UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
(Amendment No. 1)
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 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
incorporation Identification Number
8229 Boone Boulevard, Suite 802
Vienna, Virginia 22182
------------------------------------
Address of principal executive offices
Registrant's telephone number, including area code: (703) 506-9460
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 204,201,968 January 22, 2010
TABLE OF CONTENTS
PART I FINANCIAL INFORMATION
Item 1. Page
----
Condensed Consolidated Balance Sheet (unaudited) 3
Condensed Consolidated Statements of Operations (unaudited) 4
Condensed Consolidated Statement of Cash Flow (unaudited) 5-6
Notes to Condensed Consolidated Financial Statements (unaudited) 7
Item 2.
Management's Discussion and Analysis of Financial Condition 22
and Results of Operations
Item 3.
Quantitative and Qualitative Disclosures about Market Risks 26
Item 4.
Controls and Procedures 26
PART II
Item 2.
Changes in Securities and Use of Proceeds 28
Item 4.
Submission of Matters to a Vote of Security Holders 28
Item 5.
Other Information 28
Item 6.
Exhibits 28
Signatures 29
CEL-SCI CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
ASSETS December 31, September 30,
2008 2008
(As restated)
------------- -------------
CURRENT ASSETS
Cash and cash equivalents $ 98,947 $ 711,258
Short-term investments - 200,000
Prepaid expenses 19,973 27,209
Inventory used for R&D and manufacturing 452,773 395,170
Deposits 9,395 14,828
----------- -----------
Total current assets 581,088 1,348,465
RESEARCH AND OFFICE EQUIPMENT AND
LEASEHOLD IMPROVEMENTS--
Less accumulated depreciation of $2,029,269
and $1,964,597 1,389,944 1,324,686
PATENT COSTS- less accumulated amortization of
$1,112,869 and $1,091,597 574,780 587,439
RESTRICTED CASH 125,284 987,652
DEPOSITS 1,575,000 1,575,000
DEFERRED RENT 8,943,535 8,660,837
LONG-TERM INTEREST RECEIVABLE 267,907 199,593
----------- -----------
TOTAL ASSETS $ 13,457,538 $ 14,683,672
============ =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 714,165 $ 427,509
Accrued expenses 289,586 113,179
Due to employees 64,347 36,077
Accrued interest on convertible debt - 45,558
Derivative instruments - current portion 2,305,657 3,018,697
Short-term loan - 200,000
Short-term loan - related party 100,000 -
----------- -----------
Total current liabilities 3,473,755 3,841,020
Deferred rent 12,780 6,617
----------- -----------
Total liabilities 3,486,535 3,847,637
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,
123,716,263 and 120,796,094 shares at
December 31 and September 30, 2008,
respectively 1,237,163 1,207,961
Additional paid-in capital 135,603,650 134,324,370
Accumulated deficit (126,869,810) (124,696,296)
----------- -----------
Total stockholders' equity 9,971,003 10,836,035
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY $ 13,457,538 $ 14,683,672
============ ============
See notes to condensed consolidated financial statements.
3
CEL-SCI CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
Three Months Ended December 31,
2008 2007
(As restated)
--------------- -----------
REVENUE:
Rent income $ - $ 1,530
----------- ----------
Total revenue - 1,530
EXPENSES:
Research and development, excluding
depreciation of $64,523 and $30,463
included below 1,410,753 1,028,966
Depreciation and amortization 85,944 54,253
General and administrative 1,055,126 1,785,749
----------- ----------
Total expenses 2,551,823 2,868,968
----------- ----------
LOSS FROM OPERATIONS
(2,551,823) (2,867,438)
GAIN (LOSS) ON DERIVATIVE INSTRUMENTS 391,689 989,988
INTEREST INCOME 71,237 178,731
INTEREST EXPENSE (84,616) (144,016)
----------- ----------
NET LOSS BEFORE INCOME TAXES (2,173,513) (1,842,735)
INCOME TAX PROVISION - -
----------- ----------
NET LOSS (2,173,513) (1,842,735)
DIVIDENDS - (424,815)
----------- ----------
NET LOSS AVAILABLE TO COMMON SHAREHOLDERS $ (2,173,513) $(2,267,550)
============ ===========
NET LOSS PER COMMON SHARE (BASIC) $ (0.02) $ (0.02)
============ ===========
NET LOSS PER COMMON SHARE (DILUTED) $ (0.02) $ (0.02)
============ ===========
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING, BASIC & DILUTED 122,215,334 115,708,186
============ ===========
See notes to condensed consolidated financial statements.
