cvm_10q.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q
 
(Mark One)
þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2013
 
OR

o 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 001-11889
 
CEL-SCI CORPORATION
 
Colorado   84-0916344
State or other jurisdiction incorporation   (IRS) Employer 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 þ No o

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 (§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 þ No o

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 o Accelerated filer þ
Non-accelerated filer o Smaller reporting company o
(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 o No þ
 
Class of Stock   No. Shares Outstanding   Date
Common   309,905,272   July 30, 2013
 
 
 
 

TABLE OF CONTENTS
 
      Page  
PART I FINANCIAL INFORMATION      
         
Item 1.        
           
  Condensed Balance Sheets at June 30, 2013 and September 30, 2012 (unaudited)     3  
      4  
  Condensed Statements of Operations for the three months ended June 30, 2013 and 2012 (unaudited)     5  
  Condensed Statements of Cash Flows for the for the nine months ended June 30, 2013 and 2012 (unaudited)     6  
  Notes to Condensed Financial Statements (unaudited)     8  
           
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations     25  
           
Item 3. Quantitative and Qualitative Disclosures about Market Risks     29  
           
Item 4. Controls and Procedures     29  
           
PART II          
           
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds     30  
           
Item 6. Exhibits     30  
           
  Signatures     31  
 
 
2
 
 
CEL-SCI CORPORATION
BALANCE SHEETS
(UNAUDITED)
 
   
JUNE 30,
    
SEPTEMBER 30,
  
   
2013
    
2012
  
ASSETS
            
CURRENT ASSETS:
            
Cash and cash equivalents
   $ 3,484,070     $ 3,941,042  
Receivables
     163,739       158,614  
Prepaid expenses
     840,287       1,306,041  
Inventory used for R&D and manufacturing
     1,135,592       1,384,484  
Deferred rent - current portion
     612,012       651,768  
Total current assets
     6,235,700       7,441,949  
                 
RESEARCH AND OFFICE EQUIPMENT AND
                
LEASEHOLD IMPROVEMENTS - less accumulated
                
depreciation and amortization of $2,919,127
                
and $2,711,792
     538,415       630,948  
                 
PATENT COSTS - less accumulated amortization
                
of $1,148,214 and $1,313,046
     335,336       384,278  
                 
DEFERRED RENT - net of current portion
     5,569,714       5,939,358  
DEPOSITS
     2,070,917       1,670,917  
                             TOTAL ASSETS
   $ 14,750,082     $ 16,067,450  
                 
LIABILITIES AND STOCKHOLDERS' EQUITY
                
CURRENT LIABILITIES
                
Accounts payable
   $ 1,176,344     $ 592,867  
Accrued expenses
     583,525       191,214  
Due to employees
     87,930       20,178  
Deferred rent - current portion
     7,783       4,195  
Lease obligations - current portion
     7,891       -  
Related party loan
     1,104,057       1,104,057  
Total current liabilities
     2,967,530       1,912,511  
                 
Derivative instruments
     3,819,836       6,983,690  
Deferred revenue
     126,545       126,500  
Deferred rent - net of current portion
     9,369       12,317  
Lease obligations - net of current portion
     23,102       -  
Deposits held
     5,000       5,000  
Total liabilities
     6,951,382       9,040,018  
                 
COMMITMENTS AND CONTINGENCIES
                
                 
STOCKHOLDERS' EQUITY
                
Preferred stock, $.01 par value - authorized
                
200,000 shares, issued and outstanding. -0-
     -       -  
Common stock, $.01 par value – authorized 600,000,000
                
shares; issued and outstanding 309,855,272 and
                
273,113,332 shares at June 30, 2013 and
                
September 30, 2012, respectively
     3,098,553       2,731,133  
Additional paid-in-capital
     215,160,858       207,285,920  
Accumulated deficit
     (210,460,711 )     (202,989,621 )
Total stockholders' equity
     7,798,700       7,027,432  
                 
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
   $ 14,750,082     $ 16,067,450  
 
See notes to financial statements.
 
 
3
CEL-SCI CORPORATION
STATEMENTS OF OPERATIONS
NINE MONTHS ENDED JUNE 30, 2013 AND 2012
(UNAUDITED)
 
   
2013
    
2012
  
             
GRANT INCOME AND OTHER
   $ 144,133     $ 146,567  
                 
OPERATING EXPENSES:
                
Research and development (excluding
                
R&D depreciation of $208,750
                
and $338,350, respectively, included below)
     9,208,900       7,519,586  
Depreciation and amortization
     302,871       391,571  
General & administrative
     5,428,897       5,154,141  
                 
Total operating expenses
     14,940,668       13,065,298  
                 
OPERATING LOSS
     (14,796,535 )     (12,918,731 )
                 
GAIN ON DERIVATIVE INSTRUMENTS
     7,363,854       142,532  
                 
INTEREST INCOME
     89,394       86,393  
                 
INTEREST EXPENSE
     (127,803 )     (220,812 )
                 
NET LOSS
     (7,471,090 )     (12,910,618 )
                 
ISSUANCE OF ADDITIONAL SHARES DUE TO RESET PROVISIONS
     -       (250,000 )
MODIFICATION OF WARRANTS
     (59,531 )     (325,620 )
INDUCEMENT WARRANTS
     -       (1,593,000 )
                 
NET LOSS AVAILABLE TO COMMON SHAREHOLDERS
   $ (7,530,621 )   $ (15,079,238 )
                 
NET LOSS PER COMMON SHARE
                
BASIC
   $ (0.03 )   $ (0.06 )
                 
DILUTED
   $ (0.05 )   $ (0.06 )
                 
WEIGHTED AVERAGE COMMON SHARES
                
OUTSTANDING
                
BASIC
     300,383,239       244,738,972  
                 
DILUTED
     300,383,239       244,738,972  
 
See notes to financial statements.
 
 
 
4
 
CEL-SCI CORPORATION
STATEMENTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2013 AND 2012
(UNAUDITED)
 
   
2013
    
2012
  
             
GRANT INCOME AND OTHER
   $ 113,728     $ 35,000  
                 
OPERATING EXPENSES:
                
Research and development (excluding
                
R&D depreciation of $47,931
                
and $109,867, respectively, included below)
     3,769,538       2,469,166  
Depreciation and amortization
     79,008       109,718  
General & administrative
     1,778,381       1,669,214  
                 
Total operating expenses
     5,626,927       4,248,098  
                 
OPERATING LOSS
     (5,513,199 )     (4,213,098 )
                 
GAIN ON DERIVATIVE INSTRUMENTS
     1,079,392       3,390,389  
                 
INTEREST INCOME
     29,027       28,665  
                 
INTEREST EXPENSE
     (42,693 )     (41,402 )
                 
NET LOSS
     (4,447,473 )     (835,446 )
                 
MODIFICATION OF WARRANTS
     (59,531 )     -  
                 
                 
NET LOSS AVAILABLE TO COMMON SHAREHOLDERS
   $ (4,507,004 )   $ (835,446 )
                 
NET LOSS PER COMMON SHARE
                
BASIC
   $ (0.01 )   $ (0.00 )
                 
DILUTED
   $ (0.02 )   $ (0.02 )
                 
WEIGHTED AVERAGE COMMON SHARES
                
OUTSTANDING
                
BASIC
     309,306,502       258,467,582  
                 
DILUTED
     309,306,502       258,467,582  
 
See notes to financial statements.
 
