UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) (X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2008 OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _______________ to ______________. Commission File Number 0-11503 CEL-SCI CORPORATION Colorado 84-0916344 - -------------------------------- --------------------- State or other jurisdiction (IRS) Employer of incorporation Identification Number 8229 Boone Boulevard, Suite 802 Vienna, Virginia 22182 ---------------------------------- Address of principal executive offices (703) 506-9460 ---------------------------------- Registrant's telephone number, including area code Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) had been subject to such filing requirements for the past 90 days. Yes ____X_____ No __________ Indicate by check mark whether the Registrant is a large accelerated filer, and accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check One): Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [ ] Smaller reporting company [X] (Do not check if a smaller reporting company) Indicate by check mark whether the Registrant is a shell company (as defined in Exchange Act Rule 12b-2 of the Exchange Act). Yes _________ No _____X____ Class of Stock No. Shares Outstanding Date Common 117,657,105 May 13, 2008
TABLE OF CONTENTS PART I FINANCIAL INFORMATION Item 1. Page Condensed Consolidated Balance Sheet (unaudited) 3 Condensed Consolidated Statements of Operations (unaudited) 4-5 Condensed Consolidated Statement of Cash Flow (unaudited) 6 Notes to Condensed Consolidated Financial Statements (unaudited) 8 Item 2. Management's Discussion and Analysis of Financial Condition 18 and Results of Operations Item 3. Quantitative and Qualitative Disclosures about Market Risks 21 Item 4T. Controls and Procedures 21 PART II Item 2. Changes in Securities and Use of Proceeds 23 Item 4. Submission of Matters to a Vote of Security Holders 23 Item 5. Other Information 24 Item 6. Exhibits 24 Signatures 25 2
CEL-SCI CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited) ASSETS March 31, September 30, 2008 2007 CURRENT ASSETS Cash and cash equivalents $ 264,818 $10,993,021 Interest and other receivables 72,621 36,393 Prepaid expenses 48,505 34,578 Inventory used for R&D and manufacturing 316,344 385,650 Deposits 14,828 14,828 ---------- ----------- Total current assets 717,116 11,464,470 RESEARCH AND OFFICE EQUIPMENT AND LEASEHOLD IMPROVEMENTS-- Less accumulated depreciation of $1,928,766 and $1,859,644 684,527 233,876 PATENT COSTS- less accumulated amortization of $1,054,148 and $896,407 563,402 541,380 RESTRICTED CASH 2,164,091 2,168,629 AVAILABLE-FOR-SALE SECURITIES 5,800,000 - DEFERRED RENT 7,596,892 6,301,364 LONG-TERM INTEREST RECEIVABLES 113,934 21,083 DEFERRED FINANCING COSTS 10,300 - ---------- ----------- TOTAL ASSETS $17,650,262 $20,730,802 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Short-term loan $ 656,340 $ - Accounts payable 257,552 248,120 Accrued expenses 114,557 98,603 Due to employees 7,472 26,735 Accrued interest on convertible debt - 68,795 Derivative instruments - current portion 872,895 782,732 Deposits held - 3,000 ---------- ----------- Total current liabilities 1,908,816 1,227,985 Deferred rent 4,398 1,466 Derivative instruments - noncurrent portion 4,576,622 4,831,252 ---------- ----------- Total liabilities 6,489,836 6,060,703 COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY Preferred stock, $.01 par value; authorized, 100,000 shares; no shares issued and outstanding - - Common stock, $.01 par value; authorized, 300,000,000 shares; issued and outstanding, 117,532,105 and 115,678,662 shares at March 31, 2008 and September 30, 2007, respectively 1,175,321 1,156,787 Additional paid-in capital 132,031,015 130,081,378 Accumulated deficit (122,045,910) (116,568,066) ------------ ------------ Total stockholders' equity 11,160,426 14,670,099 ------------ ------------ LIABILITIES AND STOCKHOLDERS' EQUITY $ 17,650,262 $ 20,730,802 ============ ============ See notes to condensed consolidated financial statements. 3
CEL-SCI CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited) Six Months Ended March 31, 2008 2007 ------ ------ REVENUE: Grant revenue $ - $ 31,779 Rent income 1,530 12,895 Other income - 841 ----------- ----------- Total revenue 1,530 45,515 EXPENSES: Research and development, excluding depreciation of $97,856 and $41,794 included below 2,066,029 1,185,023 Depreciation and amortization 133,468 84,158 General and administrative 2,754,569 2,368,850 ----------- ----------- Total expenses 4,954,066 3,638,031 ----------- ----------- LOSS FROM OPERATIONS (4,952,536) (3,592,516) GAIN (LOSS) ON DERIVATIVE INSTRUMENTS (170,949) 271,891 INTEREST INCOME 335,987 172,665 INTEREST EXPENSE (265,531) (688,284) ----------- ----------- NET LOSS BEFORE INCOME TAXES (5,053,029) (3,836,244) INCOME TAX PROVISION - - ----------- ----------- NET LOSS (5,053,029) (3,836,244) DIVIDENDS (424,815) - ----------- ----------- NET LOSS AVAILABLE TO COMMON SHAREHOLDERS $(5,477,844) $(3,836,244) =========== =========== NET LOSS PER COMMON SHARE (BASIC) $ (0.05) $ (0.05) =========== =========== NET LOSS PER COMMON SHARE (DILUTED) $ (0.05) $ (0.05) =========== =========== WEIGHTED AVERAGE COMMON SHARES OUTSTANDING, BASIC & DILUTED 116,008,631 83,377,267 =========== =========== See notes to condensed consolidated financial statements. 4
CEL-SCI CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited) Three Months Ended March 31, 2008 2007 ------ ------ REVENUE: Grant revenue $ - $ 17,917 Rent income - 6,805 Other income - - --------- ---------- Total revenue - 24,722 EXPENSES: Research and development, excluding depreciation of $97,035 and $20,832 included below 1,037,063 678,865 Depreciation and amortization 79,215 42,316 General and administrative 968,820 1,316,146 --------- ---------- Total expenses 2,085,098 2,037,327 --------- ---------- LOSS FROM OPERATIONS (2,085,098) (2,012,605) LOSS ON DERIVATIVE INSTRUMENTS (1,160,937) (447,356) INTEREST INCOME 157,256 77,114 INTEREST EXPENSE (121,515) (341,038) --------- ---------- NET LOSS BEFORE INCOME TAXES (3,210,294) (2,723,885) INCOME TAX PROVISION - - --------- ---------- NET LOSS (3,210,294) (2,723,885) DIVIDENDS (424,815) - --------- ---------- NET LOSS AVAILABLE TO COMMON SHAREHOLDERS $(3,635,109) $(2,723,885) =========== =========== NET LOSS PER COMMON SHARE (BASIC) $ (0.03) $ (0.03) =========== =========== NET LOSS PER COMMON SHARE (DILUTED) $ (0.03) $ (0.03) =========== =========== WEIGHTED AVERAGE COMMON SHARES OUTSTANDING, BASIC & DILUTED 116,312,378 83,836,076 =========== =========== See notes to condensed consolidated financial statements. 5
