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 June 30, 2010
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
of incorporation Identification Number
8229 Boone Boulevard, Suite 802
Vienna, Virginia 22182
---------------------------------
Address of principal executive offices
(703) 506-9460
----------------------------
Registrant's telephone number, including area code
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports) and (2) had been subject to such filing
requirements for the past 90 days.
Yes X No __________
Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Web site, if any, every
Interactive Data File required to be submitted and posted pursuant to
Rule 405 of Regulation S-T (ss.232.405 of this chapter) during the
preceding 12 months (or for such shorter period that the registrant was
required to submit and post such files). Yes [ ] No [ ]
Indicate by check mark whether the Registrant is a large accelerated filer, and
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of "large accelerated filer," "accelerated filer" and "smaller
reporting company" in Rule 12b-2 of the Exchange Act. (Check One):
Large accelerated filer [ ] Accelerated filer [ ]
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 204,728,670 August 6, 2010
TABLE OF CONTENTS
PART I FINANCIAL INFORMATION
Item 1. Page
----
Condensed Consolidated Balance Sheet (unaudited) 3
Condensed Consolidated Statements of Operations (unaudited) 4-5
Condensed Consolidated Statements of Cash Flow (unaudited) 6
Notes to Condensed Consolidated Financial Statements (unaudited) 8-22
Item 2.
Management's Discussion and Analysis of Financial Condition 23
and Results of Operations
Item 3.
Quantitative and Qualitative Disclosures about Market Risks 26
Item 4.
Controls and Procedures 26
PART II
Item 1.
Legal Proceedings 27
Item 4.
Submission of Matters to a Vote of Security Holders 27
Item 6.
Exhibits 28
Signatures 29
2
CEL-SCI CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
ASSETS June 30, September 30,
2010 2009
---------- ------------
CURRENT ASSETS
Cash and cash equivalents $ 30,475,636 $ 33,567,516
Prepaid expenses 188,746 39,972
Inventory used for R&D and manufacturing 1,751,987 399,474
Deferred rent - current portion 761,786 419,354
Deposits 10,132 1,585,064
------------- --------------
Total current assets 33,188,287 36,011,380
RESEARCH AND OFFICE EQUIPMENT AND
LEASEHOLD IMPROVEMENTS--
Less accumulated depreciation of
$2,526,572 and $2,259,237 1,296,668 1,200,611
PATENT COSTS- less accumulated
amortization of $1,190,299 and $1,132,612 374,089 423,104
RESTRICTED CASH 21,337 68,552
DEFERRED RENT 7,227,243 8,323,951
------------- --------------
TOTAL ASSETS $ 42,107,624 $ 46,027,598
============= ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 758,614 $ 793,148
Accrued expenses 213,901 98,665
Due to employees 24,507 49,527
Deposits held 10,000 10,000
Deferred revenue 125,000 -
Related party loan 1,104,057 1,107,339
------------- --------------
Total current liabilities 2,236,079 2,058,679
Derivative instruments 5,175,372 35,113,970
Deferred rent 14,366 14,305
------------- --------------
Total liabilities 7,425,817 37,186,954
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value;
authorized, 200,000 shares;no
shares issued and outstanding - -
Common stock, $.01 par value;
authorized, 450,000,000 shares;
issued and outstanding, 204,728,670 and
191,972,021 shares at June 30, 2010
and September 30, 2009, respectively 2,047,287 1,919,720
Additional paid-in capital 187,104,043 173,017,978
Accumulated deficit (154,469,523) (166,097,054)
------------- --------------
Total stockholders' equity 34,681,807 8,840,644
------------- --------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 42,107,624 $ 46,027,598
============== ==============
See notes to condensed consolidated financial statements.
3
CEL-SCI CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
For the Nine Months Ended
June 30,
2010 2009
---------- ---------
REVENUE:
Rent income $ 91,500 $ 49,643
Other income - 450
----------- ------------
Total revenue 91,500 50,093
EXPENSES:
Research and development, excluding
depreciation of $316,575 and
$266,739 included below 7,733,544 3,832,582
Depreciation and amortization 377,458 331,656
General and administrative 4,947,764 4,015,921
----------- ------------
Total expenses 13,058,766 8,180,159
----------- ------------
LOSS FROM OPERATIONS (12,967,266) (8,130,066)
GAIN (LOSS) ON DERIVATIVE INSTRUMENTS 30,614,451 (1,993,250)
INTEREST INCOME 287,613 208,113
INTEREST EXPENSE (120,924) (614,654)
---------- ------------
NET INCOME (LOSS) BEFORE INCOME TA 17,813,874 (10,529,857)
INCOME TAX PROVISION - -
---------- ------------
NET INCOME (LOSS) 17,813,874 (10,529,857)
DIVIDENDS - (466,667)
MODIFICATION OF SERIES M WARRANTS (1,432,456) -
---------- ------------
NET INCOME (LOSS) AVAILABLE TO COMMON
SHAREHOLDERS $ 16,381,418 $(10,996,524)
============ ============
NET INCOME (LOSS) PER COMMON SHARE-BASIC $ 0.08 $ (0.09)
============ ============
NET LOSS PER COMMON SHARE-DILUTED $ (0.02) $ (0.09)
============ ============
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING-BASIC 201,208,121 125,655,445
============ ============
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING-DILUTED 228,443,595 125,655,445
============ ============
See notes to condensed consolidated financial statements.
4
CEL-SCI CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
For the Three Months
Ended June 30,
2010 2009
--------- ---------
REVENUE:
Rent income $ 30,900 $ 30,000
Other income - 450
--------- ---------
Total revenue 30,900 30,450
EXPENSES:
Research and development, excluding
depreciation of $113,146 and
$101,108 included below 1,587,520 1,174,066
Depreciation and amortization 134,574 123,114
General and administrative 1,702,865 1,946,396
--------- ---------
Total expenses 3,424,959 3,243,576
--------- ---------
LOSS FROM OPERATIONS (3,394,059) (3,213,126)
GAIN (LOSS) ON DERIVATIVE INSTRUMENTS 2,754,512 (2,649,493)
INTEREST INCOME 79,825 68,716
INTEREST EXPENSE (41,402) (445,161)
--------- ---------
NET LOSS BEFORE INCOME TAXES (601,124) (6,239,064)
INCOME TAX PROVISION - -
--------- ---------
NET LOSS (601,124) (6,239,064)
DIVIDENDS - (466,667)
--------- ---------
NET LOSS AVAILABLE TO COMMON SHAREHOLDERS $(601,124) $(6,705,731)
========= ===========
NET LOSS PER COMMON SHARE-BASIC $ (0.00) $ (0.05)
========= ===========
NET LOSS PER COMMON SHARE-DILUTED $ (0.01) $ (0.05)
========= ===========
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING-BASIC 204,592,051 130,076,656
=========== ===========
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING-DILUTED 231,827,525 130,076,656
=========== ===========
See notes to condensed consolidated financial statements.
