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 December 31, 2010
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______________ to ______________.
Commission File Number 0-11503
CEL-SCI CORPORATION
-------------------
Colorado 84-0916344
--------------------------- ----------------------
State or other jurisdiction (IRS) Employer
incorporation Identification Number
8229 Boone Boulevard, Suite 802
Vienna, Virginia 22182
--------------------------------------
Address of principal executive offices
(703) 506-9460
--------------------------------------------
Registrant's telephone number, including area code
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports) and (2) had been subject to such filing
requirements for the past 90 days.
Yes X No
----- ----
Indicate by check mark whether the registrant has submitted electronically and
posted on its corporate Web site, if any, every Interactive Data File required
to be submitted and posted pursuant to Rule 405 of Regulation S-T (ss.232.405 of
this chapter) during the preceding 12 months (or for such shorter period that
the registrant was required to submit and post such files). Yes [ ] No [ ]
Indicate by check mark whether the Registrant is a large accelerated filer, and
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of "large accelerated filer," "accelerated filer" and "smaller
reporting company" in Rule 12b-2 of the Exchange Act. (Check One):
Large accelerated filer [ ] Accelerated filer [X]
Non-accelerated filer [ ] Smaller reporting company [ ]
(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 207,082,157 February 3, 2011
TABLE OF CONTENTS
PART I FINANCIAL INFORMATION
Page
Item 1. ----
Condensed Consolidated Balance Sheets (unaudited) 3
Condensed Consolidated Statements of Operations (unaudited) 4
Condensed Consolidated Statements of Cash Flows (unaudited) 5
Notes to Condensed Consolidated Financial Statements (unaudited) 7
Item 2.
Management's Discussion and Analysis of Financial Condition 21
and Results of Operations
Item 3.
Quantitative and Qualitative Disclosures about Market Risks 24
Item 4.
Controls and Procedures 25
PART II
Item 1.
Legal Proceedings 26
Item 4.
Submission of Matters to a Vote of Security Holders 26
Item 6.
Exhibits 26
Signatures 27
2
CEL-SCI CORPORATION
-------------------
CONDENSED CONSOLIDATED BALANCE SHEETS
------------------------
(unaudited)
ASSETS December 31, September 30,
2010 2010
-------------- -------------
CURRENT ASSETS
Cash and cash equivalents $20,853,771 $26,568,243
Receivables 457,521 -
Prepaid expenses 2,212,668 298,719
Inventory used for R&D and
manufacturing 1,386,331 1,476,234
Deferred rent - current portion 742,984 751,338
-------------- -------------
Total current assets 25,653,275 29,094,534
RESEARCH OFFICE EQUIPMENT AND
LEASEHOLD IMPROVEMENTS--
Less accumulated depreciation of
$2,743,000 and $2,626,759 1,175,178 1,264,831
PATENT COSTS- less accumulated
amortization of $1,225,266 and
$1,205,690 404,091 356,079
RESTRICTED CASH 21,372 21,357
DEFERRED RENT - net of current portion 6,909,794 7,068,184
-------------- -------------
TOTAL ASSETS $34,163,710 $37,804,985
============== =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 937,682 $ 1,497,383
Accrued expenses 235,746 223,696
Due to employees 45,174 45,808
Related party loan 1,104,057 1,104,057
Derivative instruments - current
portion 424,286 424,286
-------------- -------------
Total current liabilities 2,746,945 3,295,230
Derivative instruments - net of
current portion 8,406,545 6,521,765
Deferred revenue 125,000 125,000
Deferred rent 7,495 8,225
-------------- -------------
Total liabilities 11,285,985 9,950,220
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value;
authorized, 200,000 shares;
no shares issued and outstanding - -
Common stock, $.01 par value;
authorized, 450,000,000
shares; issued and outstanding,
206,019,520 and 204,868,853
shares at December 31, 2010
and September 30, 2010,
respectively 2,060,195 2,048,689
Additional paid-in capital 188,868,450 187,606,044
Accumulated deficit (168,050,920) (161,799,968)
-------------- -------------
Total stockholders' equity 22,877,725 27,854,765
-------------- -------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $34,163,710 $37,804,985
============== =============
See notes to condensed consolidated financial statements.
3
CEL-SCI CORPORATION
-------------------
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
---------------------------------
(unaudited)
For the Three Months Ended
December 31,
2010 2009
-------------- -------------
REVENUE:
Rent income $ - $ 30,000
Grant and other income 662,818 -
-------------- -------------
Total revenue 662,818 30,000
EXPENSES:
Research and development, excluding
depreciation of $116,191 and
$99,583 included below 3,264,428 2,805,127
Depreciation and amortization 141,147 119,581
General and administrative 1,573,277 1,358,141
-------------- -------------
Total expenses 4,978,852 4,282,849
-------------- -------------
LOSS FROM OPERATIONS (4,316,034) (4,252,849)
(LOSS) GAIN ON DERIVATIVE INSTRUMENTS (1,946,395) 23,340,267
INTEREST INCOME 52,879 110,219
INTEREST EXPENSE (41,402) (38,120)
-------------- -------------
NET (LOSS) INCOME BEFORE INCOME TAXES (6,250,952) 19,159,517
INCOME TAX PROVISION - -
-------------- -------------
NET (LOSS) INCOME AVAILABLE TO COMMON
SHAREHOLDERS $ (6,250,952) $ 19,159,517
============== =============
NET (LOSS) INCOME PER COMMON SHARE-BASIC $ (0.03) $ 0.10
============== =============
NET (LOSS) INCOME PER COMMON
SHARE-DILUTED $ (0.03) $ 0.02
============== =============
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING-BASIC 205,112,418 194,959,814
============== =============
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING-DILUTED 205,112,418 256,198,162
============== =============
See notes to condensed consolidated financial statements.