CEL-SCI CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW (unaudited) Six Months Ended March 31, 2008 2008 2007 ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES: NET LOSS $(5,053,029) $ (3,836,244) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 133,468 84,158 Penalty shares issued to nonemployees - 156,350 Issuance of common stock and stock options for services 848,644 562,039 Common stock contributed to 401(k) plan 51,712 44,818 Employee option cost 529,417 62,067 Consultant option extension 99,181 - Loss (gain) on derivative instruments 170,949 (271,891) Amortization of discount on convertible debt 144,584 342,475 Impairment loss on retirement of equipment 595 - Loss on abandonment of patents 1,974 - Increase in deferred rent 2,932 - (Increase) decrease in receivables (129,079) 6,396 (Increase) decrease in prepaid expenses (13,927) 454,776 (Increase) decrease in inventory for R&D and manufacturing 69,306 (1,264) (Decrease) increase in accounts payable (32,659) 77,973 Increase in accrued expenses 15,954 19,240 Decrease in amount due to employees (19,263) (3,954) Decrease in deposits held (3,000) - (Decrease) increase in accrued interest on convertible debt (68,795) 97,854 --------- --------- NET CASH USED IN OPERATING ACTIVITIES (3,251,036) (2,205,207) ---------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES: Additional investment in manufacturing facility (1,290,990) - Investment in available-for-sale securities (5,800,000) - Purchase of equipment (520,775) (53,598) Patent costs (45,845) (51,313) ---------- ---------- NET CASH USED IN INVESTING ACTIVITIES (7,657,610) (104,911) ---------- ---------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from exercise of stock options 14,403 109,707 Repayment of convertible notes (480,000) - Proceeds from short term loan 656,340 - Financing costs (10,300) (10,170) ---------- ---------- NET CASH PROVIDED BY FINANCING ACTIVITIES 180,443 99,537 ---------- ---------- NET DECREASE IN CASH AND CASH EQUIVALENTS (10,728,203) (2,210,581) CASH AND CASH EQUIVALENTS: Beginning of period 10,993,021 8,080,365 ---------- ---------- End of period $ 264,818 $5,869,784 ========== ========== (continued) See notes to condensed consolidated financial statements. 6
CEL-SCI CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW (unaudited) Six Months Ended March 31, 2008 2008 2007 ---- ---- SUPPLEMENTAL INFORMATION ON NONCASH TRANSACTIONS: Patent costs included in accounts payable: Increase in accounts payable $ (17,860) $ (49,956) Increase in patent costs 17,860 49,956 --------- --------- $ - $ - ========= ========= Equipment costs included in accounts payable: Increase in accounts payable $ (24,230) $ (4,338) Increase in research and office equipment 24,230 4,338 --------- --------- $ - $ - ========= ========= Repayment of convertible debt in common stock: Decrease in convertible debt $ - $ 207,500 Increase in accounts receivable - 25,655 Increase in common stock - (3,431) Increase in additional paid-in capital - (229,724) --------- --------- $ - $ - ========= ========= Cost of investor warrant extension: Increase in accumulated deficit $ 424,815 $ - Increase in additional paid-in capital (424,815) - --------- --------- $ - $ - ========= ========= NOTE: Interest expense paid during the six months ended March 31, 2008 and 2007 totaled $150,468 and $247,955, respectively. See notes to condensed consolidated financial statements. 7
CEL-SCI CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) THREE AND SIX MONTHS ENDED MARCH 31, 2008 AND 2007 A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation The accompanying condensed consolidated financial statements of CEL-SCI Corporation and subsidiary (the Company) are unaudited and certain information and footnote disclosures normally included in the annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been omitted pursuant to the rules and regulations of the Securities and Exchange Commission. While management of the Company believes that the disclosures presented are adequate to make the information presented not misleading, interim consolidated financial statements should be read in conjunction with the consolidated financial statements and notes included in the Company's annual report on Form 10-K for the year ended September 30, 2007. In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all accruals and adjustments (each of which is of a normal recurring nature) necessary for a fair presentation of the financial position as of March 31, 2008 and the results of operations for the three-month and six-month periods then ended. The condensed consolidated balance sheet as of September 30, 2007 is derived from the September 30, 2007 audited consolidated financial statements. Significant accounting policies have been consistently applied in the interim financial statements and the annual financial statements. The results of operations for the three-month and six-month periods ended March 31, 2008 and 2007 are not necessarily indicative of the results to be expected for the entire year. Significant accounting policies are as follows: Research and Office Equipment - Research and office equipment is recorded at cost and depreciated using the straight-line method over estimated useful lives of five to seven years. Leasehold improvements are depreciated over the shorter of the estimated useful life of the asset or the term of the lease. Repairs and maintenance which do not extend the life of the asset are expensed when incurred. Depreciation expense for the six-month period ended March 31, 2008 and 2007 were $93,759 and $59,045, respectively. Depreciation expense for the three-month period ended March 31, 2008 and 2007 were $62,322 and $20,832. Patents - Patent expenditures are capitalized and amortized using the straight-line method over the shorter of the expected useful life or the legal life of the patent (17 years). In the event changes in technology or other circumstances impair the value or life of the patent, appropriate adjustment in the asset value and period of amortization is made. An impairment loss is recognized when estimated future undiscounted cash flows expected to result from the use of the asset, and from disposition, is less than the carrying value of the 8
