FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 For the fiscal year ended September 30, 2005.
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from _________ to __________.
Commission file number 1-11889
CEL-SCI CORPORATION
----------------------------
(Exact name of registrant as specified in its charter)
COLORADO 84-0916344
----------------------------------- ------------------
(State or other jurisdiction of (I.R.S.Employer
incorporation or organization) Identification No.)
8229 Boone Blvd., Suite 802
Vienna, Virginia 22182
-------------------------------- -----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (703) 506-9460 Securities
registered pursuant to Section 12(b) of the Act: None Securities registered
pursuant to Section 12(g) of the Act:
Common Stock, $.001 par value
(Title of Class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act. [ ]
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act. [ ]
Indicate by check mark whether the registrant (1) has filed all reports 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) has been subject to such filing requirements for
the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. (Check one):
Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [X]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-25 of the Exchange Act): [ ] Yes [X] No
The aggregate market value of the voting stock held by non-affiliates of the
Registrant, based upon the closing sale price of the common stock on March 31,
2005, as quoted on the American Stock Exchange, was approximately
$54,485,000.
As of April 20, 2006, the Registrant had 80,045,847 issued and outstanding
shares of common stock.
Documents Incorporated by Reference: None
PART I
ITEM 1. BUSINESS
CEL-SCI Corporation was formed as a Colorado corporation in 1983.
CEL-SCI's principal office is located at 8229 Boone Boulevard, Suite 802,
Vienna, VA 22182. CEL-SCI's telephone number is 703-506-9460 and its web site is
www.cel-sci.com. CEL-SCI makes its electronic filings with the Securities and
Exchange Commission (SEC), including its annual reports on Form 10-K, quarterly
reports on Form 10-Q, current reports on Form 8-K and amendments to these
reports available on its website free of charge as soon as practicable after
they are filed or furnished to the SEC.
OVERVIEW
CEL-SCI's lead product, Multikine(R), is being developed for the treatment
of cancer. Multikine is a patented immunotherapeutic agent consisting of a
mixture of naturally occurring cytokines, including interleukins, interferons,
chemokines and colony-stimulating factors, currently being developed for
treatment of cancer. Multikine is designed to target the tumor micro-metastases
that are mostly responsible for treatment failure. The basic concept is to add
Multikine to the current cancer treatments with the goal of making the overall
cancer treatment more successful. Phase II data indicated that Multikine
treatment resulted in a substantial increase in the survival of patients. The
lead indication is advanced primary head & neck cancer (500,000 new cases per
annum). Since Multikine is not tumor specific, it may also be applicable in many
other solid tumors.
In August 2005, the Canadian regulatory agency, the Biologics and Genetic
Therapies Directorate, concurred with the initiation of a global Phase III
clinical trial in head and neck cancer patients using Multikine. The formal "no
objection" letter from the Biologics and Genetic Therapies Directorate to the
Clinical Trial Application (CTA) enables CEL-SCI to initiate the Canadian arm of
the Phase III Multikine trial.
About 500 patients will be enrolled worldwide in the Phase III trial. The
protocol is designed to develop conclusive evidence of the efficacy of Multikine
in the treatment of advanced primary squamous cell carcinoma of the oral cavity
(head and neck cancer). A successful outcome from this trial should enable
CEL-SCI to apply for a Biologics License to market Multikine for the treatment
of this patient population.
The trial will test the hypothesis that Multikine treatment administered
prior to the current standard therapy for head and neck cancer patients
(surgical resection of the tumor and involved lymph nodes followed by
radiotherapy or radiotherapy and concurrent chemotherapy) will enhance the
local/regional control of the disease, reduce the rate of disease progression
and extend the time of progression-free survival in patients with advanced oral
squamous cell carcinoma.
Clinical trials in over 200 patients have been completed with Multikine with
the following results:
1) It has been demonstrated to be safe and non-toxic.
2
2) It has been shown to render cancer cells much more susceptible to
radiation therapy (The Laryngoscope, December 2003, Vol.113 Issue
12).
3) A publication in the Journal of Clinical Oncology (Timar et al, JCO,
23(15): May 2005), revealed the following:
(i) Multikine induced anti-tumor immune responses through the combined
activity of the different cytokines present in Multikine following
local administration of Multikine for only three weeks.
(ii) The combination of the different cytokines caused the induction,
recruitment into the tumor bed, and proliferation of anti-tumor
T-cells and other anti-tumor inflammatory cells, leading to a
massive anti-tumor immune response.
(iii) Multikine induced a reversal of the CD4/CD8 ratio in the tumor
infiltrating cells, leading to a marked increase of CD4 T-cells in
the tumor, which resulted in the prolongation of the anti-tumor
immune response and tumor cell destruction.
(iv) The anti-tumor immune-mediated processes continued long after the
cessation of Multikine administration.
(v) A three-week Multikine treatment of patients with advanced primary
oral squamous cell carcinoma resulted in an overall response rate
of 42% prior to standard therapy, with 12% of the patients having
a complete response.
(vi) A histopathology study showed that the tumor load in Multikine
treated patients was reduced by nearly 50% as compared to tumors
from control patients in the same pathology study.
(vii) The tumors of all of the patients in this Phase II trial who
responded to Multikine treatment were devoid of the cell surface
marker for HLA Class II. This finding, if confirmed in this global
Phase III clinical trial, may lead to the establishment of a
marker for selecting the patient population best suited for
treatment with Multikine.
CEL-SCI also owns a pre-clinical technology called L.E.A.P.S.TM (Ligand
Epitope Antigen Presentation System). The lead product derived from this
technology is the CEL-1000 peptide which has shown protection in animals against
herpes, malaria, viral encephalitis and cancer. With the help of government
grants, NIAID and US Army and US Navy collaborations, CEL-1000 is now being
tested against avian flu, viral encephalitis, West Nile Virus, SARS, Vaccinia,
Smallpox, herpes, malaria and other agents.
MULTIKINE
Multikine has been tested in 200 patients in clinical trials conducted in
the U.S., Canada, Europe and Israel. Most of these patients were head and neck
cancer patients, but some studies were also conducted in prostate cancer
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patients, HIV-infected patients and HIV-infected women with Human Papilloma
Virus ("HPV")-induced cervical dysplasia, the precursor stage before the
development of cervical cancer. The safety profile was found to be very good and
CEL-SCI believes that the clinical data suggests that further studies are
warranted.
The function of the immunological system is to protect the body against
infectious agents, including viruses, bacteria, parasites and malignant (cancer)
cells. An individual's ability to respond to infectious agents and to other
substances (antigens) recognized as foreign by the body's immune system is
critical to health and survival. When the immune response is adequate, infection
is usually combated effectively and recovery follows. Severe infection can occur
when the immune response is inadequate. Such immune deficiency can be present
from birth but, in adult life, it is frequently acquired as a result of intense
sickness or as a result of the administration of chemotherapeutic drugs and/or
radiation. It is also recognized that, as people reach middle age and
thereafter, the immune system grows weaker.
Two classes of white blood cells, macrophages and lymphocytes, are
believed to be primarily responsible for immunity. Macrophages are large cells
whose principal immune activity is to digest and destroy infectious agents.
Lymphocytes are divided into two sub-classes. One sub-class of lymphocytes,
B-cells, produces antibodies in response to antigens. Antibodies have unique
combining sites (specificities) that recognize the shape of particular antigens
and bind with them. The combination of an antibody with an antigen sets in
motion a chain of events which may neutralize the effects of the foreign
substance. The other sub-class of lymphocytes, T-cells, regulates immune
responses. T-cells, for example, amplify or suppress antibody formation by
B-cells, and can also directly destroy "foreign" cells by activating "killer
cells."
It is generally recognized that the interplay among T-cells, B-cells and
the macrophages determines the strength and breadth of the body's response to
infection. It is believed that the activities of T-cells, B-cells and
macrophages are controlled, to a large extent, by a specific group of hormones
called cytokines. Cytokines regulate and modify the various functions of both
T-cells and B-cells. There are many cytokines, each of which is thought to have
distinctive chemical and functional properties. IL-2 is but one of these
cytokines and it is on IL-2 and its synergy with other cytokines that CEL-SCI
has focused its attention. Scientific and medical investigation has established
that IL-2 enhances immune responses by causing activated T-cells to proliferate.
Without such proliferation no immune response can be mounted. Other cytokines
support T-cell and B-cell proliferation. However, IL-2 is the only known
cytokine which causes the proliferation of T-cells. IL-2 is also known to
activate B-cells in the absence of B-cell growth factors.
Although IL-2 is one of the best characterized cytokines with anticancer
potential, CEL-SCI is of the opinion that to have optimum therapeutic value,
IL-2 should be administered not as a single substance but rather as a mixture of
IL-2 and certain cytokines, i.e. as a "cocktail". This approach, which was
pioneered by CEL-SCI, makes use of the synergism between these cytokines. It
should be noted, however, that neither the Food and Drug Administration (FDA)
nor any other agency has determined that CEL-SCI's Multikine product will be
effective against any form of cancer.
