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 March 31, 2008
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________ to ______________.
Commission File Number 0-11503
CEL-SCI CORPORATION
Colorado 84-0916344
-------------------------------- ---------------------
State or other jurisdiction (IRS) Employer
of incorporation Identification Number
8229 Boone Boulevard, Suite 802
Vienna, Virginia 22182
----------------------------------
Address of principal executive offices
(703) 506-9460
----------------------------------
Registrant's telephone number, including area code
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports) and (2) had been subject to
such filing requirements for the past 90 days.
Yes ____X_____ No __________
Indicate by check mark whether the Registrant is a large accelerated filer,
and accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of "large accelerated filer," "accelerated
filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
(Check One):
Large accelerated filer [ ] Accelerated filer [ ]
Non-accelerated filer [ ] Smaller reporting company [X]
(Do not check if a smaller reporting company)
Indicate by check mark whether the Registrant is a shell company (as defined
in Exchange Act Rule 12b-2 of the Exchange Act).
Yes _________ No _____X____
Class of Stock No. Shares Outstanding Date
Common 117,657,105 May 13, 2008
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
Notes to Condensed Consolidated Financial Statements (unaudited) 8
Item 2.
Management's Discussion and Analysis of Financial Condition 18
and Results of Operations
Item 3.
Quantitative and Qualitative Disclosures about Market Risks 21
Item 4T.
Controls and Procedures 21
PART II
Item 2.
Changes in Securities and Use of Proceeds 23
Item 4.
Submission of Matters to a Vote of Security Holders 23
Item 5.
Other Information 24
Item 6.
Exhibits 24
Signatures 25
2
CEL-SCI CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
ASSETS March 31, September 30,
2008 2007
CURRENT ASSETS
Cash and cash equivalents $ 264,818 $10,993,021
Interest and other receivables 72,621 36,393
Prepaid expenses 48,505 34,578
Inventory used for R&D and manufacturing 316,344 385,650
Deposits 14,828 14,828
---------- -----------
Total current assets 717,116 11,464,470
RESEARCH AND OFFICE EQUIPMENT AND
LEASEHOLD IMPROVEMENTS--
Less accumulated depreciation of $1,928,766
and $1,859,644 684,527 233,876
PATENT COSTS- less accumulated amortization
of $1,054,148 and $896,407 563,402 541,380
RESTRICTED CASH 2,164,091 2,168,629
AVAILABLE-FOR-SALE SECURITIES 5,800,000 -
DEFERRED RENT 7,596,892 6,301,364
LONG-TERM INTEREST RECEIVABLES 113,934 21,083
DEFERRED FINANCING COSTS 10,300 -
---------- -----------
TOTAL ASSETS $17,650,262 $20,730,802
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Short-term loan $ 656,340 $ -
Accounts payable 257,552 248,120
Accrued expenses 114,557 98,603
Due to employees 7,472 26,735
Accrued interest on convertible debt - 68,795
Derivative instruments - current portion 872,895 782,732
Deposits held - 3,000
---------- -----------
Total current liabilities 1,908,816 1,227,985
Deferred rent 4,398 1,466
Derivative instruments - noncurrent portion 4,576,622 4,831,252
---------- -----------
Total liabilities 6,489,836 6,060,703
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value; authorized,
100,000 shares; no shares issued and outstanding - -
Common stock, $.01 par value; authorized,
300,000,000 shares; issued and outstanding,
117,532,105 and 115,678,662 shares at
March 31, 2008 and September 30, 2007,
respectively 1,175,321 1,156,787
Additional paid-in capital 132,031,015 130,081,378
Accumulated deficit (122,045,910) (116,568,066)
------------ ------------
Total stockholders' equity 11,160,426 14,670,099
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY $ 17,650,262 $ 20,730,802
============ ============
See notes to condensed consolidated financial statements.
3
CEL-SCI CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
Six Months Ended
March 31,
2008 2007
------ ------
REVENUE:
Grant revenue $ - $ 31,779
Rent income 1,530 12,895
Other income - 841
----------- -----------
Total revenue 1,530 45,515
EXPENSES:
Research and development, excluding
depreciation of $97,856 and $41,794
included below 2,066,029 1,185,023
Depreciation and amortization 133,468 84,158
General and administrative 2,754,569 2,368,850
----------- -----------
Total expenses 4,954,066 3,638,031
----------- -----------
LOSS FROM OPERATIONS (4,952,536) (3,592,516)
GAIN (LOSS) ON DERIVATIVE INSTRUMENTS (170,949) 271,891
INTEREST INCOME 335,987 172,665
INTEREST EXPENSE (265,531) (688,284)
----------- -----------
NET LOSS BEFORE INCOME TAXES (5,053,029) (3,836,244)
INCOME TAX PROVISION - -
----------- -----------
NET LOSS (5,053,029) (3,836,244)
DIVIDENDS (424,815) -
----------- -----------
NET LOSS AVAILABLE TO COMMON SHAREHOLDERS $(5,477,844) $(3,836,244)
=========== ===========
NET LOSS PER COMMON SHARE (BASIC) $ (0.05) $ (0.05)
=========== ===========
NET LOSS PER COMMON SHARE (DILUTED) $ (0.05) $ (0.05)
=========== ===========
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING, BASIC & DILUTED 116,008,631 83,377,267
=========== ===========
See notes to condensed consolidated financial statements.