asset. The amount of the impairment loss would be the difference between the estimated fair value of the asset and its carrying value. During the six-month and three-month periods ended March 31, 2008, the Company recorded patent impairment charges of $1,974 and $0. For the six-month period ended March 31, 2008 and 2007, amortization of patent costs totaled $39,709 and $42,364, respectively. For the three-month periods ended March 31, 2008 and 2007, amortization of patent costs totaled $20,170 and $21,485 respectively. The Company estimates that amortization expense will be $77,846 for each of the next five years, totaling $389,230. Research and Development Costs - Research and development expenditures are expensed as incurred. Total research and development costs, excluding depreciation, were $2,066,029 and $1,185,023 for the six months ended March 31, 2008 and 2007. For the three months ended March 31, 2008 and 2007, total research and development costs were $1,037,063 and $678,865, respectively. Income Taxes - The Company uses the asset and liability method of accounting for income taxes. Under the asset and liability method, deferred tax assets and liabilities are recognized for future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating and tax loss carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. The Company records a valuation allowance to reduce the deferred tax assets to the amount that is more likely than not to be recognized. The Company adopted the provisions of FASB Interpretation No. 48, "Accounting for Uncertainty in Income Taxes" ("FIN 48") effective January 1, 2007. FIN 48 provides a comprehensive model for how a company should recognize, measure, present and disclose in its financial statements uncertain tax positions that the company has taken or expects to take on a tax return. The Company did not have any unrecognized tax benefits and there was no effect on its financial condition or results of operations as a result of implementing FIN 48. The Company elected to continue to report any interest and penalties as income taxes. No interest or penalties were accrued as a result of the adoption of FIN 48. Stock-Based Compensation - In December 2004, the FASB issued SFAS No. 123R, "Share-Based Payment". SFAS No. 123R requires companies to recognize expense associated with share based compensation arrangements, including employee stock options, using a fair value-based option pricing model. SFAS No. 123R applies to all transactions involving issuance of equity by a company in exchange for goods and services, including employees. Compensation expense has been recognized for awards that were granted, modified, repurchased or cancelled on or after October 1, 2005 as well as for the portion of 9
awards previously granted that vested during the period ended March 31, 2008. For the six months ended March 31, 2008 and 2007, the Company recorded $64,409 and $62,067, respectively in general and administrative expense for the cost of employee options. The Company's options vest over a three-year period from the date of grant. After one year, the stock is one-third vested, with an additional one-third vesting after two years and the final one-third vesting at the end of the three-year period. There were 1,324,000 and -0- options granted to employees during the six-month periods ended March 31, 2008 and 2007. Options are granted with an exercise price equal to the closing bid price of the Company's stock on the day before the grant. The Company determines the fair value of the employee compensation using the Black Scholes method of valuation. During the six months ended March 31, 2008, no options from the non-qualified plan vested. During the six months ended March 31, 2008, no options from the incentive stock option plan vested. The Company has Incentive Stock Option Plans, Non-Qualified Stock Option Plans, a Stock Compensation Plan and Stock Bonus Plans. All Stock Option and Bonus Plans have been approved by the stockholders. A summary description of these Plans follows. In some cases these Plans are collectively referred to as the "Plans". Incentive Stock Option Plan. The Incentive Stock Option Plans authorize the issuance of shares of the Company's common stock to persons who exercise options granted pursuant to the Plan. Only Company employees may be granted options pursuant to the Incentive Stock Option Plan. To be classified as incentive stock options under the Internal Revenue Code, options granted pursuant to the Plans must be exercised prior to the following dates: (a) The expiration of three months after the date on which an option holder's employment by the Company is terminated (except if such termination is due to death or permanent and total disability); (b) The expiration of 12 months after the date on which an option holder's employment by the Company is terminated, if such termination is due to the Employee's permanent and total disability; (c) In the event of an option holder's death while in the employ of the Company, his executors or administrators may exercise, within three months following the date of his death, the option as to any of the shares not previously exercised; The total fair market value of the shares of common stock (determined at the time of the grant of the option) for which any employee may be granted options which are first exercisable in any calendar year may not exceed $100,000. 10
Options may not be exercised until one year following the date of grant. Options granted to an employee then owning more than 10% of the common stock of the Company may not be exercisable by its terms after five years from the date of grant. Any other option granted pursuant to the Plan may not be exercisable by its terms after ten years from the date of grant. The purchase price per share of common stock purchasable under an option is determined by the Committee but cannot be less than the fair market value of the common stock on the date of the grant of the option (or 110% of the fair market value in the case of a person owning more than 10% of the Company's outstanding shares). Non-Qualified Stock Option Plans. The Non-Qualified Stock Option Plans authorize the issuance of shares of the Company's common stock to persons that exercise options granted pursuant to the Plans. The Company's employees, directors, officers, consultants and advisors are eligible to be granted options pursuant to the Plans, provided however that bona fide services must be rendered by such consultants or advisors and such services must not be in connection with the offer or sale of securities in a capital-raising transaction. The option exercise price is determined by the Committee but cannot be less than the market price of the Company's common stock on the date the option is granted. During the six months ended March 31, 2008 and 2007, 50,467 and 564,966 options were exercised. All options exercised were from the non-qualified plans. The total intrinsic value of options exercised during the six months ended March 31, 2008 and 2007 was $17,691 and $210,559, respectively. The total intrinsic value of options exercised during the three months ended March 31, 2008 and 2007 was $0 and $78,915, respectively. Options to non-employees are accounted for in accordance with FASB's Emerging Issues Task Force (EITF) Issue 96-18 Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services. Accordingly, compensation is recognized when goods or services are received and is measured using the Black-Scholes valuation model. The Black-Scholes model requires management to make assumptions regarding the fair value of the options at the date of grant and the expected life of the options. There were no options granted to non-employees during the six months ended March 31, 2008. There were 258,000 shares of common stock issued to consultants during the six months ended March 31, 2008 at a cost for the six months ended March 31, 2008 of $11,395. During the six months ended March 31, 2008, 2,016,176 options to non-employees were extended. See note D. For the six months ended March 31, 2007, common stock and options with a value of $562,039 were issued for services. 11