4
CEL-SCI CORPORATION
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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
---------------------------------
(unaudited)
Three Months Ended December 31,
2010 2009
-------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
NET (LOSS) INCOME $ (6,250,952) $ 19,159,517
Adjustments to reconcile net (loss)
income to net cash used in operating
activities:
Depreciation and amortization 141,147 119,581
Issuance of common stock, warrants and
stock options for services 36,982 309,594
Common stock contributed to 401(k) plan 33,258 22,252
Extension of options 30,186 -
Employee option cost 362,077 305,001
Loss (gain) on derivative instruments 1,946,395 (23,340,267)
Amortization of loan premium - (3,282)
Decrease in deferred rent asset 166,744 147,259
Loss on abandonment of patents - 5,381
Loss on retirement of equipment 237 -
Increase in prepaid expenses (1,913,949) (73,572)
Decrease (increase) in inventory for
R&D and manufacturing 89,903 (155,507)
Increase in deposits - (26)
Increase in receivables (457,521)
Decrease in accounts payable (629,729) (145,202)
Increase (decrease) in accrued expenses 12,050 (3,160)
Decrease in amount due to employees (634) (26,373)
Increase in deferred rent liability (730) 21
-------------- -------------
NET CASH USED IN OPERATING ACTIVITIES (6,434,536) (3,678,783)
-------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
(Increase) decrease in restricted cash (15) 47,257
Purchase of equipment (27,733) (51,491)
Patent costs (1,982) (1,070)
-------------- -------------
NET CASH USED IN INVESTING ACTIVITIES (29,730) (5,304)
-------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options
and warrants and sale of stock 749,794 6,157,450
-------------- -------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 749,794 6,157,450
-------------- -------------
NET (DECREASE) INCREASE IN CASH AND CASH
EQUIVALENTS (5,714,472) 2,473,363
CASH AND CASH EQUIVALENTS:
Beginning of period 26,568,243 33,567,516
-------------- -------------
End of period $ 20,853,771 $ 36,040,879
============== =============
(continued)
See notes to condensed consolidated financial statements.
5
CEL-SCI CORPORATION
-------------------
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
---------------------------------
(unaudited)
(continued)
Three Months Ended
December 31,
2010 2009
-------------- ------------
SUPPLEMENTAL INFORMATION ON NONCASH
TRANSACTIONS:
Patent costs included in accounts
payable:
Increase in accounts payable $ (65,606) $ -
Increase in patent costs 65,606 -
-------------- ------------
$ - $ -
============== ============
Equipment costs included in accounts
payable:
Increase in accounts payable $ (4,422) $ (42,485)
Increase in research and office
equipment 4,422 42,485
-------------- ------------
$ - $ -
============== ============
Exercise of derivative liability
warrants:
Decrease in derivative liabilities $ 61,615 $ 5,048,024
Increase in additional paid-in capital (61,615) (5,048,024)
-------------- ------------
$ - $ -
============== ============
Adoption of ASC 815-40:
Increase in derivative liabilities $ - $(6,186,343)
Increase in accumulated deficit - 6,186,343
-------------- ------------
$ - $ -
============== ============
NOTE:
Cash expenditures for interest expense $ 41,402 $ 41,402
============== ============
See notes to condensed consolidated financial statements.
6
CEL-SCI CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED DECEMBER 31, 2010 AND 2009
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying condensed consolidated financial statements of CEL-SCI
Corporation and subsidiary (the Company) are unaudited and certain
information and footnote disclosures normally included in the annual
financial statements prepared in accordance with accounting principles
generally accepted in the United States of America have been omitted
pursuant to the rules and regulations of the Securities and Exchange
Commission. While management of the Company believes that the disclosures
presented are adequate to make the information presented not misleading,
interim condensed consolidated financial statements should be read in
conjunction with the condensed consolidated financial statements and notes
included in the Company's annual report on Form 10-K for the year ended
September 30, 2010.
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, 2010 and the
results of operations for the three-month period then ended. The condensed
consolidated balance sheet as of September 30, 2010 is derived from the
September 30, 2010 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, 2010 and 2009 are not
necessarily indicative of the results to be expected for the entire year.
Certain items in the consolidated financial statements have been
reclassified to conform to the current presentation.
Significant accounting policies are as follows:
Research and Office Equipment and Leasehold Improvements - Research and
office equipment is recorded at cost and depreciated using the
straight-line method over estimated useful lives of five to seven years.
Leasehold improvements are depreciated over the shorter of the estimated
useful life of the asset or the term of the lease. Repairs and maintenance
which do not extend the life of the asset are expensed when incurred.
Depreciation and amortization expense for the three-month periods ended
December 31, 2010 and 2009 was $121,571 and $99,870, respectively. During
the three months ended December 31, 2010 and 2009, equipment with a net
book value of $237 and $-0- was retired.
Patents - Patent expenditures are capitalized and amortized using the
straight-line method over the shorter of the expected useful life or the
legal life of the patent (17 years). In the event changes in technology or
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
7
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, 2010 and 2009, the Company recorded patent impairment charges
of $-0- and $5,381, respectively. For the three-month periods ended
December 31, 2010 and 2009, amortization of patent costs totaled $19,576
and $19,711, respectively. The Company estimates that amortization expense
will be $80,800 for each of the next five years, totaling $404,000.
Research and Development Costs - Research and development expenditures are
expensed as incurred. Total research and development costs, excluding
depreciation, were $3,264,428 and $2,805,127, respectively, for the three
months ended December 31, 2010 and 2009.
Income Taxes - The Company has net operating loss carryforwards of
approximately $119 million. The Company uses the asset and liability method
of accounting for income taxes. Under the asset and liability method,
deferred tax assets and liabilities are recognized for future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective
tax bases and operating and tax loss carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period
that includes the enactment date. The Company records a valuation allowance
to reduce the deferred tax assets to the amount that is more likely than
not to be recognized.
Derivative Instruments - The Company has entered into financing
arrangements that consist of freestanding derivative instruments or are
hybrid instruments that contain embedded derivative features. The Company
has also issued warrants to various parties in connection with work done by
these parties. The Company accounts for these arrangements in accordance
with Codification 815-10-50, "Accounting for Derivative Instruments and
Hedging Activities". The Company also accounts for warrants in accordance
with Codification 815-40-15, "Determining Whether an Instrument (or
Embedded Feature) is Indexed to an Entity's Own Stock". In accordance with
accounting principles generally accepted in the United States ("GAAP"),
derivative instruments and hybrid instruments are recognized as either
assets or liabilities in the balance sheet and are measured at fair value
with gains or losses recognized in earnings or other comprehensive income
depending on the nature of the derivative or hybrid instruments. The
Company determines the fair value of derivative instruments and hybrid
instruments based on available market data using appropriate valuation
models, giving consideration to all of the rights and obligations of each
instrument. The derivative liabilities are remeasured at fair value at the
end of each interim period as long as they are outstanding.
Deferred rent (asset) - The deferred rent is discussed at Note I. Long-term
interest receivable on the deposit on the manufacturing facility has been
combined with the deferred rent (asset) for both periods for comparability.