Research and human clinical trials sponsored by CEL-SCI have indicated a
correlation between administration of Multikine to cancer patients and
immunological responses. On the basis of these experimental results, CEL-SCI
believes that Multikine may have application for the treatment of solid tumors
in humans.
4
Between 1985 and 1988 Multikine was tested at St. Thomas Hospital in
London, UK in forty-eight patients with various types of cancers. Multikine was
shown to be safe when used by these patients.
In November 1990, the Florida Department of Health and Rehabilitative
Services ("DHRS") gave the physicians at a southern Florida medical institution
approval to start a clinical cancer trial in Florida using CEL-SCI's Multikine
product. The focus of the trial was unresectable head and neck cancer.
In 1991, four patients with regionally advanced squamous cell cancer of
the head and neck were treated with CEL-SCI's Multikine product. The patients
had previously received radical surgery followed by radiation therapy but
developed recurrent tumors at multiple sites in the neck and were diagnosed with
terminal cancer.
Significant tumor reduction occurred in three of the four patients as a
result of the treatment with Multikine. Negligible side effects, such as
injection site soreness and headaches, were observed and the patients were
treated as outpatients. Notwithstanding the above, it should be noted that these
trials were only preliminary and were only conducted on a small number of
patients. It remains to be seen if Multikine will be effective in treating any
form of cancer.
These results caused CEL-SCI to embark on a major manufacturing program
for Multikine with the goal of being able to produce a drug that would meet the
stringent regulatory requirements for advanced human studies. This program
included building a pilot scale manufacturing facility.
The objective of CEL-SCI scientists is to use Multikine as an adjunct
(additive) therapy to the existing treatment of previously untreated head & neck
cancer patients with the goal of reducing cancer recurrence and ultimately
increasing survival. However, pursuant to FDA regulations, CEL-SCI was required
to test the drug first for safety in locally recurrent, locally metastatic head
and neck cancer patients who had failed other cancer therapies. This dose
escalation study was started in 1995 at several centers in Canada and the US
where 16 patients were enrolled at 4 different dosage levels. The study ended in
1998 and showed Multikine to be safe and well tolerated at all dose levels.
Because CEL-SCI scientists have determined that patients with previously
untreated disease would most likely benefit more from Multikine treatment,
CEL-SCI started a safety trial in Canada in 1997 in advanced primary head & neck
cancer patients who had just recently been diagnosed with head & neck cancer.
This study ultimately enrolled 28 patients, also at 4 different dosage levels,
and ended in late 1999. Halfway through this study, CEL-SCI launched a number of
phase II studies in advanced primary head & neck cancer to determine the best
dosage, best route of administration and best frequency of administration of
Multikine. Those studies involved 19 patients in Israel (1997 - 2000), 30
patients in Poland and the Czech Republic (1999 - 2000), and 94 patients (half
treated with Multikine and the other half disease-matched cancer patients served
as control) in Hungary (1999 - 2003). The Hungarian trial compared the control
group (receiving only conventional cancer therapy) to the Multikine treated
patients (receiving Multikine prior to conventional therapy) by histopathology
and immunohistochemistry. The results of these studies were published in
peer-reviewed scientific journals and/or presented at scientific meetings. The
studies that have not yet been published were conducted in support of
Multikine's safety and clinical utility.
5
The above studies, which are all completed, indicate that Multikine was
safe and well tolerated at all dose levels investigated. The studies also showed
partial and complete tumor responses following Multikine treatment at the best
treatment regimen combinations as well as tumor necrosis (destruction) and
fibrosis (as determined by histopathology).
While CEL-SCI scientists believe partial and complete tumor responses to
be very important, they also believe that other findings with Multikine in these
studies are equally important since they may serve to enhance existing cancer
therapies, thereby affecting the clinical outcome of the cancer patient's
treatment.
The initial results of the Hungarian study were published in December
2003. Data from a Phase I/II clinical trial in fifty-four (54) advanced primary
head and neck cancer patients (half treated, half control), the first part of
the Hungarian study, were published in The Laryngoscope, December 2003, Vol.113
(12). The title of the article is "The Effect of Leukocyte Interleukin Injection
(MULTIKINE) on the Peritumoral and Intratumoral Subpopulation of Mononuclear
Cells and on Tumor Epithelia: A Possible New Approach to Augmenting Sensitivity
to Radiation Therapy and Chemotherapy in Oral Cancer - A Multi Center Phase I/II
Clinical Trial".
The data demonstrates that treatment with Multikine rendered a high
proportion of the tumor cell population highly susceptible to radiation therapy.
This finding represents a major advance in the treatment of cancer since, under
current standard therapy, only about 5%-10% of the cancer cells are thought to
be susceptible to radiation therapy at any one point in time.
The increased sensitivity of the Multikine-treated tumors to radiation was
derived from a dramatic increase in the number of proliferating (those that are
in cell cycle) cancer cells. Following Multikine treatment, the great majority
of the tumor cells were in a proliferative state, as measured by the
well-established cell proliferation marker Ki67. The control patients (not
treated with Multikine) had only low expression (near background) of the same
proliferation marker (Ki67) in this study. These findings were statistically
significant (p<0.05, ANOVA).
This is an important finding because the ability of radiation therapy (and
chemotherapy) to kill tumor cells is dependent, in large part, on the
proliferative state of the tumor cells at the time of radiation (and
chemotherapy) treatment. As seen in the control group in this study, and also in
many other tumor types, the great majority of tumor cells (about 90% or more)
are in a "resting" state (non-proliferating). It is generally accepted that
tumor cells in the "resting" state are by-and-large resistant to radiation and
chemotherapy. However, Multikine treatment induced a reversal of this
non-proliferative state of the tumor cells and caused the great majority of the
tumor cells to enter into the proliferative state, thereby rendering the tumor
highly susceptible to radiation therapy (and chemotherapy).
The results of the Israeli trial have been published in Archives of
Otolaryngology - Head & Neck Surgery, August 2003, Vol.129. This paper on 12
patients treated by Dr. Feinmesser shows positive safety, tumor response and
clinical outcome data, but no firm conclusions can be drawn from a study of only
12 patients.
Results from the Multikine Phase II clinical trials were published in June
2004 at the 40th ASCO Annual Meeting. The study involved 39 head & neck cancer
patients, 19 of whom were treated with CEL-SCI's immunotherapy drug Multikine
prior to surgery and radiation. The other 20 patients served as matched
controls, meaning that they did not receive Multikine prior to surgery and
radiation. In a comparison pathology study of the tumors, Multikine treatment
caused a significant shift in the ratio of key immune cells that infiltrate the
tumor. The cancer patients treated with Multikine were shown to have much higher
rate of tumor cell killing, resulting in a 42% overall response rate, including
12% complete responses.
6
The tumors of the 39 head & neck cancer patients were analyzed by three
independent pathologists, blinded to the study. Of the 19 Multikine treated
patients in this study, 2 patients (12%) had no remaining cancer cells, another
2 patients (12%) had a reduction in the cancer cell mass greater than 50% and an
additional 4 patients (21%) had a reduction in the cancer cell mass of more than
30%. The objective response rate in this trial was 21%, with an overall response
rate of 42%, as determined by pathology.
This study, which used a three-week, non-toxic treatment with Multikine,
caused a shift from a low CD4/CD8 cell ratio (less than one CD4 cell for each
CD8 cell) to a high (over 2.5 - 3) CD4/CD8 cell ratio (2.5 - 3 CD4 cells for
each CD8 cell) in the tumor. This indicates that Multikine treatment shifts the
immune response from a mainly CD8 cell anti-tumor response to a predominately
CD4 anti-tumor response. Both CD4 and CD8 are key cells of the immune system.
The change in the immune response from CD8 to CD4 cells is very important
for the cancer patient because the cancer cells seem to have learned to shut
down the CD8 anti-tumor immune response. This "shut-down" of the CD8 cells was
evident in the tumors of the control (non-Multikine treated) group. The control
group had predominately CD8 cell infiltrate which was inactive against the
tumor. The Multikine treated group, on the other hand, had a predominately CD4
cell infiltrate. The tumor was unable, or less able, to shut down the Multikine
induced CD4 cell immune response and, as a result thereof, the cancer patients
treated with Multikine were shown to have a much higher rate of tumor cell
killing.
A publication in the Journal of Clinical Oncology (Timar et al, JCO,
23(15): May 2005), revealed the following:
(i) Multikine induced anti-tumor immune responses through the combined activity
of the different cytokines present in Multikine following local
administration of Multikine for only three weeks.
