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, 2007
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 a large accelerated filer, an
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 [ ]
Non-accelerated filer [ ] Smaller reporting company [X]
(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 115,818,088 February 11, 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) 5-6
Notes to Condensed Consolidated Financial Statements (unaudited) 7
Item 2.
Management's Discussion and Analysis of Financial Condition 15
and Results of Operations
Item 3.
Quantitative and Qualitative Disclosures about Market Risks 18
Item 4.
Controls and Procedures 18
PART II
Item 2.
Changes in Securities and Use of Proceeds 19
Item 4.
Submission of Matters to a Vote of Security Holders 19
Item 5.
Other Information 19
Item 6.
Exhibits 19
Signatures 20
Item 1. FINANCIAL STATEMENTS
CEL-SCI CORPORATION
-------------------
CONDENSED CONSOLIDATED BALANCE SHEETS
------------------------
(unaudited)
ASSETS
December 31, September 30,
2007 2007
----------- ---------------
CURRENT ASSETS
Cash and cash equivalents $ 9,339,221 $ 10,993,021
Interest and other receivables 90,161 57,476
Prepaid expenses 21,637 34,578
Inventory used for R&D and manufacturing 332,609 385,650
Deposits 14,828 14,828
------------- -------------
Total current assets 9,798,456 11,485,553
RESEARCH AND OFFICE EQUIPMENT AND
LEASEHOLD IMPROVEMENTS -- Less accumulated
depreciation of $1,882,981 and $1,859,644 229,834 233,876
PATENT COSTS- less accumulated amortization of
$1,034,079 and $896,407 554,294 541,380
RESTRICTED CASH 2,168,629 2,168,629
DEFERRED RENT 6,301,364 6,301,364
------------- -------------
TOTAL ASSETS $ 19,052,577 $ 20,730,802
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 243,717 $ 248,120
Accrued expenses 107,061 98,603
Due to employees 19,014 26,735
Accrued interest on convertible debt 63,512 68,795
Derivative instruments - current portion 771,219 782,732
Deposits held - 3,000
------------- -------------
Total current liabilities 1,204,523 1,227,985
Deferred rent 2,932 1,466
Derivative instruments - noncurrent portion 3,738,280 4,831,252
------------- -------------
Total liabilities 4,945,735 6,060,703
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value; authorized,
100,000 shares; no shares issued and outstanding - -
Common stock, $.01 par value; authorized,
300,000,000 shares; issued and outstanding,
115,777,068 and 115,678,662 shares at December
31, 2007 and September 30, 2007, respectively 1,157,771 1,156,787
Additional paid-in capital 131,784,687 130,081,378
Accumulated deficit (118,835,616) (116,568,066)
------------- -------------
Total stockholders' equity 14,106,842 14,670,099
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 19,052,577 $ 20,730,802
============= =============
See notes to condensed consolidated financial statements.
3
CEL-SCI CORPORATION
-------------------
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
---------------------------------
(unaudited)
Three Months Ended
December 31,
2007 2006
----- ----
REVENUE:
Grant revenue $ - $ 13,862
Rent income 1,530 6,090
Other income - 841
------------- -------------
Total revenue 1,530 20,793
EXPENSES:
Research and development, excluding
depreciation of $30,463 and $20,493
included below 1,028,966 506,158
Depreciation and amortization 54,253 41,842
General and administrative 1,785,749 1,052,704
------------- -------------
Total expenses 2,868,968 1,600,704
------------- -------------
LOSS FROM OPERATIONS (2,867,438) (1,579,911)
GAIN ON DERIVATIVE INSTRUMENTS 989,988 719,247
INTEREST INCOME 178,731 95,551
INTEREST EXPENSE (144,016) (347,246)
------------- -------------
NET LOSS BEFORE INCOME TAXES (1,842,735) (1,112,359)
INCOME TAX PROVISION - -
------------- -------------
NET LOSS (1,842,735) (1,112,359)
------------- -------------
DIVIDENDS (424,815) -
------------- -------------
NET LOSS AVAILABLE TO COMMON SHAREHOLDERS $ (2,267,550) $ (1,112,359)
============= =============
NET LOSS PER COMMON SHARE (BASIC) $ (0.02) $ (0.01)
============= =============
NET LOSS PER COMMON SHARE (DILUTED) $ (0.02) $ (0.01)
============= =============
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING, BASIC & DILUTED 115,708,186 82,928,432
============= =============
See notes to condensed consolidated financial statements.