 
5
 
CEL-SCI CORPORATION
STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED JUNE 30, 2013 AND 2012
(UNAUDITED)
 
   
2013
    
2012
  
CASH FLOWS FROM OPERATING ACTIVITIES:
            
  Net loss
   $ (7,471,090 )   $ (12,910,618 )
  Adjustments to reconcile net loss to
                
    net cash used in operating activities:
                
      Depreciation and amortization
     302,871       391,571  
      Issuance of common stock, warrants and options for services
     364,318       402,708  
      Extension of stock options issued to consultants
     -       54,789  
      Extension of stock options issued to employees
     -       36,990  
      Employee option cost
     2,087,718       1,724,375  
      Common stock contributed to 401(k) plan
     119,190       115,693  
      Impairment loss on abandonment of patents
     10,651       37,352  
      Loss on retired equipment
     4,199       9,016  
      Gain on derivative instruments
     (7,363,854 )     (142,532 )
      (Increase)/decrease in assets:
                
      Receivables
     (5,125 )     431,684  
      Deferred rent
     409,400       450,374  
      Prepaid expenses
     529,511       406,305  
      Inventory for R&D and manufacturing
     248,892       198,648  
      Deposits
     (400,000 )     -  
      Increase/(decrease) in liabilities:
                
      Accounts payable
     560,521       (36,259 )
      Accrued expenses
     392,311       (96,513 )
      Due to employees
     67,752       3,443  
      Deferred rent liability
     640       (3,880 )
      Deferred revenue
     45       1,500  
      Deposits held
     -       5,000  
Net cash used in operating activities
     (10,142,050 )     (8,920,354 )
                 
CASH FLOWS FROM INVESTING ACTIVITIES:
                
      Purchases of equipment
     (93,419 )     (43,222 )
      Expenditures for patent costs
     (24,446 )     (78,959 )
Net cash used in investing activities
     (117,865 )     (122,181 )
                 
CASH FLOWS FROM FINANCING ACTIVITIES:
                
  Proceeds from issuance of common stock
     9,807,375       14,289,518  
  Proceeds from exercise of warrants and stock options
     -       2,664,539  
  Payments on convertible debt
     -       (4,950,000 )
  Payments on obligations under capital lease
     (4,432 )     -  
Net cash provided by financing activities
     9,802,943       12,004,057  
                 
NET (DECREASE) INCREASE
                
  IN CASH AND CASH EQUIVALENTS
     (456,972 )     2,961,522  
                 
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD
     3,941,042       4,260,594  
                 
CASH AND CASH EQUIVALENTS, END OF PERIOD
   $ 3,484,070     $ 7,222,116  
 
See notes to financial statements.
 
 
 
6
CEL-SCI CORPORATION
STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED JUNE 30, 2013 AND 2012
 
   
2013
    
2012
  
ISSUANCE OF WARRANTS:
            
     Increase in derivative liabilities
   $ (4,200,000 )   $ (6,706,667 )
     Decrease in additional paid-in capital
     4,200,000       6,706,667  
    $ -     $ -  
ISSUANCE OF ADDITIONAL SHARES
                
     Increase in common stock
   $ -     $ (8,333 )
     Increase in additional paid-in capital
     -       (241,667 )
     Decrease in additional paid-in capital
     -       250,000  
    $ -     $ -  
EXERCISE OF DERIVATIVE LIABILITIES:
                
     Decrease in derivative liabilities
   $ -     $ 122,367  
     Increase in additional paid-in capital
     -       (122,367 )
                 
    $ -     $ -  
MODIFICATION OF WARRANTS:
                
     Increase in additional paid-in capital
   $ (59,531 )   $ (325,620 )
     Decrease in additional paid-in capital
     59,531       325,620  
    $ -     $ -  
INDUCEMENT WARRANTS
                
     Increase in additional paid-in capital
   $ -     $ (1,593,000 )
     Decrease in additional paid-in capital
     -       1,593,000  
      -       -  
ISSUANCE OF COMMON STOCK FOR PREPAID SERVICES
                
     Increase in additional paid-in capital
   $ (117,090 )   $ (141,333 )
     Increase in  prepaid expenses
     117,090       141,333  
    $ -     $ -  
PATENT COSTS INCLUDED IN
                
  ACCOUNTS PAYABLE:
                
    Increase in patent costs
   $ 13,145     $ -  
    Increase in accounts payable
     (13,145 )     -  
    $ -     $ -  
NON-CASH RESEARCH AND OFFICE EQUIPMENT PURCHASES
                
    Increase in research and office equipment
   $ 45,236     $ -  
    Increase in accounts payable
     (8,614 )     -  
    Increase in capital lease obligation
     (36,622 )     -  
    $ -     $ -  
                 
CAPITAL LEASE PAYMENTS INCLUDED IN ACCOUNTS PAYABLE:
                
    Decrease in capital lease obligations
   $ 1,197     $ -  
    Increase in accounts payable
     (1,197 )     -  
    $ -     $ -  
                 
SUPPLEMENTAL DISCLOSURE OF CASH FLOWS
                
    INFORMATION:
                
Cash expenditure for interest expense
   $ 126,950     $ 336,316  
 
See notes to financial statements.
 
 
7
 
CEL-SCI CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
NINE MONTHS ENDED JUNE 30, 2013 AND 2012

A.           SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation
 
The accompanying condensed financial statements of CEL-SCI Corporation (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, these interim condensed financial statements should be read in conjunction with the financial statements and notes included in the Company’s annual report on Form 10-K for the year ended September 30, 2012.

In the opinion of management, the accompanying unaudited condensed financial statements contain all accruals and adjustments (each of which is of a normal recurring nature) necessary for a fair presentation of the Company’s financial position as of June 30, 2013 and the results of its operations for the nine and three-month periods then ended.  The condensed balance sheet as of September 30, 2012 is derived from the September 30, 2012 audited 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 months ended June 30, 2013 and 2012 are not necessarily indicative of the results to be expected for the entire year.

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.

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 its 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.

Research and Development Costs - Research and development expenditures are expensed as incurred.

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 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.  A full valuation was recorded against the deferred tax assets as of June 30, 2013 and September 30, 2012.
 
 

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 ASC 815, “Accounting for Derivative Instruments and Hedging Activities”.  The Company also accounts for warrants in accordance with ASC 815. 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.

Deferred Rent (Asset) - The deferred rent is discussed at Note G.  Consideration paid, including deposits, related to operating leases is recorded as a deferred rent asset and amortized as rent expense over the lease term.  Interest on the deferred rent is calculated at 3% on the funds deposited on the manufacturing facility and is included in deferred rent.  This interest income will be used to offset future rent.

Stock-Based Compensation - Compensation cost for all employee stock-based awards is measured at fair value as of the grant date in accordance with the provisions of ASC 718.  The fair value of the stock options is calculated using the Black-Scholes option pricing model.  The Black-Scholes model requires various judgmental assumptions including volatility and expected option life.  The stock-based compensation cost is recognized on the straight line attribution method as expense over the requisite service or vesting period.

Equity instruments issued to non-employees are accounted for in accordance with ASC 505-50, “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 the Company’s management to make assumptions regarding the fair value of the equity instruments at the measurement date and the expected life of the options.

The Company has Incentive Stock Option Plans, Non-Qualified Stock Option Plans, a Stock Compensation Plan and Stock Bonus Plans. In some cases these Plans are collectively referred to as the "Plans".  All Plans (have been approved by the stockholders. A summary chart and description of activity of the Plans for the nine months and three months ended June 30, 2013 and 2012 follows in Note C. For further discussion of the Stock Option Plans, Stock Compensation Plan and Stock Bonus Plans, see the Company’s Form 10-K for the year ended September 30, 2012.
 
 

B.           NEW ACCOUNTING PRONOUNCEMENTS
 
  There are no significant new accounting pronouncements that would impact the condensed financial statements.

C.           STOCKHOLDERS’ EQUITY

Stock options, stock bonuses and compensation granted by the Company as of June 30, 2013 are detailed in the following chart.  Each option represents the right to purchase one share of the Company’s common stock.
 