5
CEL-SCI CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
(unaudited)
Nine Months
Ended June 30,
2010 2009
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
NET INCOME (LOSS) $ 17,813,874 $ (10,529,857)
Adjustments to reconcile net income (loss) to
net cash used in operating activities:
Depreciation and amortization 377,458 331,656
Issuance of common stock, warrants and stock
options for services 1,159,450 1,718,450
Common stock contributed to 401(k) plan 83,023 19,972
Extension of employee options 212,444 -
Employee option cost 939,350 1,403,155
(Gain) loss on derivative instruments (30,614,451) 1,993,250
Amortization of discount on convertible debt - 111,990
Amortization of loan premium (3,282) -
Decrease (increase) in deferred rent asset 754,276 (42,316)
Loss on abandonment of patents 5,381 138,526
Loss on retirement of equipment 2,081 -
(Increase) decrease in prepaid expenses (148,774) 26,214
(Increase) in inventory for R&D and manufacturing (1,352,513) (7,214)
Decrease in deposits 1,574,932 14,828
Increase in deposits held - 10,000
(Decrease) increase in accounts payable (83,191) 1,091,454
Increase in accrued expenses 115,236 576,733
(Decrease) increase in amount due to employees (25,020) 67,298
Increase in deferred revenue 125,000 -
Increase in accrued interest on convertible debt - 23,730
Increase in deferred rent liability 61 7,668
----------- -----------
NET CASH USED IN OPERATING ACTIVITIES (9,064,665) (3,044,463)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Decrease in restricted cash 47,215 918,816
Sale of investments available-for-sale securities - 200,000
Purchase of equipment (368,281) (173,828)
Patent costs (15,023) (26,264)
----------- -----------
NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES (336,089) 918,724
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options and
warrants and sale of stock 6,308,874 5,845,241
Licensing proceeds (Note D) - 1,249,981
Repayment of convertible notes - (630,000)
Proceeds from short term loan-related party - 1,060,000
Repayment of short term loan - (200,000)
Financing costs - (339,330)
----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 6,308,874 6,985,892
----------- -----------
NET (DECREASE) INCREASE IN CASH AND CASH
EQUIVALENTS (3,091,880) 4,860,153
CASH AND CASH EQUIVALENTS:
Beginning of period 33,567,516 711,258
----------- -----------
End of period $30,475,636 $ 5,571,411
=========== ===========
(continued)
6
CEL-SCI CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
(unaudited)
(continued)
Nine Months
Ended June 30,
SUPPLEMENTAL INFORMATION ON NONCASH TRANSACTIONS: 2010 2009
----------- -----------
Patent costs included in accounts payable:
Increase in accounts payable $ - $ (4,050)
Increase in patent costs - 4,050
----------- -----------
$ - $ -
=========== ===========
Equipment costs included in accounts payable:
Increase in accounts payable $ (48,657) $ (8,090)
Increase in research and office equipment 48,657 8,909
----------- -----------
$ - $ -
=========== ===========
Modification of Series M warrants:
Increase in additional paid-in capital $(1,432,456) $ -
Decrease in additional paid capital 1,432,456 -
----------- -----------
$ - $ -
=========== ===========
Cost of investor shares issued and warrant
extension:
Increase in accumulated deficit $ - $ 466,667
Increase in additional paid-in capital - (466,667)
----------- -----------
$ - $ -
=========== ===========
Payment of convertible debt principal with
common stock:
Decrease in convertible debt $ - $ 190,000
Increase in common stock - (7,216)
Increase in additional paid-in capital - (182,784)
----------- -----------
$ - $ -
=========== ===========
Conversion of interest on convertible debt
into common stock:
Decrease in accrued interest on convertible debt $ - $ 40,153
Increase in common stock - (1,705)
Increase in additional paid-in capital - (38,448)
----------- -----------
$ - $ -
=========== ===========
Warrants issued for deferred rent:
Increase in deferred rent $ - $ 366,894
Increase in additional paid-in capital - (366,894)
----------- -----------
$ - $ -
=========== ===========
Issuance of warrants with licensing agreement:
Increase in additional paid-in capital $ - $(1,015,771)
Decrease in additional paid-in capital - 1,015,771
----------- -----------
$ - $ -
=========== ===========
Exercise of derivative liability warrants:
Decrease in derivative liabilities $ 5,510,490 $ -
Increase in additional paid-in capital (5,510,490) -
----------- -----------
$ - $ -
=========== ===========
Conversion of warrants from additional paid
in capital to derivative liabilities:
Increase in derivative liabilities $(6,186,343) $ -
Increase in accumulated deficit 6,186,343 -
----------- -----------
$ - $ -
=========== ===========
Issuance of warrants in connection with financing:
Increase in additional paid-in capital $ - $(2,731,471)
Decrease in additional paid-in capital - 2,731,471
----------- -----------
$ - -
=========== ===========
NOTE:
Cash expenditures for interest expense $ 124,206 $ 85,406
See notes to condensed consolidated financial statements.
7
CEL-SCI CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED JUNE 30, 2010 AND 2009
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying condensed consolidated financial statements of CEL-SCI
Corporation and subsidiary (the Company) are unaudited and certain
information and footnote disclosures normally included in the annual
financial statements prepared in accordance with accounting principles
generally accepted in the United States of America have been omitted
pursuant to the rules and regulations of the Securities and Exchange
Commission. While management of the Company believes that the disclosures
presented are adequate to make the information presented not misleading,
interim condensed consolidated financial statements should be read in
conjunction with the condensed consolidated financial statements and notes
included in the Company's annual report on Form 10-K for the year ended
September 30, 2009.
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 June 30, 2010 and the results
of operations for the nine and three-month periods then ended. The
condensed consolidated balance sheet as of September 30, 2009 is derived
from the September 30, 2009 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 nine and three-month periods ended June 30,
2010 and 2009 are not necessarily indicative of the results to be expected
for the entire year.
Certain items in the consolidated financial statements have been
reclassified to conform to the current presentation.
Significant accounting policies are as follows:
Research and Office Equipment and Leasehold Improvements - Research and
office equipment is recorded at cost and depreciated using the
straight-line method over estimated useful lives of five to seven years.
Leasehold improvements are depreciated over the shorter of the estimated
useful life of the asset or the term of the lease. Repairs and maintenance
which do not extend the life of the asset are expensed when incurred.
Depreciation and amortization expense for the nine-month periods ended
June 30, 2010 and 2009 was $318,800 and $267,327, respectively.
Depreciation and amortization expense for the three-month periods ended
June 30, 2010 and 2009 was $114,894 and $101,329, respectively. During the
nine and three months ended June 30, 2010 and 2009, equipment with a net
book value of $2,081 and $-0- was retired.
