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, 2005 OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _______________ to ______________. Commission File Number 0-11503 CEL-SCI CORPORATION Colorado 84-0916344 ------------------------ ----------------- State or other jurisdiction (IRS) Employer incorporation Identification Number 8229 Boone Boulevard, Suite 802 Vienna, Virginia 22182 ------------------------------- Address of principal executive offices (703) 506-9460 -------------------- Registrant's telephone number, including area code Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) had been subject to such filing requirements for the past 90 days. Yes ____X_____ No __________ Indicate by check mark whether the Registrant is an accelerated filer (as that term is defined in Exchange Act Rule 12b-2). Yes ____ _____ No _____X____ - - Class of Stock No. Shares Outstanding Date -------------- ---------------------- -------------- Common 74,221,806 August 8, 2005
TABLE OF CONTENTS PART I FINANCIAL INFORMATION Item 1. Page ---- Condensed Consolidated Balance Sheets (unaudited) 3 Condensed Consolidated Statements of Operations (unaudited) 4-5 Condensed Consolidated Statements of Cash Flow (unaudited) 6-7 Notes to Condensed Consolidated Financial Statements (unaudited) 8 Item 2. Management's Discussion and Analysis of Financial Condition 15 and Results of Operations Item 3. Quantitative and Qualitative Disclosures about Market Risks 19 Item 4. Controls and Procedures 19 PART II Item 2. Changes in Securities and Use of Proceeds 20 Item 4. Submission of Matters to a Vote of Security Holders 20 Item 5. Other Information 21 Item 6. Exhibits and Reports on Form 8-K 21 Signatures 22
Item 1. FINANCIAL STATEMENTS CEL-SCI CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited) ASSETS June 30, September 30, 2005 2004 --------- ------------ CURRENT ASSETS: Cash and cash equivalents $ 1,488,680 $ 4,263,631 Interest and other receivables 16,376 21,256 Prepaid expenses and laboratory supplies 385,528 508,597 Deposits 14,828 14,828 ------------- ------------- Total current assets 1,905,412 4,808,312 RESEARCH AND OFFICE EQUIPMENT- Less accumulated depreciation of $1,726,828 and $1,651,759 204,445 233,612 PATENT COSTS- less accumulated amortization of $796,972 and $745,321 491,342 471,886 ------------- ------------- TOTAL ASSETS $ 2,601,199 $ 5,513,810 ============= ============= LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable $ 153,262 $ 143,300 Accrued expenses 85,320 64,361 Due to officer/shareholder and employees 20,486 5,320 ------------- ------------- Total current liabilities 259,068 215,981 Deposits held 3,000 3,000 ------------- ------------- Total liabilities 262,068 215,981 STOCKHOLDERS' EQUITY Common stock, $.01 par value; authorized, 100,000,000 shares; issued and outstanding, 72,734,645 and 72,147,367 shares at June 30, 2005 and September 30, 2004, respectively 727,346 721,474 Unearned compensation (2,588) (14,237) Additional paid-in capital 95,612,127 95,343,962 Accumulated deficit (93,997,754) (90,753,370) ------------- ------------- Total stockholders' equity 2,339,131 5,297,829 ------------- ------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 2,601,199 $ 5,513,810 ============= ============= See notes to condensed consolidated financial statements. 3
CEL-SCI CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited) Nine Months Ended June 30, 2005 2004 ------ ------ REVENUES: Grant revenue and other $ 223,395 $ 253,981 ----------- ----------- EXPENSES: Research and development 1,824,044 1,414,942 Depreciation and amortization 149,590 145,838 General and administrative 1,537,454 1,805,134 ----------- ----------- Total Operating Expenses 3,511,088 3,365,914 ----------- ----------- NET OPERATING LOSS (3,287,693) (3,111,933) INTEREST INCOME 43,309 33,797 INTEREST EXPENSE - (126,840) ----------- ----------- NET LOSS $(3,244,384) $(3,204,976) ============ ============ NET LOSS PER COMMON SHARE (BASIC) $ (0.04) $ (0.05) ============ ============ NET LOSS PER COMMON SHARE (DILUTED) $ (0.04) $ (0.05) ============ ============ WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 72,316,654 65,927,925 ============ ============ See notes to condensed consolidated financial statements. 4
CEL-SCI CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited) Three Months Ended June 30, 2005 2004 ---------------------- REVENUES: Grant revenue and other $ 38,103 $ 81,532 ------------ ------------ EXPENSES: Research and development 538,053 489,904 Depreciation and amortization 39,822 49,895 General and administrative 444,599 449,166 ------------ ------------ Total Operating Expenses 1,022,474 988,965 ------------ ------------ NET OPERATING LOSS (984,371) (907,433) INTEREST INCOME 11,015 13,823 INTEREST EXPENSE - - ------------ ------------ NET LOSS $ (973,356) $ (893,610) ============ ============ NET LOSS PER COMMON SHARE (BASIC) $ (0.01) $ (0.01) ============ ============ NET LOSS PER COMMON SHARE (DILUTED) $ (0.01) $ (0.01) ============ ============ WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 72,484,497 69,638,735 ============ ============ See notes to condensed consolidated financial statements. 5
CEL-SCI CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW (unaudited) Nine Months Ended June 30, 2005 2004 CASH FLOWS FROM OPERATING ACTIVITIES: NET LOSS $(3,244,384) $(3,204,976) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 149,590 145,838 Issuance of common stock and stock options for services 7,972 163,842 Common stock contributed to 401(k) plan 60,928 33,365 Amortization of discount on note payable - 30,916 Amortization of discount associated with convertible notes - 67,118 Amortization of deferred financing costs - 16,243 Acceleration of vesting of stock options - 7,597 Impairment loss on abandonment of patents 3,716 25,720 Impairment loss on retired equipment 267 - (Increase) decrease in receivables 4,880 (6,127) (Increase) decrease in prepaid expenses 123,069 (128,151) Decrease in deferred rent - (5,540) Increase (decrease) in accrued expenses 20,959 (22,174) Increase (decrease) in amount due to officer/ shareholder & employees 15,166 (188,681) Increase (decrease) in accounts payable (28,173) (323,087) Decrease in unearned compensation 11,649 - ------------- ------------ NET CASH USED IN OPERATING ACTIVITIES (2,874,361) (3,388,097) ------------- ------------ CASH FLOWS USED IN INVESTING ACTIVITIES: Purchase of equipment (65,735) (28,124) Patent