-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, I4vXidsJ0JEZvgT1ApkCezlKyny3oIFA24yrkBJQIqAXjJ7BHJuLyL2UVdwNSABL LogOfO/Un+2CWk/BGn007g== 0001004878-04-000012.txt : 20040212 0001004878-04-000012.hdr.sgml : 20040212 20040212170433 ACCESSION NUMBER: 0001004878-04-000012 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20031231 FILED AS OF DATE: 20040212 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CEL SCI CORP CENTRAL INDEX KEY: 0000725363 STANDARD INDUSTRIAL CLASSIFICATION: BIOLOGICAL PRODUCTS (NO DIAGNOSTIC SUBSTANCES) [2836] IRS NUMBER: 840916344 STATE OF INCORPORATION: CO FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-11889 FILM NUMBER: 04592577 BUSINESS ADDRESS: STREET 1: 8229 BOONE BLVD . STREET 2: SUITE 802 CITY: VIENNA STATE: VA ZIP: 22182 BUSINESS PHONE: 7035069460 MAIL ADDRESS: STREET 1: 8229 BOONE BLVD. STREET 2: SUITE 802 CITY: VIENNA STATE: VA ZIP: 22182 FORMER COMPANY: FORMER CONFORMED NAME: INTERLEUKIN 2 INC DATE OF NAME CHANGE: 19880317 10-Q 1 dec0310qrnd204.txt R&D 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) (X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended December 31, 2003 OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _______________ to ______________. Commission File Number 0-11503 CEL-SCI CORPORATION Colorado 84-0916344 - ---------------------------- -------------------- State or other jurisdiction (IRS) Employer of incorporation Identification Number 8229 Boone Boulevard, Suite 802 Vienna, Virginia 22182 ----------------------------- Address of principal executive offices (703) 506-9460 ----------------------------- Registrant's telephone number, including area code Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) had been subject to such filing requirements for the past 90 days. Yes X No ------- -------- Indicate by check mark whether the Registrant is 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 65,287,630 February 10, 2004 TABLE OF CONTENTS PART I FINANCIAL INFORMATION Item 1. Page Condensed Consolidated Balance Sheets (unaudited) 3 Condensed Consolidated Statements of Operations (unaudited) 4 Condensed Consolidated Statements of Cash Flow (unaudited) 5-7 Notes to Condensed Consolidated Financial Statements (unaudited) 8 Item 2. Management's Discussion and Analysis of Financial Condition 16 and Results of Operations Item 3. Quantitative and Qualitative Disclosures about Market Risks 20 Item 4. Controls and Procedures 20 PART II Item 2. Changes in Securities and Use of Proceeds 21 Item 6. Exhibits and Reports on Form 8-K 22 Signatures 23 Item 1. FINANCIAL STATEMENTS CEL-SCI CORPORATION ------------------- CONDENSED CONSOLIDATED BALANCE SHEETS ------------------------ (unaudited) ASSETS December 31, September 30, 2003 2003 CURRENT ASSETS: ----------------------------- Cash and cash equivalents $ 2,449,088 $ 1,753,307 Interest and other receivables 16,108 47,051 Prepaid expenses 351,594 357,531 Deposits 14,828 14,828 Deferred financing costs - 16,243 Total Current Assets 2,831,618 2,188,960 RESEARCH AND OFFICE EQUIPMENT- Less accumulated depreciation of $2,033,491 and $2,002,232 247,447 278,706 PATENT COSTS- less accumulated amortization of $705,495 and $704,522 435,407 447,540 ---------- ---------- TOTAL ASSETS $ 3,514,472 $2,915,206 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable $ 265,115 $ 481,985 Accrued expenses 45,310 99,172 Due to officer/shareholder and employees 43,022 227,115 Deposits held 3,000 3,000 Deferred rent 2,223 5,540 Note payable - Cambrex, net of discount - 656,076 Note payable - Covance - 184,330 ---------- --------- Total current liabilities 358,670 1,657,218 CONVERTIBLE NOTES, NET - 32,882 ---------- --------- Total liabilities 358,670 1,690,100 STOCKHOLDERS' EQUITY Common stock, $.01 par value; authorized, 100,000,000 shares; issued and outstanding, 65,126,322 and 61,166,345 shares at December 31, 2003 and September 30, 2003, respectively 651,263 611,663 Additional paid-in capital 90,164,280 87,167,091 Accumulated deficit (87,659,741) (86,553,648) ----------- ----------- Total stockholders' equity 3,155,802 1,225,106 ---------- ----------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 3,514,472 $2,915,206 =========== =========== See notes to condensed consolidated financial statements. CEL-SCI CORPORATION ------------------- CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS --------------------------------- (unaudited) Three Months Ended December 31, 2003 2002 ----------------------------- Grant revenue and other $ 73,235 $ 52,955 -------- --------- EXPENSES: Research and development 368,348 511,307 Depreciation and amortization 47,927 47,426 General and administrative 647,440 698,456 -------- --------- Total Operating Expenses 1,063,715 1,257,189 --------- --------- NET OPERATING LOSS (990,480) (1,204,234) INTEREST INCOME 11,227 17,307 INTEREST EXPENSE (126,840) (495,938) --------- --------- NET LOSS (1,106,093) (1,682,865) ACCRUED DIVIDENDS ON PREFERRED STOCK - (1,917) ACCRETION OF BENEFICIAL CONVERSION FEATURE ON PREFERRED STOCK - (61,253) --------- --------- NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS $ (1,106,093) $(1,746,035) ============= ============ NET LOSS PER COMMON SHARE (BASIC) $ (0.02) $ (0.04) ============= ============ NET LOSS PER COMMON SHARE (DILUTED) $ (0.02) $ (0.04) ============= ============ WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 62,848,255 42,030,495 ============ ============ See notes to condensed consolidated financial statements. CEL-SCI CORPORATION ------------------- CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW --------------------------------- (unaudited) Three Months Ended December 31, 2003 2002 ------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES: NET LOSS $(1,106,093) $(1,682,865) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 47,927 