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CVM > SEC Filings for CVM > Form 10-K on 27-Dec-2013All Recent SEC Filings

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Form 10-K for CEL SCI CORP


27-Dec-2013

Annual Report


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with the consolidated financial statements and the related notes thereto appearing elsewhere in this report.

CEL-SCI's lead investigational therapy, Multikine, is cleared for a Phase III clinical trial in advanced primary head and neck cancer. It has received a go-ahead by the US FDA as well as eight other countries.

CEL-SCI also owns and is developing a pre-clinical technology called LEAPS (Ligand Epitope Antigen Presentation System).

All of CEL-SCI's projects are under development. As a result, CEL-SCI cannot predict when it will be able to generate any revenue from the sale of any of its products.

Since inception, CEL-SCI has financed its operations through the issuance of equity securities, convertible notes, loans and certain research grants. CEL-SCI's expenses will likely exceed its revenues as it continues the development of Multikine and brings other drug candidates into clinical trials. Until such time as CEL-SCI becomes profitable, any or all of these financing vehicles or others may be utilized to assist CEL-SCI's capital requirements.


Results of Operations

Fiscal 2013

During the year ended September 30, 2013, grant and other income decreased by $95,027 compared to the year ended September 30, 2012. The decrease is primarily due to the timing of drug shipments to supply the Company's partner in Taiwan during fiscal year 2013. Shipment of drug was made in October 2013 to resupply the partner.

During the year ended September 30, 2013, research and development expenses increased by $2,312,354 compared to the year ended September 30, 2012. CEL-SCI is continuing the Phase III clinical trial and research and development fluctuates based on the activity level of the clinical trial.

During the year ended September 30, 2013, general and administrative expenses increased by $387,399, compared to the year ended September 30, 2012. This increase is primarily due to the increased cost of employee options.

During the year ended September 30, 2013, CEL-SCI recorded a derivative gain of $10,750,666. For the year ended September 30, 2012, CEL-SCI recorded a derivative gain of $1,911,683. This variation was the result of the change in fair value of the derivative liabilities during the period which was caused by fluctuations in the share price of CEL-SCI's common stock.

Interest expense was $170,423 during the year ended September 30, 2013, and consisted primarily of interest expense on the loan from CEL-SCI's president of $165,609 and interest on a capital lease. Interest expense was $262,214 for the year ended September 30, 2012 and consisted of interest expense on the loan from CEL-SCI's president of $165,609 and interest on the convertible notes of $96,605.

Fiscal 2012

During the year ended September 30, 2012, grant income decreased by $701,544 compared to the year ended September 30, 2011. In November 2010, CEL-SCI received a $733,437 grant under The Patient Protection and Affordable Care Act of 2011 (PPACA). The grant was related to three of CEL-SCI's projects, including the Phase III trial of Multikine. The PPACA provides small and mid-sized biotech, pharmaceutical and medical device companies with up to a 50% tax credit for investments in qualified therapeutic discoveries for tax years 2009 and 2011, or a grant for the same amount tax-free. The tax credit/grant program covers research and development costs from 2009 and 2011 for all qualified "therapeutic discovery projects." CEL-SCI recognizes revenue as the expenses are incurred. CEL-SCI received the last of the funds under this grant in October for grant money earned before September 30, 2011.

During the year ended September 30, 2012, research and development expenses decreased by $1,376,934 compared to the year ended September 30, 2011. CEL-SCI is continuing the Phase III clinical trial and research and development expenses fluctuate based on the activity level of the clinical trial.

During the year ended September 30, 2012, general and administrative expenses decreased by $69,596 compared to the year ended September 30, 2011. This decrease was primarily caused by the legal fees related to litigation that was ongoing during fiscal 2011.

During the year ended September 30, 2012, other expenses decreased by $12,000,000 as a result of the settlement of litigation that occurred during fiscal 2011.