(ii) The combination of the different cytokines caused the induction,
recruitment into the tumor bed, and proliferation of anti-tumor T-cells and
other anti-tumor inflammatory cells, leading to a massive anti-tumor immune
response.
(iii) Multikine induced a reversal of the CD4/CD8 ratio in the tumor
infiltrating cells, leading to a marked increase of CD4 T-cells in the
tumor, which resulted in the prolongation of the anti-tumor immune response
and tumor cell destruction.
(iv) The anti-tumor immune-mediated processes continued long after the cessation
of Multikine administration.
7
(v) A three-week Multikine treatment of patients with advanced primary oral
squamous cell carcinoma resulted in an overall response rate of 42% prior
to standard therapy, with 12% of the patients having a complete response.
(vi) A histopathology study showed that the tumor load in Multikine treated
patients was reduced by nearly 50% as compared to tumors from control
patients in the same pathology study.
(vii) The tumors of all of the patients in this Phase II trial who responded to
Multikine treatment were devoid of the cell surface marker for HLA Class
II. This finding, if confirmed in this global Phase III clinical trial, may
lead to the establishment of a marker for selecting the patient population
best suited for treatment with Multikine.
In February 2006, CEL-SCI announced the results of a follow-up on the
Phase II study written about in the Journal of Clinical Oncology. This follow-up
study indicated that Multikine treatment resulted in a substantial increase in
the survival of patients. In addition, Multikine treatment also improved local
regional control of the patients' tumors. Improved local regional control of the
tumor is considered by many surgeons and oncologists to be an important
measurement of the success of a head & neck cancer drug. Both survival and local
regional control of the tumor are stated endpoints in CEL-SCI's planned Phase
III clinical trial.
The Phase II study, which used the same Multikine treatment protocol as
proposed for the Phase III trial, included advanced primary head & neck cancer
patients who were scheduled for their first cancer treatment. The Multikine
treatment was administered for 3 weeks prior to the standard treatment for head
& neck cancer, surgery or surgery plus radiation/chemotherapy.
The median follow-up period for the patients was 3.2 years. The results
of the Phase II trial follow-up study showed that the Multikine-treated patients
had substantially increased survival rates and achieved a higher rate of 2-year
local regional control as compared to the survival and the 2-year local regional
control rates published in the scientific literature (39 clinical trials between
1987 and 2004 in a similar population of head & neck cancer patients). As of
March 24, 2006, CEL-SCI could not provide the detailed results of this long-term
follow-up study of Multikine treatment as the data were being prepared for
publication.
In early January 2005 CEL-SCI submitted a protocol for a worldwide Phase
III clinical trial to the FDA and later in 2005 to the Canadian Biologics and
Genetic Therapies Directorate. The protocol for the Phase III clinical trial was
designed to develop conclusive evidence of the safety and efficacy of Multikine
in the treatment of advanced primary squamous cell carcinoma of the oral cavity.
CEL-SCI is in discussion with the FDA about this study. In August 2005 CEL-SCI
received a "no objection" letter from the Canadian Biologics and Genetic
Therapies Directorate which enables CEL-SCI to begin its Phase III clinical
trial in Canada.
The Phase III trial will test the hypothesis that Multikine administered
prior to the current standard therapy for head and neck cancer patients
(surgical resection of the tumor and involved lymph nodes followed by
radiotherapy or radiotherapy and concurrent chemotherapy) will enhance the
8
local/regional control of the disease, reduce the rate of disease progression
and extend the time for survival in patients with advanced oral squamous cell
carcinoma. The submission to the Canadian Biologics and Genetic Therapies
Directorate was the same as that submitted to the FDA. A successful outcome from
this trial should enable CEL-SCI to apply for a Biologics License to market
Multikine for the treatment of this patient population.
In May 2005 CEL-SCI was issued a new U.S. patent covering Multikine. The
patent, No. 6,896,879, relates to a new method for pre-sensitizing cancer with
Multikine prior to therapeutic treatment such as chemotherapy, radiation therapy
or immunotherapy.
Multikine has also been tested in 15 HIV-infected patients (1998 - 1999)
in California. This small study found Multikine to be safe in the HIV-infected
population and showed preliminary evidence of improved delayed type
hypersensitivity response to recall antigens. The results of this study were
reported in Antiviral Therapy 5 (Supplement), 2000.
Another study at the Thomas Jefferson Medical Center (1998) used very
small amounts of Multikine to determine the feasibility of injecting Multikine
into the prostate of 5 hormonal therapy refractive prostate cancer patients
scheduled for prostatectomy. Although deemed safe by the investigators,
Multikine administration in this trial directly into the prostate (under
ultrasound guidance) resulted in occasional mild dysuria and mild increase in
urinary frequency. Two out of the five treated cases had an inflammatory
response in the prostate and a third case had fibrosis. The Company believes
that more Multikine injections will need to be given to achieve a potential
outcome as seen in head & neck cancer. None of the prostate cancer patients
received more than half of the amounts given to the head & neck cancer patients.
Also, no testing was done at the time to determine if Multikine would enhance
susceptibility to radiation therapy in the prostate. The results of this trial
were published in Seminars in Oncology Vol. 26 (4) (August) 1999.
In May 2001, CEL-SCI also started a Phase I clinical trial at the
University of Maryland Biotechnology Institute (UMBI). The focus of this study
was HIV-infected women with Human Papilloma Virus (HPV)-induced cervical
dysplasia, the precursor stage before the development of cervical cancer. The
goal of the study was to obtain safety and preliminary efficacy data on
Multikine as a treatment for pre-cancerous lesions of the cervix (dysplasia).
Most cervical dysplasia and cancer is due to infection with HPV. The rationale
for using Multikine in the treatment of cervical dysplasia/cancer is that
Multikine may safely boost the patients' immune systems to the point where their
immune systems can eliminate the virally-induced cancer. Cervical cancer is the
second leading cause of cancer death in women worldwide.
The HIV-infected women with HPV-induced cervical dysplasia were chosen as
a study group because of the high morbidity and low success rate of current
surgical therapies. Since HIV infection results in immune suppression,
HPV-induced cervical dysplasia follows a more malignant and aggressive course of
disease in such women. Co-infection with HPV is common in HIV-positive women
(about 83%) and cervical cancer is considered an AIDS-defining illness.
HPV infection is also a leading health problem in non HIV-infected
American college-age women. A large concern among women who have HPV-induced
cervical dysplasia is that the repeated surgical procedures will lead to a
hysterectomy and the inability to bear children.
At the March 2002 33rd Annual Meeting of the Society of Gynecological
Oncologists in Miami, Florida, scientists from UMBI and CEL-SCI presented data
from this trial in HIV-infected women with HPV induced cervical dysplasia. The
9
results were as follows: 8 patients had been treated with no major toxicity. The
lower dosage group had 3 out of 5 patients resolved/improved with 2 out of 5
patients with no change in their cervical dysplasia status as compared to the
patient's own baseline disease. The higher dosage group had 2 out of 3 patients
who improved and 1 out of 3 patients with no change. The changes in disease
status were determined by both Colposcopy and Histology.
Subsequent HPV testing during 2001 and 2002 of the first three patients
revealed the elimination of HPV virus types (using in situ PCR) following
treatment with Multikine and ranged from 54% to 84% (Avg = 68%) reduction in HPV
virus in the cervical tissue of Multikine treated HIV/HPV co-infected patients.
The study was closed due to the inability to enroll further patients.
CEL-SCI's future studies in the HPV-induced cervical dysplasia area will
only be conducted with grant or government funds as CEL-SCI plans to devote its
resources to head and neck cancer, the area where it has the most data.
In November 2000, CEL-SCI concluded a development, supply and distribution
agreement with Orient Europharma of Taiwan. The agreement gives Orient
Europharma the exclusive marketing rights to Multikine for all cancer
indications in Taiwan, Singapore, Hong Kong and Malaysia. The agreement provides
for Orient Europharma to fund the clinical trials needed to obtain marketing
approvals in the four countries for head and neck cancer, naso-pharyngeal cancer
and potentially cervical cancer, which are very prevalent in Far East Asia.
CEL-SCI may use the clinical data generated in these trials to support
applications for marketing approvals for Multikine in other parts of the world.
Under the agreement, CEL-SCI will manufacture Multikine and Orient
Europharma will purchase the product from CEL-SCI for distribution in the
territory. Both parties will share in the revenue from the sale of Multikine. As
of September 30, 2005 Orient Europharma had not started any clinical trials
since CEL-SCI's plan is for Orient Europharma to begin a Phase III clinical
trial when CEL-SCI begins its Phase III clinical trial or to do one combined
Phase III clinical trial. The above will be finalized in the future.