47,426 Issuance of common stock for services 155,909 267,182 Common stock contributed to 401(k) plan 5,830 11,217 Amortization of discount on note payable 30,916 37,500 Amortization of discount associated with convertible notes 67,118 320,810 Amortization of deferred financing costs 16,243 118,809 Gain on sale of equipment - (26,463) Compensation expense related to variable options 20,108 - Impairment loss on abandonment of patents 25,720 - Decrease in receivables 30,943 18,704 Decrease in prepaid expenses 5,937 54,324 Decrease in deferred rent (3,317) (4,228) (Decrease) increase in accrued expenses (52,073) 19,964 (Decrease) increase in amount due to officer/shareholder & employees (184,093) 79,609 (Decrease) increase in accounts payable (254,805) 34,925 ---------- -------- NET CASH USED IN OPERATING ACTIVITIES (1,193,730) (703,086) ---------- -------- CASH FLOWS (USED IN) PROVIDED BY INVESTING ACTIVITIES: Patent costs (10,000) (10,679) ---------- -------- NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES (10,000) (10,679) ---------- -------- CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES: Cash proceeds from issuance of common stock 2,549,970 - Cash proceeds from drawdown on equity line - 287,636 Cash proceeds from exercise of warrants 291,222 22,950 Payment of Cambrex note (686,992) 25,000 Payment of Covance note (184,330) - Cash proceeds from exercise of stock options 2,100 - Transaction costs related to equity line of credit and private placement (72,459) (33,000) ---------- -------- NET CASH PROVIDED BY FINANCING ACTIVITIES 1,899,511 302,586 ---------- -------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 695,781 (411,179) CASH AND CASH EQUIVALENTS: Beginning of period 1,753,307 2,079,276 ---------- ---------- End of period $2,449,088 $ 1,668,097 =========== =========== (continued) See notes to condensed consolidated financial statements. CEL-SCI CORPORATION ------------------- CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW --------------------------------- (unaudited) (continued) Three Months Ended December 31, 2003 2002 ----------------------------- SUPPLEMENTAL INFORMATION ON NONCASH TRANSACTIONS Accrual of dividends on preferred stock: Increase in accrued expenses $ - $ 1,917 Decrease in additional paid-in capital - (1,917) --------- -------- $ - $ - ========= ======== Common stock issued in lieu of cash dividends: Decrease in accrued expenses $ - $(53,692) Increase in common stock - 496 Increase in additional paid-in capital - 53,196 --------- -------- $ - $ - ========= ======== Conversion of preferred stock into common stock: Decrease in preferred stock $ - $ (11) Increase in common stock - 9,206 Decrease in additional paid-in capital - (9,195) --------- --------- $ - $ - ========= ======== Conversion of convertible debt into common stock: Decrease in convertible notes $(100,000) $(830,000) Increase in common stock 1,794 55,528 Increase in additional paid-in capital 98,206 774,472 --------- ---------- $ - $ - ========= ========== Accretion for the beneficial conversion on preferred stock: Increase in additional paid-in capital $ - $ 61,253 Decrease in additional paid-in capital - (61,253) --------- ---------- $ - $ - ========= ========= Surrender of deposit and sale of equipment to reduce note payable: Decrease in deposits $ - $ 125,000 Decrease in equipment, net - 100,000 Decrease in note payable - (225,000) --------- ---------- $ - $ - ========= ========= Deferred financing costs included in accounts payable: Increase in accounts payable $ 17,680 $ 4,000 Increase in deferred financing costs (17,680) (4,000) --------- --------- $ - $ - ========= ========= continued CEL-SCI CORPORATION ------------------- CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW --------------------------------- (unaudited) (continued) Three Months Ended December 31, 2003 2002 ---------------------------- Interest expense paid for with common stock: Decrease in accrued expenses $ (1,789) $ (9,430) Increase in common stock 32 573 Increase in additional paid-in capital 1,757 8,857 --------- ---------- $ - $ - ========= ========= Patent costs included in accounts payable: Increase in accounts payable $ 30,255 $ 20,619 Increase in patent costs (30,255) (20,619) --------- --------- $ - $ - ========= ========= 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. CEL-SCI CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS THREE MONTHS ENDED DECEMBER 31, 2003 AND 2002 (unaudited) A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation The accompanying condensed consolidated financial statements of CEL-SCI Corporation and subsidiary (the Company) are unaudited and certain information and footnote disclosures normally included in the annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been omitted pursuant to the rules and regulations of the Securities and Exchange Commission. While management of the Company believes that the disclosures presented are adequate to make the information presented not misleading, interim consolidated financial statements should be read in conjunction with the consolidated financial statements and notes included in the Company's annual report on Form 10-K for the year ended September 30, 2003. In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all accruals and adjustments (each of which is of a normal recurring nature) necessary for a fair presentation of the financial position as of December 31, 2003 and the results of operations for the three-month period then ended. The condensed consolidated balance sheet as of September 30, 2003 is derived from the September 30, 2003 audited consolidated financial statements. Significant accounting policies have been consistently applied in the interim financial statements and the annual financial statements. The results of operations for the three-month period ended December 31, 2003 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. Investments--Investments that may be sold as part of the liquidity management of the Company or for other factors are classified as available-for-sale and are carried at fair market value. Unrealized gains and losses on such securities are reported as a separate component of stockholders' equity. Realized gains and losses on sales of securities are reported in earnings and computed using the specific identified cost basis. 