4
CEL-SCI CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
(unaudited)
Three Months Ended
December 31,
2008 2007
(As restated)
------------ --------
CASH FLOWS FROM OPERATING ACTIVITIES:
NET LOSS $ (2,173,513) $ (1,842,735)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 85,944 54,253
Issuance of common stock and stock
options for services 516,886 676,917
Common stock contributed to 401(k) plan 16,247 23,969
Employee option cost 155,272 465,008
Consultant option extension - 99,181
Gain on derivative instruments (391,689) (989,988)
Amortization of deferred rent on
manufacturing facility 222,527 -
Amortization of discount on convertible debt 43,649 80,503
Increase in deferred rent 6,163 1,466
Increase in receivables (68,314) (32,685)
Decrease in prepaid expenses 7,236 12,941
(Increases) decrease in inventory for R&D
and manufacturing (57,603) 53,041
Decrease in deposits 5,433 -
Increase (decrease) in accounts payable 272,689 (34,419)
Increase in accrued expenses 176,407 8,458
Increase (decrease) in amount due to employees 28,270 (7,721)
Decrease in deposits held - (3,000)
Decrease in accrued interest on convertible debt (5,404) (5,283)
---------- ----------
NET CASH USED IN OPERATING ACTIVITIES (1,159,800) (1,440,094)
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Decrease in restricted cash 862,368 -
Increase in deferred rent (505,225) -
Sale of investments available-for-sale
securities 200,000 -
Purchase of equipment (115,963) (27,843)
Patent costs (8,613) (5,266)
---------- ----------
NET CASH PROVIDED BY (USED IN)
INVESTING ACTIVITIES 432,567 (33,109)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options - 14,403
Private placement proceeds 499,982 -
Repayment of convertible notes (270,000) (195,000)
Proceeds from short term loan-related party 100,000 -
Repayment of short term loan (200,000) -
Financing costs (15,060) -
---------- ----------
NET CASH (USED IN) PROVIDED BY
FINANCING ACTIVITIES 114,922 (180,597)
---------- ----------
NET DECREASE IN CASH AND CASH EQUIVALENTS (612,311) (1,653,800)
CASH AND CASH EQUIVALENTS:
Beginning of period 711,258 10,993,021
---------- ----------
End of period $ 98,947 $9,339,221
========== ==========
(continued)
5
CEL-SCI CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
(unaudited)
(continued)
Three Months Ended
December 31,
2008 2007
(As restated)
------------ --------
SUPPLEMENTAL INFORMATION ON NONCASH TRANSACTIONS:
Patent costs included in accounts payable:
Increase in accounts payable $ - $ (27,187)
Increase in patent costs - 27,187
---------- ----------
$ - $ -
========== ==========
Equipment costs included in accounts payable:
Increase in accounts payable $ (13,967) $ (2,829)
Increase in research and office equipment 13,967 2,829
---------- ----------
$ - $ -
========== ==========
Payment of convertible debt principal with
common stock:
Decrease in convertible debt $ 95,000 $ -
Increase in common stock (4,056) -
Increase in additional paid-in capital (90,944) -
---------- ----------
$ - $ -
========== ==========
Conversion of interest on convertible debt
into common stock:
Decrease in accrued interest on convertible
debt $ 40,154 $ -
Increase in common stock (1,706)
Increase in additional paid-in capital (38,448)
---------- ----------
$ - $ -
========== ==========
NOTE:
Cash expenditures for interest expense $ 45,058 $ 63,512
========== ==========
See notes to condensed consolidated financial statements.
6
CEL-SCI CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED DECEMBER 31, 2008 AND 2007
(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,
2008.
In the opinion of management, the accompanying unaudited condensed
consolidated financial statements contain all accruals and adjustments
(each of which is of a normal recurring nature) necessary for a fair
presentation of the financial position as of December 31, 2008 and the
results of operations for the three-month period then ended. The condensed
consolidated balance sheet as of September 30, 2008 is derived from the
September 30, 2008 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 period ended December 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
three-month period ended December 31, 2008 and 2007 were $64,672 and
$34,714, respectively.
Patents - Patent expenditures are capitalized and amortized using the
straight-line method over the shorter of the expected useful life or the
legal life of the patent (17 years). In the event changes in technology or
other circumstances impair the value or life of the patent, appropriate
adjustment in the asset value and period of amortization is made. An
impairment loss is recognized when estimated future undiscounted cash
flows expected to result from the use of the asset, and from disposition,
is less than the carrying value of the asset. The amount of the impairment
loss would be the difference between the estimated fair value of the asset
and its carrying value. During the three-month periods ended December 31,
2008 and 2007, the Company recorded no patent impairment charges. For the
three-month periods ended December 31, 2008 and 2007, amortization
7
CEL-SCI CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED DECEMBER 31, 2008 AND 2007
(UNAUDITED)
of patent costs totaled $21,272 and $19,539, respectively. The Company
estimates that amortization expense will be $85,088 for each of the next
five years, totaling $425,440.
Research and Development Costs - Research and development expenditures are
expensed as incurred. Total research and development costs, excluding
depreciation, were $1,410,753 and $1,028,966 for the three months ended
December 31, 2008 and 2007.
Income Taxes - The Company adopted the provisions of FASB Interpretation
No. 48, "Accounting for Uncertainty in Income Taxes" ("FIN 48") effective
October 1, 2007. The Company has net operating loss carryforwards of
approximately $98,093,100. The Company uses the asset and liability method
of accounting for income taxes. Under the asset and liability method,
deferred tax assets and liabilities are recognized for future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective
tax bases and operating and tax loss carryforwards. Deferred tax assets
and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period
that includes the enactment date. The Company records a valuation
allowance to reduce the deferred tax assets to the amount that is more
likely than not to be recognized. There has been no change in the
Company's financial position and results of operations due to the adoption
of FIN 48.
Stock-Based Compensation - In December 2004, the FASB issued SFAS No.
123R, "Share-Based Payment". SFAS No. 123R requires companies to recognize
expense associated with share based compensation arrangements, including
employee stock options, using a fair value-based option pricing model.
SFAS No. 123R applies to all transactions involving issuance of equity by
a company in exchange for goods and services, including employees.
Compensation expense has been recognized for awards that were granted,
modified, repurchased or cancelled on or after October 1, 2005 as well as
for the portion of awards previously granted that vested during the period
ended December 31, 2008. For the three months ended December 31, 2008 and
2007, the Company recorded $155,272 and $465,008, 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 no options granted to employees during the
three-month periods ended December 31, 2008 and 2007. Options are granted
with an exercise price equal to the closing price of the Company's stock
on the day before the grant. The Company determines the fair value of the
employee compensation using the Black Scholes method of valuation.
8
CEL-SCI CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED DECEMBER 31, 2008 AND 2007
(UNAUDITED)
The Company has Incentive Stock Option Plans, Non-Qualified Stock Option
Plans, a Stock Compensation Plan and Stock Bonus Plans. All Stock Option
and Bonus Plans have been approved by the stockholders. A summary
description of these Plans follows. In some cases these Plans are
collectively referred to as the "Plans".
Incentive Stock Option Plan. The Incentive Stock Option Plans authorize
the issuance of shares of the Company's common stock to persons who
exercise options granted pursuant to the Plan. Only Company employees may
be granted options pursuant to the Incentive Stock Option Plan.