Name of Plan
  
Total
Shares
Reserved
Under Plans
    
Shares
Reserved for
Outstanding
Options
    
Shares
Issued as
Stock Bonus
Compensation
    
Remaining
Options/Shares
Under Plans
  
                         
Incentive Stock Option Plans
    
21,100,000
      
13,898,275
      
N/A
      
3,245,225
  
Non-Qualified Stock Option
                                
   Plans
    
57,760,000
      
34,476,781
      
N/A
      
16,761,069
  
Stock Bonus Plans
    
15,940,000
      
N/A
      
8,707,753
      
7,224,685
  
Stock Compensation Plan
    
13,500,000
      
N/A
      
6,886,531
      
6,613,469
  
 
There were 14,475,664 and 6,679,372 options granted to employees and directors during the nine months ended June 30, 2013 and 2012, respectively. There were 100,000 and 3,559,000 options granted to employees and directors during the three months ended June 30, 2013 and 2012, respectively.  The Company cancelled 100,000 and -0- options during the three months ended June 30, 2013 and 2012, respectively.

In December 2012, the Company offered employees and directors holding options that were scheduled to expire on April 1, 2013 the opportunity to forfeit these options and have new options issued with an expiration date of December 17, 2017. All twelve employees and directors eligible for this offer accepted the terms. This resulted in the cancellation of 3,874,664 options priced at $0.22 per share and the concurrent issuance of the same number of options at $0.28 per share. In accordance with ASC 718, the Company recorded the incremental compensation cost of the options. The incremental compensation cost is the excess of the fair value of the replacement award over the fair value of the cancelled award at the cancellation date.  At the cancellation date, the incremental compensation cost was $477,879.
 
In November 2011, the Company modified the number of options issued to certain employees and directors, as well as the exercise prices and the expiration dates of the options. This resulted in the cancellation of 3,900,465 options priced between $0.54 and $1.94 per share and the issuance of 3,120,372 options exercisable at $0.30 per share. In accordance with ASC 718, the incremental compensation cost was $409,370.  In December 2011, the Company extended the expiration date of certain employee options resulting in an additional option cost of $36,990.
 
 
 
Stock-Based Compensation Expense
 
   
Nine months Ended June 30,
  
   
2013
    
2012
  
             
Employees
  
$
2,087,718
    
$
1,761,365
  
 Non-employees
  
$
364,318
    
$
457,497
  
 
   
Three months Ended June 30,
  
   
2013
    
2012
  
             
Employees
  
$
564,369
    
$
463,314
  
 Non-employees
  
$
155,963
    
$
213,789
  

 
Derivative Liabilities, Warrants and Other Options
 
Below is a chart showing the derivative liabilities and the number of warrants outstanding at June 30, 2013:
 
Warrant
Issue Date
  
Shares Issuable upon Exercise of Warrant
    
Exercise Price
  
Expiration Date
  
Reference
  
                       
Series N
8/18/08
     5,187,709       0.30  
8/18/14
     1  
Series A
6/24/09
     1,303,472       0.50  
12/24/14
     1  
C. Schleuning (Series A)
7/8/09
     167,500       0.50  
1/8/15
     1  
Series B
9/4/09
     500,000       0.68  
9/4/14
     1  
Series C
8/20/09 - 8/26/09
     4,634,886       0.55  
2/20/15
     1  
Series E
9/21/09
     714,286       1.75  
8/12/14
     1  
Series F
10/6/11
     12,000,000       0.40  
10/6/14
     1  
Series G
10/6/11
     666,667       0.40  
8/12/14
     1  
Series H
1/26/12
     12,000,000       0.50  
8/1/15
     1  
Series Q
6/21/12
     12,000,000       0.50  
12/22/15
     1  
Series R
12/6/12
     26,250,000       0.40  
12/6/16
     1  
                             
Series L
4/18/07
     250,000       0.75  
4/17/14
     2  
Series L (repriced)
4/18/07
     700,000       0.25  
4/2/15
     2  
Series M (modified)
4/18/07
     6,000,000       0.34  
7/31/14
     2  
                             
Series P
2/10/12
     5,900,000       0.45  
3/6/17
     3  
                             
Private Investors
7/18/05- 6/30/09
     7,409,375       0.56 - 0.82  
    1/26/14 - 7/18/14
     4  
                             
Warrants held by
Officer and Director
6/24/09- 7/6/09
     3,497,539       0.40 - 0.50  
12/24/14 - 1/6/15
     5  
Consultants
2/15/05 - 12/28/12
     1,407,500       0.28 - 2.00  
5/20/14 – 12/27/17
     6  
                             
 
 
 
11
 
 
1.   Derivative Liabilities

See below for details of the balances of derivative instruments at June 30, 2013 and September 30, 2012.

   
June 30,
2013
    
September 30,
2012
  
Series A through E warrants
   $ 127,118     $ 786,989  
Series N warrants
     259,385       830,034  
Series F and G warrants
     253,333       1,646,667  
Series H warrants
     480,000       1,800,000  
Series Q warrants
     600,000       1,920,000  
Series R warrants
     2,100,000       -  
 
                
Total derivative liabilities
   $ 3,819,836     $ 6,983,690  
                 

The Company reviews all outstanding warrants in accordance with the requirements of ASC 815.  This topic provides that an entity should use a two-step approach to evaluate whether an equity-linked financial instrument (or embedded feature) is indexed to its own stock, including evaluating the instrument’s contingent exercise and settlement provisions.  The warrant agreements provide for adjustments to the exercise price for certain dilutive events, which includes an adjustment to the number of shares issuable upon the exercise of the warrant in the event that the Company makes certain equity offerings in the future at a price lower than the exercise prices of the warrant instruments.  Under the provisions of ASC 815, 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.

In accordance with ASC 815, derivative liabilities must be measured at fair value upon issuance and revalued at the end of each reporting period through their expiration.  Any change in fair value between the respective reporting dates is recognized as a gain or loss.

Series K and Series A through E Warrants

The Company accounted for the Series K and A through E warrants as derivative liabilities in accordance with ASC 815.  These warrants do not qualify for equity accounting and must be accounted for as a derivative liability since the Warrant Agreement provides the holder with the right, at its option, to require the Company to a cash settlement of the warrants at Black-Scholes value in the event of a Fundamental Transaction, as defined in the Warrant Agreement.  Since the occurrence of a Fundamental Transaction is not entirely within the Company's control, there exist circumstances that would require net-cash settlement of the warrants while holders of shares would not receive a cash settlement.
 
 

In October 2011, 2,318,396 Series K warrants held by the investors were reset from $0.40 to $0.30.  In addition, the investors were issued 772,799 warrants exercisable at $0.30 per share at an initial cost of $30,912.  This cost was accounted for as a debit to loss on derivatives and a credit to derivative liabilities.

In February 2012, all the Series K warrants were exercised, and the Company received $927,359 from the exercise of Series K warrants to purchase 3,091,195 of the Company’s common shares. As of September 30, 2012, all Series K warrants had been exercised and no liability was recorded.  When the warrants were exercised, the value of these warrants was converted from derivative liabilities to equity.  For the nine months and three months ended June 30, 2012, Series K warrants transferred to equity totaled $122,367 and -0-, respectively. No gain or loss was recorded for the nine months and three months ended June 30, 2013.  For the nine months and three months ended June 30, 2012, the Company recorded a loss of $21,903 and $0, respectively, on Series K warrants.

For the nine months and three months ended June 30, 2013, the Company recorded a gain of $659,871 and $61,058, respectively, on the Series A through E derivative instruments. For the nine months and three months ended June 30, 2012, the Company recorded a gain of $314,949 and $644,951, respectively, on the Series A through E derivative instruments.