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 terms of the lease. Repairs and maintenance are expensed when incurred. During the three months ended December 31, 2003 and 2002, 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 MULTIKINE, which is the Company's only product source. All production costs of MULTIKINE are expensed to R&D immediately. CEL-SCI CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS THREE MONTHS ENDED DECEMBER 31, 2003 AND 2002 (unaudited) (continued) 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 three months ended December 31, 2003 and 2002, the Company recorded patent impairment charges of $25,720 and $-0- respectively for the net book value of patents abandoned during the period and such amount is included in general and administrative expenses. During the next five years, CEL-SCI expects that the amortization of patent expenses will total approximately $240,000. Net Loss per Common Share--Net loss per common share is computed by dividing the net loss, after increasing the loss for the effect of any accrued dividends on the preferred stock and the accretion of the beneficial conversion feature related to the preferred stock, by the weighted average number of common shares outstanding during the period. Potentially dilutive common shares, including convertible preferred stock and options to purchase common stock, were excluded from the calculation because they are antidilutive. Comprehensive Loss--SFAS 130, "Reporting Comprehensive Income," establishes standards for reporting and displaying comprehensive net income or loss and its components in stockholders' equity. SFAS 130 requires the components of other comprehensive income or loss such as changes in the fair value of available-for-sale securities and foreign translation adjustments to be added to net income or loss to arrive at comprehensive income or loss. Other comprehensive income or loss items have no impact on the Company's net loss as presented on the statement of operations. During the three months ended December 31, 2003 and 2002, there were no components of comprehensive loss other than net loss and the statement of comprehensive loss has been omitted. Prepaid Expenses--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. Deferred Financing Costs--Deferred financing costs are capitalized and expensed over the period the notes are outstanding or on a pro-rata basis as the notes are converted. 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 CEL-SCI CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS THREE MONTHS ENDED DECEMBER 31, 2003 AND 2002 (unaudited) (continued) so close to maturity that they bear no interest rate risk, to be cash equivalents. Convertible Notes--Convertible debt issued by the Company is initially offset by a discount representing the relative fair value of the warrants and beneficial conversion feature. This discount is amortized to interest expense over the period the debt is outstanding and accelerated pro-rata as the notes are converted. The fair value of the warrants and beneficial conversion discount are calculated based on available market data using appropriate valuation models. 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 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 Options--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: CEL-SCI CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS THREE MONTHS ENDED DECEMBER 31, 2003 AND 2002 (unaudited) (continued) Three Months Ended December 31, 2003 December 31, 2002 Net loss: As reported $(1,106,093) $(1,682,865) Deduct: Compensation expense for stock-based performance awards included in reported net loss, net of related tax effects 20,108 - Add: Total stock-based employee compensation expense determined under fair-value-based method for all awards, net of related tax effects (199,594) (284,299) Pro forma net loss $(1,285,579) $(1,967,164) ============ ============ Net loss per common share, basic and diluted: As reported $ (0.02) $ (0.04) =========== ============ Pro forma $ (0.02) $ (0.05) =========== ============ 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. New Accounting Pronouncements--In January 2003, the FASB issued Interpretation No. 46, "Consolidation of Variable Interest Entities", (FIN46). FIN 46 provides guidance on the consolidation of certain entities in which equity investors do not have the characteristics of a controlling financial interest. Such entities are referred to as variable interest entities. FIN 46 was effective immediately for variable interest entities created or acquired after January 31, 2003 and was effective July 1, 2003 for variable interest entities created or acquired on or before January 31, 2003. In October 2003, the FASB issued Staff Position FIN 46.6, which extended the effective date of FIN 46 for variable interest entities acquired before February 1, 2003 to the first interim or annual period ending after December 15, 2003. The Company adopted FIN 46 and the implementation did not have a material effect on the Company's financial position, results of operations or cash flows. B. STOCKHOLDERS' EQUITY During the three months ended December 31, 2003 and 2002, the Company issued stock for services to both employees and nonemployees with a fair value of $155,909 and $267,182, respectively. During August 