Interest income during the year ended September 30, 2012 decreased by $48,102 compared to the fiscal year ended September 30, 2011. The decrease was due to the decrease in the funds available for investment and lower interest rates.

The gain on derivative instruments of $1,911,683 for the year ended September 30, 2012 was the result of the change in fair value of the derivative liabilities during the period. For the year ended September 30, 2011, CEL-SCI recorded a derivative gain of $4,432,148. This change was caused by fluctuations in the share price of CEL-SCI's common stock.

Interest expense was $262,214 for the year ended September 30, 2012 and consisted of interest expense on the loan from CEL-SCI's president of $165,609 and interest on the convertible notes of $96,605. Interest expense was $322,980 for the year ended September 30, 2011 and consisted of interest on the loan from the Company's President ($177,109), the dividends paid on the mandatorily redeemable preferred stock ($30,371) that are considered to be interest in accordance with generally accepted principles and accured interest on the convertible notes ($115,500).


Litigation Settlement

A Settlement Agreement, signed in May 2011, between CEL-SCI and thirteen hedge funds (the "plaintiffs") resolved all claims arising from a lawsuit initiated by the plaintiffs in October 2009. As previously disclosed by CEL-SCI in its public filings, in August 2006 the plaintiffs (or their predecessors) purchased from CEL-SCI Series K notes convertible into CEL-SCI's common stock and Series K warrants to purchase CEL-SCI's common stock under agreements which provided the Series K notes and warrants with anti-dilution protection if CEL-SCI sold additional shares of common stock, or securities convertible into common stock, at a price below the then applicable conversion price of the notes or the exercise price of the warrants. In their lawsuit, the plaintiffs alleged that a March 2009 drug marketing and distribution agreement in which CEL-SCI sold units of common stock and warrants to an unrelated third party triggered these anti-dilution provisions, and that CEL-SCI failed to give effect to these provisions. The plaintiffs sought $30 million in actual damages, $90 million in punitive damages, the issuance of additional shares of common stock and warrants, and a reduction in the conversion price of the Series K notes and the exercise price of the Series K warrants. CEL-SCI denied the plaintiffs' allegations in the lawsuit and asserted that the 2009 agreement was a strategic transaction which did not trigger the anti-dilution provisions of the 2006 financing agreements.

Although CEL-SCI believed the plaintiffs' claims were without merit, CEL-SCI was in the opinion that a settlement of the lawsuit was in the best interests of its shareholders. The settlement was entered into to avoid the substantial costs of further litigation and the risk and uncertainty that the litigation entails. By ending this dispute, and ending the significant demands on the time and attention of CEL-SCI's management necessary to respond to the litigation, CEL-SCI is better able to focus on executing its ongoing Phase III clinical trial with its investigational cancer drug Multikine.

Under the terms of the Settlement Agreement and related agreements, the plaintiffs and CEL-SCI terminated the pending litigation and released each other from all claims each may have had against the other, with certain customary exceptions. CEL-SCI agreed to make a $3 million cash payment and issue convertible promissory notes in the principal amount of $4.95 million and 4,050 shares of Series A Preferred Stock. The preferred shares were fully redeemed during the year ended September 30, 2011. All convertible notes had been paid as of March 1, 2012.

The foregoing summary of the settlement is qualified in its entirety by the detailed terms of the Settlement Agreement and the related agreements and documents which were filed as exhibits to CEL-SCI's report on Form 10-Q for the three months ended March 31, 2011.

Research and Development Expenses

During the five years ended September 30, 2013 CEL-SCI's research and
development efforts involved Multikine and LEAPS.  The table below shows the
research and development expenses associated with each project during this
five-year period.