4
CEL-SCI CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
Three Months Ended
March 31,
2008 2007
------ ------
REVENUE:
Grant revenue $ - $ 17,917
Rent income - 6,805
Other income - -
--------- ----------
Total revenue - 24,722
EXPENSES:
Research and development, excluding
depreciation of $97,035 and $20,832
included below 1,037,063 678,865
Depreciation and amortization 79,215 42,316
General and administrative 968,820 1,316,146
--------- ----------
Total expenses 2,085,098 2,037,327
--------- ----------
LOSS FROM OPERATIONS (2,085,098) (2,012,605)
LOSS ON DERIVATIVE INSTRUMENTS (1,160,937) (447,356)
INTEREST INCOME 157,256 77,114
INTEREST EXPENSE (121,515) (341,038)
--------- ----------
NET LOSS BEFORE INCOME TAXES (3,210,294) (2,723,885)
INCOME TAX PROVISION - -
--------- ----------
NET LOSS (3,210,294) (2,723,885)
DIVIDENDS (424,815) -
--------- ----------
NET LOSS AVAILABLE TO COMMON SHAREHOLDERS $(3,635,109) $(2,723,885)
=========== ===========
NET LOSS PER COMMON SHARE (BASIC) $ (0.03) $ (0.03)
=========== ===========
NET LOSS PER COMMON SHARE (DILUTED) $ (0.03) $ (0.03)
=========== ===========
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING, BASIC & DILUTED 116,312,378 83,836,076
=========== ===========
See notes to condensed consolidated financial statements.
5
CEL-SCI CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
(unaudited)
Six Months Ended
March 31, 2008
2008 2007
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
NET LOSS $(5,053,029) $ (3,836,244)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 133,468 84,158
Penalty shares issued to nonemployees - 156,350
Issuance of common stock and stock options
for services 848,644 562,039
Common stock contributed to 401(k) plan 51,712 44,818
Employee option cost 529,417 62,067
Consultant option extension 99,181 -
Loss (gain) on derivative instruments 170,949 (271,891)
Amortization of discount on convertible debt 144,584 342,475
Impairment loss on retirement of equipment 595 -
Loss on abandonment of patents 1,974 -
Increase in deferred rent 2,932 -
(Increase) decrease in receivables (129,079) 6,396
(Increase) decrease in prepaid expenses (13,927) 454,776
(Increase) decrease in inventory for R&D
and manufacturing 69,306 (1,264)
(Decrease) increase in accounts payable (32,659) 77,973
Increase in accrued expenses 15,954 19,240
Decrease in amount due to employees (19,263) (3,954)
Decrease in deposits held (3,000) -
(Decrease) increase in accrued interest on
convertible debt (68,795) 97,854
--------- ---------
NET CASH USED IN OPERATING ACTIVITIES (3,251,036) (2,205,207)
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additional investment in manufacturing facility (1,290,990) -
Investment in available-for-sale securities (5,800,000) -
Purchase of equipment (520,775) (53,598)
Patent costs (45,845) (51,313)
---------- ----------
NET CASH USED IN INVESTING ACTIVITIES (7,657,610) (104,911)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options 14,403 109,707
Repayment of convertible notes (480,000) -
Proceeds from short term loan 656,340 -
Financing costs (10,300) (10,170)
---------- ----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 180,443 99,537
---------- ----------
NET DECREASE IN CASH AND CASH EQUIVALENTS (10,728,203) (2,210,581)
CASH AND CASH EQUIVALENTS:
Beginning of period 10,993,021 8,080,365
---------- ----------
End of period $ 264,818 $5,869,784
========== ==========
(continued)
See notes to condensed consolidated financial statements.
6
CEL-SCI CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
(unaudited)
Six Months Ended
March 31, 2008
2008 2007
---- ----
SUPPLEMENTAL INFORMATION ON NONCASH TRANSACTIONS:
Patent costs included in accounts payable:
Increase in accounts payable $ (17,860) $ (49,956)
Increase in patent costs 17,860 49,956
--------- ---------
$ - $ -
========= =========
Equipment costs included in accounts payable:
Increase in accounts payable $ (24,230) $ (4,338)
Increase in research and office equipment 24,230 4,338
--------- ---------
$ - $ -
========= =========
Repayment of convertible debt in common stock:
Decrease in convertible debt $ - $ 207,500
Increase in accounts receivable - 25,655
Increase in common stock - (3,431)
Increase in additional paid-in capital - (229,724)
--------- ---------
$ - $ -
========= =========
Cost of investor warrant extension:
Increase in accumulated deficit $ 424,815 $ -
Increase in additional paid-in capital (424,815) -
--------- ---------
$ - $ -
========= =========
NOTE: Interest expense paid during the six months ended March 31, 2008 and 2007
totaled $150,468 and $247,955, respectively.
See notes to condensed consolidated financial statements.
7
CEL-SCI CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
THREE AND SIX MONTHS ENDED MARCH 31, 2008 AND 2007
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying condensed consolidated financial statements of CEL-SCI
Corporation and subsidiary (the Company) are unaudited and certain
information and footnote disclosures normally included in the annual
financial statements prepared in accordance with accounting principles
generally accepted in the United States of America have been omitted
pursuant to the rules and regulations of the Securities and Exchange
Commission. While management of the Company believes that the
disclosures presented are adequate to make the information presented
not misleading, interim consolidated financial statements should be
read in conjunction with the consolidated financial statements and
notes included in the Company's annual report on Form 10-K for the year
ended September 30, 2007.
In the opinion of management, the accompanying unaudited condensed
consolidated financial statements contain all accruals and adjustments
(each of which is of a normal recurring nature) necessary for a fair
presentation of the financial position as of March 31, 2008 and the
results of operations for the three-month and six-month periods then
ended. The condensed consolidated balance sheet as of September 30,
2007 is derived from the September 30, 2007 audited consolidated
financial statements. Significant accounting policies have been
consistently applied in the interim financial statements and the annual
financial statements. The results of operations for the three-month
and six-month periods ended March 31, 2008 and 2007 are not necessarily
indicative of the results to be expected for the entire year.