B. NEW ACCOUNTING PRONOUNCEMENTS In September 2006, FASB issued SFAS No. 157, "Fair Value Measurements". The statement defines fair value, establishes a framework for measuring fair value in GAAP and expands disclosures about fair value measurements. The statement is effective for financial statements issued for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. In September 2007, the FASB provided a one-year deferral for the implementation of SFAS 157 with regard to nonfinancial assets and liabilities. The Company is evaluating whether this statement will affect its current practice in valuing fair value of its derivatives each quarter. In February 2007, FASB issued SFAS No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities - Including an amendment of FASB Statement No. 15". The Statement permits companies to choose to measure many financial instruments and certain other items at fair value. The statement is effective for fiscal years that begin after November 15, 2007, but early adoption is permitted. The Company is evaluating the effect of the adoption of this statement. In December 2007, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 141 (revised 2007), Business Combinations, which replaces SFAS No. 141R. The statement retains the purchase method of accounting for acquisitions, but requires a number of changes, including changes in the way assets and liabilities are recognized in the purchase accounting. It also changes the recognition of assets acquired and liabilities assumed arising from contingencies, requires the capitalization of in-process research and development at fair value, and requires the expensing of acquisition-related costs as incurred. SFAS No. 141R is effective beginning October 1, 2009 and will apply prospectively to business combinations completed on or after that date. In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB 51, which changes the accounting and reporting for minority interests. Minority interests will be recharacterized as noncontrolling interests and will be reported as a component of equity separate from the parent's equity, and purchases or sales of equity interests that do not result in a change in control will be accounted for as equity transactions. In addition, net income attributable to the noncontrolling interest will be included in consolidated net income on the face of the income statement and, upon a loss of control, the interest sold, as well as any interest retained, will be recorded at fair value with any gain or loss recognized in earnings. SFAS No. 160 is effective beginning October 1, 2009 and will apply prospectively, except for the presentation and disclosure requirements, which will apply retrospectively. We are currently assessing the potential impact that adoption of SFAS No. 160 would have on our consolidated financial statements. 12
In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities - an amendment of FASB Statement No. 133, which changes disclosure requirements for derivative instruments and hedging activities. The statement is effective for periods ending on or after November 15, 2008, with early application encouraged. The Company is currently assessing the additional requirements of this statement. C. AVAILABLE-FOR-SALE SECURITIES At March 31, 2008, the Company had $5.8 million in face value of Auction Rate Cumulative Preferred Shares (ARPs), liquidation preference of $25,000 per share, of an income mutual fund. The ARPs are invested primarily in a globally diversified portfolio of convertible instruments, common and preferred stocks, and income producing securities such as investment grade and below investment grade (high yield/high risk) debt securities. All of the ARPs had credit ratings of AAA when purchased and still have the AAA rating today. None of the ARPs are mortgage-backed debt. Historically, ARPs have been highly liquid, using a Dutch auction process that resets the applicable interest rates weekly to provide liquidity at par ($25,000 per share). However, as a result of liquidity issues experienced in the global credit and capital markets, the auctions for all of our remaining ARPs since February 29, 2008 have failed. As a result thereof we are now collecting interest at a higher rate, pursuant to the ARPs agreement. The failures of these auctions do not affect the value of the collateral underlying the ARPs and we will continue to earn and receive interest at contractually set rates. In May 2008, the fund company refinanced $300 million of the $350 million outstanding ARPs. On May 6, 2008, the fund company announced the redemption of $300 million or, 85.7% of the ARPs on various dates between May 19, 2008 and May 23, 2008 subject to the investment fund lottery system. Until redemption or when these ARPs are completely refinanced, the Company has the ability to borrow against 100% of the ARPs at a favorable interest rate less than the rate it earns on the ARPs (see Note F). The fund holding the Auction Rate Preferred Shares must maintain, 1) asset coverage of the Preferred Shares as required by the rating agency or agencies rating the Preferred Shares; and 2) asset coverage of at least 200% with respect to senior securities that are stock, including the Preferred Shares. In the event that the Fund does not maintain or cure failures to maintain these coverage tests, some or all of the Preferred Shares will be subject to mandatory redemptions. Based on the composition of the Fund's portfolio as of August 31, 2007, the asset coverage of the Preferred Shares as measured pursuant to the 1940 Act was approximately 336%. 13