costs (39,992) (37,179) ------------- ------------ NET CASH USED IN INVESTING ACTIVITIES (105,727) (65,303) ------------- ------------ CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES: Proceeds from issuance of common stock - 7,799,970 Proceeds from drawdown on equity line 163,636 340,000 Proceeds from exercise of warrants - 291,222 Payment of Cambrex note - (686,992) Payment of Covance note - (184,330) Proceeds from exercise of stock options 41,501 96,882 Transaction costs related to equity line of credit and private placement - (591,611) ------------ ------------ NET CASH PROVIDED BY FINANCING ACTIVITIES 205,137 7,065,141 ------------- ------------ NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (2,774,951) 3,611,741 CASH AND CASH EQUIVALENTS: Beginning of period 4,263,631 1,753,307 ------------- ------------ End of period $ 1,488,680 $ 5,365,048 ============= ============ (continued) See notes to condensed consolidated financial statements. 6
CEL-SCI CORPORATION ------------------- CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW --------------------------------- (unaudited) (continued) Nine Months Ended June 30, 2005 2004 ------------------------ SUPPLEMENTAL INFORMATION ON NONCASH TRANSACTIONS Conversion of convertible debt into common stock: Decrease in convertible notes $ - $ (100,000) Increase in common stock - 1,794 Increase in additional paid-in capital - 98,206 ---------- ------------- $ - $ - ========== ============= Interest expense paid for with common stock: Decrease in accrued expenses $ - $ (1,789) Increase in common stock - 32 Increase in additional paid-in capital - 1,757 ---------- ------------- $ - $ - ========== ============= Cost of warrant extension: Increase in additional paid-in capital $ - $ 80,035 Decrease in additional paid-in capital - (80,035) ---------- ------------- $ - $ - ========== ============= Patent costs included in accounts payable: Increase in accounts payable $ 38,135 $ 29,713 Increase in patent costs (38,135) (29,713) ----------- ------------- $ - $ - =========== ============= Warrants issued for financing transactions: Increase in additional paid-in capital $ - $ 103,126 Decrease in additional paid-in capital - (103,126) ----------- ------------- $ - $ - =========== ============= Cashless exercise of warrants: Increase in common stock $ - $ 3,698 Decrease in additional paid-in capital - (3,698) ----------- ------------- $ - $ - =========== ============= concluded See notes to condensed consolidated financial statements. 7
CEL-SCI CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS NINE MONTHS ENDED JUNE 30, 2005 AND 2004 (unaudited) A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation The accompanying condensed consolidated financial statements of CEL-SCI Corporation and subsidiary (the Company) are unaudited and certain information and footnote disclosures normally included in the annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been omitted pursuant to the rules and regulations of the Securities and Exchange Commission. While management of the Company believes that the disclosures presented are adequate to make the information presented not misleading, interim consolidated financial statements should be read in conjunction with the consolidated financial statements and notes included in the Company's annual report on Form 10-K/A for the year ended September 30, 2004. 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, 2005 and the results of operations for the nine and three-month periods then ended. The condensed consolidated balance sheet as of September 30, 2004 is derived from the September 30, 2004 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, 2005 are not necessarily indicative of the results to be expected for the entire year. Significant accounting policies are as follows: Principles of Consolidation - The consolidated financial statements include the accounts of CEL-SCI Corporation and its wholly owned subsidiary, Viral Technologies, Inc. All intercompany transactions have been eliminated upon consolidation. 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 are expensed when incurred. During the nine month periods ended June 30, 2005 and 2004, the Company retired equipment with a net book value of $267 and $-0- respectively. During the three months ended June 30, 2005 and 2004, the Company did not retire any equipment. Research and Development Costs - Research and development (R&D) expenditures are expensed as incurred. The Company has an agreement with Cambrex Bio Science, an unrelated corporation, for the production of MultikineR, which is the Company's only product source. All production costs of Multikine are expensed to R&D immediately. 8
CEL-SCI CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS NINE MONTHS ENDED JUNE 30, 2005 AND 2004 (unaudited) Research and Development Grant Revenues - The Company's grant arrangements are handled on a reimbursement basis. Grant revenues under the arrangements are recognized as grant revenue when costs are incurred. Patents - Patent expenditures are capitalized and amortized using the straight-line method over 17 years. In the event changes in technology or other circumstances impair the value or life of the patent, appropriate adjustment in the asset value and period of amortization is made. An impairment loss is recognized when estimated future undiscounted cash flows expected to result from the use of the asset, and from disposition, is less than the carrying value of the asset. The amount of the impairment loss would be the difference between the estimated fair value of the asset and its carrying value. During the nine months ended June 30, 2005 and 2004, the Company recorded patent impairment charges of $3,716 and $25,720, respectively. During the three months ended June 30, 2005 and 2004, the Company recorded no patent impairment charges. These charges are the net book value of patents abandoned during the period and such amount is included in general and administrative expenses. Based on current patent applications and issued patents, CEL-SCI expects that the amortization of patent expenses will total approximately $350,000 during the next five years. Net Loss per Common Share - Net loss per common share is computed by dividing the net loss by the weighted average number of common shares outstanding during the period. Potentially dilutive common shares, including convertible options to purchase common stock, were