Significant accounting policies are as follows:
Research and Office Equipment - Research and office equipment is
recorded at cost and depreciated using the straight-line method over
estimated useful lives of five to seven years. Leasehold improvements
are depreciated over the shorter of the estimated useful life of the
asset or the term of the lease. Repairs and maintenance which do not
extend the life of the asset are expensed when incurred. Depreciation
expense for the six-month period ended March 31, 2008 and 2007 were
$93,759 and $59,045, respectively. Depreciation expense for the
three-month period ended March 31, 2008 and 2007 were $62,322 and
$20,832.
Patents - Patent expenditures are capitalized and amortized using the
straight-line method over the shorter of the expected useful life or
the legal life of the patent (17 years). In the event changes in
technology or other circumstances impair the value or life of the
patent, appropriate adjustment in the asset value and period of
amortization is made. An impairment loss is recognized when estimated
future undiscounted cash flows expected to result from the use of the
asset, and from disposition, is less than the carrying value of the
8
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 six-month and three-month periods ended March 31, 2008, the
Company recorded patent impairment charges of $1,974 and $0. For the
six-month period ended March 31, 2008 and 2007, amortization of patent
costs totaled $39,709 and $42,364, respectively. For the three-month
periods ended March 31, 2008 and 2007, amortization of patent costs
totaled $20,170 and $21,485 respectively. The Company estimates that
amortization expense will be $77,846 for each of the next five years,
totaling $389,230.
Research and Development Costs - Research and development expenditures
are expensed as incurred. Total research and development costs,
excluding depreciation, were $2,066,029 and $1,185,023 for the six
months ended March 31, 2008 and 2007. For the three months ended March
31, 2008 and 2007, total research and development costs were $1,037,063
and $678,865, respectively.
Income Taxes - The Company uses the asset and liability method of
accounting for income taxes. Under the asset and liability method,
deferred tax assets and liabilities are recognized for future tax
consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases and operating and tax loss carryforwards.
Deferred tax assets and liabilities are measured using enacted tax
rates expected to apply to taxable income in the years in which
temporary differences are expected to be recovered or settled. The
effect on deferred tax assets and liabilities of a change in tax rates
is recognized in income in the period that includes the enactment
date. The Company records a valuation allowance to reduce the deferred
tax assets to the amount that is more likely than not to be recognized.
The Company adopted the provisions of FASB Interpretation No. 48,
"Accounting for Uncertainty in Income Taxes" ("FIN 48") effective
January 1, 2007. FIN 48 provides a comprehensive model for how a
company should recognize, measure, present and disclose in its
financial statements uncertain tax positions that the company has taken
or expects to take on a tax return. The Company did not have any
unrecognized tax benefits and there was no effect on its financial
condition or results of operations as a result of implementing FIN 48.
The Company elected to continue to report any interest and penalties as
income taxes. No interest or penalties were accrued as a result of the
adoption of FIN 48.
Stock-Based Compensation - In December 2004, the FASB issued SFAS No.
123R, "Share-Based Payment". SFAS No. 123R requires companies to
recognize expense associated with share based compensation
arrangements, including employee stock options, using a fair
value-based option pricing model. SFAS No. 123R applies to all
transactions involving issuance of equity by a company in exchange for
goods and services, including employees. Compensation expense has been
recognized for awards that were granted, modified, repurchased or
cancelled on or after October 1, 2005 as well as for the portion of
9
awards previously granted that vested during the period ended March 31,
2008. For the six months ended March 31, 2008 and 2007, the Company
recorded $64,409 and $62,067, respectively in general and
administrative expense for the cost of employee options. The Company's
options vest over a three-year period from the date of grant. After
one year, the stock is one-third vested, with an additional one-third
vesting after two years and the final one-third vesting at the end of
the three-year period. There were 1,324,000 and -0- options granted
to employees during the six-month periods ended March 31, 2008 and
2007. Options are granted with an exercise price equal to the closing
bid price of the Company's stock on the day before the grant. The
Company determines the fair value of the employee compensation using
the Black Scholes method of valuation.
During the six months ended March 31, 2008, no options from the
non-qualified plan vested. During the six months ended March 31, 2008,
no options from the incentive stock option plan vested.
The Company has Incentive Stock Option Plans, Non-Qualified Stock
Option Plans, a Stock Compensation Plan and Stock Bonus Plans. All
Stock Option and Bonus Plans have been approved by the stockholders. A
summary description of these Plans follows. In some cases these Plans
are collectively referred to as the "Plans".
Incentive Stock Option Plan. The Incentive Stock Option Plans authorize
the issuance of shares of the Company's common stock to persons who
exercise options granted pursuant to the Plan. Only Company employees
may be granted options pursuant to the Incentive Stock Option Plan.
To be classified as incentive stock options under the Internal Revenue
Code, options granted pursuant to the Plans must be exercised prior to
the following dates:
(a) The expiration of three months after the date on which an option
holder's employment by the Company is terminated (except if such
termination is due to death or permanent and total disability);
(b) The expiration of 12 months after the date on which an option holder's
employment by the Company is terminated, if such termination is due to
the Employee's permanent and total disability;
(c) In the event of an option holder's death while in the employ of the
Company, his executors or administrators may exercise, within three
months following the date of his death, the option as to any of the
shares not previously exercised;
The total fair market value of the shares of common stock (determined
at the time of the grant of the option) for which any employee may be
granted options which are first exercisable in any calendar year may
not exceed $100,000.
10
Options may not be exercised until one year following the date of
grant. Options granted to an employee then owning more than 10% of the
common stock of the Company may not be exercisable by its terms after
five years from the date of grant. Any other option granted pursuant to
the Plan may not be exercisable by its terms after ten years from the
date of grant.
The purchase price per share of common stock purchasable under an
option is determined by the Committee but cannot be less than the fair
market value of the common stock on the date of the grant of the option
(or 110% of the fair market value in the case of a person owning more
than 10% of the Company's outstanding shares).
