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, 2006
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______________ to ______________.
Commission File Number 0-11503
CEL-SCI CORPORATION
---------------------------------------------------
Colorado 84-0916344
------------------------- ----------------------
State or other jurisdiction (IRS) Employer
incorporation Identification Number
8229 Boone Boulevard, Suite 802
Vienna, Virginia 22182
--------------------- -----------------------
Address of principal executive offices
(703) 506-9460
-------------------------------------
Registrant's telephone number, including area code
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports) and (2) had been subject to such filing
requirements for the past 90 days.
Yes ____X_____ No __________
Indicate by check mark whether the Registrant is an accelerated filer (as that
term is defined in Exchange Act Rule 12b-2).
Yes _________ No _____X____
Class of Stock No. Shares Outstanding Date
-------------- ---------------------- ----
Common 81,512,038 August 1, 2006
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 Statement of Cash Flow (unaudited) 6-7
Notes to Condensed Consolidated Financial Statements (unaudited) 8
Item 2.
Management's Discussion and Analysis of Financial Condition 20
and Results of Operations
Item 3.
Quantitative and Qualitative Disclosures about Market Risks 24
Item 4.
Controls and Procedures 24
PART II
Item 2.
Changes in Securities and Use of Proceeds 25
Item 4.
Submission of Matters to a Vote of Security Holders 25
Item 5.
Other Information 25
Item 6.
Exhibits and Reports on Form 8-K 25
Signatures 26
Item 1. FINANCIAL STATEMENTS
CEL-SCI CORPORATION
-------------------
CONDENSED CONSOLIDATED BALANCE SHEETS
------------------------
(unaudited)
ASSETS June 30, September 30,
2006 2005
-------- -------------
CURRENT ASSETS:
Cash and cash equivalents $ 1,360,943 $ 1,957,614
Interest and other receivables 30,419 21,164
Prepaid expenses and laboratory supplies 700,056 432,652
Deferred financing costs 5,000 --
------------ ------------
Total current assets 2,096,418 2,411,430
RESEARCH AND OFFICE EQUIPMENT-
Less accumulated depreciation of
$1,760,760 and $1,690,788 112,163 181,541
PATENT COSTS- less accumulated
amortization of $875,694 and $816,169 504,647 484,553
DEPOSITS 14,828 14,828
------------ ------------
TOTAL ASSETS $ 2,728,056 $ 3,092,352
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 112,083 $ 74,354
Accrued expenses 78,007 74,619
Due to employees 60,882 22,880
Derivative instruments - current portion 1,495 1,280
------------ ------------
Total current liabilities 252,467 173,133
Derivative instruments - noncurrent portion -- 811,180
Deposits held 3,000 3,000
------------ ------------
Total liabilities 255,467 987,313
STOCKHOLDERS' EQUITY
Common stock, $.01 par value; authorized,
200,000,000 shares; issued and outstanding,
81,462,038 and 74,494,206 shares at June 30,
2006 and September 30, 2005, respectively 814,620 744,942
Additional paid-in capital 104,279,407 100,359,296
Accumulated deficit (102,621,438) (98,999,199)
------------ ------------
Total stockholders' equity 2,472,589 2,105,039
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 2,728,056 $ 3,092,352
============= ============
See notes to condensed consolidated financial statements.
3
CEL-SCI CORPORATION
-------------------
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
---------------------------------
(unaudited)
Nine Months Ended June 30,
-------------------------
2006 2005
---- ----
REVENUES:
Grant revenue and other $ 106,370 $ 223,395
---------- -----------
EXPENSES:
Research and development excluding
depreciation of $55,532 and $49,999
included below 1,290,843 1,824,044
Depreciation and amortization 130,143 149,590
General and administrative 2,353,956 1,537,454
----------- ------------
Total Operating Expenses 3,774,942 3,511,088
----------- ------------
NET OPERATING LOSS (3,668,572) (3,287,693)
GAIN ON DERIVATIVE INSTRUMENTS 13,130 211,715
INTEREST INCOME 33,203 43,309
----------- ------------
NET LOSS $(3,622,239) $(3,032,669)
=========== ===========
NET LOSS PER COMMON SHARE (BASIC) $ (0.05) $ (0.04)
============ ============
NET LOSS PER COMMON SHARE (DILUTED) $ (0.05) $ (0.04)
============ ============
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING 78,076,239 72,316,654
============= ==========
See notes to condensed consolidated financial statements.
4
CEL-SCI CORPORATION
-------------------
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
---------------------------------
(unaudited)
Three Months Ended June 30,
--------------------------
2006 2005
---- ----
REVENUES:
Grant revenue and other $ 39,708 $ 38,103
------------ -------------
EXPENSES:
Research and development, excluding
depreciation of $18,511 and $16,666
included below 429,097 538,053
Depreciation and amortization 42,718 39,822
General and administrative 873,350 444,599
------------ -------------
Total Operating Expenses 1,345,165 1,022,474
------------ -------------
NET OPERATING LOSS (1,305,457) (984,371)
GAIN ON DERIVATIVE INSTRUMENTS 1,615 319,570
INTEREST INCOME 9,801 11,015
------------ -------------
NET LOSS $ (1,294,041) $ (653,786)
============= =============
NET LOSS PER COMMON SHARE (BASIC) $ (0.02) $ (0.01)
============= =============
NET LOSS PER COMMON SHARE (DILUTED) $ (0.02) $ (0.01)
============= =============
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING 80,874,687 72,484,497
============= =============
See notes to condensed consolidated financial statements.
5
CEL-SCI CORPORATION
-------------------
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
---------------------------------
(unaudited)
Nine Months Ended June 30,
2006 2005
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
NET LOSS $ (3,622,239) $ (3,032,669)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 130,143 149,590
Issuance of common stock, warrants and
stock options for services 605,951 7,972
Employee option cost 142,690 --
Common stock contributed to 401(k) plan 64,663 60,928
Decrease in unearned compensation -- 11,649
Impairment loss on abandonment of patents -- 3,716
Impairment loss on retired equipment 645 267
Gain on derivative instruments (13,130) (211,715)
(Increase) decrease in receivables (9,255) 4,880
(Increase) decrease in prepaid expenses (267,404) 123,069
Increase in deferred financing costs (5,000) --
Increase in accrued expenses 3,388 20,959
Increase in amount due to employees 38,002 15,166
Increase (decrease) in accounts payable 28,580 (28,173)
------------- -------------
NET CASH USED FOR OPERATING ACTIVITIES (2,902,966) (2,874,361)
------------- -------------
CASH FLOWS USED FOR INVESTING ACTIVITIES:
Purchase of equipment (1,885) (65,735)
Patent costs (70,470) (39,992)
------------- -------------
NET CASH USED FOR INVESTING ACTIVITIES (72,355) (105,727)
------------- -------------
CASH FLOWS PROVIDED BY FINANCING ACTIVITIES:
Private placement proceeds 1,000,000 --
Drawdown on equity line (net) 677,727 163,636
Proceeds from exercise of stock options
and warrants 700,923 41,501
------------- -------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 2,378,650 205,137
------------ -------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (596,671) (2,774,951)
CASH AND CASH EQUIVALENTS:
Beginning of period 1,957,614 4,263,631
------------- -------------
End of period $ 1,360,943 $ 1,488,680
=========== ===========
(continued)
See notes to condensed consolidated financial statements.