In June 2009, the Company issued 10,116,560 Series A warrants exercisable at $0.50 per share in connection with a financing.  The cost of the warrants of $2,775,021 was recorded as a debit to additional paid in capital and a credit to derivative liabilities.  As of June 30, 2013, 1,303,472 of these warrants remained outstanding.  As of June 30, 2013 and September 30, 2012, the values of the remaining derivative liabilities totaled $26,070 and $156,417, respectively.

In July 2009, the Company issued warrants to a private investor.  The 167,500 warrants were issued with an exercise price of $0.50 per share and valued at $43,550 using the Black Scholes method. The cost of the warrants was accounted for as a debit to additional paid in capital and a credit to derivative liabilities. As of June 30, 2013, 167,500 warrants remained outstanding.  As of June 30, 2013 and September 30, 2012, the values of the remaining derivative liabilities totaled $3,350 and $20,100, respectively.

In connection with a loan received and fully repaid in a prior period, the Company issued 500,000 Series B warrants with an exercise price of $0.68 per share. As of June 30, 2013, 500,000 Series B warrants remained outstanding.  As of June 30, 2013 and September 30, 2012, the fair values of the remaining Series B warrants were $5,000 and $40,000, respectively.

In connection with an August 2009 financing, the Company issued 5,392,218 Series C warrants exercisable at $0.55 per share.  As of June 30, 2013, 4,634,886 of these warrants remained outstanding.  As of June 30, 2013 and September 30, 2012, the fair values of the remaining Series C warrants were $92,698 and $556,186, respectively.
 
 

In September 2009, 714,286 Series E warrants were issued with an exercise price of $1.75 per share to the placement agent in connection with a financing.  As of June 30, 2013, 714,286 Series E warrants remained outstanding. As of June 30, 2013 and September 30, 2012, the fair values of the remaining Series E warrants were $0 and $14,286, respectively.

Series N Warrants

In August 2008 and June 2009, 3,890,782 Series N warrants were issued to two investors in connection with a financing and a reset provision.  In October 2011, the 3,890,782 warrants held by the investors were reset from $0.40 to $0.30.  In addition, the investors were issued 1,296,927 warrants exercisable at $0.30 per share at an initial cost of $220,478.  The cost was accounted for as a debit to loss on derivatives and a credit to derivative liabilities.

As of June 30, 2013, 5,187,709 Series N warrants remain outstanding. As of June 30, 2013 and September 30, 2012, the fair values of the Series N warrants were $259,385 and $830,034, respectively.  During the nine and three months ended June 30, 2013, the Company recorded a derivative gain on Series N warrants of $570,649  and $0 respectively.  During the nine and three months ended June 30, 2012, the Company recorded a derivative gain of $51,876 and $518,771, respectively.

Series F and G warrants

In October 2011, the Company issued 12,000,000 Series F warrants with an exercise price of $0.40 per share at any time prior to October 6, 2014 in connection with a financing.  The Company also issued 666,667 Series G warrants with an exercise price of $0.40 per share to the placement agent for this offering. The Series G warrants are exercisable at any time prior to August 12, 2014. The initial cost of the warrants of $2,146,667 was recorded as a debit to additional paid-in-capital and a credit to derivative liabilities.  As of June 30, 2013 and September 30, 2012, the fair values of the Series F and G warrants were $253,333 and $1,646,667, respectively. During the nine and three months ended June 30, 2013, the Company recorded a derivative gain of $1,393,334 and $253,334 respectively on the Series F and G warrants.  During the nine and three months ended June 30, 2012, the Company recorded a derivative gain of $120,000 and $1,266,667, respectively.

Series H Warrants

In January 2012, the Company issued 12,000,000 Series H warrants with an exercise price of $0.50 per share at any time on or after August 1, 2012 and prior to August 1, 2015 in connection with a financing.  The initial cost of the warrants of $2,400,000 was recorded as a debit to additional paid in capital and a credit to derivative liabilities. As of June 30, 2013 and September 30, 2012, the fair values of the Series H warrants were $480,000 and $1,800,000, respectively. During the nine and three months ended June 30, 2013, the Company recorded a derivative gain of $1,320,000 and $120,000 respectively on the Series H warrants.  During the nine and three months ended June 30, 2012, the Company recorded a derivative gain of $120,000 and $1,200,000, respectively.
 
 

Series Q Warrants

In June 2012, the Company issued 12,000,000 Series Q warrants with an exercise price of $0.50 per share in connection with a financing.  The Series Q warrants may be exercised at any time on or after December 22, 2012 and prior to December 22, 2015.  The initial cost of the warrants of $2,160,000 was recorded as a debit to additional paid-in capital and a credit to derivative liabilities. As of June 30, 2013 and September 30, 2012, the fair values of the Series Q warrants were $600,000 and $1,920,000, respectively.   During the nine and three months ended June 30, 2013 the Company recorded a derivative gain of $1,320,000 and $120,000, respectively, on the Series Q warrants. During the nine and three months ended June 30, 2012 the Company recorded a derivative loss of $240,000 on the Series Q warrants.

Series R Warrants

On December 4, 2012 the Company sold 35,000,000 shares of its common stock for $10,500,000, or $0.30 per share, in a registered direct offering.  The investors in this offering also received Series R warrants which entitle the investors to purchase up to 26,250,000 shares of the Company’s common stock.  The Series R warrants may be exercised at any time on or after June 6, 2013 and on or before December 6, 2016 at a price of $0.40 per share.   The Company paid the placement agent for this offering a cash commission of $682,500.  The initial cost of the warrants of $4,200,000 was recorded as a debit to additional paid-in capital and a credit to derivative liabilities. As of June 30, 2013, the fair value of the Series R warrants was $2,100,000.  During the nine and three months ended June 30, 2013, the Company recorded a derivative gain of $2,100,000 and $525,000, respectively, on the Series R warrants.

Senior Convertible Notes

In March 2012, the Company repaid the remaining Senior Secured Convertible Notes derived from the settlement, thereby completely eliminating the Senior Secured Convertible Notes, satisfying the settlement and having the lien on the Company’s assets removed.

The accounting for the Senior Secured Convertible Notes was within the scope of ASC 815.  Under ASC 815 or ASC 825, the Company may make an irrevocable election to initially and subsequently measure a hybrid financial instrument in its entirety at fair value.  Any change in fair value between the respective reporting dates shall be recognized as a gain or loss.  Based on the analysis of the Senior Secured Convertible Notes, the Company identified several embedded derivative features.  The Company elected, in accordance with ASC 825, to initially and subsequently carry the instrument at fair value without bifurcating the embedded derivatives.  For the nine and three months ended June 30, 2012, respectively, the Company recorded at gain of $49,000 and $0, respectively, on the Senior Convertible Notes.
 
 
 
2.         Series L, M and P Warrants

In April 2007, the Company completed a $15 million private financing.  Shares were sold at $0.75, a premium over the closing price of the previous two weeks.  The financing was accompanied by 10,000,000 warrants with an exercise price of $0.75 and 10,000,000 warrants with an exercise price of $2.00.  The warrants are known as Series L and Series M warrants, respectively. The warrants issued with the financing qualified for equity treatment in accordance with ASC 815. The cost of Series L and series M warrants were recorded as a debit and a credit to additional paid-in capital.

In November 2011, the Company reduced the exercise price of 1,600,000 Series L warrants to $0.34.  The additional cost of $86,826 was recorded as a debit and a credit to additional paid-in capital and was a deemed dividend. This cost is included in modification of warrants and increased the net loss available to shareholders on the statements of operations. In March 2012, 600,000 Series L warrants were exercised at a price of $0.34, and the Company received proceeds of $204,000.