Non-Qualified Stock Option Plans. The Non-Qualified Stock Option Plans
authorize the issuance of shares of the Company's common stock to
persons that exercise options granted pursuant to the Plans. The
Company's employees, directors, officers, consultants and advisors are
eligible to be granted options pursuant to the Plans, provided however
that bona fide services must be rendered by such consultants or
advisors and such services must not be in connection with the offer or
sale of securities in a capital-raising transaction. The option
exercise price is determined by the Committee but cannot be less than
the market price of the Company's common stock on the date the option
is granted.
During the six months ended March 31, 2008 and 2007, 50,467 and 564,966
options were exercised. All options exercised were from the
non-qualified plans. The total intrinsic value of options exercised
during the six months ended March 31, 2008 and 2007 was $17,691 and
$210,559, respectively. The total intrinsic value of options exercised
during the three months ended March 31, 2008 and 2007 was $0 and
$78,915, respectively.
Options to non-employees are accounted for in accordance with FASB's
Emerging Issues Task Force (EITF) Issue 96-18 Accounting for Equity
Instruments That Are Issued to Other Than Employees for Acquiring, or
in Conjunction with Selling, Goods or Services. Accordingly,
compensation is recognized when goods or services are received and is
measured using the Black-Scholes valuation model. The Black-Scholes
model requires management to make assumptions regarding the fair value
of the options at the date of grant and the expected life of the
options. There were no options granted to non-employees during the six
months ended March 31, 2008. There were 258,000 shares of common stock
issued to consultants during the six months ended March 31, 2008 at a
cost for the six months ended March 31, 2008 of $11,395. During the
six months ended March 31, 2008, 2,016,176 options to non-employees
were extended. See note D. For the six months ended March 31, 2007,
common stock and options with a value of $562,039 were issued for
services.
11
B. NEW ACCOUNTING PRONOUNCEMENTS
In September 2006, FASB issued SFAS No. 157, "Fair Value
Measurements". The statement defines fair value, establishes a
framework for measuring fair value in GAAP and expands disclosures
about fair value measurements. The statement is effective for
financial statements issued for fiscal years beginning after November
15, 2007 and interim periods within those fiscal years. In September
2007, the FASB provided a one-year deferral for the implementation of
SFAS 157 with regard to nonfinancial assets and liabilities. The
Company is evaluating whether this statement will affect its current
practice in valuing fair value of its derivatives each quarter.
In February 2007, FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities - Including an amendment of
FASB Statement No. 15". The Statement permits companies to choose to
measure many financial instruments and certain other items at fair
value. The statement is effective for fiscal years that begin after
November 15, 2007, but early adoption is permitted. The Company is
evaluating the effect of the adoption of this statement.
In December 2007, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 141
(revised 2007), Business Combinations, which replaces SFAS No. 141R.
The statement retains the purchase method of accounting for
acquisitions, but requires a number of changes, including changes in
the way assets and liabilities are recognized in the purchase
accounting. It also changes the recognition of assets acquired and
liabilities assumed arising from contingencies, requires the
capitalization of in-process research and development at fair value,
and requires the expensing of acquisition-related costs as incurred.
SFAS No. 141R is effective beginning October 1, 2009 and will apply
prospectively to business combinations completed on or after that date.
In December 2007, the FASB issued SFAS No. 160, Noncontrolling
Interests in Consolidated Financial Statements, an amendment of ARB 51,
which changes the accounting and reporting for minority interests.
Minority interests will be recharacterized as noncontrolling interests
and will be reported as a component of equity separate from the
parent's equity, and purchases or sales of equity interests that do not
result in a change in control will be accounted for as equity
transactions. In addition, net income attributable to the
noncontrolling interest will be included in consolidated net income on
the face of the income statement and, upon a loss of control, the
interest sold, as well as any interest retained, will be recorded at
fair value with any gain or loss recognized in earnings. SFAS No. 160
is effective beginning October 1, 2009 and will apply prospectively,
except for the presentation and disclosure requirements, which will
apply retrospectively. We are currently assessing the potential impact
that adoption of SFAS No. 160 would have on our consolidated financial
statements.
12
In March 2008, the FASB issued SFAS No. 161, Disclosures about
Derivative Instruments and Hedging Activities - an amendment of FASB
Statement No. 133, which changes disclosure requirements for derivative
instruments and hedging activities. The statement is effective for
periods ending on or after November 15, 2008, with early application
encouraged. The Company is currently assessing the additional
requirements of this statement.
C. AVAILABLE-FOR-SALE SECURITIES
At March 31, 2008, the Company had $5.8 million in face value of Auction
Rate Cumulative Preferred Shares (ARPs), liquidation preference of $25,000
per share, of an income mutual fund. The ARPs are invested primarily in a
globally diversified portfolio of convertible instruments, common and
preferred stocks, and income producing securities such as investment grade
and below investment grade (high yield/high risk) debt securities. All of
the ARPs had credit ratings of AAA when purchased and still have the AAA
rating today. None of the ARPs are mortgage-backed debt. Historically, ARPs
have been highly liquid, using a Dutch auction process that resets the
applicable interest rates weekly to provide liquidity at par ($25,000 per
share). However, as a result of liquidity issues experienced in the global
credit and capital markets, the auctions for all of our remaining ARPs
since February 29, 2008 have failed. As a result thereof we are now
collecting interest at a higher rate, pursuant to the ARPs agreement. The
failures of these auctions do not affect the value of the collateral
underlying the ARPs and we will continue to earn and receive interest at
contractually set rates. In May 2008, the fund company refinanced $300
million of the $350 million outstanding ARPs. On May 6, 2008, the fund
company announced the redemption of $300 million or, 85.7% of the ARPs on
various dates between May 19, 2008 and May 23, 2008 subject to the
investment fund lottery system. Until redemption or when these ARPs are
completely refinanced, the Company has the ability to borrow against 100%
of the ARPs at a favorable interest rate less than the rate it earns on the
ARPs (see Note F).