To be classified as incentive stock options under the Internal Revenue
Code, options granted pursuant to the Plans must be exercised prior to the
following dates:
(a) The expiration of three months after the date on which an option
holder's employment by the Company is terminated (except if such
termination is due to death or permanent and total disability);
(b) The expiration of 12 months after the date on which an option holder's
employment by the Company is terminated, if such termination is due to
the Employee's permanent and total disability;
(c) In the event of an option holder's death while in the employ of the
Company, his executors or administrators may exercise, within three
months following the date of his death, the option as to any of the
shares not previously exercised;
The total fair market value of the shares of common stock (determined at
the time of the grant of the option) for which any employee may be granted
options which are first exercisable in any calendar year may not exceed
$100,000.
Options may not be exercised until one year following the date of grant.
Options granted to an employee then owning more than 10% of the common
stock of the Company may not be exercisable by its terms after five years
from the date of grant. Any other option granted pursuant to the Plan may
not be exercisable by its terms after ten years from the date of grant.
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).
9
CEL-SCI CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED DECEMBER 31, 2008 AND 2007
(UNAUDITED)
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 three months ended December 31, 2007, 50,467 options were
exercised. All options exercised were from the non-qualified plans. The
total intrinsic value of options exercised during the three months ended
December 31, 2007 was $17,691. There were no options exercised during the
three months ended December 31, 2008.
Options to non-employees are accounted for in accordance with FASB's
Emerging Issues Task Force (EITF) Issue 96-18 Accounting for Equity
Instruments That Are Issued to Other Than Employees for Acquiring, or in
Conjunction with Selling, Goods or Services. Accordingly, compensation is
recognized when goods or services are received and is measured using the
Black-Scholes valuation model. The Black-Scholes model requires management
to make assumptions regarding the fair value of the options at the date of
grant and the expected life of the options. There were no options granted
to non-employees during the three months ended December 31, 2008. There
were 1,003,881 shares of common stock issued to consultants during the
three months ended December 31, 2008 at a cost for the three months ended
December 31, 2008 of $207,299. In addition, a portion of the cost of
common stock issued in previous quarters was expensed. This cost for the
three months ended December 31, 2008 was $309,587.
B. RESTATEMENT
The Company has restated its condensed consolidated financial statements
for the three months ending December 31, 2008 to reflect the amortization
of deferred rent of $222,527 that should have been expensed in the quarter
ended December 31, 2008, but was not expensed until the quarter ended June
30, 2009. The effect on the Company's condensed consolidated financial
statements as a result of the restatement are shown below:
Condensed Consolidated Balance Sheet
------------------------------------
December 31, 2008
-------------------------------------------
As Previously
Reported Adjustment As Restated
------------- ---------- -----------
Deferred rent $ 9,166,062 $ (222,527) $8,943,535
TOTAL ASSETS $ 13,680,065 $ (222,527) $ 13,457,538
============= ============ ==============
10
CEL-SCI CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED DECEMBER 31, 2008 AND 2007
(UNAUDITED)
Accumulated deficit $(126,647,283) $ (222,527) $(126,869,810)
Total stockholders'
equity $ 10,193,530 $ (222,527) $ 9,971,003
============= ============ ==============
LIABILITIES AND
STOCKHOLDERS' EQUITY $ 13,680,065 $ (222,527) $ 13,457,538
============= ============ ==============
Condensed Consolidated Statements of Operations
-----------------------------------------------
Three Months Ended December 31, 2008
-------------------------------------------
As Previously
Reported Adjustment As Restated
------------- ---------- -----------
Research and development $ 1,188,226 $ 222,527 $ 1,410,753
Total expenses 2,329,296 222,527 2,551,823
LOSS FROM OPERATIONS (2,329,296) 222,527 (2,551,823)
NET LOSS $(1,950,986) $ (222,527) $(2,173,513)
=========== ============ ============
Condensed Consolidated Statement of Cash Flows
----------------------------------------------
Three Months Ended December 31, 2008
------------------------------------------
As Previously
Reported Adjustment As Restated
------------- ---------- -----------
NET LOSS $(1,950,986) $(222,527) $(2,173,513)
Amortization of deferred rent
on manufacturing facility - 222,527 (222,527)
C. 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 February 2008, the FASB issued FASB Staff Position
("FSP") No. 157-2, Effective Data of FASB Statement No. 157. FSP 157-2
delays the effective date of SFAS 157 to fiscal years beginning after
November 15, 2008, for nonfinancial assets and nonfinancial liabilities,
except for items that are recognized or disclosed at fair value in the
financial statements on a recurring basis (at least annually). The Company
has adopted this statement and it did not affect its current practice in
valuing fair value of its derivatives each quarter. See Note G.
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,
11
CEL-SCI CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED DECEMBER 31, 2008 AND 2007
(UNAUDITED)
2007, but early adoption is permitted. The Company chose not to elect the
fair value option.
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.
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
has adopted this statement and the effect is immaterial.
In April 2008, the FASB staff issued FSP FAS 142-3, Determination of the
Useful Life of Intangible Assets, which amends the factors that should be
considered in developing renewal or extension assumptions used to
determine the useful life of a recognized intangible asset under FASB
Statement No. 142, Goodwill and Other Intangible Assets. The staff
position is intended to improve the consistency between the useful life of
a recognized intangible asset under Statement 142 and the period of
expected cash flows used to measure the fair value of the asset under FASB
Statement No. 141, Business Combinations, and other U.S. generally
accepted accounting principles (GAAP). The FSP is effective for financial
statements issued for fiscal years beginning after December 15, 2008, and
interim periods within those fiscal years; early adoption is prohibited.
12
CEL-SCI CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED DECEMBER 31, 2008 AND 2007
(UNAUDITED)
The Company is currently assessing the potential impact of this staff
position on its consolidated financial statements.