In April 2012, 250,000 Series L warrants were transferred to a consultant exercisable at a price of $0.75 per share and were extended for two years from the current expiration date.  The additional value of $43,910 was accounted for as a credit to additional paid-in capital and a debit to general and administrative expense.  In June 2012, 101,669 Series L warrants with an exercise price of $0.75 per share, expired.  In April 2013, 1,000,000 Series L warrants were repriced to $0.25 and extended for two years to April 2, 2015 in return for a reduction in outstanding warrants to 700,000.  The additional cost of $59,531 was recorded as a debit and a credit to additional paid-capital and was a deemed dividend.  This cost was included in modification of warrants and increased the net loss available to shareholders on the statements of operations.  As of June 30, 2013, 700,000 of the Series L warrants at the reduced exercise price of $0.25 and 250,000 at the original exercise price of $0.75 remained outstanding.

In November 2011, the Company reduced the exercise price of 6,000,000 Series M warrants from $0.60 to $0.34. The additional cost of $238,794 was recorded as a debit and a credit to additional paid-capital and was a deemed dividend.  This cost was included in modification of warrants and increased the net loss available to shareholders on the statements of operations.  As of June 30, 2013, 6,000,000 Series M warrants at the reduced exercise price of $0.34 remained outstanding.

3.          Series O and P Warrants
 
 
In March 2009, as further consideration for its rights under a licensing agreement, Byron Biopharma LLC (“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 Series O warrants.  Each Series O warrant entitles the holder to purchase one share of the Company’s common stock at a price of $0.25 per share.  The Series O warrants expire on March 6, 2016.  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 year end September 30, 2012, all Series O warrants were exercised and the Company received $1,625,000.

On February 10, 2012, the Company issued 5,900,000 Series P warrants to the former holder of the Series O warrants as an inducement for the early exercise of the remaining Series O warrants. Series O warrants entitled the holder to purchase 5,900,000 shares of the Company’s common stock at a price of $0.25 per share at any time on or prior to March 6, 2016.  The Series P warrants allow the holder to purchase up to 5,900,000 shares of the Company’s common stock at a price of $0.45 per share.  The Series P warrants are exercisable at any time on or after August 12, 2012 and prior to March 6, 2017.  The warrants 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 $1,593,000.  This cost was recorded as a debit and a credit to additional paid-in capital.  This cost was included in inducement warrants and increased the net loss available to shareholders on the condensed statements of operations.  As of June 30, 2013, 5,900,000 Series P warrants remained outstanding.
 
 
 
4.   Private Investor Warrants


Between May 2003 and April 2006, the Company issued 1,900,000 warrants as part of a financing to a private investor at exercise prices between $0.47 and $1.25 of which 700,000 warrants were exercised in April 2006.  The fair value of the warrants has been recorded as an addition to additional paid-in capital and also as a charge to additional paid-in capital since they qualified for equity accounting.  During the three months ended June 30, 2013, the 1,200,000 warrants with exercise prices between $0.47 and $1.25 expired.  As of June 30, 2013, none of these warrants remain outstanding.

Between July 2005 and May 2006, 1,925,000 warrants were issued to a private investor with an exercise price between $0.56 and $0.82 of which 600,000 were exercised in May 2006. As of June 30, 2013, 1,325,000 warrants remained outstanding.

In January 2009, as part of an amended lease agreement on the manufacturing facility, the Company repriced 3,000,000 warrants issued to the lessor in July 2007 at $1.25 per share and which were to expire on July 12, 2013. These warrants were repriced at $0.75 per share and expire on January 26, 2014. The cost of this repricing and extension of the warrants was $70,515 and was accounted for as a debit to the deferred rent asset and a credit to additional paid-in capital.  In addition, 787,500 additional warrants were given to the lessor of the manufacturing facility on the same date, exercisable at a price of $0.75 per share, and will expire on January 26, 2014. The cost of these warrants was $45,207 and was accounted for as a debit to the deferred rent asset and a credit to additional paid-in capital.  As of June 30, 2013, 3,787,500 warrants remained outstanding.

Between March 31 and June 30, 2009, 2,296,875 warrants were issued at $0.75 to the leaseholder on the manufacturing facility in consideration for the deferral of rent payments. As of June 30, 2013, 2,296,875 warrants remained outstanding.
 
5.   Warrants Held by Officer and Director

Between December 2008 and June 2009, Maximilian de Clara, the Company’s President and a director, loaned the Company $1,104,057.  In June 2009, the Company issued 1,648,244 warrants exercisable at $0.40 per share to Mr. de Clara.  The warrants are exercisable at any time prior to December 24, 2014.  These warrants were valued at $65,796 using the Black Scholes method.  In July 2009, as consideration for a further extension of the loan, the Company issued 1,849,295 warrants exercisable at $0.50 per share to Mr. de Clara that was amended for the second time.  These warrants were valued at $341,454 using the Black Scholes method and can be exercised at any time prior to January 6, 2015.  The first warrants were recorded as a discount to the loan and a credit to additional paid-in capital.  The second warrants were recorded as a debit to derivative loss of $831,230, a premium of $341,454 on the loan and a credit to additional paid in capital of $489,776.  The first warrants were amortized as interest expense at the time of the second amendment.  On the second amendment, $338,172 of the premium was amortized as a reduction to interest expense as of September 30, 2009.  The balance of the premium of $3,282 was amortized as a reduction to interest expense in October 2009.  As of June 30, 2013, 3,497,539 warrants remained outstanding. See Note E for additional information.
 
 
 
6.    Options and Shares Issued to Consultants

As of June 30, 2013, 1,407,500 options issued to consultants as payment for services remained outstanding, of which 1,312,000 options were issued from the Non-Qualified Stock Options plans.  On May 22, 2013, 30,000 options previously issued to a consultant from the Non-Qualified Stock Option plans expired.
 
In October 2012, the Company entered into a consulting agreement for public relations to be provided through March 31, 2013.  In May 2013, the Company extended the agreement for a six-month period ending September 30, 2013.  This contract totals $108,000 and includes a monthly retainer of 50,000 shares of restricted stock.  The common shares were issued at the fair market value on the grant date.  The aggregate fair market value of $130,500 and $37,000 for the nine and three months ended June 30, 2013 respectively, was recorded as a general and administrative expense.
 
 On December 28, 2012, the Company entered into a consulting agreement for services to be provided through December 27, 2013.  In consideration for the services to be provided, the Company issued the consultant 500,000 shares of common stock and 500,000 options to purchase common stock at a price of $0.28 per share.  The common shares were issued at the fair market value on the agreement date of $0.28.  The aggregate fair market value of $140,000 was recorded as a prepaid expense and is being charged to general and administrative expense over the period of service.  The fair value of the options issued, as calculated using the Black-Scholes method, was determined to be $98,150 and is also being charged to general and administrative expense over the period of service.  During the nine and three months ended June 30, 2013, the Company recorded $121,060 and $59,537 of expense relating to this consulting arrangement.  As of June 30, 2013 and September 30, 2012, the Company has recorded $117,090 and $53,333, respectively, in prepaid consulting expenses.
 
D.           FAIR VALUE MEASUREMENTS

In accordance with ASC 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.
 