8
Stock-Based Compensation - The Company follows Codification 718-10-30-3,
"Share-Based Payment". This Codification applies to all transactions
involving issuance of equity by a company in exchange for goods and
services, including to employees. Compensation expense has been recognized
for awards that were granted, modified, repurchased or cancelled on or
after October 1, 2005 as well as for the portion of awards previously
granted that vested during the period ended December 31, 2010. For the
three months ended December 31, 2010 and 2009, the Company recorded
$362,077 and $305,001, 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
14,794 and 110,000 options granted to employees during the three-month
periods ended December 31, 2010 and 2009, respectively. Options are granted
with an exercise price equal to the closing price of the Company's stock on
the day before the grant. The Company determines the fair value of the
employee stock-based compensation using the Black Scholes method of
valuation.
The Company has Incentive Stock Option Plans, Non-Qualified Stock Option
Plans, a Stock Compensation Plan and Stock Bonus Plans. All Plans have been
approved by the stockholders. A summary chart and description of activity
for the quarter of the Plans follows in Note C. For further discussion of
the Stock Option Plans, Stock Compensation Plan and Stock Bonus Plans, see
Form 10-K for the year ended September 30, 2010. In some cases these Plans
are collectively referred to as the "Plans".
B. NEW ACCOUNTING PRONOUNCEMENTS
There are no significant new accounting pronouncements that would impact
the financial statements.
C. STOCKHOLDERS' EQUITY
Below is a chart of the stock options, stock bonuses and compensation
granted by CEL-SCI. Each option represents the right to purchase one share
of CEL-SCI's common stock at December 31, 2010:
Total Shares
Shares Reserved for Shares Remaining
Reserved Outstanding Issued as Options/Shares
Name of Plan Under Plans Options Stock Bonus Under Plans
------------ ------------ ----------- ----------- -----------
Incentive Stock Option
Plans 17,100,000 10,593,041 N/A 5,920,225
Non-Qualified Stock
Option Plans 33,760,000 21,704,120 N/A 4,496,761
Stock Bonus Plans 11,940,000 N/A 7,441,480 4,496,761
Stock Compensation Plan 9,500,000 N/A 5,386,531 4,113,469
9
Options and stock to employees
During the three months ended December 31, 2010, 29,268 options were
exercised from the Company's option plans at prices ranging from $0.22 to
$0.48. The total intrinsic value of options exercised during the three
months ended December 31, 2010 was $10,944. The Company received a total of
$13,056 from the exercise the options during the quarter ended December 31,
2010. During the three months ended December 31, 2009, 32,625 options were
exercised from the Company's option plans. The total intrinsic value of
options exercised during the three months ended December 31, 2009 was
$6,806. The Company received a total of $22,556 from the exercise the
options during the quarter ended December 31, 2009.
During the three months ended December 31, 2010, 14,794 stock options were
granted at prices ranging from $0.72 to $0.85 with a fair value of $10,937
and 2,000 options expired. During the three months ended December 31, 2009,
110,000 stock options were granted at prices ranging from $1.05 to $1.93
with a fair value of $187,995 and no options expired.
Options and stock to non-employees
Options to non-employees are accounted for in accordance with Codification
505-50-05-5, "Equity Based Payments to Non-Employees". Accordingly,
compensation is recognized when goods or services are received and is
measured using the Black-Scholes valuation model. The Black-Scholes model
requires management to make assumptions regarding the fair value of the
options at the date of grant and the expected life of the options. There
were no options granted to non-employees during the three months ended
December 31, 2010.
There were 200,000 shares of common stock issued to consultants at a fair
value of $0.70 per share for a cost of $140,000, of which $35,000 was
expensed for the three months ended December 31, 2010. The cost will be
expensed over the term of the contract. Additionally, a portion of the cost
of common stock issued in previous quarters was expensed. The cost for the
previously issued shares for the three months ended December 31, 2010 was
$1,982. There were no options granted to non-employees during the three
months ended December 31, 2009. There were 104,192 shares of common stock
issued to consultants during the three months ended December 31, 2009 at a
cost for the three months ended December 31, 2009 of $134,999. 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, 2009 was
$174,595.
Derivative liabilities and warrants
Below is a chart showing the derivative liabilities and the number of
warrants outstanding at December 31, 2010:
10
Shares
Issuable
upon
Issue Exercise of Exercise Expiration Refer-
Warrant Date Warrant Price Date ence
------- ----- ----------- -------- ---------- ------
Series K 8/4/06 2,638,163 $ 0.40 2/4/12 1
Series N 8/18/08 3,890,782 0.40 8/18/14 1
Series A 6/24/09 1,303,472 0.50 12/24/14 1
C. Schleuning 7/8/09 167,500 0.50 01/08/15 1
(Series A)
Series B 9/3/09 500,000 0.68 3/3/15 1
Series C 8/20/09 5,217,217 0.55 2/20/15 1
Series D 9/21/09 4,714,284 1.50 9/21/11 1
Series E 9/21/09 714,286 1.75 8/12/14 1
Series L 4/18/07 951,669 0.75 4/17/12 2
Series L (repriced) 4/18/07 1,000,000 0.56 4/17/13 2
Series M 4/18/07 1,221,668 2.00 4/17/12 2
Series M (modified) 4/18/07 6,000,000 0.60 7/31/12 2
Series O 3/6/09 7,500,000 0.25 3/6/16 3
Private Investors 5/30/03- 8,609,375 0.47 - 2/9/11 - 4
6/30/09 1.25 6/30/14
Warrants held by
Officer and 6/24/09- 3,497,539 0.40 - 12/24/14 - 5
Director 7/6/09 0.50 1/6/15
1. Derivative Liabilities
The Company accounted for the Series K and A through E Warrants as
derivative liabilities in accordance with Codification 815-10, "Accounting
for Derivative Instruments and Hedging Activities". For the three months
ended December 31, 2010, the Company recorded a loss on the Series A
through E derivative instruments of $1,130,372. During the three months
ended December 31, 2010, the Company recorded a loss on remaining Series K
warrants of $290,198. During the three months ended December 31, 2009, the
Company recognized a gain of $9,324,921 on the remaining Series A through E
derivative instruments. During the three months ended December 31, 2009,
the Company recorded a gain of $1,988,163 on the remaining Series K
warrants.