Patents - Patent expenditures are capitalized and amortized using the
straight-line method over the shorter of the expected useful life or the
legal life of the patent (17 years). In the event changes in technology or
8
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 nine-month periods ended June 30, 2010
and 2009, the Company recorded patent impairment charges of $5,381 and
$138,526, respectively. During the three-month periods ended June 30, 2010
and 2009, the Company recorded patent impairment charges of $-0- and
$121,567, respectively. For the nine-month periods ended June 30, 2010 and
2009, amortization of patent costs totaled $58,658 and $64,329,
respectively. For the three-month periods ended June 30, 2010 and 2009,
amortization of patent costs totaled $19,680 and $21,785, respectively.
The Company estimates that amortization expense will be $78,000 for each
of the next five years, totaling $390,000.
Research and Development Costs - Research and development expenditures are
expensed as incurred. Total research and development costs, excluding
depreciation, were $7,733,544 and $3,832,582, respectively, for the nine
months ended June 30, 2010 and 2009. Total research and development costs,
excluding depreciation, were $1,587,520 and $1,174,066, respectively, for
the three months ended June 30, 2010 and 2009.
Income Taxes - The Company has net operating loss carryforwards of
approximately $107 million. The Company uses the asset and liability
method of accounting for income taxes. Under the asset and liability
method, deferred tax assets and liabilities are recognized for future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective
tax bases and operating and tax loss carryforwards. Deferred tax assets
and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period
that includes the enactment date. The Company records a valuation
allowance to reduce the deferred tax assets to the amount that is more
likely than not to be recognized.
Derivative Instruments - The Company has entered into financing
arrangements that consist of freestanding derivative instruments or are
hybrid instruments that contain embedded derivative features. The Company
has also issued warrants to various parties in connection with work
performed by these parties. The Company accounts for these arrangements in
accordance with Codification 815-10-50, "Accounting for Derivative
Instruments and Hedging Activities". The Company also accounts for
warrants in accordance with Codification 815-40-15, "Determining Whether
an Instrument (or Embedded Feature) is Indexed to an Entity's Own Stock".
In accordance with accounting principles generally accepted in the United
States ("GAAP"), derivative instruments and hybrid instruments are
recognized as either assets or liabilities in the balance sheet and are
measured at fair value with gains or losses recognized in earnings or
other comprehensive income depending on the nature of the derivative or
hybrid instruments. The Company determines the fair value of derivative
instruments and hybrid instruments based on available market data using
appropriate valuation models, giving consideration to all of the rights
and obligations of each instrument. The derivative liabilities are
remeasured at fair value at the end of each interim period as long as they
are outstanding.
9
Deferred rent (asset) - The deferred rent is discussed at Note J.
Long-term interest receivable on the deposit on the manufacturing facility
has been combined with the deferred rent (asset) for both periods for
comparability.
Stock-Based Compensation - The Company follows Codification 718-10-30-3,
"Share-Based Payment". This Codification applies to all transactions
involving issuance of equity by a company in exchange for goods and
services, including to employees. Compensation expense has been recognized
for awards that were granted, modified, repurchased or cancelled on or
after October 1, 2005 as well as for the portion of awards previously
granted that vested during the period ended June 30, 2010. For the nine
months ended June 30, 2010 and 2009, the Company recorded $939,350 and
$1,403,155, respectively, in general and administrative expense for the
cost of employee options. For the three months ended June 30, 2010 and
2009, the Company recorded $321,268 and $1,114,434, 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 400,000 and 4,763,389 options
granted to employees during the nine-month periods ended June 30, 2010 and
2009, respectively. There were 6,000 and 4,763,389 options granted to
employees during the three-month periods ended June 30, 2010 and 2009,
respectively. Options are granted with an exercise price equal to the
closing price of the Company's stock on the day before the grant. The
Company determines the fair value of the employee compensation using the
Black Scholes method of valuation.
On January 13, 2010, the Company extended 518,832 employee options at a
cost of $212,444, representing the difference between the fair value of
the options before the extension and the fair value after the extension.
The Company determined the fair value of the fully vested employee option
extension using the Black Scholes method of valuation.
The Company has Incentive Stock Option Plans, Non-Qualified Stock Option
Plans, a Stock Compensation Plan and Stock Bonus Plans. All Plans have
been approved by the stockholders. A summary description of the Stock
Option Plans follows. For further discussion of the Stock Compensation
Plan and Stock Bonus Plans, see Form 10-K for the year ended September 30,
2009. In some cases these Plans are collectively referred to as the
"Plans".
Incentive Stock Option Plans. 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 Plans. Only Company employees may
be granted options pursuant to the Incentive Stock Option Plans.
10
CEL-SCI CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED JUNE 30, 2010 AND 2009
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 option holder'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;
During the nine months ended June 30, 2010, 71,333 options were exercised
from the Incentive Stock Option Plan. During the three months ended June
30, 2010, no options were exercised from the Incentive Stock Option Plans.
The total intrinsic value of options exercised during the nine months
ended June 30, 2010 was $22,933. The total intrinsic value of options
exercised during the three months ended June 30, 2010 was $0. There were
no options exercised during the nine or three months ended June 30, 2009.
During the nine months ended June 30, 2010, 100,000 Incentive stock
options were granted. During the three months ended June 30, 2010, no
Incentive stock options were granted.
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.
The exercise price of an option 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 a capital-raising transaction or
promoting the Company's stock. The option exercise price is determined by
the Company's Board of Directors.
11
During the nine months ended June 30, 2010, 18,625 options were exercised
from the Non-Qualified Plans. During the three months ended June 30, 2010,
no options were exercised from the Non-Qualified Plans. The total
intrinsic value of options exercised during the nine months ended June 30,
2010 was $10,066. The total intrinsic value of options exercised during
the three months ended June 30, 2010 was $0. There were no options
exercised during the nine or three months ended June 30, 2009.
During the nine months ended June 30, 2010, 300,000 Non-Qualified stock
options were granted. During the three months ended June 30, 2010, 6,000
Non-Qualified stock options were granted.