 

ASC 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:

●  
Level 1 - Observable inputs such as quoted prices in active markets for identical assets or liabilities
●  
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
●  
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 balance sheet at June 30, 2013:
 
 
   
Quoted Prices in Active Markets for Identical Assets or Liabilities (Level 1)
    
Significant Other Observable
Inputs (Level 2)
    
Significant Unobservable Inputs (Level 3)
    
Total
  
                         
Derivative instruments
   $ -     $ -     $ 3,819,836     $ 3,819,836  

The table below sets forth the assets and liabilities measured at fair value on a recurring basis, by input level, in the condensed balance sheet at September 30, 2012:

   
Quoted Prices in Active Markets for Identical Assets or Liabilities (Level 1)
    
Significant Other Observable
Inputs (Level 2)
    
Significant Unobservable Inputs (Level 3)
    
Total
  
                         
Derivative instruments
   $ -     $ -     $ 6,983,690     $ 6,983,690  
 


The following sets forth the reconciliation of beginning and ending balances related to fair value measurements using significant unobservable inputs (Level 3) for the nine months ended June 30, 2013 and the year ended September 30, 2012:

   
June 30,
    
September 30,
  
   
2013
    
2012
  
Beginning balance
   $ 6,983,690     $ 7,261,073  
Issuances
     4,200,000       6,706,667  
Settlements
     -       (5,072,367 )
Realized and unrealized gains
                
recorded in earnings
     (7,363,854 )     (1,911,683 )
Ending balance
   $ 3,819,836     $ 6,983,690  
 
The fair values of the Company’s derivative instruments disclosed above are primarily derived from valuation models where significant inputs such as historical price and volatility of the Company’s stock as well as U.S. Treasury Bill rates are observable in active markets.

E.           LOANS FROM OFFICER

The Company’s President, and a director, Maximilian de Clara, loaned the Company $1,104,057.  The loan from Mr. de Clara bears interest at 15% per year and is 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.  At the time the loan was originally due, and in accordance with the loan agreement, the Company issued Mr. de Clara warrants 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.  In June 2009, the loan with Mr. de Clara was extended for the second time to July 6, 2014, but, at Mr. de Clara’s option, the loan may 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 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.  On May 13, 2011, to recognize Mr. de Clara’s willingness to agree to subordinate his note to the convertible preferred shares and convertible debt as part of the settlement agreement, the Company extended the maturity date of the note to July 6, 2015.

During the nine months ended June 30, 2013 and 2012, the Company paid $124,206 in interest expense to Mr. de Clara.  During the three months ended June 30, 2013 and 2012, the Company paid $41,402 in interest expense to Mr. de Clara.

F.           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 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 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 is currently running a large multi-national Phase III clinical trial for head and neck cancer with its partners TEVA Pharmaceuticals and Orient Europharma. The Company believes that it has enough capital to support its operations until year end and believes that it has ready access to new equity capital should the need arise. To finance the study beyond the next 12 months, the Company plans to raise additional capital in the form of corporate partnerships, debt and/or equity financings. The Company believes that it will be able to obtain additional financing since Multikine is a Phase III product designed to treat cancer and because it has done so consistently in the past. However, there can be no assurance that the Company will be successful in raising additional funds or that funds will be available to the Company on acceptable terms or at all.  If the Company does not raise the necessary amounts of money, the Company will either have to slow down or delay the Phase III clinical trial or even significantly curtail its operations until such time as it is able to raise the required funding.  The Company’s expenditures for fiscal year 2012 included several non-recurring items that amounted to approximately $5 million dollars, which were the settlement payments related to a lawsuit, which will not recur in fiscal year 2013, thereby reducing the Company’s expenditures.  On December 4, 2012, the Company raised $10.5 million from several institutional investors. The Company paid Chardan Capital Markets, LLC, the placement agent for this offering, a cash commission of $682,500. 

On April 23, 2013, the Company announced that it has replaced the clinical research organization (CRO) running its Phase III clinical trial. Under a co-development agreement, Ergomed will contribute up to $10 million towards the study in the form of offering discounted clinical services in exchange for a single digit percentage of milestone and royalty payments, up to a specified maximum amount, only from sales of Multikine for head and neck cancer.

The Company estimates the total cash cost of the Phase III trial, with the exception of the parts that will be paid by its licensees, Teva Pharmaceuticals and Orient Europharma, will be approximately $36.7 million going forward.  This is in addition to approximately $8.2 million which has been paid as of June 30, 2013. The estimate is based on the information currently available in the Company’s contracts with the Clinical Research Organization responsible for managing the Phase III trial.  This number can be affected by the speed of enrollment, foreign currency exchange rates and many other factors, some of which cannot be foreseen today.  It is therefore possible that the cost of the Phase III trial will be higher than currently estimated.

The condensed financial statements have been prepared assuming that the Company will continue as a going concern, but due to recurring losses from operations and future liquidity needs, there is substantial doubt about the Company’s ability to continue as a going concern.  The condensed financial statements do not include any adjustments that might result from the outcome of this uncertainty.  The Company is working on a number of collaborations that it believes will help the Company attract capital and interest from the financial community.

G.           COMMITMENTS AND CONTINGENCIES

Clinical Research Agreements

In March 2013, the Company entered into an agreement with Aptiv Solutions to provide certain clinical research services in accordance with a master service agreement.   The Company will reimburse Aptiv for costs incurred.  In May 2013, the Company made an advance payment of $400,000.  An additional advance payment of $200,000 is due on August 1, 2013.  The funds advanced will be credited back in $150,000 annual increments from December 2014 through December of 2017.
 
 

In April 2013, the Company entered into a co-development and revenue sharing agreement with Ergomed.  Under the agreement, Ergomed will contribute up to $10 million towards the Company’s Phase III clinical trial in the form of offering discounted clinical services in exchange for a single digit percentage of milestone and royalty payments, up to a specified maximum amount.

The Company accounted for the co-development and revenue sharing agreement in accordance with ASC 808 “Collaborative Arrangements”.  The Company determined the payments to Erogmed are within the scope of Topic 730 “Research and Development” expense. Therefore, the Company will record the discount on the clinical services as a credit to research and development expense on its Statement of Operations.  During the nine and three months ending June 30, 2013, the Company recorded approximately $315,000 as research and development expense. This amount was net of Ergomed’s discount of approximately $114,000.

Lease Agreements

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 an annual base rent to escalate each year at 3%.  The Company is 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 amortization of the deferred rent for the nine months ended June 30, 2013 and 2012 was $489,902 and $528,498, respectively. The amortization of the deferred rent for the three months ended June 30, 2013 and 2012 was $161,866 and $174,773, respectively.
The Company was required to deposit the equivalent of one year of base rent in accordance with the contract.  When the Company meets the minimum cash balance required by the lease, the deposit will be returned to the Company. The $1,670,917 deposit is included in non-current assets at June 30, 2013.

On December 7, 2011, the Company entered into a sublease for a period of four months commencing on December 10, 2011.  The Company receives $5,150 per month in rent for the subleased space.  The lease is now a month to month term lease with a 30 day notice requirement for termination.

The Company leases its research and development laboratory under a 60 month lease which expires February 28, 2017.  The operating lease includes escalating rental payments.  The Company is recognizing the related rent expense on a straight line basis over the full 60 month term of the lease at the rate of $11,360 per month.  As of June 30, 2013 and September 30, 2012, the Company has recorded a deferred rent liability of $3,393 and $1,033, respectively.

The Company leases office headquarters under a 36 month lease which expires June 30, 2015. The operating lease includes escalating rental payments.  The Company is recognizing the related rent expense on a straight line basis over the full 36 month term of the lease at the rate $7,864 per month.  As of June 30, 2013 and September 30, 2012, the Company has recorded a deferred rent liability of $13,759 and $15,479, respectively.

During the nine months ended June 30, 2013, the Company leased office equipment under a capital lease arrangement. The term of the capital lease is 48 months and expires on September 30, 2016.  The monthly lease payment is $1,025.  The lease bears interest at approximately 16% per annum.

In May 2003, CEL-SCI entered into a licensing agreement with Eastern Biotech. The agreement provides for future royalty payments up to 2% of the net sales of Multikine worldwide until May 20, 2033.  In March 2013, the Company’s President Maximilian de Clara notified CEL-SCI that Eastern Biotech had offered to sell him the royalty rights for $500,000.  Mr. de Clara, in turn, offered this opportunity to the Company before accepting it himself.  On March 11, 2013 the Board of Directors, without Mr. de Clara present, decided not to pursue this opportunity, and shortly thereafter, Mr. de Clara purchased the royalty rights.
 