2001, three private investors exchanged shares of the Company's common stock and remaining Series D Warrants, which they owned, for 6,288 shares of the Company's Series E CEL-SCI CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS THREE MONTHS ENDED DECEMBER 31, 2003 AND 2002 (unaudited) (continued) Preferred Stock. These investors also exchanged their Series A and Series C warrants from prior offerings for new Series E warrants. The preferred shares were entitled to receive cumulative annual dividends in an amount equal to $60 per share and have liquidation preferences equal to $1,000 per share. Each Series E Preferred share was convertible into shares of the Company's common stock on the basis of one Series E Preferred share for shares of common stock equal in number to the amount determined by dividing $1,000 by the lesser of $5 or 93% of the average closing bid prices of the Company's common stock for the 5 days prior to the date of each conversion notice. The lowest price at which the Series E Preferred stock was convertible was $1.08. The Series E Preferred stock had no voting rights and was redeemable at the Company's option at a price of 120% plus accrued dividends until August 2003, when the redemption price was fixed at 100% and 39 shares of preferred stock were automatically converted into 47,531 common shares. During the quarter ended December 31, 2002, 1,125 shares of preferred stock were converted into 920,601 shares of common stock. In addition, dividends were converted into an additional 49,558 shares of common stock during the quarter ended December 31, 2002. There were 67 shares of preferred stock outstanding at December 31, 2002. As of August 17, 2003, all shares had been converted and no shares remain outstanding at December 31, 2003. As all shares had been converted prior to the quarter ended December 31, 2003, there was no accretion of the beneficial conversion feature or accrual of preferred dividends. C. FINANCING TRANSACTIONS In December 2001, the Company sold redeemable convertible notes and Series F warrants, to a group of private investors for proceeds of $1,600,000, less transaction costs of $276,410. The notes bore interest at 7% per year and were due and payable December 31, 2003. The notes were secured by substantially all of the Company's assets and contained certain restrictions, including limitations on such items as indebtedness, sales of common stock and payment of dividends. The notes were convertible into shares of the Company's common stock at the holder's option determinable by dividing each $1,000 of note principal by 76% of the average of the three lowest daily trading prices of the Company's common stock on the American Stock Exchange during the twenty trading days immediately prior to the closing date. In addition, the notes were required to be redeemed by the Company at 130% upon certain occurrences. As of November 30, 2002, all of the notes were converted into 6,592,461 shares of common stock. The Series F warrants allowed the holders to purchase up to 960,000 shares of the Company's common stock at a price equal to 110% of the closing price per share at any time prior to the date which is seven years after the closing of the transaction. The warrant price was adjustable if the Company sells any additional shares of its common stock or convertible securities for less than fair market value or at an amount lower than the exercise price of the Series F warrants. The warrant price was adjusted every three months to an amount equal to 110% of the conversion price on such date, provided that the adjusted price is lower than the warrant exercise price on that date. The last adjustment to the warrant price was on October 17, 2002, when the warrant price was reduced to $0.153. During the three months ended December 31, 2003, the remaining 420,000 warrants were exercised for stock in a cashless transaction that resulted in the issuance of 369,796 shares of common stock. In July and September 2002, the Company sold convertible notes, plus Series G warrants, to a group of private investors for $1,300,000 less transaction costs of $177,370. The notes bore interest at 7% per year and were due and payable September 9, 2004. Interest was payable quarterly CEL-SCI CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS THREE MONTHS ENDED DECEMBER 31, 2003 AND 2002 (unaudited) (continued) beginning October 1, 2002. The notes were secured by substantially all of the Company's assets and contained certain restrictions, including limitations on such items as indebtedness, sales of common stock and payment of dividends. At the holders' option the notes were convertible into shares of the Company's common stock equal in number to the amount determined by dividing each $1,000 of note principal to be converted by the conversion price. The conversion price was 76% of the average of the three lowest daily trading prices of the Company's common stock on the American Stock Exchange during the 15 trading days immediately prior to the conversion date. If the Company sold any additional shares of common stock, or any securities convertible into common stock at a price below the then applicable conversion price, the conversion price would have been lowered to the price at which the shares were sold or the lowest price at which the securities are convertible. As of the year ended September 30, 2003, all of the notes had been converted into 8,354,198 shares of common stock. In addition, all of the discount associated with the notes had been amortized to interest expense. Interest totaling $21,472 was converted into 109,428 shares of common stock during the year ended September 30, 2003. The Series G warrants allow the holders to purchase up to 900,000 shares of the Company's common stock at a price equal to 110% of the conversion price on such date, provided that the adjusted price is lower than the warrant exercise price on that date. The warrant price was $0.145 as of December 31, 2003. As of December 31, 2003, 450,000 warrants had been exercised and 450,000 warrants remain outstanding. 