In June 2008, the FASB finalized EITF 07-5, "Determining Whether an
Instrument (or Embedded Feature) is Indexed to an Entity's Own Stock". The
EITF lays out a procedure to determine if the debt instrument is indexed
to its own common stock. The EITF is effective for fiscal years beginning
after December 15, 2008. The Company believes it will have an impact on
the convertible debt and certain warrants and it could be material.
In September 2008, the FASB staff issued PSP FAS 133-1 and FIN 45-4,
"Disclosures about Credit Derivatives and Certain Guarantees: An Amendment
of FASB Statement No. 133 and FASB Interpretation No. 45; and
Clarification of the Effective Date of FASB Statement No. 161". The FSP
applies to credit derivatives within the scope of Statement 133 and hybrid
instruments that have embedded credit derivatives. It deals with
disclosures related to these derivatives and is effective for reporting
periods ending after November 15, 2008. It also clarifies the effective
date of SFAS No. 161 as any reporting period beginning after November 15,
2008. The Company is assessing the potential impact of this staff position
on its consolidated financial statements.
D. AVAILABLE-FOR-SALE SECURITIES
-----------------------------
At September 30, 2008, the Company had $200,000 in face value of Auction
Rate Cumulative Preferred Shares (ARPs), liquidation preference of $25,000
per share, of an income mutual fund. The ARPs 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.
The Company carried the ARPs at par value until they were repaid in
November 2008. The loan that the Company had taken against these ARPs was
repaid at the same time.
E. 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.
13
CEL-SCI CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED DECEMBER 31, 2008 AND 2007
(UNAUDITED)
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 three months ended
December 31, 2008 of $60,063 was expensed to research and development
($19,377) and general and administrative expense ($40,686). In addition,
in March and April of 2008, the Company issued a total of 516,000 shares
of restricted common stock to two consultants at $0.52 and $0.69 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 three months
ended December 31, 2008 was $79,337.
In November of 2008, the Company extended its licensing agreement for
Multikine with Orient Europharma. The new agreement extends the Multikine
collaboration to also cover South Korea, the Philippines, Australia and
New Zealand. The licensing agreement initially focuses on the areas of
head and neck cancer, nasopharyngeal cancer and potentially cervical
cancer. The agreement expires 15 years after the commencement date which
is defined as the date of the first commercial sale of Multikine in any
country within their territory. As a result of the agreement, Orient
Europharma purchased 1,282,051 shares of common stock at a cost of $0.39
per share, for a total to the Company, after expenses, of $499,982.
During the three months ended December 31, 2008, 1,003,881 shares of
common stock were issued in payment of invoices totaling $207,299. Common
stock was also issued to pay interest and principal on the convertible
debt. (See Note F.)
On December 30, 2008, the Company entered into an Equity Line of Credit
agreement as a source of funding for the Company. For a two-year period,
the agreement allows the Company, at its discretion, to sell up to $5
million of the Company's common stock at the volume weighted average price
of the day minus 9%. The Company may request a drawdown once every ten
trading days, although the Company is under no obligation to request any
drawdowns under the equity line of credit. The equity line of credit
expires on January 6, 2011. There were no drawdowns during the three
months ended December 31, 2008.
F. 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
CEL-SCI CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED DECEMBER 31, 2008 AND 2007
(UNAUDITED)
Features of the Convertible Debt Instrument and Warrants
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, 2009. Interest is payable quarterly beginning September
30, 2006. Each payment of principal and accrued interest may be settled in
cash or in shares of common stock at the option of the Company. The number
of shares deliverable under the share-settlement option is determined
based on the lower of (a) $0.75 per share, as adjusted pursuant to the
terms of the Series K Notes or (b) 90% applied to the arithmetic average
of the volume-weighted-average trading prices for the twenty day period
immediately preceding each share settlement. The Company may not make
payments in shares if such payments would result in the cumulative
issuance of shares of its common stock exceeding 19.999% of the shares
outstanding on the day immediately preceding the issuance date of the
Series K Notes, unless prior approval is given by vote of at least a
majority of the shares outstanding. The Company received such approval on
November 17, 2006.
The Company is accounting for the Series K Warrants as derivative
liabilities in accordance with SFAS No. 133. A debt discount of $1,734,472
is being amortized to interest expense using the effective interest method
over the expected term of the Series K Notes. During the three-month
periods ended December 31, 2008 and 2007, the Company recorded interest
expense of $43,649 and $80,503, respectively, in amortization of the debt
discount. As of December 31, 2008, the fair value of the Series K notes is
$1,688,767 and the fair value of the investor and placement agent warrants
is $616,890. The Company recorded a gain on derivative instruments of
$391,689 and $989,988 during the three months ended December 31, 2008 and
2007, respectively.
During the three months ended December 31, 2008 and 2007, no Series K
notes were converted into shares of common stock. During the three months
ended December 31, 2008, principal payments of $270,000 were made in cash
to the holders of the Series K notes. In addition, 405,634 shares of
common stock were paid in December for the principal payment due on
January 4, 2009 of $95,000. In accordance with the agreement, payment in
stock must be made 20 days before the principal payment is due. The
Company also paid the interest expense through December 31, 2008 with
170,577 shares of common stock. As of December 31, 2008, $1,875,716 of the
Series K Notes remained.
15
CEL-SCI CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED DECEMBER 31, 2008 AND 2007
(UNAUDITED)
The following summary comprises the total of the fair value of the
convertible debt and related derivative instruments at December 31, 2008
and September 30, 2008:
December 31, September 30,
2008 2008
----------- ------------
Face value of debt $ 1,875,716 $2,240,715
Discount on debt (150,331) (193,980)
Investor warrants 1,734,472 1,734,472
Placement agent warrants 45,696 79,664
Fair value adjustment-convertible debt (36,618) (103,495)
Fair value adjustment-investor warrants (1,163,278) (738,679)
----------- ----------
Total fair value $2,305,657 $3,018,697
=========== ==========
G. FAIR VALUE MEASUREMENTS
Effective October 1, 2008, the Company adopted the provisions of Statement
of Financial Accounting Standards No. 157, "Fair Value Measurements",
which defines fair value, establishes a framework for measuring fair value
and expands disclosures about such measurements that are permitted or
required under other accounting pronouncements. While SFAS No. 157 may
change the method of calculating fair value, it does not require any new
fair value measurements. The SFAS No. 157 requirements for certain
non-financial assets and liabilities have been deferred in accordance with
Financial Accounting Board Staff Position FSP 157-2. The new effective
date is for fiscal years beginning after November 15, 2008 and the interim
periods within the fiscal year. The adoption of SFAS 157 did not have a
material impact on our results of operations, financial position or cash
flows.