In May 2003, CEL-SCI entered into an agreement with Eastern Biotech which
provided Eastern Biotech with the following (i) the exclusive right to
distribute Multikine and CEL-1000 in Greece, Serbia and Croatia, (ii) a royalty
equal to 1% of CEL-SCI's net sales of Multikine and CEL-1000 prior to May 30,
2033, (iii) 1,100,000 shares of CEL-SCI's common stock and, (iv) warrants which
allow Eastern Biotech to purchase an additional 1,100,000 shares of CEL-SCI's
common stock at a price of $0.47 per share at any time prior to May 30, 2008. In
consideration for the above Eastern Biotech paid CEL-SCI $500,000. Because the
Company did not register these shares prior to September 30, 2003, the royalty
percentage increased to 2%. If Eastern Biotech did not meet certain clinical
development milestones within one year, it would lose the right to sell both
products in these three countries. As of June 1, 2004, Eastern Biotech lost its
exclusive right to market, distribute and sell Multikine in accordance with the
agreement.
Since 1985, Multikine has been well tolerated in clinical studies involving
over 200 patients. Forty-eight patients were treated in the United States in
accordance with clinical trials authorized by the FDA. The remaining patients
10
were treated outside of the United States in accordance with protocols
authorized by comparable health regulatory authorities in the countries where
the patients were treated. All the clinical trials were conducted in accordance
with the Declaration of Helsinki (1985), and informed consent was obtained from
each patient volunteer. This process is the standard procedure for the conduct
of human clinical trials.
Proof of efficacy for anti-cancer drugs is a lengthy and complex process.
At this early stage of clinical investigation, it remains to be proven that
Multikine will be effective against any form of cancer. Even if some form of
Multikine is found to be effective in the treatment of cancer, commercial use of
Multikine may be several years away due to extensive safety and effectiveness
tests that would be necessary before required government approvals are obtained.
It should be noted that other companies and research teams are actively involved
in developing treatments and/or cures for cancer, and accordingly, there can be
no assurance that CEL-SCI's research efforts, even if successful from a medical
standpoint, can be completed before those of its competitors.
T-CELL MODULATION PROCESS
CEL-SCI's patented T-cell Modulation Process uses "heteroconjugates" to
direct the body to choose a specific immune response. The heteroconjugate
technology, referred to as L.E.A.P.S. (Ligand Epitope Antigen Presentation
System), is intended to selectively stimulate the human immune system to more
effectively fight bacterial, viral and parasitic infections and cancer, when it
cannot do so on its own. Administered like vaccines, L.E.A.P.S. combines T-cell
binding ligands with small, disease associated, peptide antigens and may provide
a new method to treat and prevent certain diseases.
The ability to generate a specific immune response is important because
many diseases are often not combated effectively due to the body's selection of
the "inappropriate" immune response. The capability to specifically reprogram an
immune response may offer a more effective approach than existing vaccines and
drugs in attacking an underlying disease.
Using the LEAPS technology, CEL-SCI discovered a peptide, named CEL-1000,
which is currently being tested in animals for the prevention/treatment of avian
flu, herpes simplex, malaria, viral encephalitis, smallpox, vaccinia and a
number of other indications.
In the Spring of 2002, CEL-SCI, in conjunction with The Naval Medical
Research Center, announced that CEL-1000 provided 100% protection against
malaria infection in a mouse model. The same peptide also induced protective
effects in mouse models for herpes simplex virus and cancer. In the Fall of 2002
CEL-SCI announced that it had signed a Cooperative Research and Development
Agreement (CRADA) with the U.S. Navy for CEL-1000 in malaria.
CEL-SCI received two grants in April 2003, one grant in May 2003, and one
grant in September 2003, all from the National Institutes of Health (NIH). The
first grant totaling $1,100,000 was awarded to Northeastern Ohio Universities
College of Medicine (NEOUCOM) with CEL-SCI as a subcontractor. The grant is for
a period of three years and is intended to support the development of CEL-SCI's
new compound, CEL-1000, as a possible treatment for viral encephalitis, a
potentially lethal inflammation of the brain. The grant was awarded following a
peer review process and will fund pre-clinical studies leading up to toxicology
studies. The second grant, totaling $134,000 and awarded to CEL-SCI with Johns
Hopkins Medical Institutions as a subcontractor, is a Phase I Small Business
11
Innovation Research (SBIR) grant for the further development of a potential
treatment for autoimmune myocarditis, a heart disease. The third grant,
announced on May 7, 2003 for $162,000 was awarded to CEL-SCI with NEOUCOM as a
sub-contractor, and is a Phase I SBIR grant for the further development of
CEL-1000 against Herpes Simplex. The fourth grant, totaling $104,000 was awarded
to CEL-SCI with the University of Nebraska as a sub-contractor, and is a Phase I
SBIR grant from the National Institute of Allergy and Infectious Diseases
(NIAID), NIH, for the development of CEL-1000 as a potential therapeutic and
prophylactic agent against vaccinia and smallpox infections as a single agent
and as an adjuvant for vaccinia vaccines. Vaccinia is the virus used in the
smallpox vaccine. The grant funds are disbursed for the necessary expenses
incurred by the Company for each specific grant. The Company submits its
expenses by accessing the Division of Payment Management, a Health and Human
Services program support center, when CEL-SCI is the primary contractor, or,
when CEL-SCI is a sub-contractor, by invoicing the primary contractor of the
grant, on a monthly basis, for expenses incurred for the grant.
As of September 30, 2005 approximately $288,000 remained from the viral
encephalitis grant. The other three grants were closed out during fiscal year
2005. As of September 30, 2005 CEL-SCI had received approximately $591,000 from
these grants. The remaining funds will be spent over the next six months.
In June 2003 CEL-SCI signed a Cooperative Agreement with the NIAID and the
U.S. Army Medical Research Institute of Infectious Disease (USAMRIID) to test
CEL-1000 against various bio-terrorism agents as well as other hard to treat
diseases.
In May 2005 CEL-SCI scientists, in collaboration with scientists from the
laboratory of Dr. Noel Rose at The Johns Hopkins University Department of
Pathology, presented animal data showing that pretreatment and early therapy of
Experimental Autoimmune Myocarditis with a compound developed by CEL-SCI
resulted in significant reduction in heart enlargement and disease associated
histopathological changes. The compound used to achieve these results was
derived from CEL-SCI's patented L.E.AP.S. technology.
This new finding could potentially lead to the development of a treatment
for autoimmune myocarditis, a life threatening heart disease which is
characterized by an enlarged and weakened heart. Myocarditis is a precursor to
dilated cardiomyopathy, a condition leading to a form of chronic heart failure
(CHF) characterized by an inflamed heart. End state CHF requires a heart
transplant or death ensues. The incidence in the United States alone of dilated
cardiomyopathy is about 200,000 people.
The protection observed was statistically significant for both
pretreatment and early therapy. This protective effect was shown to be
antigen-specific and was associated with an increase in IL-13 in both the sera
and heart tissue and of IL-1a in the sera of the protected mice. Other studies
from Dr. Rose's laboratory with IL-13 knockout mice (mice missing the IL-13
gene) demonstrate the importance of IL-13 in this model of Experimental
Autoimmune Myocarditis and corroborated these findings.
In December 2005 CEL-SCI signed an agreement with the National Institute
for Allergy and Infectious Diseases (NIAID), whereby NIAID agreed to test our
CEL-1000 drug against the avian flu virus in animal models, which are very hard
to come by.
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RESEARCH AND DEVELOPMENT
Since 1983, and through September 30, 2005, approximately $50,794,000 has
been expended on CEL-SCI-sponsored research and development, including
approximately $2,326,000, $2,052,000 and $2,030,000 respectively during the
years ended September 30, 2005, 2004 and 2003.
The extent of CEL-SCI's clinical trials and research programs is 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. CEL-SCI's
research and development expenditures have decreased in the past three years
compared to previous years due in part to the capital available to CEL-SCI and
due in part to the fact that the costs involved in manufacturing Multikine for
use in clinical trials and costs involved in validating the manufacturing
process were primarily incurred in fiscal 2001 and prior periods.
The costs associated with the clinical trials relating to CEL-SCI's
technologies, research expenditures and CEL-SCI's administrative expenses have
been funded with the public and private sales of CEL-SCI's securities and
borrowings from third parties, including affiliates of CEL-SCI.
GOVERNMENT REGULATION
New drug development and approval process
Regulation by governmental authorities in the United States and other
countries is a significant factor in the manufacture and marketing of biological
and other drug products and in ongoing research and product development
activities. CEL-SCI's products will require regulatory approval by governmental
agencies prior to commercialization. In particular, these products are subject
to rigorous preclinical and clinical testing and other premarket approval
requirements by the FDA and regulatory authorities in other countries. In the
United States, various statutes and regulations also govern or influence the
manufacturing, safety, labeling, storage, record keeping and marketing of
pharmaceutical and biological drug products. The lengthy process of seeking
these approvals, and the subsequent compliance with applicable statutes and
regulations, require the expenditure of substantial resources. CEL-SCI believes
that it is currently in compliance with applicable statutes and regulations that
are relevant to its operations. CEL-SCI has no control, however, over compliance
by its manufacturing and other partners.