Options to non-employees are accounted for in accordance with Codification
505-50-05-5, "Equity Based Payments to Non-Employees". Accordingly,
compensation is recognized when goods or services are received and is
measured using the Black-Scholes valuation model. The Black-Scholes model
requires management to make assumptions regarding the fair value of the
options at the date of grant and the expected life of the options. There
were no options granted to non-employees during the nine months ended June
30, 2010. There were 370,758 shares of common stock issued to consultants
during the nine months ended June 30, 2010 at a cost for the nine months
of $409,562. For the three months ended June 30, 2010, no shares were
issued to non-employees. Additionally, a portion of the cost of common
stock issued in previous quarters was expensed. The cost for the
previously issued shares for the nine months ended June 30, 2010 was
$349,074 and for the three months ended June 30, 2010 the cost for
previously issued shares was $57,900. There were 450,000 options granted
to non-employees during the nine months ended June 30, 2009 at a cost of
$366,894. There were 2,581,488 shares of common stock issued to
consultants during the nine months ended June 30, 2009 at a cost for the
nine months ended June 30, 2009 of $462,234. In addition, a portion of the
cost of common stock issued in previous quarters was expensed. This cost
for the nine months ended June 30, 2009 was $391,000 and $97,601 for the
three months ended June 30, 2009.
B. NEW ACCOUNTING PRONOUNCEMENTS
In June 2008, the FASB finalized Codification 815-40-15, "Determining
Whether an Instrument (or Embedded Feature) is Indexed to an Entity's Own
Stock". The topic lays out a procedure to determine if the debt instrument
is indexed to a corporation's common stock. The topic is effective for
fiscal years beginning after December 15, 2008. The Company has adopted
this topic and the effect was material. (See Note D).
In January 2010, the FASB amended Codification 820-10, "Improving
Disclosures about Fair Value Measurement", effective for interim periods
beginning after December 15, 2009. This amendment changes disclosures
required for interim and annual periods with respect to fair value
measurements. The Company has adopted the change in the disclosure
requirements and the effect was immaterial.
12
C. AVAILABLE-FOR-SALE SECURITIES
At September 30, 2008, the Company had $200,000 in face value of Auction
Rate Cumulative Preferred Shares (ARPs), liquidation preference of $25,000
per share, of an income mutual fund. The ARPs were invested primarily in a
globally diversified portfolio of convertible instruments, common and
preferred stocks, and income producing securities such as investment grade
and below investment grade (high yield/high risk) debt securities.
The Company carried the ARPs at par value until they were repaid in
November 2008. The loan that the Company had taken against these ARPs was
repaid at the same time.
D. STOCKHOLDERS' EQUITY
In November 2008, the Company extended its licensing agreement for
Multikine with Orient Europharma. The new agreement extends the Multikine
collaboration to also cover South Korea, the Philippines, Australia and
New Zealand. The licensing agreement initially focuses on the areas of
head and neck cancer, nasopharyngeal cancer and potentially cervical
cancer. The agreement expires 15 years after the commencement date which
is defined as the date of the first commercial sale of Multikine in any
country within their territory. As a result of the agreement, Orient
Europharma purchased 1,282,051 shares of common stock at a cost of $0.39
per share, for a total to the Company, after expenses, of $499,982.
During the nine months ended June 30, 2009, 2,568,816 shares of common
stock were issued in payment of invoices totaling $868,846. Common stock
was also issued to pay interest and principal on the Series K convertible
debt. (See Note E) In addition, the balance of the shares issued to the
President of the Company in September 2008 were expensed at a cost of
$200,000. An additional 1,030,928 shares were issued to the President of
the Company in March 2009. A portion of the cost of $200,000 was expensed
during the nine months ended June 30, 2009, totaling $125,555. In
addition, 12,672 shares were issued to an employee for expenses. The
shares were expensed at a cost of $3,168 during the quarter ended June 30,
2009.
On December 30, 2008, the Company entered into an Equity Line of Credit
agreement as a source of funding for the Company. For a two-year period,
the agreement allows the Company, at its discretion, to sell up to $5
million of the Company's common stock at the volume weighted average price
of the day minus 9%. The Company may request a drawdown once every ten
trading days, although the Company is under no obligation to request any
drawdowns under the equity line of credit. The equity line of credit
expires on January 6, 2011. There were no drawdowns during the nine and
three months ended June 30, 2010 or 2009.
On March 6, 2009, the Company entered into a licensing agreement with
Byron Biopharma LLC ("Byron") under which the Company granted Byron an
exclusive license to market and distribute the Company's cancer drug
Multikine in the Republic of South Africa. The Company has existing
licensing agreements for Multikine with Teva Pharmaceuticals and Orient
13
Europharma. Pursuant to the agreement Byron will be responsible for
registering the product in South Africa. Once Multikine has been approved
for sale, the Company will be responsible for manufacturing the product,
while Byron will be responsible for sales in South Africa. Revenues will
be divided equally between the Company and Byron. To maintain the license
Byron, among other requirements, had to make a $125,000 payment to the
Company on or before March 15, 2010. On March 8, 2010, Byron made the
payment of $125,000. On March 30, 2009, and as further consideration for
its rights under the licensing agreement, Byron purchased 3,750,000 Units
from the Company at a price of $0.20 per Unit. Each Unit consisted of one
share of the Company's common stock and two warrants. Each warrant
entitles the holder to purchase one share of the Company's common stock at
a price of $0.25 per share. The warrants expire on March 6, 2016. The
shares of common stock included as a component of the Units were
registered by the Company under the Securities Act of 1933. The Company
filed a new registration statement to register the shares issuable upon
the exercise of the warrants. The Units were accounted for as an equity
transaction using the Black Scholes method to value the warrants. The fair
value of the warrants was calculated to be $1,015,771.
During the nine months ended June 30, 2010, there were 12,249,441 warrants
and options exercised for 12,249,441 shares of common stock at prices
ranging from $0.22 to $1.05. The Company received a total of $6,308,874
from the exercise of warrants and options during the nine months ended
June 30, 2010. During the three months ended June 30, 2010, there were
319,767 warrants and options exercised for 319,767 shares of common stock
at $0.40.
Included in the warrants and options exercised during the nine months
ended June 30, 2010 were 1,335,221 Series K warrants (See Note E), on
which the Company recognized a gain on conversion of $280,223 and
8,813,088 Series A warrants, on which the Company recognized a total gain
of $8,433,451. These amounts include adjustments to correct errors made in
prior periods totaling $209,302 relating to the mark to market adjustment
for the exercise of the Series K warrants. Management believes the impact
of these adjustments to be immaterial to the current and prior periods.
Both the Series K warrants and the Series A warrants were accounted for as
derivative liabilities. Series A warrants were issued in connection with
the June 2009 financing. When the warrants were exercised, the value of
these warrants was converted from derivative liabilities to equity. Series
K warrants transferred to equity totaled $1,233,518 and Series A warrants
transferred to equity totaled $4,276,972. The remaining Series A through E
warrants were valued at $3,074,913 at June 30, 2010, which resulted in a
gain of $13,956,036 for the nine months ended June 30, 2010 and $1,897,335
for the three months ended June 30, 2010. See Note G for details of the
balances of derivative instruments at June 30, 2010 and September 30,
2009.