                2013             2012             2011             2010            2009

MULTIKINE   $ 12,303,564     $  9,977,617     $ 11,257,157     $ 10,868,046     $ 5,281,999
LEAPS            377,485          391,078          488,472        1,043,580         729,751

TOTAL       $ 12,681,049     $ 10,368,695     $ 11,745,629     $ 11,911,626     $ 6,011,750

In January 2007, CEL-SCI received a "no objection" letter from the FDA indicating that it could proceed with Phase III trials with Multikine in head & neck cancer patients. CEL-SCI had previously received a "no objection" letter from the Canadian Biologics and Genetic Therapies Directorate which enabled CEL-SCI to begin its Phase III clinical trial in Canada. Subsequently, CEL-SCI received similar authorizations from 7 other regulators.

CEL-SCI's Phase III clinical trial began in December 2010 after the completion and validation of CEL-SCI's dedicated manufacturing facility.

As explained in Item 1 of this report, as of November 30, 2013, CEL-SCI was involved in a number of pre-clinical studies with respect to its LEAPS technology. As with Multikine, CEL-SCI does not know what obstacles it will encounter in future pre-clinical and clinical studies involving its LEAPS technology. Consequently, CEL-SCI 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 CEL-SCI's clinical trials and research programs are primarily based upon the amount of capital available to CEL-SCI and the extent to which CEL-SCI has received regulatory approvals for clinical trials. The inability of CEL-SCI to conduct clinical trials or research, whether due to a lack of capital or regulatory approval, will prevent CEL-SCI from completing the studies and research required to obtain regulatory approval for any products which CEL-SCI is developing. Without regulatory approval, CEL-SCI will be unable to sell any of its products.


Liquidity and Capital Resources

CEL-SCI has had only limited revenues from operations since its inception in March 1983. CEL-SCI has relied upon capital generated from the public and private offerings of its common stock and convertible notes. In addition, CEL-SCI has utilized short-term loans to meet its capital requirements. Capital raised by CEL-SCI has been expended primarily to acquire an exclusive worldwide license to use, and later purchase, certain patented and unpatented proprietary technology and know-how relating to the human immunological defense system. Capital has also been used for patent applications, debt repayment, research and development, administrative costs, and the construction of CEL-SCI's laboratory facilities. CEL-SCI does not anticipate realizing significant revenues until it enters into licensing arrangements regarding its technology and know-how or until it receives regulatory approval to sell its products (which could take a number of years). As a result CEL-SCI has been dependent upon the proceeds from the sale of its securities to meet all of its liquidity and capital requirements and anticipates having to do so in the future. During fiscal year 2013 and 2012, CEL-SCI raised net proceeds of approximately $9,800,000 and $17,000,000, respectively, through the sale of stock and exercise of outstanding warrants. On October 11, 2013, CEL-SCI raised net proceeds of approximately $16,400,000 through the sale of stock and warrants in a public offering.

CEL-SCI will be required to raise additional capital or find additional long-term financing in order to continue with its research efforts. The ability of CEL-SCI to complete the necessary clinical trials and obtain FDA approval for the sale of products to be developed on a commercial basis is uncertain. Ultimately, CEL-SCI must complete the development of its products, obtain the appropriate regulatory approvals and obtain sufficient revenues to support its cost structure. CEL-SCI believes that it has enough capital to support its operations for more than the next twelve months.

On December 19, 2013, CEL-SCI announced that it had underwritten a public offering of units of common stock and warrants at a price of $0.63 per unit for net proceeds of $2,710,000, net of underwriting discounts and commissions and offering expenses of CEL-SCI. Each unit consists of one share of common stock and a warrant to purchase one share of common stock. The warrants are immediately exercisable and expire on October 11, 2018, and have an exercise price of $1.25. The underwriters had an option for 45 days to purchase up to an additional 10% of the shares and/or warrants to cover overallotments. On December 23, 2013, the underwriters exercised the option for the full 10% overallotment for additional net proceeds of approximately $379,000.

The Company estimates the total cash cost of the Phase III trial, with the exception of the parts that will be paid by its licensees, Teva Pharmaceuticals and Orient Europharma, to be approximately $35.5 million going forward.