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 for $1,350,000 less transaction costs of approximately $220,419. The first funds, totaling $600,000, were received in January 2003 and the balance of $750,000 was received on July 2, 2003. The notes bore interest at 7% per year. The first notes were due and payable January 7, 2005 and the second notes were due and payable July 7, 2005. Interest was payable quarterly. The notes were secured by substantially all of the Company's assets and contain certain restrictions, including limitations on such items as indebtedness, sales of common stock and payment of dividends. At the holders' option the notes were convertible into shares of the Company's common stock equal in number to the amount determined by dividing each $1,000 of note principal to be converted by the conversion price. The conversion price defaulted to 60% of the average of the three lowest daily trading prices of the Company's common stock on the American Stock Exchange during the 15 trading days immediately prior to the conversion date in the event of default. On May 8, 2003, the Company signed an amendment to the agreement that prevented the conversion price from defaulting to 60%. In the agreement, the conversion price declines to 70% of the average of the three lowest daily trading prices of the Company's common stock if the price of the stock climbs over $0.50. If the Company sells any additional shares of common stock, or any securities convertible into common stock at a price below the then applicable conversion price, the conversion price will be lowered to the price at which the shares were sold or the lowest price at which the securities are convertible. On May 30, 2003, the price of the Company's stock rose above $0.50. In accordance with the agreement, the discount percentage changed from 76% to 70%. This change increased the discount on the debt that the Company recorded for the Series H convertible notes by $67,669. As of October 2, 2003, all of the Series H notes had been converted into a total of 3,183,358 shares of common stock and total interest of $32,914 had been converted into 83,227 shares of common stock. The Series H warrant price was $0.25 as of December 31, 2003. As of December 31, 2003, 550,000 warrants had been exercised and 550,000 warrants remain outstanding. CEL-SCI CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS THREE MONTHS ENDED DECEMBER 31, 2003 AND 2002 (unaudited) (continued) 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. On November 15, 2001, the Company signed an agreement for a manufacturing campaign with Cambrex in which Cambrex provided manufacturing space and support to the Company during November and December 2001 and January 2002. In exchange, the Company signed a note, payable on January 2, 2003, with Cambrex to pay a total of $1,172,517. Unpaid principal began accruing interest on November 16, 2002 and carried an interest rate of the Prime Rate plus 3%. This note was later extended to January 2, 2004. There were also conversion features allowing Cambrex to convert either all or part of the note into shares of the Company's common stock. The principal balance of the note and any accrued interest were convertible into common stock at 90% of the average of the closing prices of the common stock for the three trading days immediately prior to the conversion date subject to a floor of $0.22 per share. A beneficial conversion cost of $106,716 was recorded during the year for the difference between the conversion price of the stock and the market price of the stock. The balance of the beneficial conversion cost was expensed to interest expense on the date the note was paid. During the quarter ended December 31, 2003, the Company recorded $9,943 in interest expense related to the note. During the quarter ending December 31, 2003, CEL-SCI paid $692,010 of principal plus interest expense of $59,450 to Cambrex, thereby paying off the remaining balance of the note. On October 8, 2002, CEL-SCI signed an agreement with Covance AG (Covance), a Swiss Corporation. Pursuant to the agreement, amounts owed to Covance totaling $199,928 became a note payable in June 2003, to be paid by January 2, 2004. Interest on the note was payable monthly at an annual rate of 8%. During the quarter ended December 31, 2003, the Company paid the outstanding principal balance of $184,330 to Covance plus accrued interest expense of $6,356. During the quarter ended December 31, 2003, interest expense of $2,581 was recorded for the note. 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. There have been no drawdowns on this line of credit as of December 31, 2003. CEL-SCI CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS THREE MONTHS ENDED DECEMBER 31, 2003 AND 2002 (unaudited) (continued) D. 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 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. E. 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 capital. In fiscal 2002 and 2003, the Company reduced its discretionary expenditures. If necessary, the Company plans to further reduce discretionary expenditures in fiscal year 2004; however, such reductions would further delay the development of the Company's products. 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 2004. Ultimately, the Company must complete the development of its products, obtain the appropriate regulatory approvals and obtain sufficient revenues to support its cost structure. F. 