The FDA's statutes, regulations, or policies may change and additional
statutes or government regulations may be enacted which could prevent or delay
regulatory approvals of biological or other drug products. CEL-SCI cannot
predict the likelihood, nature or extent of adverse governmental regulation that
might arise from future legislative or administrative action, either in the U.S.
or abroad.
Regulatory approval, when and if obtained, may be limited in scope. In
particular, regulatory approvals will restrict the marketing of a product to
specific uses. Further, approved biological and other drugs, as well as their
manufacturers, are subject to ongoing review. Discovery of previously unknown
problems with these products may result in restrictions on their manufacture,
sale or use or in their withdrawal from the market. Failure to comply with
regulatory requirements may result in criminal prosecution, civil penalties,
recall or seizure of products, total or partial suspension of production or
injunction, as well as other actions affecting CEL-SCI. Any failure by CEL-SCI
13
or its manufacturing and other partners to obtain and maintain, or any delay in
obtaining, regulatory approvals could materially adversely affect CEL-SCI's
business.
The process for new drug approval has many steps, including:
Preclinical testing
Once a biological or other drug candidate is identified for development,
the drug candidate enters the preclinical testing stage. During preclinical
studies, laboratory and animal studies are conducted to show biological activity
of the drug candidate in animals, both healthy and with the targeted disease.
Also, preclinical tests evaluate the safety of drug candidates. These tests
typically take approximately two years to complete. Preclinical tests must be
conducted in compliance with good laboratory practice regulations. In some
cases, long-term preclinical studies are conducted while clinical studies are
ongoing.
Investigational new drug application
When the preclinical testing is considered adequate by the sponsor to
demonstrate the safety and the scientific rationale for initial human studies,
an investigational new drug application (IND) is filed with the FDA to seek
authorization to begin human testing of the biological or other drug candidate.
The IND becomes effective if not rejected by the FDA within 30 days after
filing. The IND must provide data on previous experiments, how, where and by
whom the new studies will be conducted, the chemical structure of the compound,
the method by which it is believed to work in the human body, any toxic effects
of the compound found in the animal studies and how the compound is
manufactured. All clinical trials must be conducted under the supervision of a
qualified investigator in accordance with good clinical practice regulations.
These regulations include the requirement that all subjects provide informed
consent. In addition, an institutional review board (IRB), comprised primarily
of physicians and other qualified experts at the hospital or clinic where the
proposed studies will be conducted, must review and approve each human study.
The IRB also continues to monitor the study and must be kept aware of the
study's progress, particularly as to adverse events and changes in the research.
Progress reports detailing the results of the clinical trials must be submitted
at least annually to the FDA and more frequently if adverse events occur. In
addition, the FDA may, at any time during the 30-day period after filing an IND
or at any future time, impose a clinical hold on proposed or ongoing clinical
trials. If the FDA imposes a clinical hold, clinical trials cannot commence or
recommence without FDA authorization, and then only under terms authorized by
the FDA. In some instances, the IND process can result in substantial delay and
expense.
Some limited human clinical testing may also be done under a physician's
IND that allows a single individual to receive the drug, particularly where the
individual has not responded to other available therapies. A physician's IND
does not replace the more formal IND process, but can provide a preliminary
indication as to whether further clinical trials are warranted, and can, on
occasion, facilitate the more formal IND process.
Clinical trials are typically conducted in three sequential phases, but
the phases may overlap.
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Phase I clinical trials
Phase I human clinical trials usually involve between 20 and 80 healthy
volunteers or patients and typically take one to two years to complete. The
tests study a biological or other drug's safety profile, and may seek to
establish the safe dosage range. The Phase I clinical trials also determine how
a drug candidate is absorbed, distributed, metabolized and excreted by the body,
and the duration of its action.
Phase II clinical trials
In Phase II clinical trials, controlled studies are conducted on an
expanded population of patients with the targeted disease. The primary purpose
of these tests is to evaluate the effectiveness of the drug candidate on the
volunteer patients as well as to determine if there are any side effects or
other risks associated with the drug. These studies generally take several years
and may be conducted concurrently with Phase I clinical trials. In addition,
Phase I/II clinical trials may be conducted to evaluate not only the efficacy of
the drug candidate on the patient population, but also its safety.
Phase III clinical trials
This phase typically lasts two to three years and involves an even larger
patient population, often with several hundred or even several thousand patients
depending on the use for which the drug is being studied. Phase III trials are
intended to establish the overall risk-benefit ratio of the drug and provide, if
appropriate, an adequate basis for product labeling. During the Phase III
clinical trials, physicians monitor the patients to determine efficacy and to
observe and report any reactions or other safety risks that may result from use
of the drug candidate.
Chemical and formulation development
Concurrent with clinical trials and preclinical studies, companies also
must develop information about the chemistry and physical characteristics of the
drug and finalize a process for manufacturing the product in accordance with
current good manufacturing practice requirements (cGMPs). The manufacturing
process must be capable of consistently producing quality batches of the product
and the manufacturer must develop methods for testing the quality, purity, and
potency of the final drugs. Additionally, appropriate packaging must be selected
and tested and chemistry stability studies must be conducted to demonstrate that
the product does not undergo unacceptable deterioration over its shelf-life.
New drug application or biological license application
After the completion of the clinical trial phases of development, if the
sponsor concludes that there is substantial evidence that the biological or
other drug candidate is effective and that the drug is safe for its intended
use, a new drug application (NDA) or biologics license application (BLA) may be
submitted to the FDA. The application must contain all of the information on the
biological or other drug candidate gathered to that date, including data from
the clinical trials. Under the Pediatric Research Equity Act of 2003, a company
is also required to include an assessment, generally based on clinical study
data, on the safety and efficacy of the drug candidate for all relevant
pediatric populations before submitting an application. The statute provides for
waivers or deferrals in certain situations but no assurance can be made that
such situations will apply to a particular product.
15
The FDA reviews all NDAs and BLAs submitted before it accepts them for
filing. It may request additional information rather than accepting an
application for filing. In this event, the application must be resubmitted with
the additional information. The resubmitted application is also subject to
review before the FDA accepts it for filing. Once the submission is accepted for
filing, the FDA begins an in-depth review of the application. The FDA may refer
the application to an appropriate advisory committee, typically a panel of
clinicians, for review, evaluation and a recommendation. The FDA is not bound by
the recommendation of an advisory committee. If FDA evaluations of the NDA or
BLA and the manufacturing facilities are favorable, the FDA may issue an
approval letter authorizing commercial marketing of the drug or biological
candidate for specified indications. The FDA could also issue an approvable
letter, which usually contains a number of conditions that must be met in order
to secure final approval of the NDA or BLA. When and if those conditions have
been met to the FDA's satisfaction, the FDA will issue an approval letter. On
the other hand, if the FDA's evaluation of the NDA or BLA or manufacturing
facilities is not favorable, the FDA may refuse to approve the application or
issue a non-approvable letter.
Among the conditions for NDA or BLA approval is the requirement that each
prospective manufacturer's quality control and manufacturing procedures conform
to current good manufacturing practice standards and requirements (cGMPs).
Manufacturing establishments are subject to periodic inspections by the FDA and
by other federal, state or local agencies.
COMPETITION AND MARKETING
Many companies, nonprofit organizations and governmental institutions are
conducting research on cytokines. Competition in the development of therapeutic
agents incorporating cytokines is intense. Large, well-established
pharmaceutical companies are engaged in cytokine research and development and
have considerably greater resources than CEL-SCI has to develop products. The
establishment by these large companies of in-house research groups and of joint
research ventures with other entities is already occurring in these areas and
will probably become even more prevalent. In addition, licensing and other
collaborative arrangements between governmental and other nonprofit institutions
and commercial enterprises, as well as the seeking of patent protection of
inventions by nonprofit institutions and researchers, could result in strong
competition for CEL-SCI. Any new developments made by such organizations may
render CEL-SCI's licensed technology and know-how obsolete.
Several biotechnology companies are producing IL-2-like compounds. CEL-SCI
believes, however, that it is the only producer of a patented IL-2 product using
a patented cell-culture technology with normal human cells. CEL-SCI foresees
that its principle competition will come from producers of
genetically-engineered IL-2-like products. However, it is CEL-SCI's belief,
based upon growing scientific evidence, that its natural IL-2 products have
advantages over the genetically engineered, IL-2-like products. Evidence
indicates that genetically engineered, IL-2-like products, which lack sugar
molecules and typically are not water soluble, may be recognized by the
immunological system as a foreign agent, leading to a measurable antibody
build-up and thereby possibly voiding their therapeutic value. Furthermore,
CEL-SCI's research has established that to have optimum therapeutic value IL-2
should be administered not as a single substance but rather as an IL-2-rich
mixture of certain cytokines and other proteins, i.e. as a "cocktail". If these
differences prove to be of importance, and if the therapeutic value of its
Multikine product is conclusively established, CEL-SCI believes it will be able
to establish a strong competitive position in a future market.