In August 2007, CEL-SCI leased a building near Baltimore, Maryland. The building, which consists of approximately 73,000 square feet, has been remodeled in accordance with CEL-SCI's specifications so that it can be used by CEL-SCI to manufacture Multikine for CEL-SCI's Phase III clinical trials and sales of the drug if approved by the FDA. The lease expires on October 31, 2028, and required annual base rent payments of approximately $1,768,000 during the twelve months ended September 30, 2013. See Item 2 of this report for more information concerning the terms of this lease.

In August 2008, CEL-SCI sold 138,339 shares of common stock and 207,508 Series N warrants in a private financing for $1,037,500. In June 2009, an additional 116,667 shares and 181,570 Series N warrants were issued to the investors. In October 2011, an additional 83,333 shares and 129,693 Series N warrants were issued to the investors. As of September 30, 2013, none of the Series N Warrants had been exercised.

Between June 23 and July 8, 2009, CEL-SCI sold 1,534,935 shares of its common stock at a price of $4.00 per share totaling $6,139,739. The investors in this offering also received 1,028,406 Series A warrants which may be exercised at any time prior to December 24, 2014. As of September 30, 2013, 881,307 Series A warrants had been exercised. At September 30, 2013, the remaining Series A warrants entitle the holders to purchase 147,097 shares of CEL-SCI's common stock at a price of $5.00 per share.

Between December 2008 and June 2009, Maximilian de Clara, CEL-SCI's President and a director, loaned CEL-SCI $1,104,057 under a note payable. In June 2009, CEL-SCI issued Mr. de Clara a warrant which entitles Mr. de Clara to purchase 164,824 shares of CEL-SCI's common stock at a price of $4.00 per share. The warrant is exercisable at any time prior to December 24, 2014. Although the loan was to be repaid from the proceeds of a financing, CEL-SCI's Directors deemed it beneficial not to repay the loan and negotiated a second extension of the loan with Mr. de Clara on terms similar to the June 2009 financing. Pursuant to the terms of the second extension the note was extended to July 6, 2014. As further consideration for the second extension, Mr. de Clara received warrants which to purchase 184,930 shares of CEL-SCI's common stock at a price of $5.00 per share at any time prior to January 6, 2015. On May 13, 2011, to recognize Mr. de Clara's willingness to agree to subordinate his note to convertible preferred shares and convertible debt, CEL-SCI extended the maturity date of the note to July 6, 2015. The loan from Mr. de Clara bears interest at 15% per year and is secured by a lien on substantially all of CEL-SCI's assets. CEL-SCI does not have the right to prepay the loan without Mr. de Clara's consent. As of September 30, 2013, none of the warrants issued to Mr. de Clara had been exercised.

On August 31, 2009, CEL-SCI borrowed $2,000,000 from two institutional investors. The loans are evidenced by CEL-SCI's Series B promissory notes which were repaid in September 2009. The Series B note holders also received Series B warrants which may be exercised at any time prior to September 4, 2014. The Series B warrants entitle the holders to purchase 50,000 shares of CEL-SCI's common stock at a price of $6.80 per share. As of September 30, 2013, none of the Series B Warrants had been exercised.

On August 20, 2009, CEL-SCI sold 1,078,444 shares of its common stock to a group of private investors for $4,852,995 or $4.50 per share. The investors also received Series C warrants which may be exercised at any time prior to February 20, 2015. As of September 30, 2013, 75,733 Series C warrants had been exercised. At September 30, 2013, the remaining Series C warrants entitle the holders to purchase 463,487 shares of CEL-SCI's common stock at a price of $5.50 per share.


On September 21, 2009, CEL-SCI sold 1,428,572 shares of its common stock to a group of private investors for $20,000,000 or $14.00 per share. The investors also received Series D warrants which entitle the investors to purchase up to 471,428 shares of CEL-SCI's common stock. The Series D warrants could be exercised at any time prior to September 21, 2011 at a price of $15.00 per share. On September 21, 2011, all Series D warrants expired. The placement agent for the offering received Series E warrants may be exercised at any time prior to August 12, 2014. The Series E warrants entitle the holders to purchase 71,428 shares of CEL-SCI's common stock at a price of $17.50 per share. As of September 30, 2013, none of the Series E warrants had been exercised.