 

 H.           PATENTS

During the nine months ended June 30, 2013 and 2012, the Company recorded patent impairment charges of $10,651 and $37,352, respectively.  For the nine months ended June 30, 2013 and 2012, amortization of patent costs totaled $75,882 and $54,118, respectively. During the three months ended June 30, 2013 and 2012, the Company recorded patent impairment charges of $0 and $16,018, respectively.  For the three months ended June 30, 2013 and 2012, amortization of patent costs totaled $26,441 and $16,459, respectively.  The Company estimates that future amortization expense will be as follows:
 
Three months ending September 30, 2013
   $ 9,842  
Year ending September 30,
        
2014
     34,063  
2015
     34,063  
2016
     34,063  
2017
     34,063  
2018
     33,728  
Thereafter
     155,514  
Total
   $ 335,336  

 I.           EARNINGS PER SHARE

The Company’s diluted earnings per share (EPS) are as follows for June 30, 2013 and 2012.  For the  nine-months ended June 30, 2013 and 2012, the computation of dilutive net loss per share excluded options and warrants to purchase approximately 3,771,000 and 9,856,000 shares, respectively, of common stock because their inclusion would have an anti-dilutive effect.

   
Nine Months Ended June 30, 2013
  
         
Weighted
        
   
Net Loss
    
Average Shares
    
EPS
  
                   
Basic loss per share
   $ (7,530,621 )     300,383,239     $ (0.03 )
Gain on derivatives
     (7,363,854 )                
Dilutive loss per share
   $ (14,894,475 )     300,383,239     $ (0.05 )
                         
   
Three Months Ended June 30, 2013
  
           
Weighted
          
   
Net Loss
    
Average Shares
    
EPS
  
                         
Basic loss per share
   $ (4,507,004 )     309,306,502     $ (0.01 )
Gain on derivatives
     (1,079,392 )                
Dilutive loss per share
   $ (5,586,396 )     309,306,502     $ (0.02 )
 
 

 
   
Nine Months Ended June 30, 2012
  
         
Weighted
        
   
Net Loss
    
Average Shares
    
EPS
  
                   
Basic loss per share
   $ (15,079,238 )     244,738,972     $ (0.06 )
Gain on derivatives
     (142,532 )                
Dilutive loss per share
   $ (15,221,770 )     244,738,972     $ (0.06 )

   
Three Months Ended June 30, 2012
  
         
Weighted
        
   
Net Loss
    
Average Shares
    
EPS
  
                   
Basic loss per share
   $ (835,446 )     258,467,582     $ (0.00 )
Gain on derivatives
     (3,390,389 )                
Dilutive loss per share
   $ (4,225,835 )     258,467,582     $ (0.02 )


I.   SUBSEQUENT EVENTS

The Company has evaluated subsequent events through the date these financial statements were filed and determined there are no subsequent events that require disclosure.
 
 
 
 
ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Liquidity and Capital Resources

The Company’s lead investigational therapy, Multikine® (Leukocyte Interleukin, Injection), is cleared for a Phase III clinical trial in advanced primary head and neck cancer. It has received a go-ahead by the US FDA as well as the Canadian, Polish, Hungarian, Russian, Israeli, Indian and Taiwanese regulators.

Multikine (Leukocyte Interleukin, Injection) is the full name of this investigational therapy, which, for simplicity, is referred to in the remainder of this report as Multikine.  Multikine is the trademark that the Company has registered for this investigational therapy, and this proprietary name is subject to FDA review in connection with the Company’s future anticipated regulatory submission for approval.  Multikine has not been licensed or approved by the FDA or any other regulatory agency.  Neither has its safety or efficacy been established for any use.

The Company also owns and is developing a pre-clinical technology called LEAPS (Ligand Epitope Antigen Presentation System).

All of the Company’s projects are under development.  As a result, the Company cannot predict when it will be able to generate any revenue from the sale of any of its products.

Since inception, the Company has financed its operations through the sale of equity securities, convertible notes, loans and certain research grants.  The Company’s expenses will likely exceed its revenues as it continues the development of Multikine and brings other drug candidates into clinical trials.  Until such time as the Company becomes profitable, any or all of these financing vehicles or others may be utilized to assist the Company’s capital requirements.

Capital raised by the Company has been expended primarily for patent applications, debt repayment, research and development, administrative costs, and the construction of the Company’s laboratory facilities.  The Company does not anticipate realizing significant revenues until it enters into licensing arrangements regarding its technology and know-how or until it receives regulatory approval to sell its products (which could take a number of years).  As a result the Company has been dependent upon the proceeds from the sale of its securities to meet all of its liquidity and capital requirements and anticipates having to do so in the future.

The Company will be required to raise additional capital or find additional long-term financing in order to continue with its research efforts.  The ability of the Company to complete the necessary clinical trials and obtain Food and Drug Administration (FDA) approval for the sale of products to be developed on a commercial basis is uncertain.  Ultimately, the Company must complete the development of its products, obtain the appropriate regulatory approvals and obtain sufficient revenues to support its cost structure.  The Company believes that, counting its cash on hand and access to the capital markets established over the years, it will have enough capital to support its operations through year end.  The Company is working on a number of collaborations that it believes will help the Company attract capital and interest from the financial community.
 
 

The Company estimates the total cash cost of the Phase III trial, with the exception of the parts that will be paid by its licensees, Teva Pharmaceuticals and Orient Europharma, to be approximately $36.7 million going forward.  This is in addition to approximately $8.2 million which has been paid as of June 30, 2013.  This estimate is based on information currently available in the Company’s contracts with the Clinical Research Organization responsible for managing the Phase III trial.  This number can be affected by the speed of enrollment, foreign currency exchange rates and many other factors, some of which cannot be foreseen today.  It is therefore possible that the cost of the Phase III trial will be higher than currently estimated.

On April 23, 2013, the Company announced that it has replaced the clinical research organizations (CRO) running its Phase III clinical trial. This was necessary since the patient enrollment in the study dropped off substantially following a takeover of the CRO which caused most of the members of the CRO’s study team to leave the CRO.  The Company announced that it has hired two CRO’s who will manage the global Phase III study; Aptiv Solutions and Ergomed who are both international leaders in managing oncology trials. Both CRO’s will help the Company expand the trial by 60-80 clinical sites globally.  As of April 2013, the last update given by the Company, the study has enrolled 117 patients and has been conducted at 39 sites in 8 countries, including three centers in Israel where the Company’s partner, Teva Pharmaceuticals, has the marketing rights, and nine centers in Taiwan where the Company’s partner, Orient Europhama, has the marketing rights.

Under a co-development agreement, Ergomed will contribute up to $10 million towards the study in the form of offering discounted clinical services in exchange for a single digit percentage of milestone and royalty payments, up to a specified maximum amount, only from sales of Multikine for head and neck cancer.  Ergomed, a privately-held firm headquartered in Europe with global operations, has entered into five similar co-development agreements, including one with Genzyme (purchased by Sanofi in 2011 for over $20 billion).  Ergomed will be responsible for the majority of the new patient enrollment since it has a novel model for clinical site management to accelerate patient recruitment and retention.   For example, they have almost 25 physicians who can directly call on clinical sites to aid recruitment and retention.  Some of the Ergomed physicians also have experience of being clinical investigators themselves. CEL-SCI believes that this interaction on a physician to physician level is what is needed to help physicians increase enrollment in the Multikine study.

