UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) (X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 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 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 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 [ ] Non-accelerated filer [ ] Smaller reporting company [X] (Do not check if a smaller reporting company) Indicate by check mark whether the Registrant is a shell company (as defined in Exchange Act Rule 12b-2 of the Exchange Act). Yes _________ No X Class of Stock No. Shares Outstanding Date Common 204,728,670 August 6, 2010
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 Statements of Cash Flow (unaudited) 6 Notes to Condensed Consolidated Financial Statements (unaudited) 8-22 Item 2. Management's Discussion and Analysis of Financial Condition 23 and Results of Operations Item 3. Quantitative and Qualitative Disclosures about Market Risks 26 Item 4. Controls and Procedures 26 PART II Item 1. Legal Proceedings 27 Item 4. Submission of Matters to a Vote of Security Holders 27 Item 6. Exhibits 28 Signatures 29 2
CEL-SCI CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited) ASSETS June 30, September 30, 2010 2009 ---------- ------------ CURRENT ASSETS Cash and cash equivalents $ 30,475,636 $ 33,567,516 Prepaid expenses 188,746 39,972 Inventory used for R&D and manufacturing 1,751,987 399,474 Deferred rent - current portion 761,786 419,354 Deposits 10,132 1,585,064 ------------- -------------- Total current assets 33,188,287 36,011,380 RESEARCH AND OFFICE EQUIPMENT AND LEASEHOLD IMPROVEMENTS-- Less accumulated depreciation of $2,526,572 and $2,259,237 1,296,668 1,200,611 PATENT COSTS- less accumulated amortization of $1,190,299 and $1,132,612 374,089 423,104 RESTRICTED CASH 21,337 68,552 DEFERRED RENT 7,227,243 8,323,951 ------------- -------------- TOTAL ASSETS $ 42,107,624 $ 46,027,598 ============= ============== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable $ 758,614 $ 793,148 Accrued expenses 213,901 98,665 Due to employees 24,507 49,527 Deposits held 10,000 10,000 Deferred revenue 125,000 - Related party loan 1,104,057 1,107,339 ------------- -------------- Total current liabilities 2,236,079 2,058,679 Derivative instruments 5,175,372 35,113,970 Deferred rent 14,366 14,305 ------------- -------------- Total liabilities 7,425,817 37,186,954 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, 204,728,670 and 191,972,021 shares at June 30, 2010 and September 30, 2009, respectively 2,047,287 1,919,720 Additional paid-in capital 187,104,043 173,017,978 Accumulated deficit (154,469,523) (166,097,054) ------------- -------------- Total stockholders' equity 34,681,807 8,840,644 ------------- -------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 42,107,624 $ 46,027,598 ============== ============== See notes to condensed consolidated financial statements. 3
CEL-SCI CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited) For the Nine Months Ended June 30, 2010 2009 ---------- --------- REVENUE: Rent income $ 91,500 $ 49,643 Other income - 450 ----------- ------------ Total revenue 91,500 50,093 EXPENSES: Research and development, excluding depreciation of $316,575 and $266,739 included below 7,733,544 3,832,582 Depreciation and amortization 377,458 331,656 General and administrative 4,947,764 4,015,921 ----------- ------------ Total expenses 13,058,766 8,180,159 ----------- ------------ LOSS FROM OPERATIONS (12,967,266) (8,130,066) GAIN (LOSS) ON DERIVATIVE INSTRUMENTS 30,614,451 (1,993,250) INTEREST INCOME 287,613 208,113 INTEREST EXPENSE (120,924) (614,654) ---------- ------------ NET INCOME (LOSS) BEFORE INCOME TA 17,813,874 (10,529,857) INCOME TAX PROVISION - - ---------- ------------ NET INCOME (LOSS) 17,813,874 (10,529,857) DIVIDENDS - (466,667) MODIFICATION OF SERIES M WARRANTS (1,432,456) - ---------- ------------ NET INCOME (LOSS) AVAILABLE TO COMMON SHAREHOLDERS $ 16,381,418 $(10,996,524) ============ ============ NET INCOME (LOSS) PER COMMON SHARE-BASIC $ 0.08 $ (0.09) ============ ============ NET LOSS PER COMMON SHARE-DILUTED $ (0.02) $ (0.09) ============ ============ WEIGHTED AVERAGE COMMON SHARES OUTSTANDING-BASIC 201,208,121 125,655,445 ============ ============ WEIGHTED AVERAGE COMMON SHARES OUTSTANDING-DILUTED 228,443,595 125,655,445 ============ ============ See notes to condensed consolidated financial statements. 4
CEL-SCI CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited) For the Three Months Ended June 30, 2010 2009 --------- --------- REVENUE: Rent income $ 30,900 $ 30,000 Other income - 450 --------- --------- Total revenue 30,900 30,450 EXPENSES: Research and development, excluding depreciation of $113,146 and $101,108 included below 1,587,520 1,174,066 Depreciation and amortization 134,574 123,114 General and administrative 1,702,865 1,946,396 --------- --------- Total expenses 3,424,959 3,243,576 --------- --------- LOSS FROM OPERATIONS (3,394,059) (3,213,126) GAIN (LOSS) ON DERIVATIVE INSTRUMENTS 2,754,512 (2,649,493) INTEREST INCOME 79,825 68,716 INTEREST EXPENSE (41,402) (445,161) --------- --------- NET LOSS BEFORE INCOME TAXES (601,124) (6,239,064) INCOME TAX PROVISION - - --------- --------- NET LOSS (601,124) (6,239,064) DIVIDENDS - (466,667) --------- --------- NET LOSS AVAILABLE TO COMMON SHAREHOLDERS $(601,124) $(6,705,731) ========= =========== NET LOSS PER COMMON SHARE-BASIC $ (0.00) $ (0.05) ========= =========== NET LOSS PER COMMON SHARE-DILUTED $ (0.01) $ (0.05) ========= =========== WEIGHTED AVERAGE COMMON SHARES OUTSTANDING-BASIC 204,592,051 130,076,656 =========== =========== WEIGHTED AVERAGE COMMON SHARES OUTSTANDING-DILUTED 231,827,525 130,076,656 =========== =========== See notes to condensed consolidated financial statements. 5