During the three months ended December 31, 2009, 1,015,454 Series K
warrants, on which the Company recognized a gain on conversion of $428,769
and 8,375,000 Series A warrants, on which the Company recognized a total
gain of $8,291,250 were exercised. When the warrants were exercised, the
value of these warrants was converted from derivative liabilities to
equity. Series K warrants transferred to equity totaled $944,274 and Series
A warrants transferred to equity totaled $4,103,750.
11
During the three months ended December 31, 2010, 175,000 Series C warrants
were exercised for 175,000 shares of common stock. The Company recognized a
gain on conversion of $18,885. When the warrants were exercised, the value
of these warrants was converted from derivative liabilities to equity.
Series C warrants transferred to equity totaled $61,615.
On October 1, 2009, the Company reviewed all outstanding warrants in
accordance with the requirements of Codification 815-40, "Determining
Whether an Instrument (or Embedded Feature) is Indexed to an Entity's Own
Stock". This topic provides that an entity should use a two-step approach
to evaluate whether an equity-linked financial instrument (or embedded
feature) is indexed to its own stock, including evaluating the instrument's
contingent exercise and settlement provisions. The warrant agreements
provide for adjustments to the purchase price for certain dilutive events,
which includes an adjustment to the conversion ratio in the event that the
Company makes certain equity offerings in the future at a price lower than
the conversion prices of the warrant instruments. Under the provisions of
Codification 815-40, the warrants are not considered indexed to the
Company's stock because future equity offerings or sales of the Company's
stock are not an input to the fair value of a "fixed-for-fixed" option on
equity shares, and equity classification is therefore precluded.
Accordingly, effective October 1, 2009, 3,890,782 Series N warrants issued
in August 2008 were determined to be subject to the requirements of this
topic and were valued using the Black-Scholes formula as of October 1, 2009
at $6,186,343. Effective October 1, 2009, the Series N warrants are
recognized as a liability in the Company's condensed consolidated balance
sheet at fair value with a corresponding adjustment to accumulated deficit
and will be marked-to-market each reporting period. The Series N warrants
were revalued on December 31, 2010 at $2,451,193, which resulted in a loss
on derivatives and an increase in derivative liabilities of $544,710 for
the three months ended December 31, 2010 due to the increase in the
Company's stock price since September 30, 2010. During the three months
ended December 31, 2009, the Company recorded a gain of $3,307,164 on the
Series N warrants.
See below for details of the balances of derivative instruments at December
31, 2010 and September 30, 2010.
December 31, 2010 September 30, 2010
----------------- ------------------
Series K warrants $1,292,700 $1,002,502
2009 financings warrants
(Series A thru E) 5,086,938 4,037,066
2008 warrants reclassified
from equity to derivative
liabilities on
October 1, 2009 (Series N) 2,451,193 1,906,483
---------- ----------
Total derivative liabilities $8,830,831 $6,946,051
========== ==========
12
2. Series L and M Warrants
On April 18, 2007, the Company completed a $15 million private financing.
Shares were sold at $0.75, a premium over the closing price of the previous
two weeks. The financing was accompanied by 10 million warrants with an
exercise price of $0.75 and 10 million warrants with an exercise price of
$2.00. The warrants are known as Series L and Series M warrants,
respectively.
In September 2008, 2,250,000 of the original Series L warrants were
repriced at $0.56 and extended for one year to April 17, 2013. The increase
in the value of the warrants of $173,187 was recorded as a debit and a
credit to additional paid-in capital in accordance with the original
accounting for the Series L warrants. As of December 31, 2010, 1,951,669
Series L warrants remained outstanding.
On March 12, 2010, the Company temporarily reduced the exercise price of
the Series M warrants, originally issued on April 18, 2007. The exercise
price was reduced from $2.00 to $0.75. At any time prior to June 16, 2010
investors could have exercised the Series M warrants at a price of $0.75
per share. For every two Series M warrants exercised prior to June 16, 2010
the investor would have received one Series F warrant. Each Series F
warrant would have allowed the holder to purchase one share of CEL-SCI's
common stock at a price of $2.50 per share at any time on or before June
15, 2014. After June 15, 2010 the exercise price of the Series M warrants
reverted back to $2.00 per share. Any person exercising a Series M warrant
after June 15, 2010 would not receive any Series F warrants. The Series M
warrants expire on April 17, 2012. An analysis of the modification to the
warrants determined that the modification increased the value of the
warrants by $1,432,456. There were no exercises of the Series M warrants at
the reduced price and the exercise price of the Series M warrants reverted
back to $2.00 on June 16, 2010.
On August 3, 2010, the Company's Board of Directors approved an amendment
to the terms of the Series M warrants held by an investor. The investor was
the owner of 8,800,000 warrants priced at $2.00 per share. The investor may
now purchase 6,000,000 shares of the Company's common stock (reduced from
8,800,000) at a price of $0.60 per share. An analysis of the modification
to the warrants determined that the modification increased the value of the
warrants by $100,000. The adjustment was recorded as a debit and a credit
to additional paid-in capital. As of December 31, 2010, all of these
warrants remained outstanding. In addition, 1,221,668 Series M warrants at
the original exercise price of $2.00 were outstanding as of December 31,
2010.
3. Licensing Agreement Warrants
On March 6, 2009, the Company entered into a licensing agreement with Byron
Biopharma LLC ("Byron") under which the Company granted Byron an exclusive
license to market and distribute the Company's cancer drug Multikine in the
Republic of South Africa. Pursuant to the agreement Byron will be
responsible for registering the product in South Africa. Once Multikine has
been approved for sale, the Company will be responsible for manufacturing
13
the product, while Byron will be responsible for sales in South Africa.
Revenues will be divided equally between the Company and Byron. To maintain
the license Byron, among other requirements, made a $125,000 payment to the
Company on March 8, 2010. On March 30, 2009, and as further consideration
for its rights under the licensing agreement, Byron purchased 3,750,000
Units from the Company at a price of $0.20 per Unit. Each Unit consisted of
one share of the Company's common stock and two warrants. Each warrant
entitles the holder to purchase one share of the Company's common stock at
a price of $0.25 per share. The warrants expire on March 6, 2016. The
shares of common stock included as a component of the Units were registered
by the Company under the Securities Act of 1933. The Company filed a
registration statement to register the shares issuable upon the exercise of
the warrants. The Units were accounted for as an equity transaction using
the Black Scholes method to value the warrants. The fair value of the
warrants was calculated to be $1,015,771. As of December 31, 2010, all
warrants remain outstanding.