excluded from the calculation because they are antidilutive. Prepaid Expenses and Laboratory Supplies - The majority of prepaid expenses consist of bulk purchases of laboratory supplies used on a daily basis in the lab and items that will be used for future production. The items in prepaid expenses are expensed when used in production or daily activity as R&D expenses. These items are disposables and consumables and can be used for both the manufacturing of Multikine for clinical studies and in the laboratory for quality control and bioassay use. They can be used in training, testing and daily laboratory activities. Other prepaid expenses are payments for services over a long period and are expensed over the time period for which the service is rendered. Cash and Cash Equivalents - For purposes of the statements of cash flows, cash and cash equivalents consists principally of unrestricted cash on deposit and short-term money market funds. The Company considers all highly liquid investments with a maturity when purchased of less than three months, and those investments that are readily convertible to known amounts of cash and are so close to maturity that they bear no interest rate risk, to be cash equivalents. Use of Estimates - The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of 9
CEL-SCI CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS NINE MONTHS ENDED JUNE 30, 2005 AND 2004 (unaudited) contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Asset Valuations and Review for Potential Impairments - The Company reviews its fixed assets every fiscal quarter. This review requires that the Company make assumptions regarding the value of these assets and the changes in circumstances that would affect the carrying value of these assets. If such analysis indicates that a possible impairment may exist, the Company is then required to estimate the fair value of the asset and, as deemed appropriate, expense all or a portion of the asset. The determination of fair value includes numerous uncertainties, such as the impact of competition on future value. The Company believes that it has made reasonable estimates and judgments in determining whether its long-lived assets have been impaired; however, if there is a material change in the assumptions used in our determination of fair values or if there is a material change in economic conditions or circumstances influencing fair value, the Company could be required to recognize certain impairment charges in the future. Stock-Based Compensation - In October 1996, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation (SFAS No. 123). This statement encourages but does not require companies to account for employee stock compensation awards based on their estimated fair value at the grant date with the resulting cost charged to operations. The Company has elected to continue to account for its employee stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees and related Interpretations". In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure" which amends Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation", SFAS 148 provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation and requires more prominent and more frequent disclosures in the financial statements of the effects of stock-based compensation. The provisions of SFAS 148 are effective for fiscal years ending after December 15, 2002. If the Company had elected to recognize compensation expense based on the fair value of the awards granted, consistent with the provisions of SFAS No. 123, the Company's net loss and net loss per common share would have been increased to the pro forma amounts indicated below: Nine Months Ended June 30, 2005 June 30, 2004 ------------- ------------- Net loss: As reported $(3,244,384) $(3,204,976) Deduct: Accelerated employee awards - 7,597 10
CEL-SCI CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS NINE MONTHS ENDED JUNE 30, 2005 AND 2004 (unaudited) Add: Total stock-based employee compensation expense determined under fair-value-based method for all awards, net of related tax effects (419,789) (995,258) ------------- ------------- Pro forma net loss $(3,664,173) $(4,192,637) ============= ============= Net loss per common share, basic and diluted: As reported $ (0.04) $ (0.05) ============= ============= Pro forma $ (0.05) $ (0.06) ============= ============= Three Months Ended June 30, 2005 June 30, 2004 ------------- ------------- Net loss: As reported $ (973,356) $ (893,610) Add: Reversal of compensation expense For stock-based performance - (218,991) Deduct: Accelerated employee awards - 7,597 Add: Total stock-based employee compensation expense determined under fair-value-based method for all awards, net of related tax effects (144,949) (222,306) ------------- ------------- Pro forma net loss $(1,118,305) $(1,327,310) ============= ============= Net loss per common share, basic and diluted: As reported $ (0.01) $ (0.01) =============== ================ Pro forma $ (0.02) $ (0.02) =============== ================ 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. 11
CEL-SCI CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS NINE MONTHS ENDED JUNE 30, 2005 AND 2004 (unaudited) B. NEW ACCOUNTING PRONOUNCEMENTS In November 2004, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 151, "Inventory Costs, an amendment of ARB 43, Chapter 4". This statement amends ARB 43, Chapter 4, to clarify accounting for abnormal amounts of idle facility expense, freight, handling costs and wasted material. SFAS No. 151 requires that those items be recognized as current-period charges in all circumstances. SFAS No. 151 is effective for fiscal years beginning after June 15, 2005. The Company does not believe that the adoption of SFAS No. 151 will have a material effect on its financial position, results of operations or cash flows. In December 2004 the FASB issued SFAS No. 123R, "Share-Based Payment". SFAS No. 123R requires companies to recognize compensation expense in an amount equal to the fair value of the share-based payment (stock options and restricted stock) issued to employees. SFAS No. 123R applies to all transactions involving issuance of equity by a company in exchange for goods and services, including employees. SFAS No. 123R is effective beginning in January 2006 for the Company's 2006 fiscal year beginning October 1, 2005. The Company has not determined the impact of adopting SFAS No. 123R. On December 16, 2004, the