CEL-SCI CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW (unaudited) Nine Months Ended June 30, 2010 2009 ----------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES: NET INCOME (LOSS) $ 17,813,874 $ (10,529,857) Adjustments to reconcile net income (loss) to net cash used in operating activities: Depreciation and amortization 377,458 331,656 Issuance of common stock, warrants and stock options for services 1,159,450 1,718,450 Common stock contributed to 401(k) plan 83,023 19,972 Extension of employee options 212,444 - Employee option cost 939,350 1,403,155 (Gain) loss on derivative instruments (30,614,451) 1,993,250 Amortization of discount on convertible debt - 111,990 Amortization of loan premium (3,282) - Decrease (increase) in deferred rent asset 754,276 (42,316) Loss on abandonment of patents 5,381 138,526 Loss on retirement of equipment 2,081 - (Increase) decrease in prepaid expenses (148,774) 26,214 (Increase) in inventory for R&D and manufacturing (1,352,513) (7,214) Decrease in deposits 1,574,932 14,828 Increase in deposits held - 10,000 (Decrease) increase in accounts payable (83,191) 1,091,454 Increase in accrued expenses 115,236 576,733 (Decrease) increase in amount due to employees (25,020) 67,298 Increase in deferred revenue 125,000 - Increase in accrued interest on convertible debt - 23,730 Increase in deferred rent liability 61 7,668 ----------- ----------- NET CASH USED IN OPERATING ACTIVITIES (9,064,665) (3,044,463) ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Decrease in restricted cash 47,215 918,816 Sale of investments available-for-sale securities - 200,000 Purchase of equipment (368,281) (173,828) Patent costs (15,023) (26,264) ----------- ----------- NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES (336,089) 918,724 ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from exercise of stock options and warrants and sale of stock 6,308,874 5,845,241 Licensing proceeds (Note D) - 1,249,981 Repayment of convertible notes - (630,000) Proceeds from short term loan-related party - 1,060,000 Repayment of short term loan - (200,000) Financing costs - (339,330) ----------- ----------- NET CASH PROVIDED BY FINANCING ACTIVITIES 6,308,874 6,985,892 ----------- ----------- NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (3,091,880) 4,860,153 CASH AND CASH EQUIVALENTS: Beginning of period 33,567,516 711,258 ----------- ----------- End of period $30,475,636 $ 5,571,411 =========== =========== (continued) 6
CEL-SCI CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW (unaudited) (continued) Nine Months Ended June 30, SUPPLEMENTAL INFORMATION ON NONCASH TRANSACTIONS: 2010 2009 ----------- ----------- Patent costs included in accounts payable: Increase in accounts payable $ - $ (4,050) Increase in patent costs - 4,050 ----------- ----------- $ - $ - =========== =========== Equipment costs included in accounts payable: Increase in accounts payable $ (48,657) $ (8,090) Increase in research and office equipment 48,657 8,909 ----------- ----------- $ - $ - =========== =========== Modification of Series M warrants: Increase in additional paid-in capital $(1,432,456) $ - Decrease in additional paid capital 1,432,456 - ----------- ----------- $ - $ - =========== =========== Cost of investor shares issued and warrant extension: Increase in accumulated deficit $ - $ 466,667 Increase in additional paid-in capital - (466,667) ----------- ----------- $ - $ - =========== =========== Payment of convertible debt principal with common stock: Decrease in convertible debt $ - $ 190,000 Increase in common stock - (7,216) Increase in additional paid-in capital - (182,784) ----------- ----------- $ - $ - =========== =========== Conversion of interest on convertible debt into common stock: Decrease in accrued interest on convertible debt $ - $ 40,153 Increase in common stock - (1,705) Increase in additional paid-in capital - (38,448) ----------- ----------- $ - $ - =========== =========== Warrants issued for deferred rent: Increase in deferred rent $ - $ 366,894 Increase in additional paid-in capital - (366,894) ----------- ----------- $ - $ - =========== =========== Issuance of warrants with licensing agreement: Increase in additional paid-in capital $ - $(1,015,771) Decrease in additional paid-in capital - 1,015,771 ----------- ----------- $ - $ - =========== =========== Exercise of derivative liability warrants: Decrease in derivative liabilities $ 5,510,490 $ - Increase in additional paid-in capital (5,510,490) - ----------- ----------- $ - $ - =========== =========== Conversion of warrants from additional paid in capital to derivative liabilities: Increase in derivative liabilities $(6,186,343) $ - Increase in accumulated deficit 6,186,343 - ----------- ----------- $ - $ - =========== =========== Issuance of warrants in connection with financing: Increase in additional paid-in capital $ - $(2,731,471) Decrease in additional paid-in capital - 2,731,471 ----------- ----------- $ - - =========== =========== NOTE: Cash expenditures for interest expense $ 124,206 $ 85,406 See notes to condensed consolidated financial statements. 7