On December 10, 2010 CEL-SCI entered into a sales agreement with McNicoll Lewis & Vlak LLC relating to the sale of shares of its common stock. In accordance with the terms of the sales agreement, CEL-SCI could offer and sell shares of its common stock through McNicoll Lewis & Vlak acting as CEL-SCI's agent. CEL-SCI may also sell its common stock to McNicoll Lewis & Vlak, as principal for its own account, at a price negotiated at the time of sale.

During the year ended September 30, 2011, CEL-SCI sold 742,498 shares of its common stock to McNicoll Lewis & Vlak for $4,144,712, net of commissions and fees of $194,694 and attorney fees of $13,735. On December 5, 2011, per the terms of the agreement, CEL-SCI exercised its right to terminate the agreement.

On October 3, 2011 CEL-SCI sold 1,333,333 shares of its common stock to a group of private investors for $4,000,000 or $3.00 per share. The investors also received Series F warrants which may be exercised at any time prior to October 6, 2014. The Series F warrants entitle the holders to purchase 1,200,000 shares of CEL-SCI's common stock at a price of $4.00 per share. CEL-SCI paid the placement agent for this offering a commission consisting of $140,000 in cash and 66,667 Series G warrants. The Series G warrants may be exercised at any time prior to August 12, 2014 at a price of $4.00 per share. As of September 30, 2013, none of the Series F or G warrants had been exercised.

On January 25, 2012, CEL-SCI sold 1,600,000 shares of its common stock to institutional investors for $5,760,000 or $3.60 per share. The investors also received Series H warrants which may be exercised at any time prior to August 1, 2015. The Series H warrants entitle the holders to purchase 1,200,000 shares of CEL-SCI's common stock at a price of $5.00 per share. As of September 30, 2013, none of the Series H Warrants had been exercised.

In February 2012, CEL-SCI received $1,475,000 as a result of the exercise of the remaining Series O warrants. The Series O warrants were exercisable at any time on or prior to March 6, 2016. As an inducement for the early exercise of the Series O warrants, CEL-SCI issued Series P warrants to the former holder of the Series O warrants. The Series P warrants are exercisable at any time prior to March 7, 2017. The Series P warrants entitle the holders to purchase 590,001 shares of CEL-SCI's common stock at a price of $4.50 per share.

In June 2012, CEL-SCI sold 1,600,000 shares of its common stock for $5,600,000, or $3.50 per share, in a registered direct offering. The investors in this offering also received Series Q warrants which may be exercised at any time on or before December 22, 2015. The Series Q warrants entitle the holders to purchase 1,200,000 shares of CEL-SCI's common stock at a price of $5.00 per share. As of September 30, 2013, none of the Series Q Warrants had been exercised.

In December 2012, CEL-SCI sold 3,500,000 shares of its common stock to institutional investors for $10,500,000 or $3.00 per share. The investors also received Series R warrants which may be exercised at any time prior to December 7, 2016. The Series R warrants entitle the holders to purchase 2,625,000 shares of CEL-SCI's common stock at a price of $4.00 per share. As of September 30, 2013, none of the Series R Warrants had been exercised.

In October 2013, CEL-SCI sold 17,826,087 shares of its common stock, plus 20,475,000 Series S warrants, in an underwritten offering. The net proceeds to CEL-SCI from the sale of the shares and warrants were approximately $16,424,000, after deducting the underwriting discount. The Series S warrants may be exercised at any time on or before October 11, 2018 at a price of $1.25 per share.