In accordance with SFAS No. 157, the Company determines fair value as the
price that would be received to sell an asset or paid to transfer a
liability in an orderly transaction between market participants at the
measurement date. The Company generally applies the income approach to
determine fair value. This method uses valuation techniques to convert
future amounts to a single present amount. The measurement is based on the
value indicated by current market expectations about those future amounts.
SFAS 157 establishes a fair value hierarchy that prioritizes the inputs
used to measure fair value. The hierarchy gives the highest priority to
active markets for identical assets and liabilities (Level 1 measurement)
and the lowest priority to unobservable inputs (Level 3 measurement). We
classify fair value balances based on the observability of those inputs.
16
CEL-SCI CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED DECEMBER 31, 2008 AND 2007
(UNAUDITED)
The three levels of the fair value hierarchy are as follows:
o Level 1 - Observable inputs such as quoted prices in active markets
for identical assets or liabilities
o Level 2 - Inputs other than quoted prices that are observable for the
asset or liability, either directly or indirectly. These include
quoted prices for similar assets or liabilities in active markets,
quoted prices for identical or similar assets or liabilities in
markets that are not active and amounts derived from valuation models
where all significant inputs are observable in active markets
o Level 3 - Unobservable inputs that reflect management's assumptions
For disclosure purposes, assets and liabilities are classified in their
entirety in the fair value hierarchy level based on the lowest level of
input that is significant to the overall fair value measurement. Our
assessment of the significance of a particular input to the fair value
measurement requires judgment and may affect the placement within the fair
value hierarchy levels.
The table below sets forth the assets and liabilities measured at fair
value on a recurring basis, by input level, in the condensed consolidated
balance sheet at December 31, 2008:
Quoted Prices in Significant
Active Markets for Other Significant
Identical Assets or Observable Unobservable
Liabilities (Level 1) Inputs (Level 2) Inputs (Level 3) Total
--------------------- ---------------- ---------------- -----
Derivative instruments $ - $2,305,657 $ - $2,305,657
============= =========== ========== ===========
The fair values of the Company's derivative instruments disclosed above
are primarily derived from valuation models where significant inputs such
as historical price and volatility of the Company's stock as well as U.S.
Treasury Bill rates are observable in active markets.
H. SHORT-TERM LOANS
----------------
The Company had a line of credit through its bank to borrow up to 100% of
the ARPs (see Note D) at an interest rate of prime minus 1%. As of
September 30, 2008, the Company had borrowed $200,000, which was paid back
in November 2008. During the three months ended December 31, 2008, the
Company had paid $813 in interest on the line of credit.
In December 2008, the Company received a $100,000 short-term loan from the
president of the Company. The note bears interest at 15% and must be
repaid by March 27, 2009.
17
CEL-SCI CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED DECEMBER 31, 2008 AND 2007
(UNAUDITED)
I. OPERATIONS, FINANCING
---------------------
The Company's independent registered accountants issued a going concern
opinion on the September 30, 2008 financial statements. The Company has
funded costs for the acquisition of certain patented and unpatented
proprietary technology and know-how relating to the human immunological
defense system, patent applications, research and development,
administrative costs, construction of laboratory facilities and clinical
trials. The Company must raise additional capital or find additional
long-term financing in order to continue with its research efforts. To
date, the Company has not generated any revenue from product sales. The
ability of the Company to complete the necessary clinical trials and
obtain Federal Drug Administration (FDA) approval for the sale of products
to be developed on a commercial basis is uncertain. Ultimately, the
Company must complete the development of its products, obtain the
appropriate regulatory approvals and obtain sufficient revenues to support
its cost structure.
The Company has two partners who have agreed to participate in and pay for
part of the Phase III clinical trial for Multikine. However, in light of
the current capital market environment, CEL-SCI believes it is prudent not
to start the Phase III clinical trial for Multikine until it has firm
commitments in the form of partnerships and/or money raised for a
substantial amount of cash to support the Phase III clinical trial. In the
meantime, the Company will operate at significantly reduced cash
expenditure levels and additional cash may be raised by offering contract
manufacturing services to the pharmaceutical industry in its new
manufacturing facility. The Company expects that it will need to raise
additional capital in fiscal year 2009 in the form of corporate
partnerships and/or equity financings to support its operations at its
current rate. The Company is currently working towards a transaction which
it expects to complete in fiscal 2009 which will finance its Phase III
clinical trial of Multikine. The Company believes that it will be able to
obtain additional financing since Multikine is a Phase III product
designed to treat cancer, an area that pharmaceutical companies are
increasingly targeting. The Company is working on a sale-leaseback program
for the equipment it owns which would provide the Company approximately
$1.5 million in additional cash. It is important to note that the
Company's expenditures for fiscal year 2008 included several very large
non-recurring expenses that amounted to several million dollars, mostly
related to the build out of the manufacturing facility. These expenses
will not recur in fiscal year 2009, thereby reducing the Company's
expenditures significantly. Beyond those savings the Company has also made
other very significant cuts in its expenditures. In addition, the Company
has put in place a $5 million Equity Line of Credit (see Note E). With
this Equity Line of Credit in place the Company believes it will have the
required capital to continue operations into March 2010. However, if
necessary the Company can make further reductions in expenditures by a
reduction in force or by implementation of a salary reduction program.