The fund holding the Auction Rate Preferred Shares must maintain, 1)
asset coverage of the Preferred Shares as required by the rating agency
or agencies rating the Preferred Shares; and 2) asset coverage of at
least 200% with respect to senior securities that are stock, including
the Preferred Shares. In the event that the Fund does not maintain or
cure failures to maintain these coverage tests, some or all of the
Preferred Shares will be subject to mandatory redemptions. Based on
the composition of the Fund's portfolio as of August 31, 2007, the
asset coverage of the Preferred Shares as measured pursuant to the 1940
Act was approximately 336%.
13
There have been no defaults of the underlying collateral and interest
continues to be paid at the contractual rate and in a timely manner.
Because we have been unable to liquidate the remaining $5.8 million of
ARPs, and because of continued liquidity issues in the global credit
and capital markets, we have classified these ARPs as non-current as of
March 31, 2008.
The Company continues to carry the ARPs at par value ($25,000 per share) as
the Company believes that it will be able to collect all amounts due. This
conclusion is further supported by the fact that the issuer has already
refinanced $300 million of the $350 million outstanding ARPs and is
expected to shortly redeem 85.7% or $300 million of the ARPs.
D. STOCKHOLDERS' EQUITY
In November and December 2007, the Company extended 1,905,633 employee
options and 2,016,176 investor and consultant warrants. The options
and warrants were due to expire from December 1, 2007 through December
31, 2008. All options and warrants were extended for an additional
five years from the original expiration date. The cost of the
extension of employee options of $465,008 was recorded as a debit to
general and administrative expense and a credit to additional paid-in
capital. The cost of the extension of investor warrants of $424,815
was recorded as a debit to accumulated deficit (dividend) and a credit
to additional paid-in capital. The cost of the extension of the
consultant warrants of $99,181 is recorded as a debit to general and
administrative expense and a credit to additional paid-in capital. The
additional cost of the extension of employee options and investor and
consultant warrants was determined using the Black Scholes method.
In January and March 2008, the Company issued 1,116,020 shares of
restricted common stock to employees. The stock was valued at prices
ranging from $0.52 to $0.62. The total cost of the stock issued to
employees was $687,830. The cost of the stock for the six and three
months ended March 31, 2008 of $49,101 was expensed to research and
development ($18,171) and general and administrative expense
($30,930). In addition, on February 26, 2008, the Company issued a
total of 258,000 shares of restricted common stock to two consultants
at $0.52 per share for a total cost of $134,160. This stock will be
expensed over the period of the contracts with the consultants. The
expense for the quarter ended March 31, 2008 was $11,395.
E. SERIES K CONVERTIBLE DEBT
In August 2006, the Company issued $8,300,000 in aggregate principal
amount of convertible notes (the "Series K Notes") together with
warrants to purchase 4,825,581 shares of the Company's common stock
(the Series K Warrants"). Additionally, in connection with issuance of
the Series K Notes and Series K Warrants, the placement agent received
a fee of $498,000 and 386,047 fully vested warrants (the "Placement
Agent Warrants") to purchase shares of the Company's common stock. Net
proceeds were $7,731,290, net of $568,710 in direct transaction costs,
including the placement agent fee.
14
The Series K Notes were convertible into 10,480,000 shares of the
Company's common stock at the option of the holder at any time prior to
maturity at a conversion price of $0.75 per share, subject to
adjustment for certain events. The Series K Warrants are exercisable
over a five-year period from February 4, 2007 through February 4, 2012
at $0.75 per share.
The Series K Notes bear interest at the greater of 8% or the six month
LIBOR plus 300 basis points, and are required to be repaid in thirty equal
monthly installments of $207,500 beginning on March 4, 2007 and continuing
through September 4, 2010. Any remaining principal balance is required to
be repaid on August 4, 2011; however, holders of the Series K Notes may
require repayment of the entire remaining principal balance at any time
after August 4, 2010. Interest is payable quarterly beginning September 30,
2006. Each payment of principal and accrued interest may be settled in cash
or in shares of common stock at the option of the Company. The number of
shares deliverable under the share-settlement option is determined based on
the lower of (a) $0.75 per share, as adjusted pursuant to the terms of the
Series K Notes or (b) 90% applied to the arithmetic average of the
volume-weighted-average trading prices for the twenty day period
immediately preceding each share settlement. The Company may not make
payments in shares if such payments would result in the cumulative issuance
of shares of its common stock exceeding 19.999% of the shares outstanding
on the day immediately preceding the issuance date of the Series K Notes,
unless prior approval is given by vote of at least a majority of the shares
outstanding. The Company received such approval on November 17, 2006.
The Company is accounting for the Series K Warrants as derivative
liabilities in accordance with SFAS No. 133. A debt discount of
$1,734,472 is being amortized to interest expense using the effective
interest method over the expected term of the Series K Notes. During
the six-month periods ended March 31, 2008 and 2007, the Company
recorded interest expense of $144,584 and $342,475, respectively, in
amortization of the debt discount. As of March 31, 2008, the fair
value of the Series K notes is $2,920,012 and the fair value of the
investor and placement agent warrants is $2,529,505. The Company
recorded a loss on derivative instruments of $170,949 and a gain of
$271,891 during the six months ended March 31, 2008 and 2007
respectively. For the three months ended March 31, 2008 and 2007, the
Company recorded a loss on derivative instruments of $1,160,937 and
$447,356, respectively.
During the six months ended March 31, 2008 and 2007, no Series K notes
were converted into shares of common stock. During the six months
ended March 31, 2008, principal payments of $480,000 were made to the
holders of the Series K notes. As of March 31, 2008, $2,805,716 of the
Series K Notes remained.