FASB issued SFAS No. 153, "Exchange of Nonmonetary Assets", an amendment of Accounting Principles Board ("APB") Opinion No. 29, which differed from the International Accounting Standards Board's ("IASB") method of accounting for exchanges of similar productive assets. Statement No. 153 replaces the exception from fair value measurement in APB No. 29, with a general exception from fair value measurement for exchanges of non-monetary assets that do not have commercial substance. The Statement is to be applied prospectively and is effective for nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. The Company does not believe that SFAS No. 153 will have a material impact on its results of operations or cash flows. In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error Corrections--A replacement of APB Opinion No. 20 and FASB Statement No. 3". The statement requires that retrospective application of a change in accounting principle be limited to the direct effects of the change and is part of a broader effort by the FASB to improve the comparability of cross-border financial reporting by working with the International Accounting Standards Board (IASB) toward development of a single set of high-quality accounting standards. The Company does not believe that SFAS No. 154 will have a material impact on its results of operations or cash flows. In March 2005, the FASB issued FIN No. 47. "Accounting for Conditional Asset Retirement Obilgations - an Interpretation of FASB Statement No. 143". The interpretation clarifies terms used in FASB Statement No. 143 12
CEL-SCI CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS NINE MONTHS ENDED JUNE 30, 2005 AND 2004 (unaudited) and is effective no later than the end of fiscals ending after December 15, 2005. The Company does not believe that FIN No. 47 will have a material impact on its results on its results of operations or cash flows. C. STOCKHOLDERS' EQUITY During the nine months and three months ended June 30, 2005, the Company did not issue stock for services. During the nine months ended June 30, 2004, the Company issued stock for services to both employees and nonemployees with a fair value of $163,842. During the three months ended June 30, 2004, the Company issued stock for services to both employees and nonemployees with a fair value of $7,933. During the nine months ended June 30, 2005, the Company issued 15,000 options to a consultant for a cost of $7,972. D. FINANCING TRANSACTIONS In July and September 2002, the Company sold convertible notes, plus Series G warrants, to a group of private investors. As of the year ended September 30, 2003, all of the notes had been converted into common stock. The Series G warrants allow the holders to purchase up to 900,000 shares of the Company's common stock. The warrant price was $0.145 as of June 30, 2005. As of June 30, 2005, 450,000 warrants had been exercised and 450,000 warrants remain outstanding. In addition, in January 2003, the Company sold convertible notes, plus Series H warrants to purchase 1,100,000 shares of common stock, to a group of private investors. As of October 2, 2003, all of the Series H notes had been converted into common stock. The Series H warrant price was $0.25 as of June 30, 2005. As of June 30, 2005, 550,000 warrants had been exercised and 550,000 warrants remain outstanding. In September 2003, the Company signed an equity line of credit agreement with Rubicon Group for up to $10,000,000 of funding prior to December 29, 2005. During a twenty-four month period, the Company can request a drawdown under the equity line of credit by selling shares of its common stock to Rubicon Group, who will be obligated to purchase the shares subject to certain volume restrictions. The Company can request a drawdown once every 22 trading days, although the Company is under no obligation to request any drawdowns under the equity line of credit. The minimum amount CEL-SCI can draw down at any one time is $100,000, and the maximum amount CEL-SCI can draw down at any one time will be determined at the time of the drawdown request using a formula contained in the equity line of credit agreement. The Company is restricted from entering into any other equity line of credit arrangement until the earlier of the expiration of the agreement or two years from the date of registration. The Company issued 395,726 warrants to the issuer at a price of $0.83 and the warrants expire September 16, 2008. The warrants were valued using the Black-Scholes valuation method and expenses of $40,600 were recorded to additional paid-in capital as a cost of equity related transaction during the year ended September 30, 2003. Drawdowns totaling $340,000 were made during the nine months ended June 30, 2004 with associated costs of $4,090. A total of 307,082 shares were issued to Rubicon in exchange for the drawdowns. During the nine and three months ended June 30, 2005, 13
CEL-SCI CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS NINE MONTHS ENDED JUNE 30, 2005 AND 2004 (unaudited) drawdowns of $163,636 were made with 309,475 shares issued. Costs of $1,035 were associated with the drawdowns. On May 4, 2004, the Company announced the completion of an offering of 6,402,439 shares of registered common stock at $0.82 per share to one institutional investor. This sale resulted in gross proceeds of $5.25 million and associated costs of $498,452. The stock was offered pursuant to an existing shelf registration statement and Wachovia Capital Markets, LLC acted as the placement agent for the offering. The Company intends to use the proceeds of the offering to advance the clinical development of Multikine for the treatment of cancer. In addition, 76,642 warrants were issued to Wachovia at a price of $1.37 and the warrants expire May 4, 2009. The warrants were valued using the Black-Scholes valuation method and an expense of $38,127 was recorded to additional paid-in capital as a cost of equity related transaction during the year ended September 30, 2004. E. PRIVATE PLACEMENT On December 1, 2003, the Company sold 2,994,964 shares of its common stock to a group of private institutional investors for approximately $2,550,000, or $0.85 per share. As part of this transaction, the investors in the private offering received warrants which allow the investors to purchase 991,003 shares of the Company's common stock at a price of $1.32 per share at any time prior to December 1, 2006. As of June 30, 2005, all warrants remain outstanding. In connection with this private placement, the Company was required to file a registration statement by December 31, 2003. The registration statement was to have been declared effective by the SEC no later than March 30, 2004. If the registration statement was declared effective later than March 30, 2004, the Company was subject to paying liquidated damages to the investors. In accordance with this agreement, the Company recorded an expense of $76,499 during the year ended September 30, 2004. F. OPERATIONS AND FINANCING The Company has incurred significant costs since its inception in connection with the acquisition of an exclusive worldwide license to 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 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 14