CEL-SCI CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS NINE MONTHS ENDED JUNE 30, 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, 2009. In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all accruals and adjustments (each of which is of a normal recurring nature) necessary for a fair presentation of the financial position as of June 30, 2010 and the results of operations for the nine and three-month periods then ended. The condensed consolidated balance sheet as of September 30, 2009 is derived from the September 30, 2009 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 nine and three-month periods ended June 30, 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 nine-month periods ended June 30, 2010 and 2009 was $318,800 and $267,327, respectively. Depreciation and amortization expense for the three-month periods ended June 30, 2010 and 2009 was $114,894 and $101,329, respectively. During the nine and three months ended June 30, 2010 and 2009, equipment with a net book value of $2,081 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 8
other circumstances impair the value or life of the patent, appropriate adjustment in the asset value and period of amortization is made. An impairment loss is recognized when estimated future undiscounted cash flows expected to result from the use of the asset, and from disposition, is less than the carrying value of the asset. The amount of the impairment loss would be the difference between the estimated fair value of the asset and its carrying value. During the nine-month periods ended June 30, 2010 and 2009, the Company recorded patent impairment charges of $5,381 and $138,526, respectively. During the three-month periods ended June 30, 2010 and 2009, the Company recorded patent impairment charges of $-0- and $121,567, respectively. For the nine-month periods ended June 30, 2010 and 2009, amortization of patent costs totaled $58,658 and $64,329, respectively. For the three-month periods ended June 30, 2010 and 2009, amortization of patent costs totaled $19,680 and $21,785, respectively. The Company estimates that amortization expense will be $78,000 for each of the next five years, totaling $390,000. Research and Development Costs - Research and development expenditures are expensed as incurred. Total research and development costs, excluding depreciation, were $7,733,544 and $3,832,582, respectively, for the nine months ended June 30, 2010 and 2009. Total research and development costs, excluding depreciation, were $1,587,520 and $1,174,066, respectively, for the three months ended June 30, 2010 and 2009. Income Taxes - The Company has net operating loss carryforwards of approximately $107 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 performed 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. 9
Deferred rent (asset) - The deferred rent is discussed at Note J. Long-term interest receivable on the deposit on the manufacturing facility has been combined with the deferred rent (asset) for both periods for comparability. 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 June 30, 2010. For the nine months ended June 30, 2010 and 2009, the Company recorded $939,350 and $1,403,155, respectively, in general and administrative expense for the cost of employee options. For the three months ended June 30, 2010 and 2009, the Company recorded $321,268 and $1,114,434, 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 400,000 and 4,763,389 options granted to employees during the nine-month periods ended June 30, 2010 and 2009, respectively. There were 6,000 and 4,763,389 options granted to employees during the three-month periods ended June 30, 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 compensation using the Black Scholes method of valuation. On January 13, 2010, the Company extended 518,832 employee options at a cost of $212,444, representing the difference between the fair value of the options before the extension and the fair value after the extension. The Company determined the fair value of the fully vested employee option extension 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 description of the Stock Option Plans follows. For further discussion of the Stock Compensation Plan and Stock Bonus Plans, see Form 10-K for the year ended September 30, 2009. In some cases these Plans are collectively referred to as the "Plans". Incentive Stock Option Plans. 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 Plans. Only Company employees may be granted options pursuant to the Incentive Stock Option Plans. 10
