 Rule 13a-14(a) Certifications
32 Section 1350 Certifications
27
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CEL-SCI CORPORATION
Date: February 13, 2007 /s/ Geert Kersten
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Geert Kersten, Chief Executive Officer*
* Also signing in the capacity of the Chief Accounting Officer and Principal
Financial Officer.
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