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 does not meet certain clinical development milestones within one year, it will lose the right to sell both products in these three countries. As of December 31, 2003, no clinical trials have been started by Eastern Biotech. CEL-SCI CORPORATION Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OFOPERATIONS 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, 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 is mostly 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. On November 15, 2001, the Company signed an agreement for a manufacturing campaign with Cambrex in which Cambrex provided manufacturing space and support to the Company during November and December 2001 and January 2002. In exchange, the Company signed a note, payable on January 2, 2003, with Cambrex to pay a total of $1,172,517. Unpaid principal began accruing interest on November 16, 2002 and carried an interest rate of the Prime Rate plus 3%. This note was later extended to January 2, 2004. There were also conversion features allowing Cambrex to convert either all or part of the note into shares of the Company's common stock. The principal balance of the note and any accrued interest were convertible into common stock at 90% of the average of the closing prices of the common stock for the three trading days immediately prior to the conversion date subject to a floor of $0.22 per share. A beneficial conversion cost of $106,716 was recorded during the year for the difference between the conversion price of the stock and the market price of the stock. The balance of the beneficial conversion cost was expensed to interest expense on the date the note was paid. During the quarter ended December 31, 2003, the Company recorded $9,943 in interest expense related to the note. During the quarter ending December 31, 2003, CEL-SCI paid $692,010 of principal plus interest expense of $59,450 to Cambrex, thereby paying off the remaining balance of the note. 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. There have been no drawdowns on this line of credit as of December 31, 2003. In December 2001 and January 2002, the Company sold convertible notes, plus Series F warrants, to a group of private investors for $1,600,000. The notes bore interest at 7% per year, were due and payable on December 31, 2003 and were secured by substantially all of the Company's assets. Interest was payable quarterly except that the first interest payment was not due until July 1, 2002. The notes were fully converted into 6,592,461 shares of common stock by the end of November, 2002. At the holder's option the notes were convertible into shares of the Company's common stock equal in number to the amount determined by dividing each $1,000 of note principal to be converted by the Conversion Price. The Conversion Price is 76% of the average of the three lowest daily trading prices of the Company's common stock on the American Stock Exchange during the 20 trading days immediately prior to the conversion date. The Conversion Price may not be less than $0.57. However, if the Company's common stock trades for less than $0.57 per share for a period of 20 consecutive trading days, the $0.57 minimum price will no longer be applicable. The Series F warrants initially allowed the holders to purchase up to 960,000 shares of the Company's common stock at a price of $0.95 per share at any time prior to December 31, 2008. On January 17, 2002, the warrant exercise price, in accordance with the terms of the warrants, was adjusted to $0.65 per share and later reduced further to $0.153. During the quarter ended December 31, 2003, all remaining warrants were exercised. In July and September 2002, the Company sold convertible notes, plus Series G warrants, to a group of private investors for $1,300,000 less transaction costs of $177,370. The notes bore interest at 7% per year and were due and payable September 9, 2004. Interest was payable quarterly beginning October 1, 2002. The notes were secured by substantially all of the Company's assets and contained certain restrictions, including limitations on such items as indebtedness, sales of common stock and payment of dividends. At the holders' option the notes were convertible into shares of the Company's common stock equal in number to the amount determined by dividing each $1,000 of note principal to be converted by the conversion price. The conversion price was 76% of the average of the three lowest daily trading prices of the Company's common stock on the American Stock Exchange during the 15 trading days immediately prior to the conversion date. If the Company had sold any additional shares of common stock, or any securities convertible into common stock at a price below the then applicable conversion price, the conversion price would have been lowered to the price at which the shares were sold or the lowest price at which the securities are convertible. By June 2, 2003, all of the notes had been converted into 8,354,198 shares of common stock. In addition, interest totaling $21,472 was converted into 109,428 shares of common stock. As of December 31, 2003, 450,000 warrants had been exercised and 450,000 warrants remain outstanding. 