4
CEL-SCI CORPORATION
-------------------
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
---------------------------------
(unaudited)
Three Months Ended
December 31,
2007 2006
----- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
NET LOSS $ (1,842,735) $ (1,112,359)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 54,253 41,842
Penalty shares issued to nonemployees - 110,325
Issuance of common stock and stock options
for services 676,917 -
Common stock contributed to 401(k) plan 23,969 22,314
Employee option cost 465,008 30,984
Consultant option extension 99,181 -
Loss (gain) on derivative instruments (989,988) (719,247)
Amortization of discount on convertible debt 80,503 173,764
Increase in deferred rent 1,466 -
Increase in receivables (32,685) (1,325)
Decrease in prepaid expenses 12,941 338,961
Decrease in inventory for R&D and manufacturing 53,041 10,786
(Decrease) increase in accounts payable (34,419) 44,906
Increase in accrued expenses 8,458 13,657
(Decrease) increase in amount due to employees (7,721) 10,591
Decrease in deposits held (3,000) -
(Decrease) increase in accrued interest on
convertible debt (5,283) 99,009
------------- -------------
NET CASH USED IN OPERATING ACTIVITIES (1,440,094) (935,792)
------------- -------------
CASH FLOWS USED IN INVESTING ACTIVITIES:
Purchase of equipment (27,843) (47,769)
Patent costs (5,266) 8,587
------------- -------------
NET CASH USED IN INVESTING ACTIVITIES (33,109) (39,182)
CASH FLOWS PROVIDED BY (USED IN) FINANCING
ACTIVITIES:
Proceeds from exercise of stock options 14,403 71,427
Repayment of convertible notes (195,000) -
------------- -------------
NET CASH (USED IN) PROVIDED BY FINANCING
ACTIVITIES (180,597) 71,427
------------- -------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (1,653,800) (903,547)
CASH AND CASH EQUIVALENTS:
Beginning of period 10,993,021 8,080,365
------------- -------------
End of period $ 9,339,221 $ 7,176,818
============= =============
See notes to condensed consolidated financial statements. (continued)
5
CEL-SCI CORPORATION
-------------------
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
---------------------------------
(unaudited)
(continued)
Three Months Ended
December 31,
2007 2006
----- ----
SUPPLEMENTAL INFORMATION ON NONCASH TRANSACTIONS:
Patent costs included in accounts payable:
Increase in accounts payable $ (27,187) $ (35,576)
Increase in patent costs 27,187 35,576
------------- -------------
$ - $ -
============= =============
Equipment costs included in accounts payable:
Increase in accounts payable $ (2,829) $ -
Increase in research and office equipment 2,829 -
------------- -------------
$ - $ -
============= =============
Cost of investor warrant extension:
Increase in accumulated deficit $ 424,815 $ -
Increase in additional paid-in capital (424,815) -
------------- -------------
$ - $ -
============= =============
concluded
NOTE:
Interest expense paid during the three months ended December 31, 2007 and 2006
totaled $63,512 and $74,473, respectively.
See notes to condensed consolidated financial statements.
6
CEL-SCI CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
THREE MONTHS ENDED DECEMBER 31, 2007 AND 2006
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,
2007.
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, 2007 and the
results of operations for the three-month period then ended. The condensed
consolidated balance sheet as of September 30, 2007 is derived from the
September 30, 2007 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 periods ended December 31, 2007 and 2006
are not necessarily indicative of the results to be expected for the
entire year.