The Company has determined that the convertible debt holders of the Series
K Notes may require repayment of the entire remaining principal balance at
any time after August 4, 2009. This debt can be paid in stock and may not
require a cash payment. In addition, in December 2008, the Company was not
in compliance with certain lease requirements (i.e., failure to pay an
18
CEL-SCI CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED DECEMBER 31, 2008 AND 2007
(UNAUDITED)
installment of Base Annual Rent). However, the landlord did not declared
the Company formally in default under the terms of the lease and has
renegotiated the lease. The landlord currently has the right to declare
the Company in default if the Company fails to pay any installment of the
Base Annual Rent when such failure continues for a period of 5 business
days after the Company's receipt of written notice thereof from the
Landlord, provided that if the Company fails to pay any of the foregoing
within 5 business days more than two (2) times in any twelve (12) month
period during the lease term, the Landlord shall not be required to
provide the Company with any further notice and the Company shall be
deemed to be in default. Per the renegotiated lease (see Note L), the
landlord has agreed to defer 3 months (December - February) of rent which
will be paid back incrementally only after future financings. CEL-SCI then
will begin paying basic annual rent starting in March 2009 and failure to
pay the entire monthly installment thereafter shall constitute a material
default under the lease. In return, CEL-SCI extended 3,000,000 warrants by
one year and repriced these warrants from $1.25 to $0.75 and the landlord
was issued an additional 787,000 warrants at $0.75. Both warrants expire
on January 26, 2014.
In general, with the reduction in expenses and the $5 million Equity Line
in place, the Company expects to have enough cash to continue operations
through March 2010 if the debt holders do not exercise their put options.
While there can be no assurance that the debt holders will not exercise
their put option, and the landlord of the manufacturing facility will not
issue a default notice, the Company continues to work on solutions for
additional financing and ways to reduce expenses. The Company has shown in
the past that they are able to secure financing to continue operations.
There is no assurance the Company can do so in the future. These financial
statements do not reflect any adjustments that might result from this
uncertainty.
J. DIVIDENDS
---------
The Company has paid no dividends to shareholders since inception. The
cost of the extension of investor warrants during the three months ended
December 31, 2007 of $424,815 is recorded as a dividend, and increases the
accumulated deficit.
K. COMMITMENTS AND CONTINGENCIES
-----------------------------
Lease Agreement - In August 2007, the Company leased a building near
Baltimore, Maryland. The building, which consists of approximately 73,000
square feet, will be remodeled in accordance with the Company's
specifications so that it can be used by the Company to manufacture
Multikine for the Company's Phase III clinical trial and sales of the drug
if approved by the FDA. The lease is for a term of twenty years and
requires
19
CEL-SCI CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED DECEMBER 31, 2008 AND 2007
(UNAUDITED)
annual base rent payments of $1,575,000 during the first year of the
lease. The annual base rent escalates each year at 3%. The Company is also
required to pay all real and personal property taxes, insurance premiums,
maintenance expenses, repair costs and utilities. The lease allows the
Company, at its election, to extend the lease for two ten-year periods or
to purchase the building at the end of the 20-year lease. The lease
required the Company to pay $3,150,000 towards the remodeling costs, which
will be recouped by reductions in the annual base rent of $303,228 in
years six through twenty of the lease. On January 24, 2008, a second
amendment to the lease for the manufacturing facility was signed. In
accordance with the amendment, the Company 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. In April 2008, an
additional $288,474 was paid toward the completion of the manufacturing
facility. The Company took possession of the manufacturing facility in
October of 2008. An additional $505,225 was paid for the completion of the
work on the manufacturing facility in October 2008.
In addition, in December 2008, the Company was not in compliance with
certain lease requirements (i.e., failure to pay an installment of Base
Annual Rent). However, the landlord did not declared the Company formally
in default under the terms of the lease and has renegotiated the lease.
The landlord currently has the right to declare the Company in default if
the Company fails to pay any installment of the Base Annual Rent when such
failure continues for a period of 5 business days after the Company's
receipt of written notice thereof from the Landlord, provided that if the
Company fails to pay any of the foregoing within 5 business days more than
two (2) times in any twelve (12) month period during the lease term, the
Landlord shall not be required to provide The Company with any further
notice and the Company shall be deemed to be in default. Per the
renegotiated lease (see Note L), the landlord has agreed to defer 3 months
(December - February) of rent which will be paid back incrementally only
after future financings. CEL-SCI then will begin paying basic annual rent
starting in March 2009 and failure to pay the entire monthly installment
thereafter shall constitute a material default under the lease. In return,
CEL-SCI extended 3,000,000 warrants by one year and repriced these
warrants from $1.25 to $0.75 and the landlord was issued an additional
787,000 warrants at $0.75. Both warrants expire on January 26, 2014.
The Company began amortizing the deferred rent on the building on October
7, 2008, the day that the Company took possession of the building. The
amortization on the deferred rent for the three months ended was $222,527.
L. SUBSEQUENT EVENTS
-----------------
In January, 2009, the Company received additional loans from the president
of $210,000, bringing the total loans received to $310,000. The loans bear
interest at 15% and are payable by March 27, 2009.
20
CEL-SCI CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED DECEMBER 31, 2008 AND 2007
(UNAUDITED)
In January 2009, as part of an amended lease agreement on the
manufacturing facility, the Company repriced the 3,000,000 warrants issued
to the lessor in July 2007 at $1.25 per share and which were to expire on
July 12, 2013. These warrants are now repriced at $0.75 per share and
expire on January 26, 2014. The cost of this repricing and extension of
the warrants is $70,515 and will be accounted for as a debit to the
deferred rent asset and a credit to additional paid-in capital. In
addition, 787,500 additional warrants were given to the lessor of the
manufacturing facility on the same date at $0.75 and will expire on
January 26, 2014. The cost of these warrants was $45,207 and will be
accounted for as a debit to the deferred rent asset and a credit to
additional paid-in capital.
On January 28, 2009, the Company subleased a portion of the manufacturing
facility. The lease commences on February 2, 2009 and expires on January
31, 2011. The Company will receive $10,000 per month in rent.