15
The following summary comprises the total of the fair value of the
Series K debt and related derivative instruments at March 31, 2008 and
September 30, 2007:
March 31, September 30,
2008 2007
Face value of debt $2,805,716 $3,285,715
Discount on debt (298,502) (443,086)
Investor warrants 1,734,472 1,734,472
Placement agent warrants 187,371 192,826
Fair value adjustment-convertible debt 412,798 168,207
Fair value adjustment-investor warrants 607,662 675,850
---------- ----------
Total fair value $5,449,517 $5,613,984
========== ==========
F. SHORT-TERM LOAN
The Company has a line of credit through its bank to borrow up to 100% of
the $5.8 million ARPs (see Note C) at an interest rate of prime minus 1%
(4% at March 31, 2008). As of March 31, 2008, the Company had borrowed
$656,340. During the six and three months ended March 31, 2008, the Company
had paid $539 in interest on the line of credit. The line of credit is
secured by the ARPs. The line of credit will not expire as long as the
Company holds the ARPs, and is secured by the Company's ARPs.
G. OPERATIONS AND FINANCING
The Company has incurred significant costs since its inception in
connection with the acquisition of an exclusive worldwide license to
and later acquisition of the technology of certain patented and
unpatented proprietary technology and know-how relating to the human
immunological defense system, patent applications, research and
development, administrative costs, construction of laboratory
facilities and clinical trials. The Company has funded such costs with
proceeds realized from the public and private sale of its common and
preferred stock. The Company will be required to raise additional
capital or find additional long-term financing in order to continue
with its research efforts. To date, the Company has not generated any
revenue from product sales. The ability of the Company to complete the
16
necessary clinical trials and obtain FDA approval for the sale of products
to be developed on a commercial basis is uncertain. The Company plans to
seek continued funding of the Company's development by raising additional
capital. It is the opinion of management that sufficient funds will be
available from the Series K convertible debt, the April 2007 financing,
other external financing and additional capital and/or expenditure
reductions in order to meet the Company's liabilities and commitments as
they come due through March 31, 2009. 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 has invested in ARPs (See Note C). Because of liquidity
issues with these ARPs, the Company has borrowed $656,340 on a line of
credit. The Company believes that these issues will be resolved and in
the meantime has access to 100% of the invested assets through a line
of credit with the Company's bank.
H. DIVIDENDS
The Company has paid no dividends to shareholders since inception. The
cost of the extension of investor warrants during the six months ended
March 31, 2008 of $424,815 is recorded as a dividend, and increases the
accumulated deficit.
I. COMMITMENTS AND CONTINGENCIES
Lease Agreement - In August 2007, CEL-SCI leased a building near
Baltimore, Maryland. The building, which consists of approximately
73,000 square feet, will be remodeled in accordance with CEL-SCI's
specifications so that it can be used by CEL-SCI to manufacture
Multikine for CEL-SCI's Phase III clinical trial and sales of the drug
if approved by the FDA. The lease is for a term of twenty years and
requires annual base rent payments of $1,575,000 during the first year
of the lease. The annual base rent escalates each year at 3%. CEL-SCI
is also required to pay all real and personal property taxes, insurance
premiums, maintenance expenses, repair costs and utilities. The lease
allows CEL-SCI, at its election, to extend the lease for two ten-year
periods or to purchase the building at the end of the 20-year lease.
The lease required CEL-SCI to pay $3,150,000 towards the remodeling
costs, which will be recouped by reductions in the annual base rent of
$303,228 in years six through twenty of the lease. On January 24,
2008, a second amendment to the lease for the manufacturing facility
was signed. In accordance with the amendment, CEL-SCI is required to
pay the following: 1) an additional $518,790 for movable equipment,
which will increase restricted cash, and 2) an additional $1,295,528
into the escrow account to cover additional costs, which will increase
deferred rent. These funds were transferred in early February 2008.
17
CEL-SCI CORPORATION
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Liquidity and Capital Resources
The Company has had only limited revenues from operations since its inception
in March 1983. The Company has relied upon proceeds realized from the public
and private sale of its Common Stock and convertible notes as well as
short-term borrowings to meet its funding requirements. Funds raised by the
Company have been expended primarily in connection with the acquisition of an
exclusive worldwide license to, and later purchase of, certain patented and
unpatented proprietary technology and know-how relating to the human
immunological defense system, patent applications, the repayment of debt, the
continuation of Company sponsored research and development and administrative
costs, and the construction of laboratory facilities. Inasmuch as the
Company does not anticipate realizing significant revenues until such time as
it enters into licensing arrangements regarding its technology and know-how
or until such time it receives permission to sell its product (which could
take a number of years), the Company has been dependent upon the proceeds
from the sale of its securities to meet all of its liquidity and capital
resource requirements.
During the six-month period ended March 31, 2008 and 2007, the Company used
cash totaling $10,728,203 and $2,210,581 respectively. For the six months
ended March 31, 2008 and 2007, cash used in operating activities totaled
$3,251,036 and $2,205,207. For the six months ended March 31, 2008 and 2007,
cash provided by financing activities totaled $180,443 and $99,537,
respectively. Repayment of Series K notes ($480,000) and financing costs
($10,300) were used in financing activities and cash was provided by the
exercise of employee options ($14,403) and a short term loan of $656,340
during the six months ended March 31, 2008. For the six months ended March
31, 2007, cash provided by financing activities of $109,707 was from the
exercise of employee options, partially offset by financing costs of $10,170.
Cash used in investing activities was $7,657,610 and $104,911 for the six
months ended March 31, 2008 and 2007. This consisted of purchases of
equipment and legal costs incurred in patent applications and, for the six
months ended March 31, 2008, an additional investment in the manufacturing
facility of $1,290,990 and an increase in available for sale securities of
$5,800,000.
The Company has invested in ARPs (See Note C). Because of liquidity issues
with these ARPs, the Company has borrowed $656,340 on a line of credit. The
Company believes that these issues will be resolved and in the meantime has
access to 100% of the invested assets through a line of credit with the
Company's bank.