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 for $1,350,000 less transaction costs of approximately $220,419. The first funds, totaling $600,000, were received in January and the balance of $750,000 was received on July 2, 2003. The notes bore interest at 7% per year. The first notes were due and payable January 7, 2005 and the second notes were due and payable July 7, 2005. Interest was payable quarterly. The notes were secured by substantially all of the Company's assets and contain certain restrictions, including limitations on such items as indebtedness, sales of common stock and payment of dividends. At the holders' option, the notes were convertible into shares of the Company's common stock equal in number to the amount determined by dividing each $1,000 of note principal to be converted by the conversion price. The conversion price was 76% of the average of the three lowest daily trading prices of the Company's common stock on the American Stock Exchange during the 15 trading days immediately prior to the conversion date. The conversion price defaults to 60% of the average of the three lowest daily trading prices of the Company's common stock on the American Stock Exchange during the 15 trading days immediately prior to the conversion date in the event of default. On May 8, 2003, the Company signed an amendment to the agreement that prevented the conversion price from defaulting to 60%. In the agreement, the conversion price declines to 70% of the average of the three lowest daily trading prices of the Company's common stock if the price of the stock climbs over $0.50. The Series H warrant price is currently $0.25. No warrants had been exercised through June 30, 2003. If the Company sells any additional shares of common stock, or any securities convertible into common stock at a price below the then applicable conversion price, the conversion price will be lowered to the price at which the shares were sold or the lowest price at which the securities are convertible. On May 30, 2003, the price of the Company's stock rose above $0.50. In accordance with the agreement, the discount percentage changed from 76% to 70%. This change increased the discount on the debt that the Company recorded for the Series H convertible notes by $67,669. By October 2, 2003, all of the Series H notes had been converted into a total of 3,183,358 shares of common stock and total interest of $32,914 had been converted into 83,227 shares of common stock. The Series H warrant price is currently $0.25. As of December 31, 2003, 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. On October 8, 2002, the Company signed an agreement with Covance AG (Covance), a Swiss Corporation. Pursuant to the agreement, amounts owed to Covance totaling $199,928 became a note payable. The note was payable on January 2, 2004. Interest on the note was payable monthly at an annual rate of 8%. During the quarter ended December 31, 2003, the Company paid the outstanding principal balance of $184,330 to Covance plus accrued interest expense of $6,356. During the quarter ended December 31, 2003, interest expense of $2,581 was recorded for the note. 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 does not meet certain clinical development milestones within one year, it will lose the right to sell both products in these three countries. As of December 31, 2003 no clinical trials have been started by Eastern Biotech. There have been no material changes to the contractual obligations discussed in the Company's September 30, 2003 Form 10K other than those changes in notes payable, convertible debt and interest and dividends discussed above in this section. Results of Operations "Grant revenues and other" increased during the three months ended December 31, 2003 due to the four grants received during fiscal year 2003. The Company received two grants in April 2003, one grant in May 2003, and one grant in September 2003. The first grant, totaling $1,100,000, was awarded by the United States government to Northeastern Ohio Universities College of Medicine and the Company. The second grant, announced in April 2003 was in the amount of $134,000. The third grant was announced May 2003 in the amount $162,000. The fourth grant, awarded in September 2003 was for $104,000. Research and development expenses declined due to 1) the reversal of a disputed payable of $54,859 and 2) a decrease in expenses for clinical trials. The Company completed its MULTIKINE clinical trial in Hungary during the three months ended December 31, 2002 and the Company did not have a comparable expense during the quarter ended December 31, 2003. General and administrative expenses declined due to lower costs for public relations and travel expenses. Interest income during the three months ended December 31, 2003 was less than it was during the three months ended December 31, 2002 as a result of the lower interest rates on interest bearing accounts. Interest expense decreased significantly as a result of the conversion of the remaining convertible debt on October 2, 2003. Interest expense for the three months ended December 31, 2003 and December 31, 2002 is primarily a noncash item incurred to account for interest and amortization of 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 three months ended December 31, 2003 and 2002 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 these three month periods. Three Months Ended December 31, 2003 2002 MULTIKINE $281,693 $446,576 L.E.A.P.S. 86,655 64,731 ---------- -------- TOTAL $368,348 $511,307 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. It is the Company's intention to meet with FDA in 2004 to discuss such a trial. The Company is unable to estimate the future costs of research and clinical trials involving MULTIKINE since the Company has not yet met with the FDA to discuss the design of future clinical trials and 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 January 31, 2004 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 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. New Accounting Pronouncements In January 2003, the FASB issued Interpretation No. 46, "Consolidation of Variable Interest Entities", (FIN46). FIN 46 provides guidance on the consolidation of certain entities in which equity investors do not have the characteristics of a controlling financial interest. Such entities are referred to as variable interest entities. FIN 46 was effective immediately for variable interest entities created or acquired after January 31, 2003 and was effective July 1, 2003 for variable interest entities created or acquired on or before January 31, 2003. In October 2003, the FASB issued Staff Position FIN 46.6, which extended the effective date of FIN 46 for variable interest entities acquired before February 1, 2003 to the first interim or annual period ending after December 15, 2003. The Company adopted FIN 46 and the implementation did not have a material effect on the Company's financial position, results of operations or cash flows. 