4. Private Investor Warrants
Between May 30, 2003 and June 30, 2009 CEL-SCI sold shares of its common
stock in private transactions. In some cases warrants were issued as part
of a financing. As of December 31, 2010, 8,609,375 warrants remain
outstanding. For further discussion of these warrants, see Form 10-K for
the year ended September 30, 2010.
5. Warrants held by Officer and Director
Between December 2008 and June 2009, Maximilian de Clara, the Company's
President and a director, loaned the Company $1,104,057. In accordance with
the loan agreement, the Company issued Mr. de Clara warrants which entitle
him to purchase 1,648,244 shares of the Company's common stock at a price
of $0.40 per share. The warrants are exercisable at any time prior to
December 24, 2014. As consideration for a further extension of the note,
Mr. de Clara received warrants which allow him to purchase 1,849,295 shares
of the Company's common stock at a price of $0.50 per share at any time
prior to January 6, 2015. As of December 31, 2010, all warrants remain
outstanding. See Note E for additional information.
D. FAIR VALUE MEASUREMENTS
Effective October 1, 2008, the Company adopted the provisions of
Codification 820-10, "Fair Value Measurements", which defines fair value,
establishes a framework for measuring fair value and expands disclosures
about such measurements that are permitted or required under other
accounting pronouncements. While Codification 820-10 may change the method
of calculating fair value, it does not require any new fair value
measurements. The adoption of Codification 820-10 did not have a material
impact on the Company's results of operations, financial position or cash
flows.
In accordance with Codification 820-10, the Company determines fair value
14
as the price that would be received to sell an asset or paid to transfer a
liability in an orderly transaction between market participants at the
measurement date. The Company generally applies the income approach to
determine fair value. This method uses valuation techniques to convert
future amounts to a single present amount. The measurement is based on the
value indicated by current market expectations with respect to those future
amounts.
Codification 820-10 establishes a fair value hierarchy that prioritizes the
inputs used to measure fair value. The hierarchy gives the highest priority
to active markets for identical assets and liabilities (Level 1
measurement) and the lowest priority to unobservable inputs (Level 3
measurement). The Company classifies fair value balances based on the
observability of those inputs. The three levels of the fair value hierarchy
are as follows:
o Level 1 - Observable inputs such as quoted prices in active
markets for identical assets or liabilities
o Level 2 - Inputs other than quoted prices that are observable for
the asset or liability, either directly or indirectly. These include
quoted prices for similar assets or liabilities in active markets,
quoted prices for identical or similar assets or liabilities in
markets that are not active and amounts derived from valuation
models where all significant inputs are observable in active markets
o Level 3 - Unobservable inputs that reflect management's assumptions
For disclosure purposes, assets and liabilities are classified in their
entirety in the fair value hierarchy level based on the lowest level of
input that is significant to the overall fair value measurement. The
Company's assessment of the significance of a particular input to the fair
value measurement requires judgment and may affect the placement within the
fair value hierarchy levels.
The table below sets forth the assets and liabilities measured at fair
value on a recurring basis, by input level, in the condensed consolidated
balance sheet at December 31, 2010:
Quoted Prices in Significant
Active Markets for Other Significant
Identical Assets or Observable Unobservable
Liabilities (Level 1) Inputs (Level 2) Inputs (Level 3) Total
--------------------- ---------------- ---------------- -----
Derivative instruments $ - $ - $8,830,831 $8,830,831
========== ========== ========== ==========
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 September 30, 2010:
Quoted Prices in Significant
Active Markets for Other Significant
Identical Assets or Observable Unobservable
Liabilities (Level 1) Inputs (Level 2) Inputs (Level 3) Total
--------------------- ---------------- ---------------- -----
Derivative instruments $ - $ - $6,946,051 $6,946,051
========== ========== ========== ==========
15
The following sets forth the reconciliation of beginning and ending
balances related to fair value measurements using significant unobservable
inputs (Level 3) for the quarters ended December 31, 2010 and September 30,
2010:
December 31, September 30,
2010 2010
---- ----
Beginning balance $6,946,051 $5,175,372
Transfers in - -
Transfers out (61,615) -
Realized and unrealized losses
recorded in earnings 1,946,395 1,770,679
---------- ----------
Ending Balance $8,830,831 $6,946,051
========== ==========
The fair values of the Company's derivative instruments disclosed above are
primarily derived from valuation models where significant inputs such as
historical price and volatility of the Company's stock as well as U.S.
Treasury Bill rates are observable in active markets.
E. LOANS FROM OFFICER
Between December 2008 and June 2009, Maximilian de Clara, the Company's
President and a director, loaned the Company $1,104,057. The loan from Mr.
de Clara bears interest at 15% per year and was secured by a lien on
substantially all of the Company's assets. The Company does not have the
right to prepay the loan without Mr. de Clara's consent. The loan was
initially payable at the end of March 2009, but was extended to the end of
June 2009. At the time the loan was due, and in accordance with the loan
agreement, the Company issued Mr. de Clara warrants which entitle Mr. de
Clara to purchase 1,648,244 shares of the Company's common stock at a price
of $0.40 per share. The warrants are exercisable at any time prior to
December 24, 2014. Pursuant to Codification section 470-50, the fair value
of the warrants issuable under the first amendment was recorded as a
discount on the note payable with a credit recorded to additional paid-in
capital. The discount was amortized from April 30, 2009, through June 27,
2009. Although the loan was to be repaid from the proceeds of the Company's
June 2009 financing, the Company's Directors deemed it beneficial not to
repay the loan and negotiated a second extension of the loan with Mr. de
Clara on terms similar to the June 2009 financing. Pursuant to the terms of
the second extension the note is now due on July 6, 2014, but, at Mr. de
Clara's option, the loan can be converted into shares of the Company's
common stock. The number of shares which will be issued upon any conversion
will be determined by dividing the amount to be converted by $0.40. As
further consideration for the second extension, Mr. de Clara received
warrants which allow Mr. de Clara to purchase 1,849,295 shares of the
Company's common stock at a price of $0.50 per share at any time prior to
January 6, 2015.