6
CEL-SCI CORPORATION
-------------------
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
---------------------------------
(unaudited)
(continued)
Nine Months Ended June 30,
2006 2005
---- ----
SUPPLEMENTAL INFORMATION ON NONCASH TRANSACTIONS:
Patent costs included in accounts payable:
Increase in accounts payable $ 9,149 $ 38,135
Increase in patent costs (9,149) (38,135)
------------ -------------
$ -- $ --
============= =============
Reclassification of derivative instruments:
Decrease in derivative instruments $ 797,835 $ --
Increase in additional paid-in capital (797,835) --
------------ -------------
$ -- $ --
============= =============
Cost of new warrants and repricing of
old warrants on private placement:
Decrease in additional paid-in capital $ 1,192,949 $ --
Increase in additional paid-in capital (1,192,949) --
------------ -------------
$ -- $ --
============ =============
Cashless exercise of warrants:
Decrease in additional paid-in capital $ 8,822 $ --
Increase in common stock (8,822) --
------------ -------------
$ -- $ --
============ =============
concluded
See notes to condensed consolidated financial statements.
7
CEL-SCI CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED JUNE 30, 2006 AND 2005
(unaudited)
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying condensed consolidated financial statements of CEL-SCI
Corporation and subsidiary (the Company) are unaudited and certain
information and footnote disclosures normally included in the annual
financial statements prepared in accordance with accounting principles
generally accepted in the United States of America have been omitted
pursuant to the rules and regulations of the Securities and Exchange
Commission. While management of the Company believes that the disclosures
presented are adequate to make the information presented not misleading,
interim consolidated financial statements should be read in conjunction
with the consolidated financial statements and notes included in the
Company's annual report on Form 10-K for the year ended September 30,
2005.
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, 2006 and the results
of operations for the three and nine-month periods then ended. The
condensed consolidated balance sheet as of September 30, 2005 is derived
from the September 30, 2005 audited consolidated financial statements.
Significant accounting policies have been consistently applied in the
interim financial statements and the annual financial statements. The
results of operations for the three and nine-month periods ended June 30,
2006 are not necessarily indicative of the results to be expected for the
entire year.
Significant accounting policies are as follows:
Principles of Consolidation -- The consolidated financial statements
include the accounts of CEL-SCI Corporation and its wholly owned
subsidiary, Viral Technologies, Inc. All intercompany transactions have
been eliminated upon consolidation.
Research and Office Equipment -- Research and office equipment is recorded
at cost and depreciated using the straight-line method over estimated
useful lives of five to seven years. Leasehold improvements are
depreciated over the shorter of the estimated useful life of the asset or
the term of the lease. Repairs and maintenance are expensed when incurred.
During the nine-month periods ended June 30, 2006 and 2005, the Company
retired equipment with a net book value of $645 and $267 respectively.
Research and Development Costs -- Research and development (R&D)
expenditures are expensed as incurred. The Company has an agreement with
Cambrex Bio Science, an unrelated corporation, for the production of
Multikine(R), which is the Company's only product source. All production
costs of Multikine are expensed to R&D immediately.
8
CEL-SCI CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED JUNE 30, 2006 AND 2005
(unaudited)
Research and Development Grant Revenues -- The Company's grant
arrangements are handled on a reimbursement basis. Grant revenues under
the arrangements are recognized as grant revenue when costs are incurred.
Patents -- Patent expenditures are capitalized and amortized using the
straight-line method over 17 years. In the event changes in technology or
other circumstances impair the value or life of the patent, appropriate
adjustment in the asset value and period of amortization is made. An
impairment loss is recognized when estimated future undiscounted cash
flows expected to result from the use of the asset, and from disposition,
is less than the carrying value of the asset. The amount of the impairment
loss would be the difference between the estimated fair value of the asset
and its carrying value. During the nine months ended June 30, 2006 and
2005, the Company recorded patent impairment charges of $-0- and $3,716,
respectively. These charges are the net book value of patents abandoned
during the period and such amount is included in general and
administrative expenses. Based on current patent applications and issued
patents, CEL-SCI expects that the amortization of patent expenses will
total approximately $350,000 during the next five years.
Net Loss per Common Share -- Net loss per common share is computed by
dividing the net loss by the weighted average number of common shares
outstanding during the period. Potentially dilutive common shares,
including convertible options to purchase common stock, were excluded from
the calculation because they are antidilutive.
Prepaid Expenses and Laboratory Supplies -- The majority of prepaid
expenses consist of bulk purchases of laboratory supplies used on a daily
basis in the lab and items that will be used for future production. The
items in prepaid expenses are expensed when used in production or daily
activity as R&D expenses. These items are disposables and consumables and
can be used for both the manufacturing of Multikine for clinical studies
and in the laboratory for quality control and bioassay use. They can be
used in training, testing and daily laboratory activities. Other prepaid
expenses are payments for services over a long period and are expensed
over the time period for which the service is rendered.
Cash and Cash Equivalents -- For purposes of the statements of cash flows,
cash and cash equivalents consists principally of unrestricted cash on
deposit and short-term money market funds. The Company considers all
highly liquid investments with a maturity when purchased of less than
three months, and those investments that are readily convertible to known
amounts of cash and are so close to maturity that they bear no interest
rate risk, to be cash equivalents.
Use of Estimates -- The preparation of financial statements in conformity
with accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
9
CEL-SCI CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED JUNE 30, 2006 AND 2005
(unaudited)
Asset Valuations and Review for Potential Impairment -- The Company
reviews its fixed assets every quarter. This review requires that the
Company make assumptions regarding the value of these assets and the
changes in circumstances that would affect the carrying value of these
assets. If such analysis indicates that a possible impairment may exist,
the Company is then required to estimate the fair value of the asset and,
as deemed appropriate, expense all or a portion of the asset. The
determination of fair value includes numerous uncertainties, such as the
impact of competition on future value. The Company believes that it has
made reasonable estimates and judgments in determining whether its
long-lived assets have been impaired; however, if there is a material
change in the assumptions used in our determination of fair values or if
there is a material change in economic conditions or circumstances
influencing fair value, the Company could be required to recognize certain
impairment charges in the future.
Stock-Based Compensation -- In October 1996, the Financial Accounting
Standards Board (FASB) issued Statement of Financial Accounting Standards
No. 123, Accounting for Stock-Based Compensation (SFAS No. 123). This
statement encouraged but did not require companies to account for employee
stock compensation awards based on their estimated fair value at the grant
date with the resulting cost charged to operations. The Company had
elected to continue to account for its employee stock-based compensation
using the intrinsic value method prescribed in Accounting Principles Board
Opinion No. 25, Accounting for Stock Issued to Employees and related
Interpretations". In December 2004 the FASB issued SFAS No. 123R,
"Share-Based Payment". SFAS No. 123R requires companies to recognize
expense associated with share based compensation arrangements, including
employee stock options, using a fair value-based option pricing model.
SFAS No. 123R applies to all transactions involving issuance of equity by
a company in exchange for goods and services, including employees. Using
the modified prospective transition method of adoption, CEL-SCI reflects
compensation expense in the financial statements beginning October 1,
2005. The modified prospective transition method does not require
restatement of prior periods to reflect the impact of SFAS No. 123R. As
such, compensation expense will be recognized for awards that were
granted, modified, repurchased or cancelled on or after October 1, 2005 as
well as for the portion of awards previously granted that vested during
the period ended June 30, 2006. For the nine months ended June 30, 2006,
the Company recorded $142,690 in general and administrative expense for
the cost of employee options. The Company's options vest over a three-year
period from the date of grant. After one year, the stock is one-third
vested, with an additional one-third vesting after two years and the final
one-third vesting at the end of the three-year period. There were no
options granted during the nine-month period ended June 30, 2006. Options
are granted with an exercise price equal to the closing bid price of the
Company's stock on the day before the grant. The Company determines the
fair value of the employee compensation using the Black Scholes method of
valuation. This method requires several assumptions, including the
following assumptions for the options vesting during the nine-months ended
June 30, 2006.