CEL-SCI CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS NINE MONTHS ENDED JUNE 30, 2010 AND 2009 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 option holder'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; During the nine months ended June 30, 2010, 71,333 options were exercised from the Incentive Stock Option Plan. During the three months ended June 30, 2010, no options were exercised from the Incentive Stock Option Plans. The total intrinsic value of options exercised during the nine months ended June 30, 2010 was $22,933. The total intrinsic value of options exercised during the three months ended June 30, 2010 was $0. There were no options exercised during the nine or three months ended June 30, 2009. During the nine months ended June 30, 2010, 100,000 Incentive stock options were granted. During the three months ended June 30, 2010, no Incentive stock options were granted. The total fair market value of the shares of common stock (determined at the time of the grant of the option) for which any employee may be granted options which are first exercisable in any calendar year may not exceed $100,000. Options may not be exercised until one year following the date of grant. Options granted to an employee then owning more than 10% of the common stock of the Company may not be exercisable by its terms after five years from the date of grant. Any other option granted pursuant to the Plan may not be exercisable by its terms after ten years from the date of grant. The exercise price of an option 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 a capital-raising transaction or promoting the Company's stock. The option exercise price is determined by the Company's Board of Directors. 11
During the nine months ended June 30, 2010, 18,625 options were exercised from the Non-Qualified Plans. During the three months ended June 30, 2010, no options were exercised from the Non-Qualified Plans. The total intrinsic value of options exercised during the nine months ended June 30, 2010 was $10,066. The total intrinsic value of options exercised during the three months ended June 30, 2010 was $0. There were no options exercised during the nine or three months ended June 30, 2009. During the nine months ended June 30, 2010, 300,000 Non-Qualified stock options were granted. During the three months ended June 30, 2010, 6,000 Non-Qualified stock options were granted. 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 nine months ended June 30, 2010. There were 370,758 shares of common stock issued to consultants during the nine months ended June 30, 2010 at a cost for the nine months of $409,562. For the three months ended June 30, 2010, no shares were issued to non-employees. Additionally, a portion of the cost of common stock issued in previous quarters was expensed. The cost for the previously issued shares for the nine months ended June 30, 2010 was $349,074 and for the three months ended June 30, 2010 the cost for previously issued shares was $57,900. There were 450,000 options granted to non-employees during the nine months ended June 30, 2009 at a cost of $366,894. There were 2,581,488 shares of common stock issued to consultants during the nine months ended June 30, 2009 at a cost for the nine months ended June 30, 2009 of $462,234. In addition, a portion of the cost of common stock issued in previous quarters was expensed. This cost for the nine months ended June 30, 2009 was $391,000 and $97,601 for the three months ended June 30, 2009. B. NEW ACCOUNTING PRONOUNCEMENTS In June 2008, the FASB finalized Codification 815-40-15, "Determining Whether an Instrument (or Embedded Feature) is Indexed to an Entity's Own Stock". The topic lays out a procedure to determine if the debt instrument is indexed to a corporation's common stock. The topic is effective for fiscal years beginning after December 15, 2008. The Company has adopted this topic and the effect was material. (See Note D). In January 2010, the FASB amended Codification 820-10, "Improving Disclosures about Fair Value Measurement", effective for interim periods beginning after December 15, 2009. This amendment changes disclosures required for interim and annual periods with respect to fair value measurements. The Company has adopted the change in the disclosure requirements and the effect was immaterial. 12
C. AVAILABLE-FOR-SALE SECURITIES At September 30, 2008, the Company had $200,000 in face value of Auction Rate Cumulative Preferred Shares (ARPs), liquidation preference of $25,000 per share, of an income mutual fund. The ARPs were invested primarily in a globally diversified portfolio of convertible instruments, common and preferred stocks, and income producing securities such as investment grade and below investment grade (high yield/high risk) debt securities. The Company carried the ARPs at par value until they were repaid in November 2008. The loan that the Company had taken against these ARPs was repaid at the same time. D. STOCKHOLDERS' EQUITY In November 2008, the Company extended its licensing agreement for Multikine with Orient Europharma. The new agreement extends the Multikine collaboration to also cover South Korea, the Philippines, Australia and New Zealand. The licensing agreement initially focuses on the areas of head and neck cancer, nasopharyngeal cancer and potentially cervical cancer. The agreement expires 15 years after the commencement date which is defined as the date of the first commercial sale of Multikine in any country within their territory. As a result of the agreement, Orient Europharma purchased 1,282,051 shares of common stock at a cost of $0.39 per share, for a total to the Company, after expenses, of $499,982. During the nine months ended June 30, 2009, 2,568,816 shares of common stock were issued in payment of invoices totaling $868,846. Common stock was also issued to pay interest and principal on the Series K convertible debt. (See Note E) In addition, the balance of the shares issued to the President of the Company in September 2008 were expensed at a cost of $200,000. An additional 1,030,928 shares were issued to the President of the Company in March 2009. A portion of the cost of $200,000 was expensed during the