On March 12, 2010, the Company temporarily reduced the exercise price of
the Series M warrants, originally issued on April 18, 2007. The exercise
price was reduced from $2.00 to $0.75. At any time prior to June 16, 2010
investors could have exercised the Series M warrants at a price of $0.75
per share. For every two Series M warrants exercised prior to June 16,
2010 the investor would have received one Series F warrant. Each Series F
14
warrant would have allowed the holder to purchase one share of the
Company's common stock at a price of $2.50 per share at any time on or
before June 15, 2014. After June 15, 2010 the exercise price of the Series
M warrants reverted back to $2.00 per share. Any person exercising a
Series M warrant after June 15, 2010 would not receive any Series F
warrants. The Series M warrants expire on April 17, 2012. An analysis of
the modification to the warrants determined that the modification
increased the value of the warrants by $1,432,456. There were no exercises
of the Series M warrants at the reduced price and the exercise price of
the Series M warrants reverted back to $2.00 on June 16, 2010.
On October 1, 2009, the Company reviewed all outstanding warrants in
accordance with the requirements of Codification 815-40, "Determining
Whether an Instrument (or Embedded Feature) is Indexed to an Entity's Own
Stock". This topic provides that an entity should use a two-step approach
to evaluate whether an equity-linked financial instrument (or embedded
feature) is indexed to its own stock, including evaluating the
instrument's contingent exercise and settlement provisions. Two warrant
agreements provide for adjustments to the purchase price for certain
dilutive events, which includes an adjustment to the warrant exercise
price in the event that the Company makes certain equity offerings in the
future at a price lower than the exercise price of the warrants. Under the
provisions of Codification 815-40, the warrants are not considered indexed
to the Company's stock because future equity offerings or sales of the
Company's stock are not an input to the fair value of a "fixed-for-fixed"
option on equity shares, and equity classification is therefore precluded.
Accordingly, effective October 1, 2009, 3,890,782 warrants issued in
August 2008 were determined to be subject to the requirements of this
topic and were valued using the Black-Scholes formula as of October 1,
2009 at $6,186,343. Effective October 1, 2009, the warrants are recognized
as a liability in the Company's condensed consolidated balance sheet at
fair value with a corresponding adjustment to accumulated deficit and will
be marked-to-market each reporting period. The warrants were revalued on
June 30, 2010 at $1,361,774, which resulted in a gain on derivatives and a
reduction in derivative liabilities of $4,824,569 for the nine months
ended June 30, 2010 and $583,617 for the three months ended June 30, 2010
due to the decline in the Company's stock price since October 1, 2009. The
assumptions used in the fair value calculation for the warrants as of
October 1, 2009 and June 30, 2010 are as follows:
October 1, 2009 June 30, 2009
--------------- -------------
Expected stock price volatility 95% 95%
Risk-free interest rate 2.151% 1.449%
Expected life of warrant 4.88 years 4.14 years
E. 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
15
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 Company accounted for the Series K Warrants as derivative liabilities
in accordance with Codification 815-10. A debt discount of $1,734,472 was
amortized to interest expense using the effective interest method over the
expected term of the Series K Notes. During the nine-month periods ended
June 30, 2010 and 2009, the Company recorded interest expense of $-0- and
$111,990, respectively, in amortization of the debt discount. During the
fiscal year ended September 30, 2009, the balance of the debt was either
repaid or converted into shares of common stock. The Company recorded a
loss on derivative instruments of $1,892,084 during the nine months ended
June 30, 2009. For the three months ended June 30, 2009, the Company
recorded a loss on derivative instruments of $2,548,327.
During the nine months ended June 30, 2009, principal payments of $630,000
were made in cash to the holders of the Series K Notes. In addition,
721,565 shares of common stock were issued in December 2008 for the
principal payment due on January 4, and February 4, 2009 of $190,000. The
Company also paid the interest expense through December 31, 2008 with
170,577 shares of common stock.
During the nine months ended June 30, 2010, the Company recorded a gain on
remaining Series K warrants of $3,120,172. The following summary comprises
the total of the fair value of the Series K convertible debt and related
derivative instruments at June 30, 2010 and September 30, 2009:
June 30, 2010 September 30, 2009
------------- ------------------
Investor warrants $1,734,472 $1,734,472
Fair value adjustment-
investor warrants (995,786) 3,638,126
---------- ----------
Total fair value $ 738,686 $5,372,598
========== ==========
F. FAIR VALUE MEASUREMENTS
Effective October 1, 2008, the Company adopted the provisions of
Codification 820-10, "Fair Value Measurements", which defines fair value,
establishes a framework for measuring fair value and expands disclosures
about such measurements that are permitted or required under other
accounting pronouncements. While Codification 820-10 may change the method
of calculating fair value, it does not require any new fair value
measurements. The new effective date is for fiscal years beginning after
November 15, 2008 and the interim periods within the fiscal year. The
adoption of Codification 820-10 did not have a material impact on the
Company's results of operations, financial position or cash flows.
16
In accordance with Codification 820-10, the Company determines fair value
as the price that would be received to sell an asset or paid to transfer a
liability in an orderly transaction between market participants at the
measurement date. The Company generally applies the income approach to
determine fair value. This method uses valuation techniques to convert
future amounts to a single present amount. The measurement is based on the
value indicated by current market expectations with respect to those
future amounts.
Codification 820-10 establishes a fair value hierarchy that prioritizes
the inputs used to measure fair value. The hierarchy gives the highest
priority to active markets for identical assets and liabilities (Level 1
measurement) and the lowest priority to unobservable inputs (Level 3
measurement). The Company classifies fair value balances based on the
observability of those inputs. The three levels of the fair value
hierarchy are as follows:
o Level 1 - Observable inputs such as quoted prices in active markets
for identical assets or liabilities.
o Level 2 - Inputs other than quoted prices that are observable for the
asset or liability, either directly or indirectly. These include
quoted prices for similar assets or liabilities in active markets,
quoted prices for identical or similar assets or liabilities in
markets that are not active and amounts derived from valuation models
where all significant inputs are observable in active markets.
o Level 3 - Unobservable inputs that reflect management's assumptions
For disclosure purposes, assets and liabilities are classified in their
entirety in the fair value hierarchy level based on the lowest level of
input that is significant to the overall fair value measurement. The
Company's assessment of the significance of a particular input to the fair
value measurement requires judgment and may affect the placement within
the fair value hierarchy levels.