10
Volatility 74% - 106%
Dividend yield 0%
Risk-free interest rate 3.12% - 4.25%
Expected average life 5 years
Exercise price per option $0.22 - $1.67
CEL-SCI has Incentive Stock Option Plans, Non-Qualified Stock Option
Plans, a Stock Compensation Plan and Stock Bonus Plans. All Stock Option
and Bonus Plans have been approved by the stockholders. A summary
description of these Plans follows. In some cases these Plans are
collectively referred to as the "Plans".
Incentive Stock Option Plan. The Incentive Stock Option Plans authorize
the issuance of shares of CEL-SCI's common stock to persons who exercise
options granted pursuant to the Plan. Only Company employees may be
granted options pursuant to the Incentive Stock Option Plan.
To be classified as incentive stock options under the Internal Revenue
Code, options granted pursuant to the Plans must be exercised prior to the
following dates:
(a) The expiration of three months after the date on which an option
holder's employment by CEL-SCI 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 CEL-SCI is terminated, if such termination is
due to the Employee's permanent and total disability;
(c) In the event of an option holder's death while in the employ of
CEL-SCI, his executors or administrators may exercise, within three
months following the date of his death, the option as to any of the
shares not previously exercised;
The total fair market value of the shares of Common Stock (determined at
the time of the grant of the option) for which any employee may be granted
options which are first exercisable in any calendar year may not exceed
$100,000.
Options may not be exercised until one year following the date of grant.
Options granted to an employee then owning more than 10% of the Common
Stock of CEL-SCI may not be exercisable by its terms after five years from
the date of grant. Any other option granted pursuant to the Plan may not
be exercisable by its terms after ten years from the date of grant.
11
CEL-SCI CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED JUNE 30, 2006 AND 2005
(unaudited)
The purchase price per share of Common Stock purchasable under an option
is determined by the Committee but cannot be less than the fair market
value of the Common Stock on the date of the grant of the option (or 110%
of the fair market value in the case of a person owning more than 10% of
CEL-SCI's outstanding shares).
Non-Qualified Stock Option Plans. The Non-Qualified Stock Option Plans
authorize the issuance of shares of CEL-SCI's common stock to persons that
exercise options granted pursuant to the Plans. CEL-SCI's employees,
directors, officers, consultants and advisors are eligible to be granted
options pursuant to the Plans, provided however that bona fide services
must be rendered by such consultants or advisors and such services must
not be in connection with the offer or sale of securities in a
capital-raising transaction. The option exercise price is determined by
the Committee but cannot be less than the market price of CEL-SCI's Common
Stock on the date the option is granted.
The following table summarizes stock option activity for the nine months
ended June 30, 2006.
Non-Qualified Stock Option Plan
Outstanding Exercisable
------------------------------------------------------ ------------------------------------------------------
Weighted Weighted
Average Average
Weighted Remaining Aggregate Weighted Remaining Aggregate
Number of Average Contractual Intrinsic Number of Average Contractual Intrinsic
Shares Exercise Price Term (Years) Value Shares Exercise Price Term (Years) Value
------------------------------------------------------ ------------------------------------------------------
Outstanding
at October
1, 2005 6,215,363 $ 0.66 5.80 $ 642,085 4,642,893 $ 0.76 4.98 $432,032
Vested - -
Granted - -
Exercised (71,335) 0.22 7.33 19,260 (71,335) 0.22 7.33 19,260
Forfeited - -
Expired - -
--------- --------
Outstanding
at December
31, 2005 6,144,028 0.67 5.80 659,395 4,571,558 0.77 4.98 434,222
Vested - -
Granted
Exercised - -
Forfeited - -
Expired -
--------- --------
Outstanding
at March 31,
2006 6,144,028 0.67 5.51 1,486,298 4,571,558 0.77 4.77 932,715
12
Outstanding Exercisable
------------------------------------------------------ ------------------------------------------------------
Weighted Weighted
Average Average
Weighted Remaining Aggregate Weighted Remaining Aggregate
Number of Average Contractual Intrinsic Number of Average Contractual Intrinsic
Shares Exercise Price Term (Years) Value Shares Exercise Price Term (Years) Value
------------------------------------------------------ ------------------------------------------------------
Vested -- 847,812 0.22
Granted -- -
Exercised (65,966) 0.26 6.55 40,048 (65,966) 0.26 6.55 40,048
Forfeited -- -
Expired -- -
-------- -------
Outstanding 6,078,062 $0.67 5.33 $1,953,297 5,353,404 $ 0.71 4.70 $1,326,170
at June 30,
2006
Incentive Stock Option Plan
Outstanding Exercisable
------------------------------------------------------ ------------------------------------------------------
Weighted Weighted
Average Average
Weighted Remaining Aggregate Weighted Remaining Aggregate
Number of Average Contractual Intrinsic Number of Average Contractual Intrinsic
Shares Exercise Price Term (Years) Value Shares Exercise Price Term (Years) Value
------------------------------------------------------ ------------------------------------------------------
Outstanding
at October
1, 2005 3,972,633 $ 0.68 6.18 $ 630,833 2,885,968 $ 0.81 5.52 $ 418,334
Vested - -
Granted - -
Exercised - -
Forfeited - -
Expired - -
--------- ---------
Outstanding
at December
31, 2005 3,972,633 0.68 6.18 683,000 2,885,968 0.81 5.52 451,800
Vested - 33,333 1.13
Granted - -
Exercised - -
Forfeited - -
Expired (1,500) 1.05 (1,500) 1.05
--------- ---------
Outstanding
at March 31,
2006 3,971,133 0.68 5.93 1,329,400 2,917,801 0.82 5.35 853,400
Vested - 849,999 0.22
Granted - -
Exercised - -
Forfeited (1,200) 8.43 (1,200) 8.43
Expired - -
-------- ---------
Outstanding 3,969,933 $0.67 5.68 $1,679,533 3,766,600 $0.88 6.09 $1,365,120
at
June 30,
2006
The total intrinsic value of options exercised during the nine months ended June
30, 2006 and 2005 was $60,955 and $79,263, respectively.