CEL-SCI CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS NINE MONTHS ENDED JUNE 30, 2005 AND 2004 (unaudited) capital. It is the opinion of management that sufficient funds will be available from external financing and additional capital and/or expenditure reductions in order to meet the Company's liabilities and commitments as they come due during fiscal year 2005. Ultimately, the Company must complete the development of its products, obtain the appropriate regulatory approvals and obtain sufficient revenues to support its cost structure. G. MARKETING AGREEMENT On May 30, 2003, the Company and Eastern Biotech signed an agreement to develop both Multikine and CEL-1000, and their derivatives and improvements, in three Eastern European countries: Greece, Serbia and Croatia. Eastern Biotech also has the exclusive right to sales in these three countries. As part of the agreement, Eastern Biotech gained the right to receive a 1% royalty on the future net sales of these two products and their derivatives and improvements worldwide. Eastern Biotech also purchased 1,100,000 shares of common stock and warrants, which allow the holder to purchase up to 1,100,000 shares of the Company's common stock at a price equal to $0.47. The Company received proceeds of $500,000 for these shares and warrants. Because the Company did not register these shares prior to September 30, 2003, the royalty percentage increased to 2%. If Eastern Biotech did not meet certain clinical development milestones within one year, it would lose the right to sell both products in these three countries. As of June 1, 2004, Eastern Biotech lost its exclusive right to market, distribute and sell Multikine in accordance with the agreement. H. SUBSEQUENT EVENT On July 18, 2005, CEL-SCI sold 1,250,000 shares of its common stock and 375,000 warrants to one investor for $500,000. Each warrant entitles the holder to purchase one share of CEL-SCI's common stock at a price of $0.65 per share at any time prior to July 18, 2009. The shares of common stock and warrants are "restricted" securities as defined in Rule 144 of the Securities and Exchange Commission. 15
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 exclusive rights to certain patented and unpatented proprietary technology and know-how relating to the human immunological defense system, the funding of Viral Technologies, Inc.'s (VTI) research and development program (inactive since 2000), 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 short-term borrowings and the proceeds from the sale of its securities to meet all of its liquidity and capital resource requirements. In June 2000, the Company entered into an agreement with Cambrex Bio Science, Inc. ("Cambrex") whereby Cambrex agreed to provide the Company with a facility which allows the Company to manufacture Multikine in accordance with the Good Manufacturing Practices regulations of the FDA for periodic manufacturing campaigns. Company personnel will staff this facility. This agreement runs until December 31, 2006. In September 2003, the Company signed an equity line of credit agreement with Rubicon Group for up to $10,000,000 of funding prior to December 29, 2005. During this twenty-four month period, the Company can request a drawdown under the equity line of credit by selling shares of its common stock to Rubicon Group, who will be obligated to purchase the shares subject to certain volume restrictions. The Company can request a drawdown once every 22 trading days, although the Company is under no obligation to request any drawdowns under the equity line of credit. The minimum amount CEL-SCI can draw down at any one time is $100,000, and the maximum amount CEL-SCI can draw down at any one time will be determined at the time of the drawdown request using a formula contained in the equity line of credit agreement. The Company is restricted from entering into any other equity line of credit arrangement until the earlier of the expiration of the agreement or two years from the date of registration. The Company issued 395,726 warrants to the issuer at a price of $0.83 and the warrants expire September 16, 2008. The warrants were valued using the Black-Scholes valuation method and expenses of $40,600 were recorded to additional paid-in capital as a cost of equity related transaction during the year ended September 30, 2003. During the nine and three months ended June 30, 2005, drawdowns of $163,636 were made with associated costs of $1,035. A total of 309,475 shares were issued to Rubicon in exchange for the drawdowns during that period. During the nine months ended June 30, 2004, drawdowns totaling $340,000 16
were made, with associated costs of $4,090. A total of 307,082 shares were issued to Rubicon in exchange for the drawdowns. In July and September 2002, the Company sold convertible notes, plus 900,000 Series G warrants, to a group of private investors. By June 2, 2003, all of the notes had been converted into common stock. In addition, interest totaling $21,472 was converted into 109,428 shares of common stock. As of June 30, 2005, 450,000 warrants had been exercised and 450,000 warrants remain outstanding. In addition, in January 2003, the Company sold convertible notes, plus Series H warrants to purchase 1,100,000 shares of common stock, to a group of private investors. By October 2, 2003, all of the Series H notes had been converted into common stock. The Series H warrant price is currently $0.25. As of June 30, 2005, 550,000 warrants had been exercised and 550,000 warrants remain outstanding. On December 1, 2003, the Company sold 2,994,964 shares of its common stock to a group of private institutional investors for