Results of Operations and Financial Condition
Grant revenue decreased by $31,779 during the six months ended March 31,
2008, compared to the same period of the previous year, due to the completion
of the work funded by the grants. The final grant ended on March 31, 2007.
Grant revenue decreased by $17,917 during the three months ended March 31,
2008 compared to the same period of the previous year for the same reason.
18
During the six-month period ended March 31, 2008, research and development
expenses increased by $881,006 compared to the six-month period ended March
31, 2007. This increase was due to expenses relating to the preparation for
the Phase III clinical trial on Multikine. The Company is preparing for the
opening of the manufacturing facility. During the three months ended March
31, 2008, research and development expenses increased by $358,198 over the
three months ended March 31, 2008 for the same reason.
During the six-month period ended March 31, 2008, general and administrative
expenses increased by $385,719 compared to the six-month period ended March 31,
2007. This change was primarily due to: 1) the cost of stock issued to employees
(approximately $30,930), 2) the cost of extending employee options
(approximately $465,000), 3) an increase in travel related expenses
(approximately $22,700), and 4) the cost of extending consultant warrants
(approximately $99,200). These increases were partially offset by a decrease in
business development costs (approximately $365,000). During the three months
ended March 31, 2008, general and administrative expenses decreased by $347,326
compared to the three months ended March 31, 2007. This was primarily due to a
decrease in presentation costs (approximately $217,300) and a decrease in legal
and accounting costs (approximately $62,000), partially offset by the cost of
stock issued to employees (approximately $30,930).
Interest income during the six months ended March 31, 2008 increased by
$163,322 compared to the six-month period ended March 31, 2007. The increase
was due to interest earned on the funds received from the April 2007
financing. Interest income increased during the three months ended March 31,
2008 over the same period ended March 31, 2007 by $80,142. The increase was
due to interest earned on a higher amount of invested funds.
The loss on derivative instruments of $170,949 for the six months ended March
31, 2008, and for the three months ended March 31, 2008, of $1,160,937 was
the result of the change in fair value of the Series K Notes and Series K
Warrants during the period. These losses were caused by the increase in
share price of the Company's common stock.
The interest expense of $265,531 for the six months ended March 31, 2008 was
composed of two elements: 1) amortization of the Series K discount
($144,584) and 2) interest paid and accrued on the Series K debt ($120,947).
This is a decline of approximately $422,753 from the six months ended March
31, 2007 because of the lower balance of Series K debt. During the three
months ended March 31, 2008, the interest expense was $121,515, a decrease of
$219,523 from the three months ended March 31, 2007. This decline is because
of the lower balance of the Series K debt. Amortization of the Series K
discount was $64,081 and interest paid on the series K debt totaled $56,895.
Additional interest expense was on the short term loan, totaling $539.
Research and Development Expenses
During the six and three-month periods ended March 31, 2008 and 2007, 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.
19
Six Months Three Months
Ended March 31, Ended March 31,
2008 2007 2008 2007
---- ---- ---- ----
MULTIKINE $1,865,345 $1,032,075 $ 956,397 $603,754
L.E.A.P.S 200,684 152,948 80,666 75,111
---------- ---------- ---------- --------
TOTAL $2,066,029 $1,185,023 $1,037,063 $678,865
========== ========== ========== ========
In January 2007, the Company received a "no objection" letter from the FDA
indicating that it could proceed with the Phase III protocol with Multikine
in head & neck cancer patients. The protocol for the Phase III clinical
trial was designed to develop conclusive evidence of the safety and efficacy
of Multikine in the treatment of advanced primary squamous cell carcinoma of
the oral cavity. The Company had previously received a "no objection" letter
from the Canadian Biologics and Genetic Therapies Directorate which enabled
the Company to begin its Phase III clinical trial in Canada.
As of March 31, 2008, the Company was involved in a number of pre-clinical
studies with respect to its L.E.A.P.S. technology. The Company does not know
what obstacles it will encounter in future pre-clinical and clinical studies
involving its L.E.A.P.S. technology. Consequently, the Company cannot
predict with any certainty the funds required for future research and
clinical trials and the timing of future research and development projects.
Clinical and other studies necessary to obtain regulatory approval of a new
drug involve significant costs and require several years to complete. The
extent of the Company's clinical trials and research programs are primarily
based upon the amount of capital available to the Company and the extent to
which the Company has received regulatory approvals for clinical trials. The
inability of the Company to conduct clinical trials or research, whether due
to a lack of capital or regulatory approval, will prevent the Company from
completing the studies and research required to obtain regulatory approval
for any products which the Company is developing. Without regulatory
approval, the Company will be unable to sell any of its products.
In August 2007, CEL-SCI leased a building near Baltimore, Maryland. The
building, which consists of approximately 73,000 square feet, will be
remodeled in accordance with CEL-SCI's specifications so that it can be used
by CEL-SCI to manufacture Multikine for CEL-SCI's Phase III clinical trial
and sales of the drug if approved by the FDA. The lease is for a term of
twenty years and requires annual base rent payments of $1,575,000 during the
first year of the lease. The annual base rent escalates each year at 3%.
CEL-SCI is also required to pay all real and personal property taxes,
insurance premiums, maintenance expenses, repair costs and utilities. The
lease allows CEL-SCI, at its election, to extend the lease for two ten-year
periods or to purchase the building at the end of the 20-year lease. The
lease required CEL-SCI to pay $3,150,000 towards the remodeling costs, which
will be recouped by reductions in the annual base rent of $303,228 in years
six through twenty of the lease. In January 2008, the Company signed a
second amendment to the lease. In accordance with the lease, on February 8,
2008, the Company paid an additional $1,295,528 toward the remodeling costs
and a further $518,790 to pay for lab equipment. The building is expected to
be ready for occupancy during the third calendar quarter of 2008.