A summary of the status of the Company's non-vested options as of June 30, 2006
is presented below:
13
Weighted
Average
Number of Grant Date
Shares Fair Value
--------- ----------
Non-Qualified Stock Option Plan
-------------------------------
Nonvested at October 1, 2005 1,572,470 $ 0.25
Vested -
Granted -
Forfeited -
Expired -
---------
Nonvested at December 31, 2005 1,572,470 0.25
Vested -
Granted -
Forfeited -
Expired -
---------
Nonvested at March 31, 2006 1,572,470 0.25
Vested (847,812) 0.22
Granted -
Forfeited -
Expired -
---------
Nonvested at June 30, 2006 724,658 $ 0.56
Incentive Stock Option Plan
---------------------------
Nonvested at October 1, 2005 1,086,665 $ 0.21
Vested
Granted -
Forfeited -
Expired -
---------
Nonvested at December 31, 2005 1,086,665 0.21
Vested (33,333) 0.79
Granted -
Forfeited -
Expired -
----------
Nonvested at March 31, 2006 1,053,332 0.18
Vested (849,999) 0.22
Granted -
Forfeited -
Expired -
---------
Nonvested at June 30, 2006 203,333 $ 0.59
14
No corresponding expense was recorded for the nine months ended June 30,
2005 because the statement did not require the cost to be recorded in that
period. Under SFAS 148, "Accounting for Stock-Based Compensation -
Transition and Disclosure", which was in effect during the nine months
ended June 30, 2005, the Company's net loss and net loss per common share
would have been increased to the pro forma amounts indicated below:
Nine Three
Months Months
Ended Ended
June 30, June 30,
2005 2005
---------- ----------
Net loss:
As reported and amended $(3,244,384) $(973,356)
Add: Total stock-based employee compensation
expense determined under fair-value-based
method for all awards, net of related tax
effects (419,789) (144,949)
----------- --------
Pro forma net loss, as amended $(3,664,173) $(1,118,305)
=========== ===========
Net loss per share, as reported and amended $ 0.04 $ 0.01
=========== ===========
Pro forma net loss per share $ 0.05 $ 0.02
=========== ===========
Options to non-employees are accounted for in accordance with FASB's
Emerging Issues Task Force (EITF) Issue 96-18 Accounting for Equity
Instruments That Are Issued to Other Than Employees for Acquiring, or in
Conjunction with Selling, Goods or Services. Accordingly, compensation is
recognized when goods or services are received and is measured using the
Black-Scholes valuation model. The Black-Scholes model requires management
to make assumptions regarding the fair value of the options at the date of
grant and the expected life of the options.
B. NEW ACCOUNTING PRONOUNCEMENTS
In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error
Corrections--A replacement of APB Opinion No. 20 and FASB Statement No.
3". The statement requires that retrospective application of a change in
accounting principle be limited to the direct effects of the change and is
part of a broader effort by the FASB to improve the comparability of
cross-border financial reporting by working with the International
Accounting Standards Board (IASB) toward development of a single set of
high-quality accounting standards. The Company does not believe that SFAS
No. 154 will have a material impact on its results of operations or cash
flows.
15
In March 2005, the FASB issued FIN No. 47, "Accounting for Conditional
Asset Retirement Obligations - an Interpretation of FASB Statement No.
143". The interpretation clarifies terms used in FASB Statement No. 143 and
is effective no later than the end of fiscal years ending after December
15, 2005. The Company does not believe that FIN No. 47 will have a material
impact on its results of operations or cash flows.
In February 2006, the FASB issued SFAS No. 155, "Hybrid Instruments". The
statement amends SFAS No. 133 and SFAS No. 140, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities". The
statement also resolves issues addressed in Statement 133 Implementation
Issue No. D1, "Application of Statement 133 to Beneficial Interests in
Securitized Financial Assets." The statement: a) permits fair value
remeasurement for any hybrid financial instrument that contains an embedded
derivative that otherwise would require bifurcation, b) clarifies which
interest-only strips and principal-only strips are not subject to the
requirements of SFAS No. 133, c) establishes a requirement to evaluate
interests in securitized financial assets to identify interests that are
freestanding derivatives or that are hybrid financial instruments that
contain an embedded derivative requiring bifurcation, d) clarifies that
concentrations of credit risk in the form of subordination are not embedded
derivatives, and e) amends Statement 140 to eliminate the prohibition on a
qualifying special purpose entity from holding a derivative financial
instrument that pertains to a beneficial interest other than another
derivative financial instrument. CEL-SCI does not believe that SFAS No. 155
will have a material impact on its results of operations or cash flows.
FASB issued SFAS No. 156, "Accounting for Servicing of Financial Assets -
an amendment of FASB Statement No. 140". The statement requires: 1) an
entity to recognize a servicing asset or servicing liability each time it
undertakes an obligation to service a financial asset; 2) requires all
separately recognized servicing assets and servicing liabilities to be
initially measured at fair value; 3) permits an entity to choose either the
amortization method or the fair value measurement method for measuring the
asset or liability; 4) permits a one-time reclassification of
available-for-sale securities to trading securities; and 5) requires
separate presentation of servicing assets and servicing liabilities
subsequently measured at fair value in the statement of financial position.
Since the Company has no servicing assets or servicing liabilities, the
Company believes that there will be no impact on its results of operations
or cash flows. The statement is effective for fiscal years beginning after
September 15, 2006.
C. STOCKHOLDERS' EQUITY
During the nine months ended June 30, 2006, the Company issued stock and
stock warrants for services to a nonemployee with a fair value of $605,951.
During the nine months ended June 30, 2005, the Company issued stock or
stock options for services to a nonemployee with a fair value of $7,972.
16
D. FINANCING TRANSACTIONS
In July and September 2002, the Company sold convertible notes, plus
Series G warrants, to a group of private investors. As of the year ended
September 30, 2003, all of the notes had been converted into common stock.
The Series G warrants allow the holders to purchase up to 900,000 shares
of the Company's common stock. As of June 30, 2006, all warrants had been
exercised. In addition, in January 2003, the Company sold convertible
notes, plus Series H warrants to purchase 1,100,000 shares of common
stock, to a group of private investors. As of October 2, 2003, all of the
Series H notes had been converted into common stock. As of June 30, 2006,
all Series H warrants had been exercised. Both the Series G and Series H
warrants were exercised in a cashless transaction.
On December 1, 2003, the Company sold 2,994,964 shares of its common stock
to a group of private institutional investors for approximately
$2,550,000, or $0.85 per share. As part of this transaction, the investors
in the private offering received warrants which allow the investors to
purchase 991,003 shares of the Company's common stock at a price of $1.32
per share at any time prior to December 1, 2006. As of June 30, 2006, all
warrants remain outstanding.
In connection with this private placement, the Company was required to
file a registration statement by December 31, 2003. The registration
statement was to have been declared effective by the SEC no later than
March 30, 2004. If the registration statement was declared effective later
than March 30, 2004, the Company was subject to paying liquidated damages
to the investors. In accordance with this agreement, the Company recorded
an expense of $76,499 during the year ended September 30, 2004.
On May 4, 2004, the Company announced the completion of an offering of
6,402,439 shares of registered common stock at $0.82 per share to one
institutional investor. This sale resulted in gross proceeds of $5.25
million and associated costs of $498,452. The stock was offered pursuant
to an existing shelf registration statement and Wachovia Capital Markets,
LLC acted as the placement agent for the offering. The Company used the
proceeds of the offering to advance the clinical development of Multikine
for the treatment of cancer. In addition, 76,642 warrants were issued to
Wachovia at a price of $1.37 and the warrants expire May 4, 2009. The
warrants were valued using the Black-Scholes valuation method and an
expense of $38,127 was recorded to additional paid-in capital as a cost of
equity related transaction during the year ended September 30, 2004.
On July 18, 2005, CEL-SCI sold 1,250,000 shares of its common stock and
375,000 warrants to one investor for $500,000. Each warrant entitles the
holder to purchase one share of CEL-SCI's common stock at a price of $0.65
per share at any time prior to July 18, 2009. The shares of common stock
and warrants are "restricted" securities as defined in Rule 144 of the
Securities and Exchange Commission. The warrants were valued at $155,671.
17
In order to provide a possible source of funding for CEL-SCI's current
activities and for the development of its current and planned products,
CEL-SCI entered into an equity line of credit agreement with Jena Holdings
LLC on October 31, 2005.