Significant accounting policies are as follows:
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 which do not extend the
life of the asset are expensed when incurred. Depreciation expense for the
three-month period ended December 31, 2007 and 2006 were $34,714 and
$20,962.
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
7
and its carrying value. During the three-month period ended December 31,
2007 and 2006, the Company recorded no patent impairment charges. For the
three-month periods ended December 31, 2007 and 2006, amortization of
patent costs totaled $19,539 and $20,880 respectively. The Company
estimates that amortization expense will be $77,846 for each of the next
five years, totaling $389,230.
Research and Development Costs - Research and development expenditures are
expensed as incurred. Total research and development costs, excluding
depreciation, were $1,028,966 and $506,158 for the three months ended
December 31, 2007 and 2006.
Income Taxes - 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 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.
The Company adopted the provisions of FASB Interpretation No. 48,
"Accounting for Uncertainty in Income Taxes" ("FIN 48") effective January
1, 2007. FIN 48 provides a comprehensive model for how a company should
recognize, measure, present and disclose in its financial statements
uncertain tax positions that the company has taken or expects to take on a
tax return. The Company did not have any unrecognized tax benefits and
there was no effect on its financial condition or results of operations as
a result of implementing FIN 48. The Company elected to continue to report
any interest and penalties as income taxes. No interest or penalties were
accrued as a result of the adoption of FIN 48.
Stock-Based Compensation - 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.
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 December 31, 2007. For the three months ended December 31, 2007 and
2006, the Company recorded $-0- and $30,984, 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 8,000 and -0- options granted to new
8
employees during the three-month periods ended December 31, 2007 and 2006.
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.
During the three months ended December 31, 2007, no options from the
non-qualified plan vested. During the three months ended December 31,
2007, no options from the incentive stock option plan vested.
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.
9
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 par value of the Company's
common stock on the date the option is granted.
During the three months ended December 31, 2007 and 2006, 50,467 and
324,666 options were exercised. All options exercised were from the
non-qualified plans. The total intrinsic value of options exercised during
the three months ended December 31, 2007 and 2006 was $17,691 and
$131,644, respectively.
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 options granted
to non-employees during the three months ended December 31, 2007. In
addition, no shares of common stock were issued during the quarter. During
the quarter ended December 31, 2007, 2,016,176 options to non-employees
were extended. See note C. For the three months ended December 31, 2006,
common stock and options with a value of $66,718 were issued for services.
B. NEW ACCOUNTING PRONOUNCEMENTS
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.
10
In February 2007, FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities - Including an amendment of
FASB Statement No. 15". The Statement permits companies to choose to
measure many financial instruments and certain other items at fair value.
The statement is effective for fiscal years that begin after November 15,
2007, but early adoption is permitted. The Company is evaluating the
effective of the adoption of this statement.
In December 2007, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 141 (revised
2007), Business Combinations, which replaces SFAS No. 141. The statement
retains the purchase method of accounting for acquisitions, but requires a
number of changes, including changes in the way assets and liabilities are
recognized in the purchase accounting. It also changes the recognition of
assets acquired and liabilities assumed arising from contingencies,
requires the capitalization of in-process research and development at fair
value, and requires the expensing of acquisition-related costs as
incurred. SFAS No. 141R is effective beginning October 1, 2009 and will
apply prospectively to business combinations completed on or after that
date.
In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests
in Consolidated Financial Statements, an amendment of ARB 51, which
changes the accounting and reporting for minority interests. Minority
interests will be recharacterized as noncontrolling interests and will be
reported as a component of equity separate from the parent's equity, and
purchases or sales of equity interests that do not result in a change in
control will be accounted for as equity transactions. In addition, net
income attributable to the noncontrolling interest will be included in
consolidated net income on the face of the income statement and, upon a
loss of control, the interest sold, as well as any interest retained, will
be recorded at fair value with any gain or loss recognized in earnings.
SFAS No. 160 is effective beginning October 1, 2009 and will apply
prospectively, except for the presentation and disclosure requirements,
which will apply retrospectively. We are currently assessing the potential
impact that adoption of SFAS No. 160 would have on our financial
statements.