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. Comprehensive Loss - SFAS 130, "Reporting Comprehensive Income," establishes standards for reporting and displaying comprehensive net income or loss and its components in stockholders' equity. SFAS 130 requires the components of other comprehensive income or loss such as changes in the fair value of available-for-sale securities and foreign translation adjustments to be added to net income or loss to arrive at comprehensive income or loss. Other comprehensive income or loss items have no impact on the Company's net loss as presented on the statement of operations. During the three months ended December 31, 2003 and 2002, there were no components of comprehensive loss other than net loss and the statement of comprehensive loss has been omitted. Stock Options - 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 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. 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 and holds no debt or equity securities. Additionally, the Company is not exposed to interest rate risks due to the fact the Company has no outstanding debt as of December 31, 2003. 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 there are no investments held at December 31, 2003. Item 4. CONTROLS AND PROCEDURES The Company's Chief Executive Officer and Principal 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. Based upon his evaluation, the Chief Executive Officer and Principal Financial Officer has concluded that the Company's disclosure controls and procedures are effective as of December 31, 2003 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. During the quarter ended December 31, 2003 there were no significant changes 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, no corrective actions were taken. PART II Item 2. Changes in Securities and Use of Proceeds During the three months ended December 31, 2003, the Company issued 145,659 shares of its common stock to officers, directors and employees in lieu of salaries. The issuance of these securities was exempt under Section 4(2) of the Securities Act of 1933 as transactions by an issuer not involving a public offering. At the time of issuance, the persons who acquired these securities were all fully informed and advised about matters concerning the Company, including the Company's business, financial affairs and other matters. The shareholders acquired the securities for their own account. The shares acquired by the shareholders were "restricted" securities as defined in Rule 144 of the Securities and Exchange Commission. No underwriters were involved with the issuance of these securities. Item 6. (a) Exhibits Number Exhibit - ------ ------- 31 Rule 13a-14(a) Certifications 32 Section 1350 Certifications (b) Reports on Form 8-K On December 3, 2003 the Company filed a report on Form 8-K which disclosed the sale of 2,994,964 shares of common stock, plus warrants for the purchase of an additional 900,000 shares, to a group of private investors for $2,550,000. 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 /s/ Geert Kersten Date: February 12, 2004 ---------------------------- Geert Kersten Chief Executive Officer* *Also signing in the capacity of the Chief Accounting Officer and Principal Financial Officer EX-31 3 dec0310qrndex31.txt Exhibit 31 CERTIFICATIONS I, Geert Kersten, the Chief Executive Officer of CEL-SCI Corporation, certifies that: 1. I have reviewed this quarterly report on Form 10-Q of CEL-SCI Corporation; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15 and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) designed such internal control over financial reporting, or cause such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of the internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have significant role in the registrant's internal control over financial reporting. February 12, 2004 /s/ Geert Kersten ------------------------------ Geert Kersten Chief Executive Officer CERTIFICATIONS I, Geert Kersten, the Principal Financial Officer of CEL-SCI Corporation, certifies that: 1. I have reviewed this quarterly report on Form 10-Q of CEL-SCI Corporation; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15 and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) designed such internal control over financial reporting, or cause such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of the internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have significant role in the registrant's internal control over financial reporting. February 12, 2004 /s/ Geert Kersten ------------------------------ Geert Kersten Principal Financial Officer EX-32 4 dec0310qrndex32.txt Exhibit 32 In connection with the Quarterly Report of CEL-SCI Corporation (the "Company") on Form 10-Q for the period ending December 31, 2003 as filed with the Securities and Exchange Commission (the "Report"), Geert Kersten, the Chief Executive Officer and Principal Financial Officer of the Company, certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of his knowledge: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects the financial condition and results of the Company. By: /s/ Geert Kersten ----------------------------- Geert Kersten Chief Executive Officer and Principal Financial Officer February 12, 2004 -----END PRIVACY-ENHANCED MESSAGE-----