Under the equity line of credit agreement, Jena Holdings LLC has agreed to
provide CEL-SCI with up to $5,000,000 of funding for a two year period
which will begin on the date that a registration statement filed by
CEL-SCI to register the shares to be sold to Jena Holdings LLC is declared
effective by the SEC. During this two year period, CEL-SCI may request a
drawdown under the equity line of credit by selling shares of its common
stock to Jena Holdings LLC, and Jena Holdings LLC will be obligated to
purchase the shares. The minimum amount CEL-SCI can draw down at any one
time is $100,000, and the maximum amount CEL-SCI can draw down at any one
time will be determined at the time of the drawdown request using a
formula contained in the equity line of credit agreement. CEL-SCI may
request a drawdown once every 22 trading days, although CEL-SCI is under
no obligation to request any drawdowns under the equity line of credit.
During the 22 trading days following a drawdown request, CEL-SCI will
calculate the amount of shares it will sell to Jena Holdings LLC and the
purchase price per share. The purchase price per share of common stock
will be based on the daily volume weighted average price of CEL-SCI's
common stock during each of the 22 trading days immediately following the
drawdown date, less a discount of 11%. As consideration for extending the
equity line of credit, CEL-SCI granted Jena Holdings LLC warrants to
purchase 271,370 shares of common stock at a price of $0.55 per share at
any time prior to October 24, 2010. CEL-SCI will be registering the shares
of common stock issuable to Jena Holdings under the equity line of credit,
as well as 271,370 shares underlying the warrants that CEL-SCI granted to
Jena Holdings LLC. During the three-month period ended December 31, 2005,
the Company made drawdowns on a previous equity line of credit totaling
$677,727, selling 1,419,446 shares of common stock. This equity line of
credit expired on December 29, 2005.
On February 9, 2006, CEL-SCI sold 2,500,000 unregistered shares of its
common stock and 750,000 unregistered warrants to one investor for
$1,000,000. Each warrant entitles the holder to purchase one share of
CEL-SCI's common stock at a price of $0.56 per share at any time prior to
February 9, 2011. The warrants were valued at $238,986. In addition,
441,176 warrants issued to the investor in December 2003 were repriced and
extended for one year. The revaluing of the warrants was valued at
$76,122. In addition, on May 18, 2006, 800,000 unregistered warrants were
issued to the same investor at a strike price of $0.82. These warrants
were valued using the Black Scholes method at $416,921 (73% volatility, 5
years expected life, 4.96% discount rate) and expire in 5 years. These
warrants were recorded in equity.
18
On April 17, 2006, 800,000 unregistered warrants were issued to an investor
with a strike price of $1.25 per share. These warrants were valued at
$460,920 using the Black Scholes method (77% volatility, 2.17 years
expected life, 4.91% discount rate) and expire in August of 2008. They were
recorded in equity. An additional 100,000 unregistered warrants were issued
to an investor relations consultant on April 12, 2006. These warrants were
valued at $79,976 using the Black Scholes method (77% volatility, 3 years
expected life, 4.90% discount rate) and expire in April 2009. They were
recorded as general and administrative expense. A public relations and
corporate presentation consultant group was issued 375,000 unregistered
shares of CEL-SCI Corporation common stock and 375,000 unregistered
warrants to purchase additional shares at $0.73. These warrants will be
expensed to general and administrative expense over the one-year contract
period. These warrants expire March 31, 2007 and were valued at $58,005
using the Black Scholes method (77% volatility, 1 year expected life, 4.86%
discount rate). Also during the quarter ended June 30, 2006, 1,300,000
warrants were exercised, resulting in an increase in equity of $665,000.
Cashless exercise of 882,222 warrants also occurred during the quarter
ended June 30, 2006.
E. RESTATEMENT OF FINANCIAL STATEMENTS
Subsequent to the issuance of the Company's September 30, 2004 consolidated
financial statements, the Company determined that it had erroneously
accounted for certain financial instruments, including free-standing and
embedded derivatives within such instruments, issued by the Company from
fiscal year 1992 through November 2003. Specifically, the instruments
erroneously accounted for were: the Series E Preferred Stock, the Cambrex
Convertible Note Payable, Series F, G and H Convertible Debt, the equity
line of credit agreements, as well as Series I and J warrants and various
other warrants. The Company has concluded that these instruments were
either freestanding derivative instruments in their entirely, or contained
embedded derivatives, and should have been accounted for under SFAS No. 133
and EITF 00-19, as well as related interpretations of these standards. All
such derivatives were required to be recognized as either assets or
liabilities in the statement of financial position and measured at fair
value in the statement of operations. At June 30, 2006, the only remaining
instrument that needs this valuation is the Series E warrants, which expire
on August 16, 2006. For a further discussion of this restatement and an
assessment of each instrument, please see the Company's September 30, 2005
10-K, footnote 2.
F. OPERATIONS AND FINANCING
The Company has incurred significant costs since its inception in
connection with the acquisition of an exclusive worldwide license to
certain patented and unpatented proprietary technology and know-how
relating to the human immunological defense system, patent applications,
research and development, administrative costs, construction of laboratory
facilities and clinical trials. The Company has funded such costs with
proceeds realized from the public and private sale of its common and
preferred stock. The Company will be required to raise additional capital
or find additional long-term financing in order to continue with its
research efforts. To date, the Company has not generated any revenue from
19
product sales. The ability of the Company to complete the necessary
clinical trials and obtain FDA approval for the sale of products to be
developed on a commercial basis is uncertain. The Company plans to seek
continued funding of the Company's development by raising additional
capital. It is the opinion of management that sufficient funds will be
available from external financing and additional capital and/or expenditure
reductions in order to meet the Company's liabilities and commitments as
they come due during fiscal years 2006 and 2007. Ultimately, the Company
must complete the development of its products, obtain the appropriate
regulatory approvals and obtain sufficient revenues to support its cost
structure.
G. SUBSEQUENT EVENT
CONVERTIBLE DEBT INSTRUMENT AND WARRANT LIABILITIES
In August 2006, the Company issued $8,300,000 million in aggregate principal
amount of convertible notes (the "Notes") together with warrants to purchase
4,825,581 shares of the Company's common stock (the "Warrants"). Additionally,
in connection with issuance of the Notes and Warrants, the placement agent
received a fee of $498,000 and 386,047 fully vested warrants (the "Placement
Agent Warrants") to purchase shares of the Company's common stock. Net proceeds
were approximately $7.75 million, net of approximately $550,000 in direct
transaction costs, including the placement agent fee.
Features of the Convertible Debt Instrument and Warrants
The Notes are convertible into 9,651,163 shares of the Company's common stock at
the option of the holder at any time prior to maturity at a conversion price of
$0.86 per share, subject to adjustment for certain events described below. The
Warrants are exercisable over a five-year period from February 4, 2007 through
February 4, 2012 at $0.95 per share.
The Notes bear interest at the greater of 8% or LIBOR plus 300 basis points, and
are required to be repaid in thirty equal monthly installments beginning in
March 7, 2007 and continuing through September 7, 2010. Interest is payable
quarterly beginning in September 30, 2006. Each payment of principal and accrued
interest may be settled in cash or in shares of common stock at the option of
the Company. The number of shares deliverable under the share-settlement option
is determined based on the lower of (a) $0.86 per share, as adjusted pursuant to
the terms of the Notes or (b) 90% applied to the arithmetic average of the
volume-weighted-average trading prices for the twenty day period immediately
preceding each share settlement.