16
CEL-SCI has not established a definitive plan for marketing nor has it
established a price structure for CEL-SCI's saleable products. However, CEL-SCI
intends, if CEL-SCI is in a position to begin commercialization of its products,
to enter into written marketing agreements with various major pharmaceutical
firms with established sales forces. The sales forces in turn would probably
target CEL-SCI's products to cancer centers, physicians and clinics involved in
immunotherapy.
CEL-SCI may encounter problems, delays and additional expenses in
developing marketing plans with outside firms. In addition, CEL-SCI may
experience other limitations involving the proposed sale of its products, such
as uncertainty of third-party reimbursement. There is no assurance that CEL-SCI
can successfully market any products which they may develop or market them at
competitive prices.
Some of the clinical trials funded to date by CEL-SCI have not been
approved by the FDA, but rather have been conducted pursuant to approvals
obtained from certain states and foreign countries. Conducting clinical studies
in foreign countries is normal industry practice since these studies can often
be completed in less time and are less expensive than studies conducted in the
U.S. Conducting clinical studies in foreign countries is also beneficial since
CEL-SCI will need the approval from a foreign country prior to the time CEL-SCI
can market any of its drugs in the foreign country. However, since the results
of these clinical trials may not be accepted by the FDA, competitors conducting
clinical trials approved by the FDA may have an advantage in that the products
of such competitors are further advanced in the regulatory process than those of
CEL-SCI. CEL-SCI is conducting its trials in compliance with internationally
recognized standards. By following these standards, CEL-SCI anticipates
obtaining acceptance from world regulatory bodies, including the FDA.
EMPLOYEES
As of February 28, 2006 CEL-SCI had 19 employees. Seven employees are
involved in administration, 10 employees are involved in manufacturing and 2
employees are involved in general research and development with respect to
CEL-SCI's products.
ITEM 1A. RISK FACTORS
Investors should be aware that the risks described below could adversely
affect the price of CEL-SCI's common stock.
Risks Related to CEL-SCI
Since CEL-SCI Has Earned Only Limited Revenues and Has a History of Losses,
CEL-SCI Will Require Additional Capital to Remain in Operation.
CEL-SCI has had only limited revenues since it was formed in 1983. Since
the date of its formation and through September 30, 2005 CEL-SCI incurred net
losses of approximately $99,000,000. CEL-SCI has relied principally upon the
proceeds of public and private sales of its securities to finance its activities
to date. All of CEL-SCI's potential products, with the exception of Multikine,
are in the early stages of development, and any commercial sale of these
products will be many years away. Even potential product sales from Multikine
are many years away as cancer trials can be lengthy. Accordingly, CEL-SCI
expects to incur substantial losses for the foreseeable future.
17
Since CEL-SCI does not intend to pay dividends on its common stock, any return
to investors will come only from potential increases in the price of CEL-SCI's
common stock.
At the present time, CEL-SCI intends to use available funds to finance
CEL-SCI's operations. Accordingly, while payment of dividends rests within the
discretion of the Board of Directors, no common stock dividends have been
declared or paid by CEL-SCI and CEL-SCI has no intention of paying any common
stock dividends.
If CEL-SCI cannot obtain additional capital, CEL-SCI may have to postpone
development and research expenditures which will delay CEL-SCI's ability to
produce a competitive product. Delays of this nature may depress the price of
CEL-SCI's common stock.
Clinical and other studies necessary to obtain approval of a new drug can
be time consuming and costly, especially in the United States, but also in
foreign countries. CEL-SCI's estimates of the costs associated with future
clinical trials and research may be substantially lower than the actual costs of
these activities. The different steps necessary to obtain regulatory approval,
especially that of the Food and Drug Administration, involve significant costs
and may require several years to complete. CEL-SCI expects that it will need
substantial additional financing over an extended period of time in order to
fund the costs of future clinical trials, related research, and general and
administrative expenses. Although CEL-SCI's equity line of credit agreement is
expected to be a source of funding, the amounts which CEL-SCI is able to draw
from the equity line during each drawdown period are limited and may not satisfy
CEL-SCI's capital needs.
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. CEL-SCI
is unable to estimate the future costs of clinical trials since CEL-SCI has not
yet met with the FDA to discuss the design of future clinical trials; and until
the scope of future clinical trials is known, CEL-SCI will not be able to price
any trials with clinical trial organizations.
Over the past three years CEL-SCI's research and development expenditures
have decreased, due in part to the capital available to CEL-SCI. 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.
To raise additional capital CEL-SCI will most likely sell shares of its
common stock or securities convertible into common stock at prices that may be
below the prevailing market price of CEL-SCI's common stock at the time of sale.
The issuance of additional shares will have a dilutive impact on other
stockholders and could have a negative effect on the market price of CEL-SCI's
common stock. During the two years ended September 2005 CEL-SCI has sold
approximately 11,700,000 shares of its common stock to private investors at
prices that were between 11% and 22% below the market price of CEL-SCI's common
stock at the time of sale.
Any failure to obtain or any delay in obtaining required regulatory
approvals may adversely affect the ability of CEL-SCI or potential licensees to
successfully market any products they may develop.
18
Multikine is made from components of human blood which involves inherent risks
that may lead to product destruction or patient injury which could materially
harm CEL-SCI's financial results, reputation and stock price.
Multikine is made, in part, from components of human blood. There are
inherent risks associated with products that involve human blood such as
possible contamination with viruses, including Hepatitis or HIV. Any possible
contamination could require CEL-SCI to destroy batches of Multikine or cause
injuries to patients who receive the product thereby subjecting CEL-SCI to
possible financial losses and harm to its business.
Although CEL-SCI has product liability insurance for Multikine, the successful
prosecution of a product liability case against CEL-SCI could have a materially
adverse effect upon its business if the amount of any judgment exceeds CEL-SCI's
insurance coverage.
Although no claims have been brought to date, participants in CEL-SCI's
clinical trials could bring civil actions against CEL-SCI for any unanticipated
harmful effects arising from the use of Multikine or any drug or product that
CEL-SCI may try to develop. Although CEL-SCI believes its insurance coverage of
$1,000,000 per claim is adequate, the defense or settlement of any product
liability claim could adversely affect CEL-SCI even if the defense and
settlement costs did not exceed CEL-SCI's insurance coverage.
CEL-SCI's directors are allowed to issue shares of preferred stock with
provisions that could be detrimental to the interests of the holders of
CEL-SCI's common stock.
The provisions in CEL-SCI's Articles of Incorporation relating to
CEL-SCI's Preferred Stock would allow CEL-SCI's directors to issue Preferred
Stock with rights to multiple votes per share and dividend rights which would
have priority over any dividends paid with respect to CEL-SCI's Common Stock.
The issuance of Preferred Stock with such rights may make more difficult the
removal of management even if such removal would be considered beneficial to
shareholders generally, and will have the effect of limiting shareholder
participation in certain transactions such as mergers or tender offers if such
transactions are not favored by incumbent management.
Risks Related to Government Approvals
CEL-SCI's product candidates must undergo rigorous preclinical and clinical
testing and regulatory approvals, which could be costly and time-consuming and
subject CEL-SCI to unanticipated delays or prevent CEL-SCI from marketing any
products.
Therapeutic agents, drugs and diagnostic products are subject to approval,
prior to general marketing, by the FDA in the United States and by comparable
agencies in most foreign countries. Before obtaining marketing approval,
CEL-SCI's product candidates must undergo rigorous preclinical and clinical
testing which is costly and time consuming and subject to unanticipated delays.
There can be no assurance that such approvals will be granted.
CEL-SCI cannot be certain when or under what conditions it will undertake
further clinical trials, including a Phase III program for Multikine. The
clinical trials of CEL-SCI's product candidates may not be completed on
schedule, and the FDA or foreign regulatory agencies may order CEL-SCI to stop
19
or modify its research or these agencies may not ultimately approve any of
CEL-SCI's product candidates for commercial sale. Varying interpretations of the
data obtained from pre-clinical and clinical testing could delay, limit or
prevent regulatory approval of CEL-SCI's product candidates. The data collected
from CEL-SCI's clinical trials may not be sufficient to support regulatory
approval of its various product candidates, including Multikine. For example,
Multikine is now being made by a process that was different from the process
tested in many of CEL-SCI's clinical studies to date. It is possible that the
FDA will require CEL-SCI to conduct additional studies to demonstrate that the
Multikine that it plans to use for its Phase III program is the same as the
product previously tested in CEL-SCI's phase II studies. Even if CEL-SCI
believes the data collected from its clinical trials are sufficient, the FDA has
substantial discretion in the approval process and may disagree with CEL-SCI's
interpretation of the data. CEL-SCI can make no assurances that the FDA will not
require CEL-SCI to conduct more Phase II studies before beginning Phase III
trials. CEL-SCI's failure to adequately demonstrate the safety and efficacy of
any of its product candidates would delay or prevent regulatory approval of its
product candidates in the United States, which could prevent CEL-SCI from
achieving profitability.