20
Regulatory authorities prefer to see biologics such as Multikine manufactured
for commercial sale in the same manufacturing facility for Phase III clinical
trials and the sale of the product since this arrangement helps to ensure
that the drug lots used to conduct the clinical trials will be consistent
with those that may be subsequently sold commercially. Although some biotech
companies outsource their manufacturing, this can be risky with biologics
because they require intense manufacturing and process control. With biologic
products a minor change in manufacturing and process control can result in a
major change in the final product. Good and consistent manufacturing and
process control is critical and is best assured if the product is
manufactured and controlled in the manufacturer's own facility by their own
specially trained personnel. Since all of the Company's projects are under
development, the Company cannot predict when it will be able to generate any
revenue from the sale of any of its products.
Critical Accounting Estimates and Policies
Management's discussion and analysis of the Company's financial condition and
results of operations is based on its unaudited condensed consolidated
financial statements. The preparation of these financial statements is based
on the selection of accounting policies and the application of significant
accounting estimates, some of which require management to make judgments,
estimates and assumptions that affect the amounts reported in the financial
statements and notes. The Company believes some of the more critical
estimates and policies that affect its financial condition and results of
operations are in the areas of revenue recognition, operating leases, asset
retirement obligations, stock-based compensation and income taxes. For more
information regarding the Company's critical accounting estimates and
policies, see Part II, Item 7, MD&A "Critical Accounting Estimates and
Policies" of the Company's 2007 10-K. We have discussed the application of
these critical accounting policies and estimates with the Audit Committee of
the Company's Board of Directors.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
As of March 31, 2008, the Company had outstanding Series K Notes and Series K
Warrants which were classified as derivative financial instruments. Interest
on the Series K Notes is tied to the 6-month LIBOR. Should the 6-month LIBOR
increase, interest payments on the Series K debt may increase as well.
The Company has available-for-sale securities totaling $5,800,000 as of March
31, 2008. Due to liquidity issues (See Note C of the condensed financial
statements), the Company has borrowed $656,340 on a line of credit secured by
these securities. The interest rate on the line of credit is at prime minus
1%. Should the prime rate increase, interest payments on the line of credit
may increase as well.
Item 4T. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Geert Kersten, CEL-SCI's Chief Executive and Financial Officer, has evaluated
the effectiveness of CEL-SCI's disclosure controls and procedures as of March
31, 2008, and in his opinion CEL-SCI's disclosure controls and procedures are
effective and ensure that material information relating to CEL-SCI, including
21
CEL-SCI's consolidated subsidiary, is made known to him by others within
those entities, particularly during the period in which this report is being
prepared, so as to allow timely decisions regarding required disclosure. The
Company has determined that these controls and procedures are effective as of
March 31, 2008.
Changes in Internal Control over Financial Reporting
To the knowledge of Mr. Kersten, there have been no significant changes in
CEL-SCI's internal controls or in other factors that could significantly
affect CEL-SCI's internal controls subsequent to the date of evaluation. The
Company continues to evaluate its internal controls.
22
PART II
Item 2. Changes in Securities and Use of Proceeds
None
Item 4. Submission of Matters to a Vote of Security Holders
The annual meeting of CEL-SCI's shareholders was held on March 3,
2008. At the meeting the following persons were elected as directors
for the upcoming year:
Name Votes For Votes Withheld
Maximilian de Clara 77,883,141 3,911,418
Geert Kersten 78,836,734 2,957,825
Alexander Esterhazy 79,118,263 2,676,296
C. Richard Kinsolving 79,280,474 2,514,085
Peter R. Young 79,181,763 2,612,796
At the meeting the following proposals were ratified by the shareholders.
(1) to approve the adoption of CEL-SCI's 2008 Incentive Stock Option
Plan which provides that up to 1,000,000 shares of common stock may
be issued upon the exercise of options granted pursuant to the
Incentive Stock Option Plan;
(2) to approve the adoption of CEL-SCI's 2008 Non-Qualified Stock Option
Plan which provides that up to 1,000,000 shares of common stock may
be issued upon the exercise of options granted pursuant to the
Non-Qualified Stock Option Plan;
(3) to approve the adoption of CEL-SCI's 2008 Stock Bonus Plan which
provides that up to 1,000,000 shares of common stock may be issued
to persons granted stock bonuses pursuant to the Stock Bonus Plan;
(4) to approve an amendment to CEL-SCI's Stock Compensation Plan to
provide for the issuance of up to 1,000,000 additional restricted
shares of common stock to CEL-SCI's directors, officers, employees
and consultants for services provided to the Company;
(5) subject to the determination of CEL-SCI's directors that a reverse
split would be in the best interest of CEL-SCI's shareholders, to
approve a reverse split of CEL-SCI's common stock;
(6) to ratify the appointment of BDO Seidman, LLP as CEL-SCI's
independent registered public accounting firm for the fiscal year
ending September 30, 2008.
23
The following is a tabulation of votes cast with respect to these
proposals:
Votes
---------------------------------------- Broker
Proposal For Against Abstain Non-Votes
1. 22,876,122 6,492,020 359,671 52,066,746
2. 23,134,557 6,157,452 435,804 52,066,746
3. 21,676,413 7,658,224 393,176 52,066,746
4. 21,376,495 7,973,363 377,922 52,066,746
5. 62,659,222 18,672,755 462,582 0
6. 79,208,863 1,057,206 1,528,490 0
Item 5. Other Information
None
Item 6. (a) Exhibits
Number Exhibit
31 Rule 13a-14(a) Certifications
32 Section 1350 Certifications
24
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: May 15, 2008 /s/ Geert Kersten
--------------------------------
Geert Kersten, Chief Executive Officer*
* Also signing in the capacity of the Chief Accounting Officer and Principal
Financial Officer.