C. STOCKHOLDERS' EQUITY
In November and December 2007, the Company extended 1,905,633 employee
options and 2,016,176 investor warrants. The options and warrants were due
to expire from December 1, 2007 through December 31, 2008. All options and
warrants were extended for an additional five years from the original
expiration date. The cost of the extension of employee options of $465,008
was recorded as a debit to general and administrative expense and a credit
to additional paid-in capital. The cost of the extension of investor
warrants of $424,815 was recorded as a debit to accumulated deficit
(dividend) and a credit to additional paid-in capital. The cost of the
11
extension of the consultant warrants of $99,181 is recorded as a debit to
general and administrative expense and a credit to additional paid-in
capital. The additional cost of the extension of employee options and
investor warrants was determined using the Black Scholes method.
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 were convertible into 10,480,000 shares of the
Company's common stock at the option of the holder at any time prior to
maturity at a conversion price of $0.75 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 $0.75 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) $0.75 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
periods ended December 31, 2007 and 2006, the Company recorded interest
expense of $80,503 and $173,764, respectively, in amortization of the debt
discount. As of December 31, 2007, the fair value of the Series K notes is
12
$2,772,162 and the fair value of the investor and placement agent warrants
is $1,737,337. The Company recorded a gain on derivative instruments of
$989,988 and $719,247 during the three months ended December 31, 2007 and
2006 respectively.
During the three months ended December 31, 2007 and 2006, no Series K
notes were converted into shares of common stock. Principal payments of
$195,000 were made to the holders of the Series K notes. As of December
31, 2007, $3,090,716 of the Series K Notes remained outstanding.
The following summary comprises the total of the fair value of the
convertible debt and related derivative instruments at December 31, 2007
and September 30, 2007:
December 31, September 30,
2007 2007
Face value of debt $3,090,716 $3,285,715
Discount on debt (362,583) (443,086)
Investor warrants 1,734,472 1,734,472
Placement agent warrants 128,692 192,826
Fair value adjustment-convertible debt 44,029 168,207
Fair value adjustment-investor warrants (125,827) 675,850
--------- ----------
Total fair value $4,509,499 $5,613,984
========== ==========
E. OPERATIONS AND FINANCING
The Company has incurred significant costs since its inception in
connection with the acquisition of an exclusive worldwide license to and
later acquisition of the technology 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 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, the April 2007 financing, other external financing and additional
capital and/or expenditure reductions in order to meet the Company's
liabilities and commitments as they come due through December 31, 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.
13
F. DIVIDENDS
The Company has paid no dividends to shareholders since inception. The
cost of the extension of investor warrants during the three months ended
December 31, 2007 of $424,815 is recorded as a dividend, and increases the
accumulated deficit.
G. SUBSEQUENT EVENTS
On January 24, 2008, a second amendment to the lease for the manufacturing
facility was signed. In accordance with the amendment, CEL-SCI is required
to pay the following: 1) an additional $518,790 for movable equipment,
which will increase restricted cash, and 2) an additional $1,295,528 into
the escrow account to cover additional costs, which will increase deferred
rent. These funds were transferred in early February 2008.
14
CEL-SCI CORPORATION
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Liquidity and Capital Resources
The Company has had only limited revenues from operations since its inception in
March 1983. The Company has relied upon proceeds realized from the public and
private sale of its Common Stock and convertible notes as well as short-term
borrowings to meet its funding requirements. Funds raised by the Company have
been expended primarily in connection with the acquisition of 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, 2007 and 2006, the Company used
cash totaling $1,653,800 and $903,547 respectively. Cash used in operating
activities totaled $1,440,094 and $935,792 for each of the three-month periods.
Cash provided by (used in) financing activities totaled ($180,597) and $71,427,
respectively. Cash used in financing activities was for repayment of convertible
notes ($195,000), partially offset by the exercise of employee options $14,403
during the three months ended December 31, 2007. For the three months ended
December 31, 2006, cash provided by financing activities was from the exercise
of employee options. Cash used in investing activities was $33,109 and $39,182
for the three months ended December 31, 2007 and 2006. This consisted of
purchases of equipment and legal costs incurred in patent applications.