nine months ended June 30, 2009, totaling $125,555. In addition, 12,672 shares were issued to an employee for expenses. The shares were expensed at a cost of $3,168 during the quarter ended June 30, 2009. On December 30, 2008, the Company entered into an Equity Line of Credit agreement as a source of funding for the Company. For a two-year period, the agreement allows the Company, at its discretion, to sell up to $5 million of the Company's common stock at the volume weighted average price of the day minus 9%. The Company may request a drawdown once every ten trading days, although the Company is under no obligation to request any drawdowns under the equity line of credit. The equity line of credit expires on January 6, 2011. There were no drawdowns during the nine and three months ended June 30, 2010 or 2009. 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. The Company has existing licensing agreements for Multikine with Teva Pharmaceuticals and Orient 13
Europharma. 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 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, had to make a $125,000 payment to the Company on or before March 15, 2010. On March 8, 2010, Byron made the payment of $125,000. 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 new 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. During the nine months ended June 30, 2010, there were 12,249,441 warrants and options exercised for 12,249,441 shares of common stock at prices ranging from $0.22 to $1.05. The Company received a total of $6,308,874 from the exercise of warrants and options during the nine months ended June 30, 2010. During the three months ended June 30, 2010, there were 319,767 warrants and options exercised for 319,767 shares of common stock at $0.40. Included in the warrants and options exercised during the nine months ended June 30, 2010 were 1,335,221 Series K warrants (See Note E), on which the Company recognized a gain on conversion of $280,223 and 8,813,088 Series A warrants, on which the Company recognized a total gain of $8,433,451. These amounts include adjustments to correct errors made in prior periods totaling $209,302 relating to the mark to market adjustment for the exercise of the Series K warrants. Management believes the impact of these adjustments to be immaterial to the current and prior periods. Both the Series K warrants and the Series A warrants were accounted for as derivative liabilities. Series A warrants were issued in connection with the June 2009 financing. When the warrants were exercised, the value of these warrants was converted from derivative liabilities to equity. Series K warrants transferred to equity totaled $1,233,518 and Series A warrants transferred to equity totaled $4,276,972. The remaining Series A through E warrants were valued at $3,074,913 at June 30, 2010, which resulted in a gain of $13,956,036 for the nine months ended June 30, 2010 and $1,897,335 for the three months ended June 30, 2010. See Note G for details of the balances of derivative instruments at June 30, 2010 and September 30, 2009. 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 14
warrant would have allowed the holder to purchase one share of the Company'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 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. Two warrant agreements provide for adjustments to the purchase price for certain dilutive events, which includes an adjustment to the warrant exercise price in the event that the Company makes certain equity offerings in the future at a price lower than the exercise price of the warrants. 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 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 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 warrants were revalued on June 30, 2010 at $1,361,774, which resulted in a gain on derivatives and a reduction in derivative liabilities of $4,824,569 for the nine months ended June 30, 2010 and $583,617 for the three months ended June 30, 2010 due to the decline in the Company's stock price since October 1, 2009. The assumptions used in the fair value calculation for the warrants as of October 1, 2009 and June 30, 2010 are as follows: October 1, 2009 June 30, 2009 --------------- ------------- Expected stock price volatility 95% 95% Risk-free interest rate 2.151% 1.449% Expected life of warrant 4.88 years 4.14 years 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 15
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. The Company accounted for the Series K Warrants as derivative liabilities in accordance with Codification 815-10. A debt discount of $1,734,472 was amortized to interest expense using the effective interest method over the expected term of the Series K Notes. During the nine-month periods ended June 30, 2010 and 2009, the Company recorded interest expense of $-0- and $111,990, respectively, in amortization of the debt discount. During the fiscal year ended September 30, 2009, the balance of the debt was either repaid or converted into shares of common stock. The Company recorded a loss on derivative instruments of $1,892,084 during the nine months ended June 30, 2009. For the three months ended June 30, 2009, the Company recorded a loss on derivative instruments of $2,548,327. During the nine months ended June 30, 2009, principal payments of $630,000 were made in cash to the holders of the Series K Notes. In addition, 721,565 shares of common stock were issued in December 2008 for the principal payment due on January 4, and February 4, 2009 of $190,000. The Company also paid the interest expense through December 31, 2008 with 170,577 shares of common stock. During the nine months ended June 30, 2010, the Company recorded a gain on remaining Series K warrants of $3,120,172. The following summary comprises the total of the fair value of the Series K convertible debt and related derivative instruments at June 30, 2010 and September 30, 2009: June 30, 2010 September 30, 2009 ------------- ------------------ Investor warrants $1,734,472 $1,734,472 Fair value adjustment- investor warrants (995,786) 3,638,126 ---------- ---------- Total fair value $ 738,686 $5,372,598 ========== ========== F. 