approximately $2,550,000, or $0.85 per share. As part of this transaction, the investors in the private offering received warrants which allow the investors to purchase approximately 900,000 shares of the Company's common stock at a price of $1.32 per share at any time prior to December 1, 2006. As of June 30, 2005, all warrants remain outstanding. On May 30, 2003, the Company and Eastern Biotech signed an agreement to develop both Multikine and CEL-1000, and their derivatives and improvements, in three Eastern European countries: Greece, Serbia and Croatia. Eastern Biotech also has the exclusive right to sales in these three countries. As part of the agreement, Eastern Biotech gained the right to receive a 1% royalty on the future net sales of these two products and their derivatives and improvements worldwide. Eastern Biotech also purchased 1,100,000 shares of common stock and warrants, which allow the holder to purchase up to 1,100,000 shares of the Company's common stock at a price equal to $0.47. The Company received proceeds of $500,000 for these shares and warrants. Because the Company did not register these shares prior to September 30, 2003, the royalty percentage increased to 2%. If Eastern Biotech did not meet certain clinical development milestones within one year, it would lose the right to sell both products in these three countries. As of June 1, 2004 no clinical trials had been started by Eastern Biotech and in accordance with the agreement, Eastern Biotech lost its exclusive right to market, distribute and sell Multikine in the countries. On May 4, 2004, the Company announced the completion of an offering of 6,402,439 shares of registered common stock at $0.82 per share to one institutional investor. This sale resulted in gross proceeds of $5.25 million and associated costs of $498,452. The stock was offered pursuant to an existing shelf registration statement and Wachovia Capital Markets, LLC acted as the placement agent for the offering. The Company intends to use the proceeds of the offering to advance the clinical development of Multikine for the treatment of cancer. In addition, 76,642 warrants were issued to Wachovia at a price of $1.37 and the warrants expire May 4, 2009. The warrants were valued using the Black-Scholes valuation method and an expense of $38,127 was recorded to additional paid-in capital as a cost of equity related transaction during the fiscal year ended September 30, 2004. At the annual shareholders meeting on April 21, 2005, the shareholders ratified the adoption of the following proposals. 17
1. The adoption of the Company's 2005 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. The adoption of the Company's Non-Qualified Stock Option Plan which provides that up to 1,000,000 shares of common stock may be issued upon the exercise of optiosn granted pursuant to the Non-Qualified Stock Option Plan. 3. The adoption o f the Company's 2005 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. The adoption of an amendment to the Company's Stock Compensation Plan. The amendment provides for the issuance of up to 500,000 additional restricted shares of common stock to the Company's directors, officers, employees and consultants for services provided to the Company. Results of Operations "Grant revenues and other" decreased by $30,586 during the nine months ended June 30, 2005, compared to the same period of the previous year, due to the winding down of the work funded by the grants in 2005. The Company is continuing to apply for grants to support its work. During the three months ended June 30, 2005, grant revenues and other decreased by $43,429 for the same reason. During the nine month period ended June 30, 2005, research and development expenses increased by $409,102. The increase in research and development expense was due to an increase in work related to the Company's Phase III application for Multikine. During the three month period ended June 30, 2005, research and development expenses increased by $48,149 compared to the same period in 2004, also because of the increase in work related to the Phase III application for Multikine. During the nine month period ended June 30, 2005, general and administrative expenses decreased by $267,680. During the three month period ended June 30, 2005, general and administrative expenses decreased by $4,567 compared to the same period in 2004. This decrease in both the nine month and three month period was mostly due to a decrease in business development expenses, filing fees and legal fees, as the Company's foremost efforts were focused on the submission of the Phase III clinical trial application for Multikine to the FDA. Interest income during the nine months ended June 30, 2005 increased by $9,512. Interest income during the three months ended June 30, 2005 was less than it was during the three months ended June 30, 2004 by $2,808. Increases for the nine month period were a result of higher balances in interest bearing accounts in the first six months of the year. However, as the balances in the interest bearing accounts declined, interest income also declined, resulting in the small decline during the three months ended June 30, 2005. Interest expense decreased to zero as a result of the conversion of the remaining convertible debt on October 2, 2003. Interest expense for the nine months ended June 30, 2004 is primarily a noncash item incurred to account for interest and amortization of 18
the discounts and deferred financing costs related to the convertible debt, the note payable to Covance AG and the convertible debt payable to Cambrex Biosciences, Inc. Research and Development Expenses During the nine and three month periods ended June 30, 2005 and 2004, the Company's research and development efforts involved Multikine and L.E.A.P.S.. The table below shows the research and development expenses associated with each project during the nine and three-month periods. Nine Months Ended Three Months Ended June 30, 2005 June, 2004 2005 2004 ------------- ---------- ---- ---- MULTIKINE $1,558,633 $1,126,182 $ 462,391 $ 378,828 L.E.A.P.S. 265,411 288,760 75,662 111,076 ----------- ----------- ---------- ---------- TOTAL $1,824,044 $1,414,942 $ 538,053 $ 489,904 ========== =========== ========== ========== The Company believes that it has compiled sufficient data and clinical information to justify a Phase III clinical trial which would be designed to prove the clinical benefit from Multikine as an addition