Results of Operations and Financial Condition
Grant revenues and other decreased by $13,862 during the three months ended
December 31, 2007, compared to the same period of the previous year, due to the
completion of the work funded by the grants. The final grant ended on March 31,
2007.
During the three-month period ended December 31, 2007, research and development
expenses increased by $522,808 compared to the three-month period ended December
31, 2006. 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. The Company is preparing for the opening of the manufacturing
facility.
15
During the three-month period ended December 31, 2007, general and
administrative expenses increased by $733,045 compared to the three-month period
ended December 31, 2006. This change was primarily due to: 1) the cost of stock
issued to employees (approximately $418,350), 2) the cost of extending employee
options (approximately $465,000), and 3) the cost of extending consultant
warrants (approximately $99,200). These increases were partially offset by a
decrease in presentation costs (approximately $248,000).
Interest income during the three months ended December 31, 2007 increased by
$83,180 compared to the three-month period ended December 31, 2006. The increase
was due to interest earned on the funds received from the Series K convertible
notes and the April 2007 financing.
The gain on derivative instruments of $989,988 for the three months ended
December 31, 2007, was the result of the change in fair value of the Series K
Notes and Series K Warrants during the period.
The interest expense of $144,016 for the three months ended December 31, 2007
was composed of two elements: 1) amortization of the Series K discount ($80,503)
and 2) interest paid and accrued on the Series K warrants ($63,513). This is a
decline of approximately $206,230 from the three months ended December 31, 2006
because of the lower balance of convertible debt.
Research and Development Expenses
During the three-month periods ended December 31, 2007 and 2006, 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 periods.
Three Months Ended December 31,
2007 2006
---- ----
MULTIKINE $908,948 $428,321
L.E.A.P.S 120,018 77,837
---------- --------
TOTAL $1,028,966 $506,158
========== ========
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.
As of December 31, 2007, 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
16
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 August 2007, CEL-SCI leased a building near Baltimore, Maryland. The
building, which consists of approximately 73,000 square feet, will be remodeled
in accordance with CEL-SCI's specifications so that it can be used by CEL-SCI to
manufacture Multikine for CEL-SCI'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
requires annual base rent payments of $1,575,000 during the first year of the
lease. The annual base rent escalates each year at 3%. CEL-SCI is also required
to pay all real and personal property taxes, insurance premiums, maintenance
expenses, repair costs and utilities. The lease allows CEL-SCI, 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 CEL-SCI 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.
Regulatory authorities prefer to see biologics such as Multikine manufactured
for commercial sale in the same manufacturing facility for Phase III clinical
trials and the sale of the product since this arrangement helps to 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 they
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 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 their own specially trained personnel. 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 patents, stock options and warrants, asset valuations and review for
potential impairments, prepaid expenses and laboratory supplies, and derivative
instruments. For more information regarding the Company's critical accounting
estimates and policies, see Item 7, MD&A "Critical Accounting Policies" of the
Company's 2007 10-K. We have discussed the application of these critical
accounting policies and estimates with the Audit Committee of the Company's
Board of Directors.
17
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
As of December 31, 2007, 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, 2007, and in his opinion CEL-SCI's disclosure controls and procedures are
effective and 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. The Company has
determined that these controls and procedures are effective as of December 31,
2007.
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. The Company
continues to evaluate its internal controls.
18
PART II
Item 2. Changes in Securities and Use of Proceeds
None
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, 2007.
Item 5. Other Information
None
Item 6. (a) Exhibits
Number Exhibit
31 Rule 13a-14(a) Certifications
32 Section 1350 Certifications
19
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CEL-SCI CORPORATION
Date: February 14, 2008 /s/ Geert Kersten
------------------------------------
Geert Kersten, Chief Executive Officer*
* Also signing in the capacity of the Chief Accounting Officer and Principal
Financial Officer.
20