There have been no defaults of the underlying collateral and interest continues to be paid at the contractual rate and in a timely manner. Because we have been unable to liquidate the remaining $5.8 million of ARPs, and because of continued liquidity issues in the global credit and capital markets, we have classified these ARPs as non-current as of March 31, 2008. The Company continues to carry the ARPs at par value ($25,000 per share) as the Company believes that it will be able to collect all amounts due. This conclusion is further supported by the fact that the issuer has already refinanced $300 million of the $350 million outstanding ARPs and is expected to shortly redeem 85.7% or $300 million of the ARPs. D. STOCKHOLDERS' EQUITY In November and December 2007, the Company extended 1,905,633 employee options and 2,016,176 investor and consultant warrants. The options and warrants were due to expire from December 1, 2007 through December 31, 2008. All options and warrants were extended for an additional five years from the original expiration date. The cost of the extension of employee options of $465,008 was recorded as a debit to general and administrative expense and a credit to additional paid-in capital. The cost of the extension of investor warrants of $424,815 was recorded as a debit to accumulated deficit (dividend) and a credit to additional paid-in capital. The cost of the extension of the consultant warrants of $99,181 is recorded as a debit to general and administrative expense and a credit to additional paid-in capital. The additional cost of the extension of employee options and investor and consultant warrants was determined using the Black Scholes method. In January and March 2008, the Company issued 1,116,020 shares of restricted common stock to employees. The stock was valued at prices ranging from $0.52 to $0.62. The total cost of the stock issued to employees was $687,830. The cost of the stock for the six and three months ended March 31, 2008 of $49,101 was expensed to research and development ($18,171) and general and administrative expense ($30,930). In addition, on February 26, 2008, the Company issued a total of 258,000 shares of restricted common stock to two consultants at $0.52 per share for a total cost of $134,160. This stock will be expensed over the period of the contracts with the consultants. The expense for the quarter ended March 31, 2008 was $11,395. E. SERIES K CONVERTIBLE DEBT In August 2006, the Company issued $8,300,000 in aggregate principal amount of convertible notes (the "Series K Notes") together with warrants to purchase 4,825,581 shares of the Company's common stock (the Series K Warrants"). Additionally, in connection with issuance of the Series K Notes and Series K Warrants, the placement agent received a fee of $498,000 and 386,047 fully vested warrants (the "Placement Agent Warrants") to purchase shares of the Company's common stock. Net proceeds were $7,731,290, net of $568,710 in direct transaction costs, including the placement agent fee. 14
The Series K Notes were convertible into 10,480,000 shares of the Company's common stock at the option of the holder at any time prior to maturity at a conversion price of $0.75 per share, subject to adjustment for certain events. The Series K Warrants are exercisable over a five-year period from February 4, 2007 through February 4, 2012 at $0.75 per share. The Series K Notes bear interest at the greater of 8% or the six month LIBOR plus 300 basis points, and are required to be repaid in thirty equal monthly installments of $207,500 beginning on March 4, 2007 and continuing through September 4, 2010. Any remaining principal balance is required to be repaid on August 4, 2011; however, holders of the Series K Notes may require repayment of the entire remaining principal balance at any time after August 4, 2010. Interest is payable quarterly beginning September 30, 2006. Each payment of principal and accrued interest may be settled in cash or in shares of common stock at the option of the Company. The number of shares deliverable under the share-settlement option is determined based on the lower of (a) $0.75 per share, as adjusted pursuant to the terms of the Series K Notes or (b) 90% applied to the arithmetic average of the volume-weighted-average trading prices for the twenty day period immediately preceding each share settlement. The Company may not make payments in shares if such payments would result in the cumulative issuance of shares of its common stock exceeding 19.999% of the shares outstanding on the day immediately preceding the issuance date of the Series K Notes, unless prior approval is given by vote of at least a majority of the shares outstanding. The Company received such approval on November 17, 2006. The Company is accounting for the Series K Warrants as derivative liabilities in accordance with SFAS No. 133. A debt discount of $1,734,472 is being amortized to interest expense using the effective interest method over the expected term of the Series K Notes. During the six-month periods ended March 31, 2008 and 2007, the Company recorded interest expense of $144,584 and $342,475, respectively, in amortization of the debt discount. As of March 31, 2008, the fair value of the Series K notes is $2,920,012 and the fair value of the investor and placement agent warrants is $2,529,505. The Company recorded a loss on derivative instruments of $170,949 and a gain of $271,891 during the six months ended March 31, 2008 and 2007 respectively. For the three months ended March 31, 2008 and 2007, the Company recorded a loss on derivative instruments of $1,160,937 and $447,356, respectively. During the six months ended March 31, 2008 and 2007, no Series K notes were converted into shares of common stock. During the six months ended March 31, 2008, principal payments of $480,000 were made to the holders of the Series K notes. As of March 31, 2008, $2,805,716 of the Series K Notes remained. 15