Inventory decreased by $367,856 at September 30, 2013 as compared to September 30, 2012, as CEL-SCI continues to consume supplies for the manufacturing of Multikine for the Phase III trial. In addition, prepaid expenses decreased by approximately $525,518 due to the utilization of certain Phase III clinical trial expenses prepaid in the prior year.

In May 2011, CEL-SCI settled a lawsuit which had been filed in October 2009. Pursuant to the terms of the Settlement Agreement, CEL-SCI paid the plaintiffs $3,000,000 in cash and issued securities with a face value of $9,000,000 to the plaintiffs. See the discussion above for more information concerning the settlement.

During the year ended September 30, 2013, CEL-SCI's cash decreased by $3,899,430. Significant components of this decrease include: 1) net cash used in operating activities of $13,548,580, 2) expenditures for equipment and patents of $132,761, and 3) the repayment of $6,858 in capital lease obligations; offset by $9,788,769 in proceeds from the sale of stock and exercise of stock options and warrants.


Future Capital Requirements

Other than funding operating losses, funding its research and development
program, and making required lease payments, CEL-SCI does not have any material
capital commitments. Material contractual obligations as of September 30, 2013
are as follows:

                                                            Years Ending September 30,
                                                                                                                      2019 &
                     Total            2014            2015            2016            2017            2018          thereafter
Operating
Leases            $ 30,204,997     $ 1,777,567     $ 1,785,873     $ 1,769,497     $ 1,746,328     $ 1,746,802     $  21,378,930
Related Party
Note & Interest      1,393,872         165,609       1,228,263               -               -               -                 -
Total
Obligations       $ 31,598,869     $ 1,943,176     $ 3,014,136     $ 1,769,497     $ 1,746,328     $ 1,746,802     $  21,378,930

For additional information on employment contracts, see Item 11 of this report.

Further, CEL-SCI has contingent obligations with vendors for work that will be completed in relation to the Phase III trial. The timing of these obligations cannot be determined at this time. The estimated remaining cash cost of these obligations for the Phase III trial is approximately $35,500,000.

CEL-SCI will need to raise additional funds, either through the exercise of the outstanding warrants/options, through a debt or equity financing or a partnering arrangement, to complete the Phase III trial and bring Multikine to market. If CEL-SCI is able to raise additional funds, then CEL-SCI believes that it has enough capital to support its operations for more than the next twelve months. If CEL-SCI cannot raise the needed funds, then CEL-SCI may have to end the Phase III clinical trial before its completion.

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 CEL-SCI's clinical trials and research programs are primarily based upon the amount of capital available to CEL-SCI and the extent to which CEL-SCI has received regulatory approvals for clinical trials. The inability of CEL-SCI to conduct clinical trials or research, whether due to a lack of capital or regulatory approval, will prevent CEL-SCI from completing the studies and research required to obtain regulatory approval for any products which CEL-SCI is developing. Without regulatory approval, CEL-SCI will be unable to sell any of its products.

In the absence of revenues, CEL-SCI will be required to raise additional funds through the sale of securities, debt financing or other arrangements in order to continue with its research efforts. However, there can be no assurance that such financing will be available or be available on favorable terms. Ultimately, CEL-SCI must complete the development of its products, obtain appropriate regulatory approvals and obtain sufficient revenues to support its cost structure.

Since all of CEL-SCI's projects are under development, CEL-SCI cannot predict with any certainty the funds required for future research and clinical trials, the timing of future research and development projects, or when it will be able to generate any revenue from the sale of any of its products.

CEL-SCI's cash flow and earnings are subject to fluctuations due to changes in interest rates on its bank accounts, and, to an immaterial extent, foreign currency exchange rates.

Critical Accounting Policies

CEL-SCI's significant accounting policies are more fully described in Note 1 to the consolidated financial statements included as part of this report. 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 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 CEL-SCI's historical experience, terms of existing contracts, observance of trends in the industry and information available from outside sources, as appropriate. CEL-SCI's significant accounting policies include:

. . .

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