The requirements governing the conduct of clinical trials, manufacturing,
and marketing of CEL-SCI's product candidates, including Multikine, outside the
United States vary widely from country to country. Foreign approvals may take
longer to obtain than FDA approvals and can require, among other things,
additional testing and different trial designs. Foreign regulatory approval
processes include all of the risks associated with the FDA approval processes.
Some of those agencies also must approve prices for products. Approval of a
product by the FDA does not ensure approval of the same product by the health
authorities of other countries. In addition, changes in regulatory policy in the
US or in foreign countries for product approval during the period of product
development and regulatory agency review of each submitted new application may
cause delays or rejections.
In addition to conducting further clinical studies of Multikine and
CEL-SCI's other product candidates, CEL-SCI also must undertake the development
of its manufacturing process and optimize its product formulations.
CEL-SCI has only limited experience in filing and pursuing applications
necessary to gain regulatory approvals, which may impede its ability to obtain
timely approvals from the FDA or foreign regulatory agencies, if at all. CEL-SCI
will not be able to commercialize Multikine and other product candidates until
it has obtained regulatory approval, and any delay in obtaining, or inability to
obtain, regulatory approval could harm its business. In addition, regulatory
authorities may also limit the types of patients to which CEL-SCI or others may
market Multikine or CEL-SCI's other products.
Even if CEL-SCI obtains regulatory approval for its product candidates, CEL-SCI
will be subject to stringent, ongoing government regulation.
Even if CEL-SCI's products receive regulatory approval, either in the
United States or internationally, it will continue to be subject to extensive
regulatory requirements. These regulations are wide-ranging and govern, among
other things:
20
o product design, development, manufacture and testing;
o adverse drug experience and other reporting regulations;
o product advertising and promotion;
o product manufacturing, including good manufacturing practice requirements;
o record keeping requirements;
o registration of CEL-SCI's establishments with the FDA and certain state
agencies;
o product storage and shipping;
o drug sampling and distribution requirements;
o electronic record and signature requirements; and
o labeling changes or modifications.
CEL-SCI and any third-party manufacturers or suppliers must continually
adhere to federal regulations setting forth requirements, known as current Good
Manufacturing Practices, or cGMPs, and their foreign equivalents, which are
enforced by the FDA and other national regulatory bodies through their
facilities inspection programs. If CEL-SCI's facilities, or the facilities of
its manufacturers or suppliers, cannot pass a pre-approval plant inspection, the
FDA will not approve the marketing application of CEL-SCI's product candidates.
In complying with cGMP and foreign regulatory requirements, CEL-SCI and any of
its potential third-party manufacturers or suppliers will be obligated to expend
time, money and effort in production, record-keeping and quality control to
ensure that its products meet applicable specifications and other requirements.
State regulatory agencies and the regulatory agencies of other countries have
similar requirements.
CEL-SCI has an agreement with Cambrex Bio Science, Inc. whereby Cambrex
agreed to provide CEL-SCI with a facility for the periodic manufacturing of
Multikine in accordance with the cGMPs established by FDA regulations. This
agreement expires on December 31, 2006. If the Cambrex facility were not
available for the production of Multikine, CEL-SCI estimates that it would take
approximately six to ten months to find or build an alternative manufacturing
facility for Multikine. CEL-SCI does not know what cost it would incur to obtain
an alternative source of Multikine.
If CEL-SCI does not comply with regulatory requirements at any stage,
whether before or after marketing approval is obtained, it may be subject to
criminal prosecution, seizure, injuction, fines, or be forced to remove a
product from the market or experience other adverse consequences, including
restrictions or delays in obtaining regulatory marketing approval, which could
materially harm CEL-SCI's financial results, reputation and stock price.
Additionally, CEL-SCI may not be able to obtain the labeling claims necessary or
desirable for product promotion. CEL-SCI may also be required to undertake
post-marketing trials. In addition, if CEL-SCI or other parties identify adverse
effects after any of CEL-SCI's products are on the market, or if manufacturing
problems occur, regulatory approval may be withdrawn and CEL-SCI may be required
to reformulate its products, conduct additional clinical trials, make changes in
its product's labeling or indications of use, or submit additional marketing
applications to support these changes. If CEL-SCI encounters any of the
foregoing problems, its business and results of operations will be harmed and
the market price of our common stock may decline.
Also, the extent of adverse government regulations which might arise from
future legislative or administrative action cannot be predicted. Without
government approval, CEL-SCI will be unable to sell any of its products.
21
Risks Related to Intellectual Property
CEL-SCI may not be able to achieve or maintain a competitive position and other
technological developments may result in CEL-SCI's proprietary technologies
becoming uneconomical or obsolete.
The biomedical field in which CEL-SCI is involved is undergoing rapid and
significant technological change. The successful development of therapeutic
agents from CEL-SCI's compounds, compositions and processes through
CEL-SCI-financed research, or as a result of possible licensing arrangements
with pharmaceutical or other companies, will depend on its ability to be in the
technological forefront of this field.
Many pharmaceutical and biotechnology companies are developing products
for the prevention or treatment of cancer and infectious diseases including
Introgen Therapeutics, Inc. and ImClone Systems, Inc. which are currently
developing drugs for head and neck cancer. Both Introgen and ImClone, as well as
many other companies working on drugs designed to prevent, cure or treat cancer,
have substantial financial, research and development, and marketing resources
and are capable of providing significant long-term competition either by
establishing in-house research groups or by forming collaborative ventures with
other entities. In addition, smaller companies and non-profit institutions are
active in research relating to cancer and infectious diseases and are expected
to become more active in the future.
CEL-SCI's patents might not protect CEL-SCI's technology from competitors, in
which case CEL-SCI may not have any advantage over competitors in selling any
products which it may develop.
Certain aspects of CEL-SCI's technologies are covered by U.S. and foreign
patents. In addition, CEL-SCI has a number of new patent applications pending.
There is no assurance that the applications still pending or which may be filed
in the future will result in the issuance of any patents. Furthermore, there is
no assurance as to the breadth and degree of protection any issued patents might
afford CEL-SCI. Disputes may arise between CEL-SCI and others as to the scope
and validity of these or other patents. Any defense of the patents could prove
costly and time consuming and there can be no assurance that CEL-SCI will be in
a position, or will deem it advisable, to carry on such a defense. Other private
and public concerns, including universities, may have filed applications for, or
may have been issued, patents and are expected to obtain additional patents and
other proprietary rights to technology potentially useful or necessary to
CEL-SCI. The scope and validity of such patents, if any, the extent to which
CEL-SCI may wish or need to acquire the rights to such patents, and the cost and
availability of such rights are presently unknown. Also, as far as CEL-SCI
relies upon unpatented proprietary technology, there is no assurance that others
may not acquire or independently develop the same or similar technology.
CEL-SCI's first Multikine patent expired in 2000. Since CEL-SCI does not know if
it will ever be able to sell Multikine on a commercial basis, CEL-SCI cannot
predict what effect the expiration of this patent will have on CEL-SCI.
Notwithstanding the above, CEL-SCI believes that trade secrets and later issued
patents will protect the technology associated with Multikine.
22
Risks Related to CEL-SCI's Common Stock
Since the market price for CEL-SCI's common stock is volatile, investors in this
offering may not be able to sell any of CEL-SCI's shares at a profit.
The market price of CEL-SCI's common stock, as well as the securities of
other biopharmaceutical and biotechnology companies, have historically been
highly volatile, and the market has from time to time experienced significant
price and volume fluctuations that are unrelated to the operating performance of
particular companies. During the year ended September 30, 2005 CEL-SCI's stock
price has ranged from a low of $0.46 per share to a high of $1.08 per share.
Factors such as fluctuations in CEL-SCI's operating results, announcements of
technological innovations or new therapeutic products by CEL-SCI or its
competitors, governmental regulation, developments in patent or other
proprietary rights, public concern as to the safety of products developed by
CEL-SCI or other biotechnology and pharmaceutical companies, and general market
conditions may have a significant effect on the future market price of CEL-SCI's
common stock.
Shares issuable upon the exercise of options and warrants, or as a result of
sales made in connection with the equity line of credit may substantially
increase the number of shares available for sale in the public market and may
depress the price of CEL-SCI's common stock.