The following summary comprises the total of the fair value of the Series K debt and related derivative instruments at March 31, 2008 and September 30, 2007: March 31, September 30, 2008 2007 Face value of debt $2,805,716 $3,285,715 Discount on debt (298,502) (443,086) Investor warrants 1,734,472 1,734,472 Placement agent warrants 187,371 192,826 Fair value adjustment-convertible debt 412,798 168,207 Fair value adjustment-investor warrants 607,662 675,850 ---------- ---------- Total fair value $5,449,517 $5,613,984 ========== ========== F. SHORT-TERM LOAN The Company has a line of credit through its bank to borrow up to 100% of the $5.8 million ARPs (see Note C) at an interest rate of prime minus 1% (4% at March 31, 2008). As of March 31, 2008, the Company had borrowed $656,340. During the six and three months ended March 31, 2008, the Company had paid $539 in interest on the line of credit. The line of credit is secured by the ARPs. The line of credit will not expire as long as the Company holds the ARPs, and is secured by the Company's ARPs. G. OPERATIONS AND FINANCING The Company has incurred significant costs since its inception in connection with the acquisition of an exclusive worldwide license to and later acquisition of the technology of certain patented and unpatented proprietary technology and know-how relating to the human immunological defense system, patent applications, research and development, administrative costs, construction of laboratory facilities and clinical trials. The Company has funded such costs with proceeds realized from the public and private sale of its common and preferred stock. The Company will be required to raise additional capital or find additional long-term financing in order to continue with its research efforts. To date, the Company has not generated any revenue from product sales. The ability of the Company to complete the 16
necessary clinical trials and obtain FDA approval for the sale of products to be developed on a commercial basis is uncertain. The Company plans to seek continued funding of the Company's development by raising additional capital. It is the opinion of management that sufficient funds will be available from the Series K convertible debt, the April 2007 financing, other external financing and additional capital and/or expenditure reductions in order to meet the Company's liabilities and commitments as they come due through March 31, 2009. Ultimately, the Company must complete the development of its products, obtain the appropriate regulatory approvals and obtain sufficient revenues to support its cost structure. The Company has invested in ARPs (See Note C). Because of liquidity issues with these ARPs, the Company has borrowed $656,340 on a line of credit. The Company believes that these issues will be resolved and in the meantime has access to 100% of the invested assets through a line of credit with the Company's bank. H. DIVIDENDS The Company has paid no dividends to shareholders since inception. The cost of the extension of investor warrants during the six months ended March 31, 2008 of $424,815 is recorded as a dividend, and increases the accumulated deficit. I. COMMITMENTS AND CONTINGENCIES Lease Agreement - In August 2007, CEL-SCI leased a building near Baltimore, Maryland. The building, which consists of approximately 73,000 square feet, will be remodeled in accordance with CEL-SCI's specifications so that it can be used by CEL-SCI to manufacture Multikine for CEL-SCI's Phase III clinical trial and sales of the drug if approved by the FDA. The lease is for a term of twenty years and requires annual base rent payments of $1,575,000 during the first year of the lease. The annual base rent escalates each year at 3%. CEL-SCI is also required to pay all real and personal property taxes, insurance premiums, maintenance expenses, repair costs and utilities. The lease allows CEL-SCI, at its election, to extend the lease for two ten-year periods or to purchase the building at the end of the 20-year lease. The lease required CEL-SCI to pay $3,150,000 towards the remodeling costs, which will be recouped by reductions in the annual base rent of $303,228 in years six through twenty of the lease. On January 24, 2008, a second amendment to the lease for the manufacturing facility was signed. In accordance with the amendment, CEL-SCI is required to pay the following: 1) an additional $518,790 for movable equipment, which will increase restricted cash, and 2) an additional $1,295,528 into the escrow account to cover additional costs, which will increase deferred rent. These funds were transferred in early February 2008. 17
CEL-SCI CORPORATION Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Liquidity and Capital Resources The Company has had only limited revenues from operations since its inception in March 1983. The Company has relied upon proceeds realized from the public and private sale of its Common Stock and convertible notes as well as short-term borrowings to meet its funding requirements. Funds raised by the Company have been expended primarily in connection with the acquisition of an exclusive worldwide license to, and later purchase of, certain patented and unpatented proprietary technology and know-how relating to the human immunological defense system, patent applications, the repayment of debt, the continuation of Company sponsored research and development and administrative costs, and the construction of laboratory facilities. Inasmuch as the Company does not anticipate realizing significant revenues until such time as it enters into licensing arrangements regarding its technology and know-how or until such time it receives permission to sell its product (which could take a number of years), the Company has been dependent upon the proceeds from the sale of its securities to meet all of its liquidity and capital resource requirements. During the six-month period ended March 31, 2008 and 2007, the Company used cash totaling $10,728,203 and $2,210,581 respectively. For the six months ended March 31, 2008 and 2007, cash used in operating activities totaled $3,251,036 and $2,205,207. For the six months ended March 31, 2008 and 2007, cash provided by financing activities totaled $180,443 and $99,537, respectively. Repayment of Series K notes ($480,000) and financing costs ($10,300) were used in financing activities and cash was provided by the exercise of employee options ($14,403) and a short term loan of $656,340 during the six months ended March 31, 2008. For the six months ended March 31, 2007, cash provided by financing activities of $109,707 was from the exercise of employee options, partially offset by financing costs of $10,170. Cash used in investing activities was $7,657,610 and $104,911 for the six months ended March 31, 2008 and 2007. This consisted of purchases of equipment and legal costs incurred in patent applications and, for the six months ended March 31, 2008, an additional investment in the manufacturing facility of $1,290,990 and an increase in available for sale securities of $5,800,000. The Company has invested in ARPs (See Note C). Because of liquidity issues with these ARPs, the Company has borrowed $656,340 on a line of credit. The Company believes that these issues will be resolved and in the meantime has access to 100% of the invested assets through a line of credit with the Company's bank. Results of Operations and Financial Condition Grant revenue decreased by $31,779 during the six months ended March 31, 2008, compared to the same period of the previous year, due to the completion of the work funded by the grants. The final grant ended on March 31, 2007. Grant revenue decreased by $17,917 during the three months ended March 31, 2008 compared to the same period of the previous year for the same reason. 18