In accordance with Codification 470-50, the second amendment to the loan
16
was accounted for as an extinguishment of the first amendment debt. The
extinguishment of the loan required that the new loan be recorded at fair
value and a gain or loss was recognized, including the warrants issued in
connection with the second amendment. This resulted in a premium of
$341,454, which was amortized over the period from July 6, 2009, the date
of the second amendment, to October 1, 2009, the date at which the loan
holder could have demand payment of the loan. During the three months ended
December 31, 2009, the Company amortized the remaining $3,282 in premium on
the loan. During each of the three months ended December 31, 2010 and 2009,
the Company paid $41,402 in interest expense to Mr. de Clara.
H. OPERATIONS, FINANCING
The Company has incurred significant costs since its inception in
connection with the acquisition of certain patented and unpatented
proprietary technology and know-how relating to the human immunological
defense system, patent applications, research and development,
administrative costs, construction of laboratory facilities and clinical
trials. The Company has funded such costs with proceeds realized from the
public and private sale of its common and preferred stock. The Company will
be required to raise additional capital or find additional long-term
financing in order to continue with its research efforts. There can be no
assurance the Company will be successful in raising additional funds. To
date, the Company has not generated any revenue from product sales. The
ability of the Company to complete the necessary clinical trials and obtain
Federal Drug Administration (FDA) approval for the sale of products to be
developed on a commercial basis is uncertain. Ultimately, the Company must
complete the development of its products, obtain the appropriate regulatory
approvals and obtain sufficient revenues to support its cost structure. The
Company believes that it has sufficient funds to support its operations for
more than the next twelve months.
The Company has two partners who have agreed to participate in and pay for
part of the Phase III clinical trial for Multikine. Since the Company was
able to raise substantial capital during 2009, the Company completed the
preparations for the Phase III trial for Multikine. On December 29, 2010,
the Company announced that it has commenced the Phase III clinical trial
for Multikine. The net cost to the Company of the clinical trial is
estimated to be $25 - $26 million.
In November 2010, the Company received a $733,437 grant under The Patient
Protection and Affordable Care Act of 2010 (PPACA). The Company recognizes
revenue as the expenses are incurred. The amount of the grant earned during
the three months ended December 31, 2010 was $640,385. During the three
months ended December 31, 2010, the Company collected $572,141 of this
grant. The balance of the funds will be collected in October 2011. The
grant was related to three of the Company's projects including the Phase
III trial of Multikine. The PPACA provides small and mid-sized biotech,
pharmaceutical and medical device companies with up to a 50% tax credit for
investments in qualified therapeutic discoveries for tax years 2009 and
2010, or a grant for the same amount tax-free. The tax credit/grant program
covers research and development costs from 2009 and 2010 for all
"qualifying therapeutic discovery projects".
17
I. 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, was remodeled in accordance with the Company's specifications
so that it can be used by the Company to manufacture Multikine for the
Company's Phase III clinical trial and sales of the drug if approved by the
FDA. The lease is for a term of twenty years and required an annual base
rent payment of $1,575,000 during the first year of the lease. The annual
base rent escalates each year at 3%. The Company is also required to pay
all real and personal property taxes, insurance premiums, maintenance
expenses, repair costs and utilities. The lease allows the Company, at its
election, to extend the lease for two ten-year periods or to purchase the
building at the end of the 20-year lease. The lease required the Company to
pay $3,150,000 towards the remodeling costs, which will be recouped by
reductions in the annual base rent of $303,228 in years six through twenty
of the lease, subject to the Company maintaining compliance with the lease
covenants. On January 24, 2008, a second amendment to the lease for the
manufacturing facility was signed. In accordance with the amendment, the
Company was required to pay the following: 1) an additional $518,790 for
movable equipment, which increased restricted cash, and 2) an additional
$1,295,528 into the escrow account to cover additional costs, which
increased deferred rent. These funds were transferred in early February
2008. In April 2008, an additional $288,474 was paid toward the completion
of the manufacturing facility. The Company took possession of the
manufacturing facility in October of 2008. An additional $505,225 was paid
for the completion of the work on the manufacturing facility in October
2008. During the three months ended December 31, 2009, an additional
$32,059 was paid for final completion costs.
In December 2008, the Company was not in compliance with certain lease
requirements (i.e., failure to pay an installment of Base Annual Rent).
However, the landlord did not declare the Company to be in default under
the terms of the lease, but instead renegotiated the lease. In January
2009, as part of an amended lease agreement on the manufacturing facility,
the Company repriced the 3,000,000 warrants initially issued to the
landlord in July 2007 at $1.25 per share with an expiration date of July
12, 2013. These warrants were repriced at $0.75 per share and expire on
January 26, 2014. The cost of this repricing and extension of the warrants
was $70,515. In addition, 787,500 additional warrants were given to the
landlord of the manufacturing facility on the same date. These warrants are
exercisable at $0.75 per share and will expire on January 26, 2014. The
cost of these warrants was $45,207. All back rent was paid to the landlord
in early July 2009. During the three months ended June 30, 2009, the
Company issued the landlord an additional 2,296,875 warrants in accordance
with an amendment to the agreement. These warrants were issued at a price
of $0.75 and will expire between March 31, 2014 and June 30, 2014. These
warrants were valued at $251,172 using the Black Scholes method. These
warrants are included in the private investor warrants in the Stockholder
Equity section (Note C, Reference 4). The Company is in compliance with the
lease and, in February 2010, received a refund of the $1,575,000 additional
deposit placed with the landlord in July 2008.
18
On January 28, 2009, the Company subleased a portion of the manufacturing
facility. The sublease commenced on February 2, 2009 and ended in July
2010. The Company received $10,300 per month in rent for the subleased
space.
The Company began amortizing the deferred rent on the building on October
7, 2008, the day that the Company took possession of the building. The
amortization of the deferred rent for the three months ended December 31,
2010 was $191,890 and for the three months ended December 31, 2009 was
$202,944.
Equity Line of Credit - On December 30, 2008, the Company entered into an
Equity Line of Credit agreement as a source of funding for the Company. The
Equity Line was never utilized and the agreement ended in January 2011.
MLV Agreement - On December 10, 2010, the Company entered into a sales
agreement with McNicoll Lewis & Vlak, LLC (MLV) relating to shares of
common stock which have been registered by means of a shelf registration
statement filed in July 2009. The Company may offer and sell shares of its
common stock, having an aggregate offering price of up to $30 million from
time to time through MLV acting as agent and/or principal.