21
CEL-SCI CORPORATION
-------------------
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Restatement
The Company determined that a restatement of its condensed consolidated
financial statements was needed for amortization of deferred rent for the three
months ended December 31, 2008 of $222,527. The adjustment increased the
research and development expense and reduced the deferred rent. Please see Item.
4 for discussion of internal control over financial reporting. For a discussion
of the significant restatement adjustments and the background leading to the
adjustments, see Note B to the condensed consolidated financial statements. All
amounts in this Form 10-Q/A affected by the restatement adjustments have been
update to reflect the adjusted amounts.
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 and will have to
continue doing so in the future.
During the three-month period ended December 31, 2008 and 2007, the Company used
cash totaling $612,311 and $1,653,800, respectively. For the three months ended
December 31, 2008 and 2007, cash used in operating activities totaled $1,159,800
and $1,440,094. For the three months ended December 31, 2008 and 2007, cash
provided by financing activities totaled $114,922 and cash used by financing
activities totaled $180,597, respectively. Private placement proceeds of
$499,982 and receipt of the short-term loan of $100,000 provided funds. The
repayment of convertible notes ($270,000), financing costs (15,060) and the
repayment of the short-term loan ($200,000) was used in financing activities
during the three months ended December 31, 2008. For the three months ended
December 31, 2007, cash was provided by financing was from the exercise of
employee options ($14,403). Repayment of convertible notes of $195,000 used cash
in financing activities. Cash provided by investing activities was $432,567 and
$33,109 was used in investing activities for the three months ended December 31,
2008 and 2007, respectively. The use of cash in investing activities consisted
of purchases of equipment and legal costs incurred in patent applications and,
for the three months ended December 31, 2008, the sale of the final $200,000 in
ARPs.
22
The Company has two partners who have agreed to participate in and pay for part
of the Phase III clinical trial for Multikine. However in light of the current
capital market environment, the Company believes it is prudent not to start the
Phase III clinical trial until it has firm commitments in the form of
partnerships and/or money raised for a substantial amount of cash to support the
Phase III clinical trial. In the meantime, the Company will operate at
significantly reduced cash expenditure levels and additional cash may be raised
by offering contract manufacturing services to the pharmaceutical industry in
its new manufacturing facility. The Company expects that it will need to raise
additional capital in fiscal year 2009 in the form of corporate partnerships
and/or equity financings to support its operations at its current rate. The
Company is currently working towards a transaction which it expects to complete
in fiscal 2009 which will finance its Phase III clinical trial of Multikine. The
Company believes that it will be able to obtain additional financing since
Multikine is a Phase III product designed to treat cancer, an area that
pharmaceutical companies are increasingly targeting. The Company is working on a
sale-leaseback program for the equipment it owns which would provide the Company
approximately $1.5 million in additional cash. It is important to note that the
Company's expenditures for fiscal year 2008 included several very large
non-recurring expenses that amounted to several million dollars, mostly related
to the build out of the manufacturing facility. These expenses will not recur in
fiscal year 2009, thereby reducing the Company's expenditures significantly.
Beyond those savings the Company has also made other very significant cuts in
its expenditures. In addition, the Company has put in place a $5 million Equity
Line of Credit (see Note E). With this Equity Line of Credit in place the
Company believes it will have the required capital to continue operations into
March 2010. However, if necessary the Company can make further reductions in
expenditures by a reduction in force or by implementation of a salary reduction
program.
The Company has determined that the convertible debt holders of the Series K
Notes may require repayment of the entire remaining principal balance at any
time after August 4, 2009. This debt can be paid in stock and may not require a
cash payment. In addition, in December 2008, CEL-SCI was not in compliance with
certain lease requirements (i.e., failure to pay an installment of Base Annual
Rent). However, the landlord has not declared the Company formally in default
under the terms of the lease and has renegotiated the lease. The landlord
currently has the right to declare the Company in default if the Company fails
to pay any installment of the Base Annual Rent when such failure continues for a
period of 5 business days after the Company's receipt of written notice thereof
from the Landlord, provided that if the Company fails to pay any of the
foregoing within 5 business days more than two (2) times in any twelve (12)
month period during the lease term, the Landlord shall not be required to
provide the Company with any further notice and the Company shall be deemed to
be in default. Per the renegotiated lease (see Note L), the landlord has agreed
to defer 3 months (December - February) of rent which will be paid back
incrementally only after future financings. CEL-SCI then will begin paying basic
annual rent starting in March 2009 and failure to pay the entire monthly
installment thereafter shall constitute a material default under the lease. In
return, CEL-SCI extended 3,000,000 warrants by one year and repriced these
warrants from $1.25 to $0.75 and the landlord was issued an additional 787,000
warrants at $0.75. Both warrants expire on January 26, 2014.
In general, with the reduction in expenses and the $5 million Equity Line in
place, the Company expects to have enough cash to continue operations through
January 2010 if the debt holders do not exercise their put options and the
landlord of their manufacturing facility does not issue a default notice.
23
While there can be no assurance that the debt holders will not exercise their
put option, and the landlord of the manufacturing facility will not issue a
default notice, the Company continues to work on solutions for additional
financing and ways to reduce expenses. The Company has shown in the past that
they are able to secure financing to continue operations. However, there is no
assurance to do so in the future.
It should be noted that substantial funds will be needed for the clinical trial
which will be necessary before the Company will be able to apply to the FDA for
approval to sell any products which may be developed on a commercial basis
throughout the United States. In the absence of revenues, the Company will be
required to raise additional funds through the sale of securities, debt
financing or other arrangements in order to continue with its research efforts.
However, there can be no assurance that such financing will be available or be
available on favorable terms. Ultimately, the Company must complete the
development of its products, obtain appropriate regulatory approvals and obtain
sufficient revenues to support its cost structure.
Since all of the Company's projects are under development the Company cannot
predict with any certainty the funds required for future research and clinical
trials, the timing of future research and development projects, or when it will
be able to generate any revenue from the sale of any of its products.