The table below sets forth the assets and liabilities measured at fair
value on a recurring basis, by input level, in the condensed consolidated
balance sheet at June 30, 2010 and the consolidated balance sheet at
September 30, 2009:
June 30, 2010
------------------------------------------------------------------
Quoted Prices in Significant
Active Markets for Other Significant
Identical Assets or Observable Unobservable
Liabilities (Level 1) Inputs (Level 2) Inputs (Level 3) Total
--------------------- ---------------- --------------- -----
Derivative instruments $ - $5,175,372 $ - $5,175,372
=========== ========== ========== ==========
17
September 30, 2009
------------------------------------------------------------------
Quoted Prices in Significant
Active Markets for Other Significant
Identical Assets or Observable Unobservable
Liabilities (Level 1) Inputs (Level 2) Inputs (Level 3) Total
--------------------- ---------------- --------------- -----
Derivative instruments $ - $35,113,970 $ - $35,113,970
========== =========== ========== ===========
The fair values of the Company's derivative instruments disclosed above
are primarily derived from valuation models where significant inputs such
as historical price and volatility of the Company's stock as well as U.S.
Treasury Bill rates are observable in active markets.
G. DERIVATIVE LIABILITIES
The Company has several groups of warrants that require classification in
the balance sheet as derivative liabilities. These warrants have been
discussed above. Below is a summary of the derivative liabilities at June
30, 2010 and September 30, 2009:
June 30, 2010 September 30, 2009
------------- ------------------
Series K warrants (Note E) $ 738,686 $ 5,372,598
2009 financings warrants (Note D) 3,074,912 29,741,372
2008 warrants reclassified from equity
to derivative liabilities on
October 1, 2009 (Note D) 1,361,774 -
----------- ------------
Total derivative liabilities $ 5,175,372 $ 35,113,970
============ ============
H. SHORT-TERM LOANS
The Company had a line of credit with its bank to borrow up to 100% of the
ARPs (see Note C) at an interest rate of prime minus 1%. As of September
30, 2008, the Company had borrowed $200,000, which was repaid in November
2008. During the three months ended December 31, 2008, the Company had
paid $813 in interest on the line of credit.
Between December 2008 and June 2009, Maximilian de Clara, the Company's
President and a director, loaned the Company $1,104,057. The loan from Mr.
de Clara bears interest at 15% per year and was secured by a lien on
substantially all of the Company's assets. The Company does not have the
right to prepay the loan without Mr. de Clara's consent. The loan was
initially payable at the end of March 2009, but was extended to the end of
June 2009. At the time the loan was due, and in accordance with the loan
agreement, the Company issued Mr. de Clara warrants which entitle Mr. de
Clara to purchase 1,648,244 shares of the Company's common stock at a
price of $0.40 per share. The warrants are exercisable at any time prior
to December 24, 2014. Pursuant to Codification section 470-50, the fair
value of the warrants issuable under the first amendment was recorded as a
18
discount on the note payable with a credit recorded to additional paid-in
capital. The discount was amortized from April 30, 2009 through June 27,
2009. Although the loan was to be repaid from the proceeds of the
Company's June 2009 financing, the Company's Directors deemed it
beneficial not to repay the loan and negotiated a second extension of the
loan with Mr. de Clara on terms similar to the June 2009 financing.
Pursuant to the terms of the second extension, the note is now due on July
6, 2014 but, at Mr. de Clara's option, the loan can be converted into
shares of the Company's common stock. The number of shares which will be
issued upon any conversion will be determined by dividing the amount to be
converted by $0.40. As further consideration for the second extension, Mr.
de Clara received warrants which allow Mr. de Clara to purchase 1,849,295
shares of the Company's common stock at a price of $0.50 per share at any
time prior to January 6, 2015.
In accordance with Codification 470-50, the second amendment to the loan
was accounted for as an extinguishment of the first amendment debt. The
extinguishment of the loan required that the new loan be recorded at fair
value and a gain or loss must be recognized, including the warrants issued
in connection with the second amendment. This resulted in a premium of
$341,454, which was amortized over the period from July 6, 2009, the date
of the second amendment, to October 1, 2009, the date at which the loan
holder may demand payment of the loan. During the nine months ended June
30, 2010, the Company amortized the remaining $3,282 in premium on the
loan. As of June 30, 2010, the fair value and the face value of the loan
was $1,104,057. As of September 30, 2009, the balance of the loan with
unamortized premium was $1,107,339.
I. OPERATIONS, FINANCING
The Company has incurred significant costs since its inception in
connection with the acquisition of certain patented and unpatented
proprietary technology and know-how relating to the human immunological
defense system, patent applications, research and development,
administrative costs, construction of laboratory facilities and clinical
trials. The Company has funded such costs with proceeds realized from the
public and private sale of its common and preferred stock, as well as
loans from affiliates. 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 Federal Drug Administration (FDA) approval for
the sale of products to be developed on a commercial basis is uncertain.
Ultimately, the Company must complete the development of its products,
obtain the appropriate regulatory approvals and obtain sufficient revenues
to support its cost structure. The Company believes that it has sufficient
funds to support its operations for more than the next twelve months.
The Company has two partners who have agreed to participate in and pay for
part of the Phase III clinical trial for Multikine. Since the Company was
able to raise substantial capital during 2009, the Company is currently
preparing the Phase III trial for Multikine. The net cost to the Company
of the clinical trial is estimated to be $25 million.
19
J. COMMITMENTS AND CONTINGENCIES
In August 2007, the Company leased a building near Baltimore, Maryland.
The building, which consists of approximately 73,000 square feet, was
remodeled in accordance with the Company's specifications so that it can
be used by the Company to manufacture Multikine for the Company's Phase
III clinical trial and sales of the drug if approved by the FDA. The lease
is for a term of twenty years and 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%. The Company is also required to pay all real
and personal property taxes, insurance premiums, maintenance expenses,
repair costs and utilities. The lease allows the Company, at its election,
to extend the lease for two ten-year periods or to purchase the building
at the end of the 20-year lease. The lease required the Company to pay
$3,150,000 towards the remodeling costs, which will be recouped by
reductions in the annual base rent of $303,228 in years six through twenty
of the lease, subject to the Company maintaining compliance with the lease
covenants. On January 24, 2008, a second amendment to the lease for the
manufacturing facility was signed. In accordance with the amendment, the
Company was required to pay the following: 1) an additional $518,790 for
movable equipment, which increased restricted cash, and 2) an additional
$1,295,528 into an escrow account to cover additional costs, which
increased deferred rent. These funds were transferred in early February
2008. In April 2008, an additional $288,474 was paid toward the completion
of the manufacturing facility. The Company took possession of the
manufacturing facility in October of 2008. An additional $505,225 was paid
for the completion of the work on the manufacturing facility in October
2008. During the nine months ended June 30, 2010, an additional $32,059
was paid for final completion costs.
In December 2008, the Company was not in compliance with certain lease
requirements (i.e., failure to pay an installment of Base Annual Rent).
However, the landlord did not declare the Company formally in default
under the terms of the lease and renegotiated the lease. In January 2009,
as part of an amended lease agreement on the manufacturing facility, the
Company repriced the 3,000,000 warrants initially issued to the landlord
in July 2007 at $1.25 per share with an expiration date of July 12, 2013.