In the event of default, as defined in the Notes, all amounts due and
outstanding thereunder shall become, at the option of the holders, immediately
due and payable in cash, in an amount that equals the sum of (i) the greater of
(a) 115% of the outstanding balance plus all accrued and unpaid interest or (b)
115% of the arithmetic average of the volume-weighted-average trading prices for
the five day period immediately preceding notice requiring repayment, and (ii)
20
all other amounts due in connection with the Notes and associated agreements.
Additionally, if a certain breach occurs under a related registration rights
agreement, the Company will be required to pay, as liquidated damages, 1.5% per
month of the outstanding balance of the Notes, until such default is cured (or
2% per month if such breach occurs after 180 days following closing of the
transaction). Events of default include circumstances in which the Company
either fails to have a registration statement for shares into which the Notes
can be converted be declared effective by the SEC within 120 days of the
issuance date of the Notes or that the registration statement's effectiveness
lapses for any reason.
The Company may not make payments in shares if such payments would result in the
cumulative issuance of shares of its common stock exceeding 19.999% of the
shares outstanding on the day immediately preceding the issuance date of the
Notes (the "Issuable Maximum"), unless prior approval is given by vote of at
least a majority of the shares. The Company cannot determine at this time if it
will be required to issue shares in excess of the Issuable Maximum because the
number of shares issuable as payments of principal and interest under the Notes
will depend on future share prices. As required by the transaction documents for
these securities, the Company is seeking shareholder approval for the issuance
of in excess of the Issuable Maximum, even though the Issuable Maximum may not
be exceeded.
The conversion price of the Notes and exercise price of the Warrants are each
subject to certain anti-dilution protections, including for stock splits, stock
dividends, change in control events and dilutive issuances of common stock or
common stock equivalents, such as stock options, at an effective price per share
that is lower than the then conversion price. In the event of a dilutive
issuance of common stock or common stock equivalents, the conversion price and
exercise price would be reduced to equal the lower per share price of the
subsequent transaction.
Accounting for the Convertible Debt Instrument and Warrants
The Company will account for the Warrants as derivative liabilities in
accordance with SFAS No. 133, "Accounting for Derivative Financial Instruments
Indexed to and Potentially Settled in a Company's Own Stock." The Company has
determined that the Notes constitute a hybrid instrument that have the
characteristics of a debt host contract containing several embedded derivative
features that would require bifurcation and separate accounting as a derivative
instrument pursuant to the provisions of FAS 133. As permitted by SFAS No. 155,
"Accounting for Certain Hybrid Financial Instruments--an amendment of FASB
Statements No. 133 and 140", the Company will irrevocably electe to initially
and subsequently measure the Notes in their entirety at fair value with changes
in fair value recognized as either a gain or loss.
Upon issuance of the Notes and Warrants, the Company will allocate proceeds
received to the Notes and the Warrants on a relative fair value basis. The Notes
will then be immediately marked to fair value and a charge to change in fair
value of convertible debt instrument and warrant liabilities will be recorded.
21
The debt discount in the Notes resulting from the allocation of proceeds will be
amortized to interest expense using the effective interest method over the
expected term of the Notes.
Upon issuance, the Warrants and Placement Agent Warrants did not meet the
requirements for equity classification set forth in EITF Issue No. 00-19,
"Accounting for Derivative Financial Instruments Indexed to, and Potentially
Settled in, a Company's Own Stock," because such warrants (a) must be settled in
registered shares and (b) are subject to substantial liquidated damages if the
Company is unable to maintain the effectiveness of the resale registration of
the shares. Therefore such warrants must be accounted for as freestanding
derivative instruments pursuant to the provisions of FAS 133. Accordingly, the
Company will allocate a portion of the initial proceeds to the Warrants and
immediately mark them to fair value which will result in a derivative liability
and a charge to change in fair value of convertible debt instrument and warrant
liabilities.
Transaction costs will be expensed immediately as part of fair value adjustments
required in connection with the convertible debt instrument and the Company's
irrevocable election to initially and subsequently measure the Notes at fair
value with changes in fair value recognized in earnings.
22
CEL-SCI CORPORATION
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Liquidity and Capital Resources
The Company has had only limited revenues from operations since its inception in
March 1983. The Company has relied upon proceeds realized from the public and
private sale of its Common Stock and convertible notes as well as short-term
borrowings to meet its funding requirements. Funds raised by the Company have
been expended primarily in connection with the acquisition of exclusive rights
to certain patented and unpatented proprietary technology and know-how relating
to the human immunological defense system, the funding of Viral Technologies,
Inc.'s (VTI) research and development program (inactive since 2000), patent
applications, the repayment of debt, the continuation of Company-sponsored
research and development and administrative costs, and the construction of
laboratory facilities. Inasmuch as the Company does not anticipate realizing
significant revenues until such time as it enters into licensing arrangements
regarding its technology and know-how or until such time it receives permission
to sell its product (which could take a number of years), the Company has been
dependent upon short-term borrowings and the proceeds from the sale of its
securities to meet all of its liquidity and capital resource requirements.
In June 2000, the Company entered into an agreement with Cambrex Bio Science,
Inc. ("Cambrex") whereby Cambrex agreed to provide the Company with a facility
which allows the Company to manufacture Multikine in accordance with the Good
Manufacturing Practices regulations of the FDA for periodic manufacturing
campaigns. Company personnel will staff this facility. This agreement runs until
December 31, 2006.
In July and September 2002, the Company sold convertible notes, plus 900,000
Series G warrants, to a group of private investors. By June 2, 2003, all of the
notes had been converted into common stock. As of June 30, 2006, all of the
warrants had been exercised. In addition, in January 2003, the Company sold
convertible notes, plus Series H warrants to purchase 1,100,000 shares of common
stock, to a group of private investors. By October 2, 2003, all of the Series H
notes had been converted into common stock. As of June 30, 2006, all remaining
warrants had been exercised in a cashless exercise.
On December 1, 2003, the Company sold 2,994,964 shares of its common stock to a
group of private institutional investors for approximately $2,550,000, or $0.85
per share. As part of this transaction, the investors in the private offering
received warrants which allow the investors to purchase approximately 900,000
shares of the Company's common stock at a price of $1.32 per share at any time
prior to December 1, 2006. As of June 30, 2006, all warrants remain outstanding.
On May 4, 2004, the Company announced the completion of an offering of 6,402,439
shares of registered common stock at $0.82 per share to one institutional
investor. This sale resulted in gross proceeds of $5.25 million and associated
costs of $498,452. The stock was offered pursuant to an existing shelf
registration statement and Wachovia Capital Markets, LLC acted as the placement
23
agent for the offering. The Company intends to use the proceeds of the offering
to advance the clinical development of Multikine for the treatment of cancer. In
addition, 76,642 warrants were issued to Wachovia at a price of $1.37 and the
warrants expire May 4, 2009. The warrants were valued using the Black-Scholes
valuation method and an expense of $38,127 was recorded to additional paid-in
capital as a cost of equity related transaction during the fiscal year ended
September 30, 2004.
In order to provide a possible source of funding for CEL-SCI's current
activities and for the development of its current and planned products, CEL-SCI
entered into an equity line of credit agreement with Jena Holdings LLC on
October 31, 2005.