The Company had invested in ARPs (See Note D). Because of liquidity issues with
these ARPs, the Company borrowed $200,000 on a line of credit which was paid off
in November of 2008.
Results of Operations and Financial Condition
During the three-month period ended December 31, 2008, research and development
expenses increased by $381,787 compared to the three-month period ended December
31, 2007. This increase was due to continuing expenses relating to the
preparation for the Phase III clinical trial on Multikine and the amortization
of the deferred rent of $222,527. The Company is preparing for the beginning of
the Phase III clinical trial.
During the three-month period ended December 31, 2008, general and
administrative expenses decreased by $730,623 compared to the three-month period
ended December 31, 2007. This decrease is caused by the Company having extended
and repriced options during the three-month period ended December 31, 2007 of
$465,008 and the expensing of stock issued to employees in the three-month
period ended December 31, 2007 of $378,350 compared to a cost of employee stock
issued in prior periods but expensed in the three-month period ended December
31, 2008 of only $40,686, a decrease of $337,664. This decrease from December
31, 2007 to December 31, 2008 was partially offset by higher insurance costs of
approximately $16,500.
Interest income during the three months ended December 31, 2008 decreased by
$107,494 compared to the three-month period ended December 31, 2007. The
decrease was due to the decrease in the funds available for investment.
The gain on derivative instruments of $391,689 for the three months ended
December 31, 2008, was the result of the change in fair value of the Series K
Notes and Series K Warrants during the period. These gains were caused by
fluctuations in the share price of the Company's common stock.
24
The interest expense of $84,616 for the three months ended December 31, 2008 was
composed of three elements: 1) amortization of the Series K discount ($43,649),
2) interest paid and accrued on the Series K debt ($40,154) and 3) margin
interest ($813). This is a decline of approximately $59,400 from the three
months ended December 31, 2007 because of the lower balance of Series K debt.
Research and Development Expenses
During the three-month periods ended December 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 nine and three-month periods.
Three Months Ended December 31,
2008 2007
----- ----
MULTIKINE $1,355,705 $ 908,948
L.E.A.P.S 55,048 120,018
----------- -----------
TOTAL $1,410,753 $1,028,966
=========== ===========
In January 2007, the Company received a "no objection" letter from the FDA
indicating that it could proceed with the Phase III protocol with Multikine in
head & neck cancer patients. The protocol for the Phase III clinical trial was
designed to develop conclusive evidence of the safety and efficacy of Multikine
in the treatment of advanced primary squamous cell carcinoma of the oral cavity.
The Company had previously received a "no objection" letter from the Canadian
Biologics and Genetic Therapies Directorate which enabled the Company to begin
its Phase III clinical trial in Canada.
As of December 31, 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.
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, the Company leased a building near Baltimore, Maryland. The
building, which consists of approximately 73,000 square feet, will be remodeled
in accordance with the Company specifications so that it can be used by the
Company to manufacture Multikine for the Company's Phase III clinical trial and
sales of the drug if approved by the FDA. The lease is for a term of twenty
years and requires annual base rent payments of $1,575,000 during the first year
of the lease. The annual base rent escalates each year at 3%. the Company is
also required to pay all real and personal property taxes, insurance premiums,
maintenance expenses, repair costs and utilities. The lease allows the Company,
at its election, to extend the lease for two ten-year periods or to purchase the
building at the end of the 20-year lease. The lease required the Company to pay
25
$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. In
addition, in April 2008, an additional $288,474 was paid for the completion of
the facility. The Company took possession of the manufacturing facility in
October, 2008.
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 2008 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 December 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.
Item 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Under the direction and with the participation of the Company's management,
including the Company's Chief Executive and Chief Financial Officer, the Company
has conducted an evaluation of the effectiveness of the design and operation of
its disclosure controls and procedures as of December 31, 2008. The Company
26
maintains disclosure controls and procedures that are designed to ensure that
information required to be disclosed in its periodic reports with the Securities
and Exchange Commission is recorded, processed, summarized and reported within
the time periods specified in the SEC's rules and regulations, and that such
information is accumulated and communicated to the Company's management,
including its principal executive officer and principal financial officer, as
appropriate, to allow timely decisions regarding required disclosure. The
Company's disclosure controls and procedures are designed to provide a
reasonable level of assurance of reaching its desired disclosure control
objectives. Based on the evaluation, the Chief Executive and Chief Financial
Officer has concluded that there was a material weakness in the Company's
internal control over financial reporting. During the fourth quarter of the
fiscal year ended September 30, 2009, CEL-SCI remediated this weakness by hiring
a third party to assist in various accounting transactions. After giving effect
to the restatements referred to above, the Chief Executive and Chief Financial
Officer has now concluded that the financial statements included in this Form
10Q/A fairly present in all material respects the Company's financial position,
results of operations and cash flows for the periods presented in conformity
with generally accepted accounting principles.
Changes in Internal Control over Financial Reporting
The Company's management, with the participation of the Chief Executive and
Chief Financial Officer, has evaluated whether any change in the Company's
internal control over financial reporting occurred during the first quarter of
fiscal year 2009. At that time, it was concluded that there had been no change
in our internal control over financial reporting during the first quarter of
fiscal year 2009 that had materially affected, or was reasonably likely to
materially affect, our internal control over financial reporting. However, it
was determined during the fourth quarter of the fiscal year ended September 30,
2009, that there was a material weakness in the Company's financial reporting
internal controls. As discussed above, the Company believes that the hiring of
the third party to assist in various accounting transactions has remedied this
weakness in internal control over financial reporting.
27
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. (a) Exhibits
Number Exhibit
------ -------
31 Rule 13a-14(a) Certifications
32 Section 1350 Certifications
7
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: January 29, 2010 /s/ Geert Kersten
------------------------------------
Geert Kersten, Chief Executive Officer*
* Also signing in the capacity of the Chief Accounting Officer and Principal
Financial Officer.