During the six-month period ended March 31, 2008, research and development expenses increased by $881,006 compared to the six-month period ended March 31, 2007. This increase was due to expenses relating to the preparation for the Phase III clinical trial on Multikine. The Company is preparing for the opening of the manufacturing facility. During the three months ended March 31, 2008, research and development expenses increased by $358,198 over the three months ended March 31, 2008 for the same reason. During the six-month period ended March 31, 2008, general and administrative expenses increased by $385,719 compared to the six-month period ended March 31, 2007. This change was primarily due to: 1) the cost of stock issued to employees (approximately $30,930), 2) the cost of extending employee options (approximately $465,000), 3) an increase in travel related expenses (approximately $22,700), and 4) the cost of extending consultant warrants (approximately $99,200). These increases were partially offset by a decrease in business development costs (approximately $365,000). During the three months ended March 31, 2008, general and administrative expenses decreased by $347,326 compared to the three months ended March 31, 2007. This was primarily due to a decrease in presentation costs (approximately $217,300) and a decrease in legal and accounting costs (approximately $62,000), partially offset by the cost of stock issued to employees (approximately $30,930). Interest income during the six months ended March 31, 2008 increased by $163,322 compared to the six-month period ended March 31, 2007. The increase was due to interest earned on the funds received from the April 2007 financing. Interest income increased during the three months ended March 31, 2008 over the same period ended March 31, 2007 by $80,142. The increase was due to interest earned on a higher amount of invested funds. The loss on derivative instruments of $170,949 for the six months ended March 31, 2008, and for the three months ended March 31, 2008, of $1,160,937 was the result of the change in fair value of the Series K Notes and Series K Warrants during the period. These losses were caused by the increase in share price of the Company's common stock. The interest expense of $265,531 for the six months ended March 31, 2008 was composed of two elements: 1) amortization of the Series K discount ($144,584) and 2) interest paid and accrued on the Series K debt ($120,947). This is a decline of approximately $422,753 from the six months ended March 31, 2007 because of the lower balance of Series K debt. During the three months ended March 31, 2008, the interest expense was $121,515, a decrease of $219,523 from the three months ended March 31, 2007. This decline is because of the lower balance of the Series K debt. Amortization of the Series K discount was $64,081 and interest paid on the series K debt totaled $56,895. Additional interest expense was on the short term loan, totaling $539. Research and Development Expenses During the six and three-month periods ended March 31, 2008 and 2007, the Company's research and development efforts involved Multikine and L.E.A.P.S.(TM). The table below shows the research and development expenses associated with each project during the six and three-month periods. 19
Six Months Three Months Ended March 31, Ended March 31, 2008 2007 2008 2007 ---- ---- ---- ---- MULTIKINE $1,865,345 $1,032,075 $ 956,397 $603,754 L.E.A.P.S 200,684 152,948 80,666 75,111 ---------- ---------- ---------- -------- TOTAL $2,066,029 $1,185,023 $1,037,063 $678,865 ========== ========== ========== ======== In January 2007, the Company received a "no objection" letter from the FDA indicating that it could proceed with the Phase III protocol with Multikine in head & neck cancer patients. The protocol for the Phase III clinical trial was designed to develop conclusive evidence of the safety and efficacy of Multikine in the treatment of advanced primary squamous cell carcinoma of the oral cavity. The Company had previously received a "no objection" letter from the Canadian Biologics and Genetic Therapies Directorate which enabled the Company to begin its Phase III clinical trial in Canada. As of March 31, 2008, the Company was involved in a number of pre-clinical studies with respect to its L.E.A.P.S. technology. The Company does not know what obstacles it will encounter in future pre-clinical and clinical studies involving its L.E.A.P.S. technology. Consequently, the Company cannot predict with any certainty the funds required for future research and clinical trials and the timing of future research and development projects. Clinical and other studies necessary to obtain regulatory approval of a new drug involve significant costs and require several years to complete. The extent of the Company's clinical trials and research programs are primarily based upon the amount of capital available to the Company and the extent to which the Company has received regulatory approvals for clinical trials. The inability of the Company to conduct clinical trials or research, whether due to a lack of capital or regulatory approval, will prevent the Company from completing the studies and research required to obtain regulatory approval for any products which the Company is developing. Without regulatory approval, the Company will be unable to sell any of its products. In August 2007, CEL-SCI leased a building near Baltimore, Maryland. The building, which consists of approximately 73,000 square feet, will be remodeled in accordance with CEL-SCI's specifications so that it can be used by CEL-SCI to manufacture Multikine for CEL-SCI's Phase III clinical trial and sales of the drug if approved by the FDA. The lease is for a term of twenty years and requires annual base rent payments of $1,575,000 during the first year of the lease. The annual base rent escalates each year at 3%. CEL-SCI is also required to pay all real and personal property taxes, insurance premiums, maintenance expenses, repair costs and utilities. The lease allows CEL-SCI, at its election, to extend the lease for two ten-year periods or to purchase the building at the end of the 20-year lease. The lease required CEL-SCI to pay $3,150,000 towards the remodeling costs, which will be recouped by reductions in the annual base rent of $303,228 in years six through twenty of the lease. In January 2008, the Company signed a second amendment to the lease. In accordance with the lease, on February 8, 2008, the Company paid an additional $1,295,528 toward the remodeling costs and a further $518,790 to pay for lab equipment. The building is expected to be ready for occupancy during the third calendar quarter of 2008. 20