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 new effective date is for fiscal years beginning after November 15, 2008 and the interim periods within the fiscal year. The adoption of Codification 820-10 did not have a material impact on the Company's results of operations, financial position or cash flows. 16
In accordance with Codification 820-10, the Company determines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The Company generally applies the income approach to determine fair value. This method uses valuation techniques to convert future amounts to a single present amount. The measurement is based on the value indicated by current market expectations 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 June 30, 2010 and the consolidated balance sheet at September 30, 2009: <TABLE> June 30, 2010 ------------------------------------------------------------------ <S> <C> <C> <C> <C> 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 $ - $5,175,372 $ - $5,175,372 =========== ========== ========== ========== </TABLE> 17
<TABLE> September 30, 2009 ------------------------------------------------------------------ <S> <C> <C> <C> <C> 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 $ - $35,113,970 $ - $35,113,970 ========== =========== ========== =========== </TABLE> 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. G. DERIVATIVE LIABILITIES The Company has several groups of warrants that require classification in the balance sheet as derivative liabilities. These warrants have been discussed above. Below is a summary of the derivative liabilities at June 30, 2010 and September 30, 2009: June 30, 2010 September 30, 2009 ------------- ------------------ Series K warrants (Note E) $ 738,686 $ 5,372,598 2009 financings warrants (Note D) 3,074,912 29,741,372 2008 warrants reclassified from equity to derivative liabilities on October 1, 2009 (Note D) 1,361,774 - ----------- ------------ Total derivative liabilities $ 5,175,372 $ 35,113,970 ============ ============ H. SHORT-TERM LOANS The Company had a line of credit with its bank to borrow up to 100% of the ARPs (see Note C) at an interest rate of prime minus 1%. As of September 30, 2008, the Company had borrowed $200,000, which was repaid in November 2008. During the three months ended December 31, 2008, the Company had paid $813 in interest on the line of credit. 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 18
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 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 must be 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 may demand payment of the loan. During the nine months ended June 30, 2010, the Company amortized the remaining $3,282 in premium on the loan. As of June 30, 2010, the fair value and the face value of the loan was $1,104,057. As of September 30, 2009, the balance of the loan with unamortized premium was $1,107,339. I. 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, as well as loans from affiliates. 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 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 is currently preparing the Phase III trial for Multikine. The net cost to the Company of the clinical trial is estimated to be $25 million. 19
J. COMMITMENTS AND CONTINGENCIES 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 requires annual base rent payments of $1,575,000 during the first year of the lease. The annual base rent escalates each year at 3%. The Company is also required to pay all real and personal property taxes, insurance premiums, maintenance expenses, repair costs and utilities. The lease allows the Company, at its election, to extend the lease for two ten-year periods or to purchase the building at the end of the 20-year lease. The lease required the Company to pay $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 an 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 nine months ended June 30, 2010, 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 formally in default under the terms of the lease and 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 are now 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. 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 valued at $251,172 using the Black Scholes method. The Company is in compliance with the lease and in February 2010, received a refund of the $1,575,000 deposited with the landlord in July 2008. On January 28, 2009, the Company subleased a portion of the manufacturing facility. The sublease commenced on February 2, 2009 and expires on January 31, 2011. The Company currently receives $10,300 per month in rent for the subleased space. 20