Under the equity line of credit agreement, Jena Holdings LLC has agreed to
provide CEL-SCI with up to $5,000,000 of funding for a two year period which
will begin on the date that a registration statement filed by CEL-SCI to
register the shares to be sold to Jena Holdings LLC is declared effective by the
SEC. During this two year period, CEL-SCI may request a drawdown under the
equity line of credit by selling shares of its common stock to Jena Holdings
LLC, and Jena Holdings LLC will be obligated to purchase the shares. The minimum
amount CEL-SCI can draw down at any one time is $100,000, and the maximum amount
CEL-SCI can draw down at any one time will be determined at the time of the
drawdown request using a formula contained in the equity line of credit
agreement. CEL-SCI may request a drawdown once every 22 trading days, although
CEL-SCI is under no obligation to request any drawdowns under the equity line of
credit.
During the 22 trading days following a drawdown request, CEL-SCI will calculate
the amount of shares it will sell to Jena Holdings LLC and the purchase price
per share. The purchase price per share of common stock will be based on the
daily volume weighted average price of CEL-SCI's common stock during each of the
22 trading days immediately following the drawdown date, less a discount of 11%.
As consideration for extending the equity line of credit, CEL-SCI granted Jena
Holdings LLC warrants to purchase 271,370 shares of common stock at a price of
$0.55 per share at any time prior to October 24, 2010. CEL-SCI will be
registering the shares of common stock issuable to Jena Holdings under the
equity line of credit, as well as 271,370 shares underlying the warrants that
CEL-SCI granted to Jena Holdings LLC. During the three-month period ended
December 31, 2005, the Company made drawdowns on a previous equity line of
credit totaling $677,727, selling 1,419,446 shares of common stock. This equity
line of credit expired on December 29, 2005.
Subsequent to the issuance of the Company's September 30, 2004 consolidated
financial statements, the Company determined that it had erroneously accounted
for certain financial instruments, including free-standing and embedded
derivatives within such instruments, issued by the Company from fiscal year 1992
through November 2003. Specifically, the instruments erroneously accounted for
were: the Series E Preferred Stock, the Cambrex Convertible Note Payable, Series
F, G and H Convertible Debt, the equity line of credit agreements, as well as
Series I and J warrants and various other warrants. The Company has concluded
that these instruments were either freestanding derivative instruments in their
entirety, or contained embedded derivatives, and should have been accounted for
under SFAS No. 133 and EITF 00-19, as well as related interpretations of these
standards. All such derivatives were required to be recognized as either assets
or liabilities in the statement of financial position and measured at fair value
in the statement of operations. At December 31, 2005, the only remaining
24
instrument that needs this valuation is the Series E warrants, which expire on
August 16, 2006. For a further discussion of this restatement and an assessment
of each instrument, please see the Company's September 30, 2005 10-K, footnote
2.
On February 9, 2006, CEL-SCI sold 2,500,000 shares of its common stock and
750,000 warrants to one investor for $1,000,000. Each warrant entitles the
holder to purchase one share of CEL-SCI's common stock at a price of $0.56 per
share at any time prior to February 9, 2011. The warrants were valued at
$238,986. In addition, 441,176 warrants previously issued to the investor were
repriced and extended for one year. The revaluing of the warrants was valued at
$76,122. In addition, on May 18, 2006, 800,000 unregistered warrants were issued
to the same investor at a strike price of $0.82. These warrants were valued
using the Black Scholes method at $416,921 and expire in 5 years.
On April 17, 2006, 800,000 unregistered warrants were issued to an investor with
a strike price of $1.25 per share. These warrants were valued at $460,920 using
the Black Scholes method and expire in August of 2008. An additional 100,000
unregistered warrants were issued to a group of consultants on April 12, 2006.
These warrants were valued at $79,976 using the Black Scholes method and expire
in April 2009. Another consultant group was issued 375,000 unregistered shares
of CEL-SCI Corporation common stock and 375,000 unregistered warrants to
purchase additional shares at $0.73. These warrants expire March 31, 2007 and
were valued at $58,005 using the Black Scholes method.
Results of Operations
"Grant revenues and other" decreased by $117,025 during the nine months ended
June 30, 2006, compared to the same period of the previous year, due to the
winding down of the work funded by the grants in the summer of 2005. The Company
is continuing to apply for grants to support its work. Grant revenues and others
remained about the same for the three months ended June 30, 2006 as it was for
the three months ended June 30, 2005.
During the nine-month period ended June 30, 2006, research and development
expenses decreased by $533,201. During the three-month period ended June 30,
2006, research and development expenses decreased by $108,956. In the previous
year, expenses were higher because the Company was doing work in support of the
Phase III application for Multikine.
During the three and nine-month periods ended June 30, 2006, general and
administrative expenses increased by $428,751 and $816,502, respectively. This
change was due to: 1) costs related to the restatement of the financial
statements ($185,800 and $318,750, respectively); 2) an increase in public
relations and corporate presentation expenses ($239,850 and $408,850,
respectively); and 3) the employee stock option expense required by SFAS 123R
($39,100 and $142,700, respectively).
Interest income during the nine months ended June, 2006 decreased by $10,106.
The decrease was due to a decline in the balances in the interest bearing
accounts. Interest income during the three months ended June 30, 2006 decreased
by $1,214 for the same reason.
The gain on derivative instruments of $13,130 for the nine months ended June 30,
2006, compared to a loss of $211,715 for the same period of 2005 was the result
of reclassification to equity of all derivative instruments except the Series E
warrants on December 27, 2005. The gain on derivative instruments of $1,615
25
during the three months ended June 30, 2006 compared to a gain of $319,570 for
the same period in 2005 was the result of the reclassification to equity of all
derivative instruments except the Series E warrants.
Research and Development Expenses
During the nine and three-month periods ended June 30, 2006 and 2005, the
Company's research and development efforts involved Multikine and L.E.A.P.S.(TM)
The table below shows the research and development expenses associated with each
project during the six and three-month periods.
Nine Months Ended Three Months Ended
June 30, June 30,
2006 2005 2006 2005
---- ---- ---- ----
MULTIKINE $1,120,673 $1,558,633 $367,741 $462,391
L.E.A.P.S. 170,170 265,411 61,356 75,662
------------ ----------- ---------- ----------
TOTAL $1,290,843 $1,824,044 $ 429,097 $ 538,053
========== ========== ========= =========
In August 2005, the Canadian regulatory agency, the Biologics and Genetic
Therapies Directorate, concurred with the initiation of a global Phase III
clinical trial in head and neck cancer patients using Multikine. On January 4,
2005, the Company announced that it had submitted a Phase III clinical trial
protocol to the U.S. Food and Drug Administration ("FDA") for the use of its
investigational immunotherapy drug Multikine in the treatment of advanced
primary squamous cell carcinoma of the oral cavity. Additional information in
support of and to provide the rationale for the Phase III trial (final reports
of clinical trials conducted with Multikine to date and manufacturing and
testing information) was included with this submission. The Company met with FDA
in April of 2005 and in October of 2005 to discuss the Phase III trial design
and manufacturing issues. The meetings were very useful and productive, and were
the start of what has been a continuing dialogue with the Agency on these
matters. It is clear that the FDA recognizes the need for new and improved
therapies for head and neck cancer patients, and it appears to be amenable to
new approaches. A number of specific technical aspects of the Company's
development plans were discussed, and the FDA made several suggestions as to how
the plans could be improved. The Company provided additional information to the
FDA in 2005 following the two meetings, and had a recent (July 2006) discussion
with them regarding this information. The Company is unable to estimate the
future costs of research and clinical trials involving Multikine since the
Company has not yet reached final agreement with the FDA on all issues or the
design of future clinical trials. Until agreements are reached on these issues
the Company will not be able to price any future trials with clinical trial
organizations.