Sales of the Company's common stock, if any, may be made in sales deemed to
be "at-the-market" equity offerings as defined in Rule 415 promulgated
under the Securities Act of 1933, as amended, including sales made directly
on or through the NYSE Amex, the existing trading market for our common
stock, sales made to or through a market maker other than on an exchange or
otherwise, in negotiated transactions at market prices prevailing at the
time of sale or at prices related to such prevailing market prices, and/or
any other method permitted by law. MLV will act as sales agent on a best
efforts basis. The Company is not required to sell any shares to MLV and
MLV is not required to sell any shares on the Company's behalf or purchase
any of our shares for its own account.
MLV will be entitled to a commission in an amount equal to the greater of
3% of the gross proceeds from each sale of the shares, or $0.025 for each
share sold, provided, that, in no event will MLV receive a commission
greater than 8.0% of the gross proceeds from the sale of the shares. During
the three months ended December 31, 2010, the Company sold 705,839 shares
of common stock to MLV for $674,739, less commissions and fees of $20,515.
Net proceeds of $389,277 was received in January 2011 and is included in
receivables at December 31, 2010.
J. EARNINGS PER SHARE
The Company's diluted earnings per share (EPS) are as follows for December
31, 2010 and 2009. For the three months ended December 31, 2010, the
computation of dilutive net loss per share excluded options and warrants to
purchase approximately 23,300,000 of common stock because their inclusion
would have an anti-dilutive effect.
19
Three Months Ended December 31, 2010
------------------------------------
Weighted average
Net Loss Shares EPS
-------- ------ ---
Basic Earnings per Share $(6,250,952) 205,112,418 $(0.03)
Note conversion - -
Warrants and options convertible
into shares of common stock - -
------------ ------------ -------
Dilutive EPS $(6,250,952) 205,112,418 $(0.03)
============ ============ =======
Three Months Ended December 31, 2009
------------------------------------
Weighted average
Net Income Shares EPS
---------- ------ ---
Basic Earnings per Share $19,159,517 194,959,814 $0.10
Note conversion 41,402 2,760,142
Warrants and options convertible
into shares of common stock (14,620,248) 58,478,206
------------ ------------ -------
Dilutive EPS $ 4,580,671 256,198,162 $0.02
=========== =========== =======
K. SUBSEQUENT EVENTS
The Company has evaluated subsequent events through the date these
financial statements were filed.
20
Item 2. MANAGEMENT'S DISCUSSION stocktickerAND ANALYSIS OF FINANCIAL CONDITION
stocktickerAND RESULTS OF OPERATIONS
Liquidity and Capital Resources
The Company has had only limited revenues from operations since its inception in
March 1983. The Company has relied upon capital generated from the public and
private offerings of its common stock and convertible notes. In addition, the
Company has utilized short-term loans to meet its capital requirements. Capital
raised by the Company has been expended primarily to acquire an exclusive
worldwide license to use, and later purchase, certain patented and unpatented
proprietary technology and know-how relating to the human immunological defense
system. Capital has also been used for patent applications, debt repayment,
research and development, administrative costs, and the construction of the
Company's laboratory facilities. The Company does not anticipate realizing
significant revenues until it enters into licensing arrangements regarding its
technology and know-how or until it receives regulatory approval to sell its
products (which could take a number of years). As a result the Company has been
dependent upon the proceeds from the sale of its securities to meet all of its
liquidity and capital requirements and anticipates having to do so in the
future.
The Company will be required to raise additional capital or find additional
long-term financing in order to continue with its research efforts. The ability
of the Company to complete the necessary clinical trials and obtain Federal Drug
Administration (FDA) approval for the sale of products to be developed on a
commercial basis is uncertain. Ultimately, the Company must complete the
development of its products, obtain the appropriate regulatory approvals and
obtain sufficient revenues to support its cost structure. The Company believes
that it has sufficient capital to support its operations for more than the next
twelve months.
The Company has two partners who have agreed to participate in and pay for part
of the Phase III clinical trial for Multikine. The Company has substantial
capital for its operations and can raise another $30 million under the sales
agreement with McNicoll Lewis & Vlak, LLC (MLV) (see Note I). On December 29,
2010, the Company announced that it has commenced the Phase III clinical trial
for Multikine. The net cost to the Company of the Phase III clinical trial is
estimated to be $25 - $26 million.
During the three-month period ended December 31, 2010, the Company's cash
decreased by $5,714,472, which includes approximately $2.1 million in
prepayments for the Phase III clinical trial which the Company expects to be
used during fiscal year 2011, compared to an increase in cash of $2,473,363
during the three months ended December 31, 2009. For the three months ended
December 31, 2010 and 2009, cash used in operating activities totaled $6,434,536
and $3,678,783, respectively. For the three months ended December 31, 2010 and
2009, cash provided by financing activities totaled $749,794 and $6,157,450,
respectively. Cash used by investing activities was $29,730 and $5,304,
respectively, for the three months ended December 31, 2010 and 2009. The use of
cash in investing activities consisted primarily of purchases of equipment and
legal costs incurred in patent applications.
21
In August 2007, the Company leased a building near Baltimore, Maryland. The
building, which consists of approximately 73,000 square feet, was remodeled in
accordance with the Company specifications so that it can be used by the Company
to manufacture Multikine for the Company's Phase III clinical trial and sales of
the drug if approved by the FDA. The lease is for a term of twenty years and
required an 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 was required to pay
the following: 1) an additional $518,790 for movable equipment, which increased
restricted cash, and 2) an additional $1,295,528 into the escrow account to
cover additional costs, which increased deferred rent. These funds were
transferred in early February 2008. In April 2008, an additional $288,474 was
paid toward the completion of the manufacturing facility. The Company took
possession of the manufacturing facility in October of 2008. An additional
$505,225 was paid for the completion of the work on the manufacturing facility
in October 2008. During the three months ended December 31, 2009, an additional
$32,059 was paid for final completion costs.
In December 2008, the Company was not in compliance with certain lease
requirements (i.e., failure to pay an installment of Base Annual Rent). However,
the landlord did not declare the Company to be in default, but instead
renegotiated the lease. In January 2009, as part of an amended lease agreement
on the manufacturing facility, the Company repriced the 3,000,000 warrants
issued to the landlord in July 2007 at $1.25 per share which were to expire on
July 12, 2013. These warrants were repriced at $0.75 per share and expire on
January 26, 2014. The cost of this repricing and extension of the warrants was
$70,515. In addition, 787,500 additional warrants were given to the landlord on
the same date. The warrants are exercisable at a price of $0.75 per share and
will expire on January 26, 2014. The cost of these warrants was $45,207. During
the three months ended June 30, 2009, the Company issued the landlord an
additional 2,296,875 warrants in accordance with an amendment to the lease.