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 nine months ended June 30, 2010 was $606,583 and for the nine months ended June 30, 2009 was $595,994. The amortization on the deferred rent for the three months ended June 30, 2010 was $201,820 and for the three months ended June 30, 2009 was $150,940. K. EARNINGS PER SHARE The Company's diluted earnings per share (EPS) are as follows for June 30, 2010. The June 30, 2009 diluted earnings per share were the same as the basic earnings per share. Nine Months Ended June 30, 2010 ------------------------------------------- Weighted average Net Income Shares EPS ---------- ---------------- ----- Basic Earnings per Share $ 16,381,418 201,208,121 $ 0.08 Note conversion 124,206 2,760,142 Warrants and options convertible into shares of common stock (21,900,777) 24,475,332 ------------- ----------- Dilutive EPS $ (5,395,153) 228,443,595 $(0.02) ============== =========== ====== Three Months Ended June 30, 2010 ------------------------------------------ Weighted average Net Income Shares EPS ------------ ---------------- ----- Basic Earnings per Share $ (601,124) 204,592,051 $(0.00) Note conversion 41,402 2,760,142 Warrants and options convertible into shares of common stock (2,903,058) 24,475,332 -------------- ------------ Dilutive EPS $ (3,462,780) 231,827,525 $(0.01) ============== ============ ====== Nine Months Ended June 30, 2009 ------------------------------------------- Weighted average Net Income Shares EPS ---------- ---------------- ----- Basic Earnings per Share $ (10,996,524) 125,655,445 $(0.09) Warrants and options convertible into shares of common stock - - -------------- ----------- Dilutive EPS $ (10,996,524) 125,655,445 $(0.09) ============== =========== ====== 21
Three Months Ended June 30, 2010 ------------------------------------------ Weighted average Net Income Shares EPS ------------ ---------------- ----- Basic Earnings per Share $ (6,705,731) 130,076,656 $(0.05) Warrants and options convertible into shares of common stock - - ------------- ----------- Dilutive EPS $ (6,705,731) 130,076,656 $(0.05) ============== =========== ====== L. SUBSEQUENT EVENTS The Company has evaluated subsequent events through the date these financial statements were filed. 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 is 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. In approving the amendment, CEL-SCI's Directors determined that reducing the number of CEL-SCI's outstanding warrants would be beneficial. 22
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 capital generated from the public and private offerings of its securities as well as loans to meet its capital requirements. Capital has primarily 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 and loans from third parties 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 also raised significant capital through stock sales and the exercise of warrants and options during 2009. If needed, the Company can access a $5 million Equity Line of Credit (see Note D). Since the Company was able to raise substantial capital in 2009, the Company is currently preparing the Phase III trial for Multikine. The net cost to the Company of the Phase III clinical trial is estimated to be $25 million. During the nine-month period ended June 30, 2010, the Company's cash decreased by $3,091,880 compared to an increase in cash of $4,860,153 during the nine months ended June 30, 2009. For the nine months ended June 30, 2010 and 2009, cash used in operating activities totaled $9,064,665 and $3,044,463, respectively. For the nine months ended June 30, 2010 and 2009, cash provided by financing activities totaled $6,308,874 and $6,985,892, respectively. The repayment of the Series K convertible notes ($630,000), financing costs ($339,330) and the repayment of the short-term loan ($200,000) was used in financing activities during the nine months ended June 30, 2009. Licensing proceeds of $1,249,981 and receipt of short-term loans to the Company of $1,060,000 provided funds, as did the June 2009 financing ($5,845,241). For the nine months ended June 30, 2010, cash provided by financing was from the exercise of warrants and options ($6,308,874). Cash used by investing activities was $336,089 and provided by investing activities was $918,724, respectively, for the nine months ended June 30, 2010 and 2009. The use of cash in investing activities consisted of purchases of equipment and legal costs incurred in patent applications and, for the nine months ended June 30, 2009, the sale of the final $200,000 in ARPs. 23