As of June 30, 2006 the Company was involved in a number of pre-clinical studies
with respect to its L.E.A.P.S. technology. As with Multikine, the Company does
not know what obstacles it will encounter in future pre-clinical and clinical
studies involving its L.E.A.P.S. technology. Consequently, the Company cannot
predict with any certainty the funds required for future research and clinical
trials and the timing of future research and development projects. In April 2006
26
the Company filed a provisional U.S. patent application covering CEL-1000 for
the prevention/treatment of bird flu and/or as an adjuvant to be included in a
bird flu vaccine.
Clinical and other studies necessary to obtain regulatory approval of a new drug
involve significant costs and require several years to complete. The extent of
the Company's clinical trials and research programs are primarily based upon the
amount of capital available to the Company and the extent to which the Company
has received regulatory approvals for clinical trials. The inability of the
Company to conduct clinical trials or research, whether due to a lack of capital
or regulatory approval, will prevent the Company from completing the studies and
research required to obtain regulatory approval for any products which the
Company is developing. Without regulatory approval, the Company will be unable
to sell any of its products.
Since all of the Company's projects are under development, the Company cannot
predict when it will be able to generate any revenue from the sale of any of its
products.
Critical Accounting Policies - The Company's significant accounting policies are
more fully described in Note A to the financial statements. However certain
accounting policies are particularly important to the portrayal of financial
position and results of operations and require the application of significant
judgments by management. As a result, the condensed consolidated financial
statements are subject to an inherent degree of uncertainty. In applying those
policies, management uses its judgment to determine the appropriate assumptions
to be used in the determination of certain estimates. These estimates are based
on the Company's historical experience, terms of existing contracts, observance
of trends in the industry and information available from outside sources, as
appropriate. Our significant accounting policies include:
Patents - Patent expenditures are capitalized and amortized using the
straight-line method over 17 years. In the event changes in technology or other
circumstances impair the value or life of the patent, appropriate adjustment in
the asset value and period of amortization is made. An impairment loss is
recognized when estimated future undiscounted cash flows expected to result from
the use of the asset, and from disposition, is less than the carrying value of
the asset. The amount of the impairment loss would be the difference between the
estimated fair value of the asset and its carrying value.
Stock Options and Warrants - In October 1996, the Financial Accounting Standards
Board (FASB) issued Statement of Financial Accounting Standards No. 123,
Accounting for Stock-Based Compensation (SFAS No. 123). This statement
encourages but does not require companies to account for employee stock
compensation awards based on their estimated fair value at the grant date with
the resulting cost charged to operations. The Company had elected to continue to
account for its employee stock-based compensation using the intrinsic value
method prescribed in Accounting Principles Board Opinion No. 25, Accounting for
Stock Issued to Employees, and related Interpretations. Options to non-employees
are accounted for in accordance with FASB's Emerging Issues Task Force (EITF)
Issue 96-18 Accounting for Equity Instruments That Are Issued to Other Than
Employees for Acquiring, or in Conjunction with Selling, Goods or Services.
Accordingly, compensation is recognized when goods or services are received and
is measured using the Black-Scholes valuation model. The Black-Scholes model
requires management to make assumptions regarding the fair value of the options
at the date of grant and the expected life of the options. The Company
determines the fair value of the employee compensation using the Black Scholes
method of valuation. Using the modified prospective transition method of
adoption, CEL-SCI reflects compensation expense in the financial statements
beginning October 1, 2005. The modified prospective transition method does not
require restatement of prior periods to reflect the impact of SFAS No. 123R. As
27
such, compensation expense will be recognized for awards that were granted,
modified, repurchased or cancelled on or after October 1, 2005 as well as for
the portion of awards previously granted that vested during the period ended
June 30, 2006. For the nine months ended June 30, 2006, the Company recorded
$142,690 in general and administrative expense for the cost of employee options.
The Company determines the fair value of the employee compensation using the
Black Scholes method of valuation. No corresponding expense was recorded for the
nine months ended June 30, 2005 because the statement did not require the cost
to be recorded in that period. Asset Valuations and Review for Potential
Impairments - The Company reviews its fixed assets every fiscal quarter. This
review requires that the Company make assumptions regarding the value of these
assets and the changes in circumstances that would affect the carrying value of
these assets. If such analysis indicates that a possible impairment may exist,
the Company is then required to estimate the fair value of the asset and, as
deemed appropriate, expense all or a portion of the asset. The determination of
fair value includes numerous uncertainties, such as the impact of competition on
future value. The Company believes that it has made reasonable estimates and
judgments in determining whether our long-lived assets have been impaired;
however, if there is a material change in the assumptions used in our
determination of fair values or if there is a material change in economic
conditions or circumstances influencing fair value, the Company could be
required to recognize certain impairment charges in the future.
Prepaid Expenses and Laboratory Supplies--The majority of prepaid expenses
consist of bulk purchases of laboratory supplies used on a daily basis in the
lab and items that will be used for future production. The items in prepaid
expenses are expensed when used in production or daily activity as R&D expenses.
These items are disposables and consumables and can be used for both the
manufacturing of Multikine for clinical studies and in the laboratory for
quality control and bioassay use. They can be used in training, testing and
daily laboratory activities. Other prepaid expenses are payments for services
over a long period and are expensed over the time period for which the service
is rendered.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
Market risk is the potential change in an instrument's value caused by, for
example, fluctuations in interest and currency exchange rates. The Company has
only one derivative financial instrument at June 30, 2006, the Series E
warrants, which will expire in August of 2006. Additionally, the Company is not
exposed to interest rate risks due to the fact the Company has no outstanding
debt as of June 30, 2006. Further, there is no exposure to risks associated with
foreign exchange rate changes because none of the operations of the Company are
transacted in a foreign currency. The interest rate risk in investments is
considered immaterial due to the fact that all investments have maturities of 3
months or less.
28
Item 4. CONTROLS AND PROCEDURES
Geert Kersten, CEL-SCI's Chief Executive and Financial Officer, has evaluated
the effectiveness of CEL-SCI's disclosure controls and procedures as of June 30,
2006, and in his opinion CEL-SCI's disclosure controls and procedures ensure
that material information relating to CEL-SCI, including CEL-SCI's consolidated
subsidiary, is made known to him by others within those entities, particularly
during the period in which this report is being prepared, so as to allow timely
decisions regarding required disclosure. To the knowledge of Mr. Kersten there
have been no significant changes in CEL-SCI's internal controls or in other
factors that could significantly affect CEL-SCI's internal controls subsequent
to the date of evaluation, and as a result, no corrective actions with regard to
significant deficiencies or material weakness in CEL-SCI's internal controls
were required with the exception of accounting for certain derivatives under FAS
133 and EITF 00-19. Subsequent to September 30, 2005, CEL-SCI adopted additional
accounting policies and internal controls to address the issues raised by the
restatement of previously issued financial statements for the years ended
September 30, 2004 and 2003.
29
PART II
Item 2. Changes in Securities and Use of Proceeds
------------------------------------------
None
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
None
Item 5. Other Information
-----------------
None
Item 6. Exhibits
(a) Exhibits
Number Exhibit
31 Rule 13a-14(a) Certifications
32 Section 1350 Certifications
(b) Reports on Form 8-K
The Company filed no reports on Schedule 8-K during the quarter
ended June 30, 2006.
30
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 14, 2006 /s/ Geert Kersten
------------------------------
Geert Kersten
Chief Executive Officer*
*Also signing in the capacity of the Chief Accounting Officer and Principal
Financial Officer