During the nine months ended June 30, 2013, the Company’s cash decreased by approximately $500,000.  Significant components of this decrease include net proceeds from the sale of the Company’s stock of approximately $9,807,000 offset by net cash used to fund the Company’s regular operations, including its on-going Phase III clinical trial, of approximately $10,142,000. This compares to approximately $8,920,000 used in operations during the nine months ended June 30, 2012.  Cash used in investing activities was approximately $118,000 and $122,000, for the nine months ended June 30, 2013 and 2012, respectively.  The use of cash in investing activities consisted of purchases of equipment and legal costs incurred in patent applications.  For the nine months ended June 30, 2013 and 2012, net cash provided by financing activities totaled approximately $9,803,000 and $12,004,000, respectively.  The increase in cash provided by financing activities is due to proceeds of the December 2012 financing, which were approximately $10,500,000, less expenses of approximately $693,000, and offset by approximately $4,000 in capital lease payments.  This compares to prior year financing activities which consisted of proceeds from the sale of Company stock and the exercise of warrants totaling approximately $16,954,000 offset by payments on convertible debt of $4,950,000.
 
 

In August 2011, the Company paid a deposit of $1,670,917 to the landlord since the Company’s cash balances did not meet the minimum amount required by the lease.  When the Company meets the minimum cash balance required by the lease, the deposit will be returned to the Company.

In October 2011, the Company sold 13,333,334 shares of its common stock to private investors for $4,000,000, or $0.30 per share.  The investors also received 12,000,000 Series F warrants.  Each Series F warrant entitles the holder to purchase one share of the Company’s common stock at a price of $0.40 per share at any time prior to October 6, 2014. The Company paid the placement agent for this offering a commission consisting of $140,000 in cash and 666,667 Series G warrants.  Each Series G warrant entitles the holder to purchase one share of the Company’s common stock at a price of $0.40 per share at any time prior to August 12, 2014.

In January 2012, the Company sold 16,000,000 shares of its common stock to one private investor for $5,760,000 or $0.36 per share.  The investor also received Series H warrants which entitled the investor to purchase up to 12,000,000 shares of the Company’s common stock.  The Series H warrants may be exercised at any time after July 31, 2012 and prior to August 1, 2015 at a price of $0.50 per share.  The Company paid the placement agent for this offering a cash commission of $403,200.

On December 4, 2012, the Company sold 35,000,000 shares of its common stock for $10,500,000, or $0.30 per share, in a registered direct offering.  The investors in this offering also received Series R warrants which entitle the investors to purchase up to 26,250,000 shares of the Company’s common stock.  The Series R warrants may be exercised at any time on or after June 7, 2013 and on or before December 7, 2016 at a price of $0.40 per share.   The Company paid Chardan Capital Markets, LLC, the placement agent for this offering, a cash commission of $682,500.

Results of Operations and Financial Condition

During the nine months and three months ended June 30, 2013, grant and other income decreased by approximately $2,000 and increased by approximately $79,000, respectively, compared to the nine and three months ended June 30, 2012.

During the nine and three months ended June 30, 2013, research and development expenses increased by approximately $1,689,000 and $1,300,000 compared to the nine and three months ended June 30, 2012.  The Company is continuing the Phase III clinical trial and research and development fluctuates based on the activity level of the clinical trial.

During the nine and three months ended June 30, 2013, general and administrative expenses increased by approximately $275,000 and $109,000, respectively, compared to the nine and three months ended June 30, 2012.  This increase is primarily due to increased cost of employee options.
 
 
 
For the nine and three months ended June 30, 2013, the Company recorded a derivative gain of approximately $7,364,000 and $1,079,000 respectively.  For the nine and three months ended June 30, 2012, the Company recorded a derivative gain of approximately $143,000 and $3,390,000 respectively.  This variation was the result of the change in fair value of the derivative liabilities during the period which was caused by fluctuations in the share price of the Company’s common stock.

Interest expense was approximately $128,000 and $43,000 for the nine and three months ended June 30, 2013 and consisted primarily of interest expense on the loan from the Company’s president of $41,000 per quarter and interest on a capital lease.  Interest expense was approximately $221,000 and $41,000 for the nine and three months ended June 30, 2012 and consisted of interest expense on the loan from the Company’s president of approximately $124,000 and interest on the convertible notes of approximately $97,000.

Research and Development Expenses

During the nine and three months ended June 30, 2013 and 2012, the Company’s research and development efforts involved Multikine and LEAPS.  The table below shows the research and development expenses associated with each project.

   
Nine months ended June 30,
    
Three months ended June 30,
  
   
2013
    
2012
    
2013
    
2012
  
MULTIKINE
   $ 8,939,630     $ 7,212,524     $ 3,683,472     $ 2,367,751  
L.E.A.P.S
     269,270       307,062       86,066       101,415  
TOTAL
   $ 9,208,900     $ 7,519,586     $ 3,769,538     $ 2,469,166  

Clinical and other studies necessary to obtain regulatory approval of a new drug involve significant costs and require several years to complete.  The extent of the Company’s clinical trials and research programs are primarily based upon the amount of capital available to the Company and the extent to which the Company has received regulatory approvals for clinical trials.  The inability of the Company to conduct clinical trials or research, whether due to a lack of capital or regulatory approval, will prevent the Company from completing the studies and research required to obtain regulatory approval for any products which the Company is developing.  Without regulatory approval, the Company will be unable to sell any of its products.  Since all of the Company’s projects are under development, the Company cannot predict when it will be able to generate any revenue from the sale of any of its products.

Critical Accounting Estimates and Policies

Management’s discussion and analysis of the Company’s financial condition and results of operations is based on its unaudited condensed financial statements. The preparation of these financial statements is based on the selection of accounting policies and the application of significant accounting estimates, some of which require management to make judgments, estimates and assumptions that affect the amounts reported in the financial statements and notes. The Company believes some of the more critical estimates and policies that affect its financial condition and results of operations are in the areas of operating leases and stock-based compensation. For more information regarding the Company’s critical accounting estimates and policies, see Part II, Item 7 of the Company’s 2012 10-K report. The application of these critical accounting policies and estimates has been discussed with the Audit Committee of the Company’s Board of Directors.
 
 
 
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
 
The Company has a loan from the president that bears interest at 15%.  The Company does not believe that it has any significant exposures to market risk.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Under the direction and with the participation of the Company’s management, including the Company’s Chief Executive and Chief Financial Officer, the Company has conducted an evaluation of the effectiveness of the design and operation of its disclosure controls and procedures as of June 30, 2013.  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, 2013.

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, 2013.  There was no change in the Company’s internal control over financial reporting during the three months ended June 30, 2013.
 
 

 
PART II

ITEM 2.  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

Issuance of Restricted Stock

During the three months ended June 30, 2013 the Company issued 150,000 shares of common stock to a consultant for investor relations services and 282,973 shares of common stock to a consultant for regulatory services.

The Company relied upon the exemption provided by Section 4(2) of the Securities Act of 1933 with respect to the issuance of these shares.  The persons who acquired these shares were sophisticated investors and were provided full information regarding the Company’s business and operations.  There was no general solicitation in connection with the offer or sale of these securities.  The persons who acquired these shares acquired them for their own accounts.  The certificates representing these shares bears a restricted legend providing that they cannot be sold except pursuant to an effective registration statement or an exemption from registration.  No commission or other form of remuneration was given to any person in connection with the issuance of these shares.

ITEM 6. (A) EXHIBITS
 
Number   Exhibit
     
31   Rule 13a-14(a) Certifications
     
32   Section 1350 Certifications
 
 
 
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 9, 2013 
By:
/s/ Geert Kersten  
   
Geert Kersten,
Principal Executive Officer*
  

* Also signing in the capacity of the Principal Accounting and Financial Officer.
 



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