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. See Note J to the financial statements included as part of this report for information concerning the terms of the lease. 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. On January 28, 2009, the Company subleased a portion of the manufacturing facility. The sublease commenced on February 2, 2009 and expires on January 31, 2011. The Company currently receives $10,300 per month in rent for the subleased space. Results of Operations and Financial Condition During the nine-month period ended June 30, 2010, research and development expenses increased by $3,900,962 compared to the nine-month period ended June 30, 2009. This increase was due to continuing expenses relating to the preparation for the Phase III clinical trial. During the three month period ended June 30, 2010, research and development expenses increased by $413,454 compared to the three-month period ended June 30, 2009 for the same reason. During the nine-month period ended June 30, 2010, general and administrative expenses increased by $931,843 compared to the nine-month period ended June 30, 2009. During the three-month period ended June 30, 2010, general and administrative expenses decreased by $243,531 compared to the three-month period ended June 30, 2009. This increase for the nine months ended June 30, 2010 was caused by higher costs for employee options and a bonus given to the Company's Chief Executive Officer in the three-months ended March 31, 2010. The decrease in the three month period ended June 30, 2010 was due to a reduced cost of employee options when compared to the three month period ended June 30, 2009. Interest income during the nine months ended June 30, 2010 increased by $79,500 compared to the nine-month period ended June 30, 2009. Interest income during the three months ended June 30, 2010 increased by $11,109 compared to the three-month period ended June 30, 2009. The increase was due to the increase in the funds available for investment, partially offset by lower interest rates. The gain on derivative instruments of $30,614,451 for the nine months ended June 30, 2010 was the result of the change in fair value of the Series A through E Warrants and Series K Warrants during the period. The gain on derivative instruments of $2,754,512 for the three months ended June 30, 2010, was the result of the change in fair value of the Series A through E Warrants and Series 24
K Warrants during the period. These gains were caused by fluctuations in the price of the Company's common stock. The interest expense of $120,924 for the nine months ended June 30, 2010 was interest on the loan from the Company's president, offset by the amortization of the remaining premium on the loan of ($3,282). The interest expense of $41,402 for the three months ended June 30, 2010 also represented interest on the loan from the Company's president. The interest expense of $614,654 for the nine months ended June 30, 2009 was composed of five elements: 1) amortization of the Series K discount ($111,990), 2) interest paid and accrued on the Series K debt ($103,784), 3) margin interest ($813), 4) interest on the short term loan ($39,265), and 5) cost of warrants issued to short term loan holder ($358,802). The interest expense of $445,161 for the three months ended June 30, 2009 was composed of four elements: 1) amortization of the Series K discount ($31,439), 2) interest paid and accrued on the Series K debt ($29,134), 3) interest on the short term loan ($25,786), and 4) cost of warrants issued to short term loan holder ($358,802). Research and Development Expenses During the nine and three-month periods ended June 30, 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 nine and three-month periods Nine Months Ended June 30, Three Months Ended June 30, 2010 2009 2010 2009 ---- ---- ---- ---- MULTIKINE $6,823,218 $3,769,302 $1,434,208 $1,165,834 L.E.A.P.S 910,326 63,280 153,312 8,232 ---------- ---------- ---------- ---------- TOTAL $7,733,544 $3,832,582 $1,587,520 $1,174,066 ========== ========== ========== ========== 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 is preparing for the start of its Phase III clinical trial in the United States, Canada and other countries. As of June 30, 2010, the Company was involved in a number of pre-clinical studies with respect to its L.E.A.P.S. technology. The Company does not know what obstacles it will encounter in future pre-clinical and clinical studies involving its L.E.A.P.S. technology. Clinical and other studies necessary to obtain regulatory approval of a new drug involve significant costs and require several years to complete. The extent of the Company's clinical trials and research programs are primarily based upon the amount of capital available to the Company and the extent to which the Company has received regulatory approvals for clinical trials. The inability of the Company to conduct clinical trials or research, whether due to a lack of capital 25
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, MD&A "Critical Accounting Estimates and Policies" of the Company's 2009 10-K report. The application of these critical accounting policies and estimates have 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 its President that bears interest at 15%. The Company does not believe that it has any significant exposures to market risk. 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 June 30, 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 June 30, 2010. 26
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 three months ended June 30, 2010. There was no change in the Company's internal control over financial reporting during the three months ended June 30, 2010. PART II Item 1. Legal Proceedings See Item 3 of the Company's report on Form 10-K for the year ended September 30, 2009. Item 6. (a) Exhibits Number Exhibit 31 Rule 13a-14(a) Certifications 32 Section 1350 Certifications 27
SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. CEL-SCI CORPORATION Date: August 16, 2010 /s/ Geert Kersten ------------------------------------ Geert Kersten, Principal Executive Officer* * Also signing in the capacity of the Principal Accounting and Financial Officer. 28