to established anti-cancer therapies. On January 4, 2005, the Company announced that it had submitted a Phase III clinical trial protocol to the U.S. Food and Drug Administration ("FDA") for the use of its investigational immunotherapy drug Multikine in the treatment of advanced primary squamous cell carcinoma of the oral cavity. Additional information in support of and to provide the rationale for the Phase III trial (final reports of clinical trials conducted with Multikine to date and manufacturing and testing information) was included with this submission. The Company met with FDA in April of 2005 to discuss the Phase III trial. The meeting was very useful and productive, and the Company views it as the start of a continuing dialogue with the Agency on this matter. It is clear that the FDA recognizes the need for new and improved therapies for head and neck cancer patients, and it appears to be amenable to new approaches. The Company found the FDA's evaluation of the plan supportive and helpful. A number of specific technical aspects of our development plan were discussed and the FDA made several suggestions as to how the plan could be improved. In the coming months the Company plans to provide additional information to the FDA and confer with it to arrive at a final plan which would produce data supportive of a biological license application. The Company is unable to estimate the future costs of research and clinical trials involving Multikine since the Company has not yet finalized the design of future clinical trials. Until the scope of these trials is known, the Company will not be able to price any future trials with clinical trial organizations. As of June 30, 2005 the Company was involved in a number of pre-clinical studies with respect to its L.E.A.P.S. technology. As with Multikine, 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 19
involve significant costs and require several years to complete. The extent of the Company's clinical trials and research programs are primarily based upon the amount of capital available to the Company and the extent to which the Company has received regulatory approvals for clinical trials. The inability of the Company to conduct clinical trials or research, whether due to a lack of capital or regulatory approval, will prevent the Company from completing the studies and research required to obtain regulatory approval for any products which the Company is developing. Without regulatory approval, the Company will be unable to sell any of its products. Since all of the Company's projects are under development, the Company cannot predict when it will be able to generate any revenue from the sale of any of its products. Critical Accounting Policies - The Company's significant accounting policies are more fully described in Note A to the financial statements. However certain accounting policies are particularly important to the portrayal of financial position and results of operations and require the application of significant judgments by management. As a result, the condensed consolidated financial statements are subject to an inherent degree of uncertainty. In applying those policies, management uses its judgment to determine the appropriate assumptions to be used in the determination of certain estimates. These estimates are based on the Company's historical experience, terms of existing contracts, observance of trends in the industry and information available from outside sources, as appropriate. Our significant accounting policies include: Patents - Patent expenditures are capitalized and amortized using the straight-line method over 17 years. In the event changes in technology or other circumstances impair the value or life of the patent, appropriate adjustment in the asset value and period of amortization is made. An impairment loss is recognized when estimated future undiscounted cash flows expected to result from the use of the asset, and from disposition, is less than the carrying value of the asset. The amount of the impairment loss would be the difference between the estimated fair value of the asset and its carrying value. Stock Options and Warrants - In October 1996, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation (SFAS No. 123). This statement encourages but does not require companies to account for employee stock compensation awards based on their estimated fair value at the grant date with the resulting cost charged to operations. The Company has elected to continue to account for its employee stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations. 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. Asset Valuations and Review for Potential Impairments - The Company reviews its fixed assets every fiscal quarter. This review requires that the Company make assumptions regarding the value of these assets and the changes in circumstances that would affect the carrying value of these assets. If such analysis indicates 20
that a possible impairment may exist, the Company is then required to estimate the fair value of the asset and, as deemed appropriate, expense all or a portion of the asset. The determination of fair value includes numerous uncertainties, such as the impact of competition on future value. The Company believes that it has made reasonable estimates and judgments in determining whether our long-lived assets have been impaired; however, if there is a material change in the assumptions used in our determination of fair values or if there is a material change in economic conditions or circumstances influencing fair value, the Company could be required to recognize certain impairment charges in the future. Prepaid Expenses and Laboratory Supplies--The majority of prepaid expenses consist of bulk purchases of laboratory supplies used on a daily basis in the lab and items that will be used for future production. The items in prepaid expenses are expensed when used in production or daily activity as R&D expenses. These items are disposables and consumables and can be used for both the manufacturing of Multikine for clinical studies and in the laboratory for quality control and bioassay use. They can be used in training, testing and daily laboratory activities. Other prepaid expenses are payments for services over a long period and are expensed over the time period for which the service is rendered. Convertible Notes - The Company initially offsets a portion of the convertible notes issued with a discount representing the relative fair value of the warrants and a beneficial conversion feature discount. This discount is amortized to interest expense over the period the notes are outstanding and is accelerated pro-rata as the notes are converted. The fair value of the warrants and the beneficial conversion discount are calculated based on available market data using appropriate valuation models. These valuations require that the Company make assumptions and estimates regarding the convertible notes and warrants. Management uses its judgment, as well as outside sources, to determine these assumptions and estimates. Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS Market risk is the potential change in an instrument's value caused by, for example, fluctuations in interest and currency exchange rates. The Company has no derivative financial instruments. Additionally, the Company is not exposed to interest rate risks due to the fact the Company has no outstanding debt as of June 30, 2005. Further, there is no exposure to risks associated with foreign exchange rate changes because none of the operations of the Company are transacted in a foreign currency. The interest rate risk in investments is considered immaterial due to the fact that all investments have maturities of 3 months or less. Item 4. CONTROLS AND PROCEDURES The Company's Chief Executive Officer/Chief Financial Officer has evaluated the effectiveness of the Company's "disclosure controls and procedures," as such term is defined in Rule 13a(c) of the Securities Exchange Act of 1934 (the "Exchange Act"), as amended, as of June 30, 2005. Based upon his evaluation, the Chief Executive Officer/Chief Financial Officer has concluded that as of June 30, 2005, the Company's disclosure controls and procedures are effective to ensure that the information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms. There were no significant changes during 21
the nine and three months ended June 30, 2005 in the Company's internal controls or in other factors which could significantly affect these controls, since the date the controls were evaluated. There were no significant deficiencies or material weaknesses and, therefore, there were no corrective actions taken. 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 the Company's shareholders was held on April 21, 2005. At the meeting the following persons were elected as directors for the upcoming year. Name Votes For Votes Withheld - ---- ---------- -------------- Maximilian de Clara 63,030,454 3,433,801 Geert Kersten 65,442,847 1,021,408 Alexander Esterhazy 64,815,982 1,648,273 C. Richard Kinsolving 65,523,972 940,283 Peter Young 65,552,502 911,753 At the meeting the following proposals were ratified by the shareholders. 1. The adoption of the Company's 2005 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. The adoption of the Company's 2005 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. The adoption of the Company's 2005 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. The adoption of an amendment to the Company's Stock Compensation Plan. The amendment provides for the issuance of up to 500,000 additional restricted shares of common stock to the Company's directors, officers, employees and consultants for services provided to the Company. 23
The following is a tabulation of votes cast with respect to these proposals: Votes -------------------------------------- Broker Proposal For Against Abstain Non-Votes -------- --- ------- --------- 1. 15,958,035 4,362,170 205,405 45,938,615 2. 15,734,614 4,432,769 358,227 45,938,615 3. 15,785,608 4,484,015 255,987 45,938,615 4. 15,356,880 4,983,113 185,617 45,938,615 Item 5. Other Information On May 20, 2005, Phase II clinical trial results with the Company's immunotherapy drug Multikine(R) were published in the Journal of Clinical Oncology, the official journal of the American Society of Clinical Oncology (ASCO). The title of the publication is: "Neoadjuvant Immunotherapy of Oral Squamous Cell Carcinoma Modulates Intratumoral CD4/CD8 Ratio and Tumor Microenvironment: A Multicenter Phase II Clinical Trial". In this publication the authors describe a new mechanism of action by which Multikine is able to marshal the immune system to fight head and neck cancer. In addition, the authors suggest that the presence or absence of a cell surface marker on head and neck cancer cells may help select the patients best suited for treatment with Multikine. The publication attributes the Multikine induced anti-tumor immune response to the combined activity of the different cytokines in the product following the local administration of Multikine for only 3 weeks. This combination of different cytokines caused the induction, recruitment into the tumor bed, and proliferation of anti-tumor T cells and other anti-tumor inflammatory cells, leading to a massive anti-tumor immune response. Multikine induced a reversal of the CD4/CD8 ratio in the tumor infiltrating cells, leading to a marked increase in CD4 T cells in the tumor, which resulted in the prolongation of the anti-tumor immune response and tumor cell destruction. The immune-mediated processes continued long after the cessation of Multikine administration. Multikine treatment of patients with advanced primary oral squamous cell carcinoma resulted in an overall response rate of 42%, with 12% of the patients having a complete response. A histopathology study showed that the tumor load in Multikine treated patients was reduced by nearly 50% as compared to tumors from control patients in the same study. These results were achieved with little to no toxicity and without any reported severe adverse events associated with Multikine treatment. The tumors of all of the patients in this trial who responded to Multikine treatment were devoid of the cell surface marker for HLA Class II. This finding, if confirmed in the planned Phase III trial, may lead to the establishment of a marker for selecting the patients best suited for treatment with Multikine. 24
Item 6. (a) Exhibits Number Exhibit 31 Rule 13a-14(a) Certifications 32 Section 1350 Certifications (b) Reports on Form 8-K The Company filed four reports on Schedule 8-K during the quarter ended June 30, 2005. 25
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 __, 2005 ____________________________________ Geert Kersten Chief Executive Officer* *Also signing in the capacity of the Chief Accounting Officer and Principal Financial Officer