These warrants are now repriced at $0.75 per share and expire on January
26, 2014. The cost of this repricing and extension of the warrants was
$70,515. In addition, 787,500 additional warrants were given to the
landlord on the same date. These warrants are exercisable at $0.75 per
share and will expire on January 26, 2014. The cost of these warrants was
$45,207. All back rent was paid to the landlord in early July 2009. During
the three months ended June 30, 2009, the Company issued the landlord an
additional 2,296,875 warrants in accordance with an amendment to the
agreement. These warrants were valued at $251,172 using the Black Scholes
method. The Company is in compliance with the lease and in February 2010,
received a refund of the $1,575,000 deposited with the landlord in July
2008.
On January 28, 2009, the Company subleased a portion of the manufacturing
facility. The sublease commenced on February 2, 2009 and expires on
January 31, 2011. The Company currently receives $10,300 per month in rent
for the subleased space.
20
The Company began amortizing the deferred rent on the building on October
7, 2008, the day that the Company took possession of the building. The
amortization of the deferred rent for the nine months ended June 30, 2010
was $606,583 and for the nine months ended June 30, 2009 was $595,994. The
amortization on the deferred rent for the three months ended June 30, 2010
was $201,820 and for the three months ended June 30, 2009 was $150,940.
K. EARNINGS PER SHARE
The Company's diluted earnings per share (EPS) are as follows for June 30,
2010. The June 30, 2009 diluted earnings per share were the same as the
basic earnings per share.
Nine Months Ended June 30, 2010
-------------------------------------------
Weighted average
Net Income Shares EPS
---------- ---------------- -----
Basic Earnings per Share $ 16,381,418 201,208,121 $ 0.08
Note conversion 124,206 2,760,142
Warrants and options
convertible into shares
of common stock (21,900,777) 24,475,332
------------- -----------
Dilutive EPS $ (5,395,153) 228,443,595 $(0.02)
============== =========== ======
Three Months Ended June 30, 2010
------------------------------------------
Weighted average
Net Income Shares EPS
------------ ---------------- -----
Basic Earnings per Share $ (601,124) 204,592,051 $(0.00)
Note conversion 41,402 2,760,142
Warrants and options
convertible into shares
of common stock (2,903,058) 24,475,332
-------------- ------------
Dilutive EPS $ (3,462,780) 231,827,525 $(0.01)
============== ============ ======
Nine Months Ended June 30, 2009
-------------------------------------------
Weighted average
Net Income Shares EPS
---------- ---------------- -----
Basic Earnings per Share $ (10,996,524) 125,655,445 $(0.09)
Warrants and options
convertible into shares
of common stock - -
-------------- -----------
Dilutive EPS $ (10,996,524) 125,655,445 $(0.09)
============== =========== ======
21
Three Months Ended June 30, 2010
------------------------------------------
Weighted average
Net Income Shares EPS
------------ ---------------- -----
Basic Earnings per Share $ (6,705,731) 130,076,656 $(0.05)
Warrants and options
convertible into shares
of common stock - -
------------- -----------
Dilutive EPS $ (6,705,731) 130,076,656 $(0.05)
============== =========== ======
L. SUBSEQUENT EVENTS
The Company has evaluated subsequent events through the date these
financial statements were filed. On August 3, 2010, the Company's Board of
Directors approved an amendment to the terms of the Series M warrants held
by an investor. The investor is the owner of 8,800,000 warrants priced at
$2.00 per share. The investor may now purchase 6,000,000 shares of the
Company's common stock (reduced from 8,800,000) at a price of $0.60 per
share. In approving the amendment, CEL-SCI's Directors determined that
reducing the number of CEL-SCI's outstanding warrants would be beneficial.
22
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Liquidity and Capital Resources
The Company has had only limited revenues from operations since its inception in
March 1983. The Company has relied upon capital generated from the public and
private offerings of its securities as well as loans to meet its capital
requirements. Capital has primarily been used for patent applications, debt
repayment, research and development, administrative costs, and the construction
of the Company's laboratory facilities. The Company does not anticipate
realizing significant revenues until it enters into licensing arrangements
regarding its technology and know-how or until it receives regulatory approval
to sell its products (which could take a number of years). As a result the
Company has been dependent upon the proceeds from the sale of its securities and
loans from third parties to meet all of its liquidity and capital requirements
and anticipates having to do so in the future.
The Company will be required to raise additional capital or find additional
long-term financing in order to continue with its research efforts. The ability
of the Company to complete the necessary clinical trials and obtain Federal Drug
Administration (FDA) approval for the sale of products to be developed on a
commercial basis is uncertain. Ultimately, the Company must complete the
development of its products, obtain the appropriate regulatory approvals and
obtain sufficient revenues to support its cost structure. The Company believes
that it has sufficient capital to support its operations for more than the next
twelve months.
The Company has two partners who have agreed to participate in and pay for part
of the Phase III clinical trial for Multikine. The Company also raised
significant capital through stock sales and the exercise of warrants and options
during 2009. If needed, the Company can access a $5 million Equity Line of
Credit (see Note D). Since the Company was able to raise substantial capital in
2009, the Company is currently preparing the Phase III trial for Multikine. The
net cost to the Company of the Phase III clinical trial is estimated to be $25
million.
During the nine-month period ended June 30, 2010, the Company's cash decreased
by $3,091,880 compared to an increase in cash of $4,860,153 during the nine
months ended June 30, 2009. For the nine months ended June 30, 2010 and 2009,
cash used in operating activities totaled $9,064,665 and $3,044,463,
respectively. For the nine months ended June 30, 2010 and 2009, cash provided by
financing activities totaled $6,308,874 and $6,985,892, respectively. The
repayment of the Series K convertible notes ($630,000), financing costs
($339,330) and the repayment of the short-term loan ($200,000) was used in
financing activities during the nine months ended June 30, 2009. Licensing
proceeds of $1,249,981 and receipt of short-term loans to the Company of
$1,060,000 provided funds, as did the June 2009 financing ($5,845,241). For the
nine months ended June 30, 2010, cash provided by financing was from the
exercise of warrants and options ($6,308,874). Cash used by investing activities
was $336,089 and provided by investing activities was $918,724, respectively,
for the nine months ended June 30, 2010 and 2009. The use of cash in investing
activities consisted of purchases of equipment and legal costs incurred in
patent applications and, for the nine months ended June 30, 2009, the sale of
the final $200,000 in ARPs.
23
In August 2007, the Company leased a building near Baltimore, Maryland. The
building, which consists of approximately 73,000 square feet, was remodeled in
accordance with the Company specifications so that it can be used by the Company
to manufacture Multikine for the Company's Phase III clinical trial and sales of
the drug if approved by the FDA. See Note J to the financial statements included
as part of this report for information concerning the terms 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.