Regulatory authorities prefer to see biologics such as Multikine manufactured for commercial sale in the same manufacturing facility for Phase III clinical trials and the sale of the product since this arrangement helps to ensure that the drug lots used to conduct the clinical trials will be consistent with those that may be subsequently sold commercially. Although some biotech companies outsource their manufacturing, this can be risky with biologics because they require intense manufacturing and process control. With biologic products a minor change in manufacturing and process control can result in a major change in the final product. Good and consistent manufacturing and process control is critical and is best assured if the product is manufactured and controlled in the manufacturer's own facility by their own specially trained personnel. Since all of the Company's projects are under development, the Company cannot predict when it will be able to generate any revenue from the sale of any of its products. Critical Accounting Estimates and Policies Management's discussion and analysis of the Company's financial condition and results of operations is based on its unaudited condensed consolidated financial statements. The preparation of these financial statements is based on the selection of accounting policies and the application of significant accounting estimates, some of which require management to make judgments, estimates and assumptions that affect the amounts reported in the financial statements and notes. The Company believes some of the more critical estimates and policies that affect its financial condition and results of operations are in the areas of revenue recognition, operating leases, asset retirement obligations, stock-based compensation and income taxes. For more information regarding the Company's critical accounting estimates and policies, see Part II, Item 7, MD&A "Critical Accounting Estimates and Policies" of the Company's 2007 10-K. We have discussed the application of these critical accounting policies and estimates with the Audit Committee of the Company's Board of Directors. Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS As of March 31, 2008, the Company had outstanding Series K Notes and Series K Warrants which were classified as derivative financial instruments. Interest on the Series K Notes is tied to the 6-month LIBOR. Should the 6-month LIBOR increase, interest payments on the Series K debt may increase as well. The Company has available-for-sale securities totaling $5,800,000 as of March 31, 2008. Due to liquidity issues (See Note C of the condensed financial statements), the Company has borrowed $656,340 on a line of credit secured by these securities. The interest rate on the line of credit is at prime minus 1%. Should the prime rate increase, interest payments on the line of credit may increase as well. Item 4T. CONTROLS AND PROCEDURES Evaluation of Disclosure Controls and Procedures Geert Kersten, CEL-SCI's Chief Executive and Financial Officer, has evaluated the effectiveness of CEL-SCI's disclosure controls and procedures as of March 31, 2008, and in his opinion CEL-SCI's disclosure controls and procedures are effective and ensure that material information relating to CEL-SCI, including 21
CEL-SCI's consolidated subsidiary, is made known to him by others within those entities, particularly during the period in which this report is being prepared, so as to allow timely decisions regarding required disclosure. The Company has determined that these controls and procedures are effective as of March 31, 2008. Changes in Internal Control over Financial Reporting To the knowledge of Mr. Kersten, there have been no significant changes in CEL-SCI's internal controls or in other factors that could significantly affect CEL-SCI's internal controls subsequent to the date of evaluation. The Company continues to evaluate its internal controls. 22
PART II Item 2. Changes in Securities and Use of Proceeds None Item 4. Submission of Matters to a Vote of Security Holders The annual meeting of CEL-SCI's shareholders was held on March 3, 2008. At the meeting the following persons were elected as directors for the upcoming year: Name Votes For Votes Withheld Maximilian de Clara 77,883,141 3,911,418 Geert Kersten 78,836,734 2,957,825 Alexander Esterhazy 79,118,263 2,676,296 C. Richard Kinsolving 79,280,474 2,514,085 Peter R. Young 79,181,763 2,612,796 At the meeting the following proposals were ratified by the shareholders. (1) to approve the adoption of CEL-SCI's 2008 Incentive Stock Option Plan which provides that up to 1,000,000 shares of common stock may be issued upon the exercise of options granted pursuant to the Incentive Stock Option Plan; (2) to approve the adoption of CEL-SCI's 2008 Non-Qualified Stock Option Plan which provides that up to 1,000,000 shares of common stock may be issued upon the exercise of options granted pursuant to the Non-Qualified Stock Option Plan; (3) to approve the adoption of CEL-SCI's 2008 Stock Bonus Plan which provides that up to 1,000,000 shares of common stock may be issued to persons granted stock bonuses pursuant to the Stock Bonus Plan; (4) to approve an amendment to CEL-SCI's Stock Compensation Plan to provide for the issuance of up to 1,000,000 additional restricted shares of common stock to CEL-SCI's directors, officers, employees and consultants for services provided to the Company; (5) subject to the determination of CEL-SCI's directors that a reverse split would be in the best interest of CEL-SCI's shareholders, to approve a reverse split of CEL-SCI's common stock; (6) to ratify the appointment of BDO Seidman, LLP as CEL-SCI's independent registered public accounting firm for the fiscal year ending September 30, 2008. 23
The following is a tabulation of votes cast with respect to these proposals: Votes ---------------------------------------- Broker Proposal For Against Abstain Non-Votes 1. 22,876,122 6,492,020 359,671 52,066,746 2. 23,134,557 6,157,452 435,804 52,066,746 3. 21,676,413 7,658,224 393,176 52,066,746 4. 21,376,495 7,973,363 377,922 52,066,746 5. 62,659,222 18,672,755 462,582 0 6. 79,208,863 1,057,206 1,528,490 0 Item 5. Other Information None Item 6. (a) Exhibits Number Exhibit 31 Rule 13a-14(a) Certifications 32 Section 1350 Certifications 24
SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. CEL-SCI CORPORATION Date: May 15, 2008 /s/ Geert Kersten -------------------------------- Geert Kersten, Chief Executive Officer* * Also signing in the capacity of the Chief Accounting Officer and Principal Financial Officer.