These warrants were issued at a price of $0.75 and will expire between March 31,
2014 and June 30, 2014. These warrants were valued at $251,172 using the Black
Scholes method. The Company is currently in compliance with the lease.
Regulatory authorities prefer to see biologics such as Multikine manufactured in
the same manufacturing facility for Phase III clinical trials and for the sale
of the product since this arrangement helps 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 biologics 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
biological activity of 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 the Company's own specially
trained personnel.
22
On January 28, 2009, the Company subleased a portion of the manufacturing
facility. The sublease commenced on February 2, 2009 and ended July 2010. The
Company received $10,300 per month in rent for the subleased space.
Results of Operations and Financial Condition
During the three months ended December 31, 2010, revenue increased by $632,818
compared to the three months ended December 31, 2009. In November 2010, the
Company received a $733,437 grant under The Patient Protection and Affordable
Care Act of 2010 (PPACA). The grant was related to three of the Company's
projects, including the Phase III trial of Multikine. The PPACA provides small
and mid-sized biotech, pharmaceutical and medical device companies with up to a
50% tax credit for investments in qualified therapeutic discoveries for tax
years 2009 and 2010, or a grant for the same amount tax-free. The tax
credit/grant program covers research and development costs from 2009 and 2010
for all "qualifying therapeutic discovery projects." The Company recognizes
revenue as the expenses are incurred. The amount of the grant earned during the
three months ended December 31, 2010 was $640,385.
During the three month period ended December 31, 2010, research and development
expenses increased by $459,301 compared to the three-month period ended December
31, 2009. This increase was due to the ongoing work to begin the Phase III
clinical trial.
During the three-month period ended December 31, 2010, general and
administrative expenses increased by $215,136 compared to the three-month period
ended December 31, 2009. This increase was primarily because of an increase in
legal fees in connection with the ongoing lawsuit described in Item 3 of the
Company's report on Form 10-K.
Interest income during the three months ended December 31, 2010 decreased by
$57,340 compared to the three-month period ended December 31, 2009. The decrease
was due to the decrease in the funds available for investment and lower interest
rates.
The loss on derivative instruments of $1,946,395 for the three months ended
December 31, 2010 was the result of the change in fair value of the derivative
liabilities and Series K Warrants during the period. This loss was caused by
fluctuations in the share price of the Company's common stock.
The interest expense of $41,402 for the three months ended December 31, 2010 was
interest expense on the loan from the Company's president. The interest expense
of $38,120 for the three months ended December 31, 2009 was interest on the loan
from the Company's president, offset by the final $3,282 in amortization of the
loan premium.
Research and Development Expenses
During the three-month periods ended December 31, 2010 and 2009, the Company's
research and development efforts involved Multikine and L.E.A.P.S.(TM). The
table below shows the research and development expenses associated with each
project during the three-month periods.
23
Three Months Ended December 31,
2010 2009
----- ----
MULTIKINE $3,075,120 $2,296,333
L.E.A.P.S 189,308 508,794
---------- ----------
TOTAL $3,264,428 $2,805,127
========== ==========
In January 2007, the Company received a "no objection" letter from the FDA
indicating that it could proceed with the Phase III protocol with Multikine in
head & neck cancer patients. The protocol for the Phase III clinical trial was
designed to develop conclusive evidence of the safety and efficacy of Multikine
in the treatment of advanced primary squamous cell carcinoma of the oral cavity.
The Company had previously received a "no objection" letter from the Canadian
Biologics and Genetic Therapies Directorate which enabled the Company to begin
its Phase III clinical trial in Canada. The Company's Phase III clinical trial
began in December 2010.
Clinical and other studies necessary to obtain regulatory approval of a new drug
involve significant costs and require several years to complete. The extent of
the Company's clinical trials and research programs are primarily based upon the
amount of capital available to the Company and the extent to which the Company
has received regulatory approvals for clinical trials. The inability of the
Company to conduct clinical trials or research, whether due to a lack of capital
or regulatory approval, will prevent the Company from completing the studies and
research required to obtain regulatory approval for any products which the
Company is developing. Without regulatory approval, the Company will be unable
to sell any of its products. Since all of the Company's projects are under
development, the Company cannot predict when it will be able to generate any
revenue from the sale of any of its products.
Critical Accounting Estimates and Policies
Management's discussion and analysis of the Company's financial condition and
results of operations is based on its unaudited condensed consolidated financial
statements. The preparation of these financial statements is based on the
selection of accounting policies and the application of significant accounting
estimates, some of which require management to make judgments, estimates and
assumptions that affect the amounts reported in the financial statements and
notes. The Company believes some of the more critical estimates and policies
that affect its financial condition and results of operations are in the areas
of operating leases and stock-based compensation. For more information regarding
the Company's critical accounting estimates and policies, see Part II, Item 7 of
the Company's 2010 10-K report. The application of these critical accounting
policies and estimates has been discussed with the Audit Committee of the
Company's Board of Directors.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
The Company has a loan from the president that bears interest at 15%. The
Company does not believe that it has any significant exposures to market risk.
24
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, 2010. The Company
maintains disclosure controls and procedures that are designed to ensure that
information required to be disclosed in its periodic reports with the Securities
and Exchange Commission is recorded, processed, summarized and reported within
the time periods specified in the SEC's rules and regulations, and that such
information is accumulated and communicated to the Company's management,
including its principal executive officer and principal financial officer, as
appropriate, to allow timely decisions regarding required disclosure. The
Company's disclosure controls and procedures are designed to provide a
reasonable level of assurance of reaching its desired disclosure control
objectives. Based on the evaluation, the Chief Executive and Chief Financial
Officer has concluded that the Company's disclosure controls and procedures were
effective as of December 31, 2010.
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 three months
of fiscal year 2011. There was no change in the Company's internal control over
financial reporting during the three months ended December 31, 2010.
25
PART II
Item 1. Legal Proceedings
See Item 3 of the Company's report on Form 10-K for the year ended
September 30, 2010.
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
None
Item 6. (a) Exhibits
Number Exhibit
------ -------
31 Rule 13a-14(a) Certifications
32 Section 1350 Certifications
26
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: February 9, 2011 /s/ Geert Kersten
-------------------------------
Geert Kersten, Principal Executive Officer*
* Also signing in the capacity of the Principal Accounting and Financial
Officer.
27