On January 28, 2009, the Company subleased a portion of the manufacturing
facility. The sublease commenced on February 2, 2009 and expires on January 31,
2011. The Company currently receives $10,300 per month in rent for the subleased
space.
Results of Operations and Financial Condition
During the nine-month period ended June 30, 2010, research and development
expenses increased by $3,900,962 compared to the nine-month period ended June
30, 2009. This increase was due to continuing expenses relating to the
preparation for the Phase III clinical trial. During the three month period
ended June 30, 2010, research and development expenses increased by $413,454
compared to the three-month period ended June 30, 2009 for the same reason.
During the nine-month period ended June 30, 2010, general and administrative
expenses increased by $931,843 compared to the nine-month period ended June 30,
2009. During the three-month period ended June 30, 2010, general and
administrative expenses decreased by $243,531 compared to the three-month period
ended June 30, 2009. This increase for the nine months ended June 30, 2010 was
caused by higher costs for employee options and a bonus given to the Company's
Chief Executive Officer in the three-months ended March 31, 2010. The decrease
in the three month period ended June 30, 2010 was due to a reduced cost of
employee options when compared to the three month period ended June 30, 2009.
Interest income during the nine months ended June 30, 2010 increased by $79,500
compared to the nine-month period ended June 30, 2009. Interest income during
the three months ended June 30, 2010 increased by $11,109 compared to the
three-month period ended June 30, 2009. The increase was due to the increase in
the funds available for investment, partially offset by lower interest rates.
The gain on derivative instruments of $30,614,451 for the nine months ended June
30, 2010 was the result of the change in fair value of the Series A through E
Warrants and Series K Warrants during the period. The gain on derivative
instruments of $2,754,512 for the three months ended June 30, 2010, was the
result of the change in fair value of the Series A through E Warrants and Series
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K Warrants during the period. These gains were caused by fluctuations in the
price of the Company's common stock.
The interest expense of $120,924 for the nine months ended June 30, 2010 was
interest on the loan from the Company's president, offset by the amortization of
the remaining premium on the loan of ($3,282). The interest expense of $41,402
for the three months ended June 30, 2010 also represented interest on the loan
from the Company's president. The interest expense of $614,654 for the nine
months ended June 30, 2009 was composed of five elements: 1) amortization of the
Series K discount ($111,990), 2) interest paid and accrued on the Series K debt
($103,784), 3) margin interest ($813), 4) interest on the short term loan
($39,265), and 5) cost of warrants issued to short term loan holder ($358,802).
The interest expense of $445,161 for the three months ended June 30, 2009 was
composed of four elements: 1) amortization of the Series K discount ($31,439),
2) interest paid and accrued on the Series K debt ($29,134), 3) interest on the
short term loan ($25,786), and 4) cost of warrants issued to short term loan
holder ($358,802).
Research and Development Expenses
During the nine and three-month periods ended June 30, 2010 and 2009, 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 nine and three-month periods
Nine Months Ended June 30, Three Months Ended June 30,
2010 2009 2010 2009
---- ---- ---- ----
MULTIKINE $6,823,218 $3,769,302 $1,434,208 $1,165,834
L.E.A.P.S 910,326 63,280 153,312 8,232
---------- ---------- ---------- ----------
TOTAL $7,733,544 $3,832,582 $1,587,520 $1,174,066
========== ========== ========== ==========
In January 2007, the Company received a "no objection" letter from the FDA
indicating that it could proceed with the Phase III protocol with Multikine in
head & neck cancer patients. The protocol for the Phase III clinical trial was
designed to develop conclusive evidence of the safety and efficacy of Multikine
in the treatment of advanced primary squamous cell carcinoma of the oral cavity.
The Company had previously received a "no objection" letter from the Canadian
Biologics and Genetic Therapies Directorate which enabled the Company to begin
its Phase III clinical trial in Canada. The Company is preparing for the start
of its Phase III clinical trial in the United States, Canada and other
countries.
As of June 30, 2010, 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.
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
25
or regulatory approval, will prevent the Company from completing the studies and
research required to obtain regulatory approval for any products which the
Company is developing. Without regulatory approval, the Company will be unable
to sell any of its products. Since all of the Company's projects are under
development, the Company cannot predict when it will be able to generate any
revenue from the sale of any of its products.
Critical Accounting Estimates and Policies
Management's discussion and analysis of the Company's financial condition and
results of operations is based on its unaudited condensed consolidated financial
statements. The preparation of these financial statements is based on the
selection of accounting policies and the application of significant accounting
estimates, some of which require management to make judgments, estimates and
assumptions that affect the amounts reported in the financial statements and
notes. The Company believes some of the more critical estimates and policies
that affect its financial condition and results of operations are in the areas
of operating leases and stock-based compensation. For more information regarding
the Company's critical accounting estimates and policies, see Part II, Item 7,
MD&A "Critical Accounting Estimates and Policies" of the Company's 2009 10-K
report. The application of these critical accounting policies and estimates have
been discussed with the Audit Committee of the Company's Board of Directors.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
The Company has a loan from its President that bears interest at 15%. The
Company does not believe that it has any significant exposures to market risk.
Item 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Under the direction and with the participation of the Company's management,
including the Company's Chief Executive and Chief Financial Officer, the Company
has conducted an evaluation of the effectiveness of the design and operation of
its disclosure controls and procedures as of June 30, 2010. The Company
maintains disclosure controls and procedures that are designed to ensure that
information required to be disclosed in its periodic reports with the Securities
and Exchange Commission is recorded, processed, summarized and reported within
the time periods specified in the SEC's rules and regulations, and that such
information is accumulated and communicated to the Company's management,
including its principal executive officer and principal financial officer, as
appropriate, to allow timely decisions regarding required disclosure. The
Company's disclosure controls and procedures are designed to provide a
reasonable level of assurance of reaching its desired disclosure control
objectives. Based on the evaluation, the Chief Executive and Chief Financial
Officer has concluded that the Company's disclosure controls and procedures were
effective as of June 30, 2010.
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Changes in Internal Control over Financial Reporting
The Company's management, with the participation of the Chief Executive and
Chief Financial Officer, has evaluated whether any change in the Company's
internal control over financial reporting occurred during the three months ended
June 30, 2010. There was no change in the Company's internal control over
financial reporting during the three months ended June 30, 2010.
PART II
Item 1. Legal Proceedings
See Item 3 of the Company's report on Form 10-K for the year ended
September 30, 2009.
Item 6. (a) Exhibits
Number Exhibit
31 Rule 13a-14(a) Certifications
32 Section 1350 Certifications
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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: August 16, 2010 /s/ Geert Kersten
------------------------------------
Geert Kersten, Principal Executive Officer*
* Also signing in the capacity of the Principal Accounting and Financial
Officer.
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