CEL-SCI had outstanding options and warrants which as of September 30,
2005 allow the holders to acquire up to 15,798,603 additional shares of
CEL-SCI's common stock. Until the options and warrants expire, the holders will
have an opportunity to profit from any increase in the market price of CEL-SCI's
common stock without assuming the risks of ownership. Holders of the options and
warrants may exercise or convert these securities at a time when CEL-SCI could
obtain additional capital on terms more favorable than those provided by the
options. The exercise of the options and warrants will dilute the voting
interest of the owners of presently outstanding shares of CEL-SCI's common
stock.
CEL-SCI has filed, or plans to file, registration statements with the
Securities and Exchange Commission so that substantially all of the shares of
common stock which are issuable upon the exercise of outstanding options and
warrants may be sold in the public market. The sale of common stock issued or
issuable upon the exercise of the warrants described above, or the perception
that such sales could occur, may adversely affect the market price of CEL-SCI's
common stock.
Equity Line of Credit
An unknown number of shares of common stock may also be sold under an
equity line of credit arrangement with Jena Holdings LLC. As CEL-SCI sells
shares of its common stock to Jena Holdings LLC under the equity line of credit,
and Jena Holdings LLC sells the common stock to third parties, the price of
CEL-SCI's common stock may decrease due to the additional shares in the market.
If CEL-SCI decides to draw down on the equity line of credit as the price of its
common stock decreases, CEL-SCI will be required to issue more shares of its
common stock for any given dollar amount invested by Jena Holdings LLC, subject
to the minimum selling price specified by CEL-SCI. The more shares that are
issued under the equity line of credit, the more CEL-SCI's then outstanding
shares will be diluted and the more CEL-SCI's stock price may decrease. Any
23
decline in the price of CEL-SCI's common stock may encourage short sales, which
could place further downward pressure on the price of CEL-SCI's common stock.
Short selling is a practice of selling shares which are not owned by a seller
with the expectation that the market price of the shares will decline in value
after the sale.
ITEM 2. PROPERTIES
CEL-SCI leases office space at 8229 Boone Blvd., Suite 802, Vienna,
Virginia at a monthly rental of approximately $6,750. The lease on the office
space expires in June 2007.
CEL-SCI believes this arrangement is adequate for the conduct of its present
business.
CEL-SCI has a 17,900 square foot laboratory located at 4820 A-E Seton
Drive, Baltimore, Maryland. The laboratory is leased by CEL-SCI at a cost of
approximately $10,556 per month. The laboratory lease expires in 2009, with an
extension available until 2014.
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
As of February 28, 2006 there were approximately 2,550 record holders of
CEL-SCI's common stock. CEL-SCI's common stock is traded on the American Stock
Exchange under the symbol "CVM". Set forth below are the range of high and low
quotations for CEL-SCI's common stock for the periods indicated as reported on
the American Stock Exchange. The market quotations reflect inter-dealer prices,
without retail mark-up, mark-down or commissions and may not necessarily
represent actual transactions.
Quarter Ending High Low
12/31/03 $1.75 $0.91
3/31/04 $1.45 $0.86
6/30/04 $1.30 $0.67
9/30/04 $0.89 $0.52
12/31/04 $0.67 $0.46
3/31/05 $1.08 $0.62
6/30/05 $0.73 $0.48
9/30/05 $0.60 $0.46
12/31/05 $0.69 $0.45
Holders of Common Stock are entitled to receive dividends as may be
declared by the Board of Directors out of legally available funds and, in the
event of liquidation, to share pro rata in any distribution of CEL-SCI's assets
24
after payment of liabilities. The Board of Directors is not obligated to declare
a dividend. CEL-SCI has not paid any dividends on its common stock and CEL-SCI
does not have any current plans to pay any common stock dividends.
The provisions in CEL-SCI's Articles of Incorporation relating to
CEL-SCI's Preferred Stock would allow CEL-SCI's directors to issue Preferred
Stock with rights to multiple votes per share and dividend rights which would
have priority over any dividends paid with respect to CEL-SCI's Common Stock.
The issuance of Preferred Stock with such rights may make more difficult the
removal of management even if such removal would be considered beneficial to
shareholders generally, and will have the effect of limiting shareholder
participation in certain transactions such as mergers or tender offers if such
transactions are not favored by incumbent management.
The market price of CEL-SCI's common stock, as well as the securities of
other biopharmaceutical and biotechnology companies, have historically been
highly volatile, and the market has from time to time experienced significant
price and volume fluctuations that are unrelated to the operating performance of
particular companies. Factors such as fluctuations in CEL-SCI's operating
results, announcements of technological innovations or new therapeutic products
by CEL-SCI or its competitors, governmental regulation, developments in patent
or other proprietary rights, public concern as to the safety of products
developed by CEL-SCI or other biotechnology and pharmaceutical companies, and
general market conditions may have a significant effect on the market price of
CEL-SCI's Common Stock.
During the three months ended September 30, 2005 neither CEL-SCI, any
officer or director of CEL-SCI, nor any principal shareholder purchased any
shares of CEL-SCI's common stock either from CEL-SCI, from third parties in a
private transaction, or as a result of purchases in the open market.
Other Shares Which May Be Issued:
The following table lists additional shares of CEL-SCI's common stock
which may be issued as of February 28, 2006 as the result of the exercise of
other outstanding options or warrants issued by CEL-SCI:
Number of Note
Shares Reference
Shares issuable upon exercise of warrants 4,983,499 A
held by private investors
Shares issuable upon exercise of options and 10,433,769 B
warrants granted to CEL-SCI's officers,
directors, employees, consultants, and
third parties
Shares issuable upon exercise of options 310,000 C
granted to investor relations consultants
Note A. In August 2003, the Company issued warrants to a private investor. The
warrants permit the holder to purchase 23,758 shares of CEL-SCI's common stock
at a price of $0.77 per share at any time prior to August 17, 2006.
25
In July and September 2002, CEL-SCI sold Series G convertible notes, plus
Series G warrants, to a group of private investors for $1,300,000. As of June
30, 2003 all of the Series G notes had been converted into 8,390,746 shares of
CEL-SCI's common stock. As of September 30, 2005 the Series G warrants allowed
the holders to purchase up to 450,000 shares of CEL-SCI's common stock at a
price of $0.145 per share at any time prior to July 12, 2009. Every three months
after December 9, 2005, the exercise price of the Series G warrants will be
adjusted to an amount equal to 84% of the average of the 3 lowest daily trading
prices of CEL-SCI's common stock on the American Stock Exchange during the 15
trading days immediately prior to the three month adjustment date, provided that
the adjusted price is lower than the warrant exercise price on that date.
In January and July 2003, CEL-SCI sold Series H convertible notes, plus
Series H warrants, to a group of private investors for $1,350,000. As of October
31, 2003 all of the Series H notes had been converted into 3,233,229 shares of
CEL-SCI's common stock. As of September 30, 2005 the Series H warrants allowed
the holders to purchase up to 550,000 shares of CEL-SCI's common stock at a
price of $0.25 per share at any time prior to January 7, 2010. Every three
months after September 26, 2005 the exercise price of the Series H warrants will
be adjusted to an amount equal to 84% of the average of the 3 lowest daily
trading prices of CEL-SCI's common stock on the American Stock Exchange during
the 15 trading days immediately prior to the three month adjustment date,
provided that the adjusted price is lower than the warrant exercise price on
that date.
In May 2003 CEL-SCI sold shares of its common stock plus Series I warrants
to a strategic partner, at prices equal to or above the then current price of
CEL-SCI's common stock. The Series I warrants allow the holder to purchase
1,100,000 shares of CEL-SCI's common stock at a price of $0.47 per share at any
time prior to May 30, 2008.
In September 2003 CEL-SCI entered into an equity line of credit agreement
with Rubicon Group Ltd. An unknown number of shares of common stock are issuable
under the equity line of credit agreement between CEL-SCI and Rubicon Group,
Ltd. As consideration for extending the equity line of credit, CEL-SCI granted
Rubicon Group warrants to purchase 395,726 shares of common stock at a price of
$0.83 per share at any time prior to September 16, 2008. On July 6, 2004,
Rubicon Group transferred 50% (197,863) of their warrants to another entity. The
terms of the warrants remain the same.
On December 1, 2003, CEL-SCI sold 2,999,964 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 Series J warrants which allow the investors to purchase
991,003 shares of CEL-SCI's common stock at a price of $1.32 per share at any
time prior to December 1, 2006.
In May 2004, CEL-SCI completed an offering to one institutional investor
of 6,402,439 shares of its common stock at a price of $0.82 per share. In
connection with this financing, Wachovia Capital Markets, LLC, the placement
agent for the offering, received warrants to purchase 76,642 shares of CEL-SCI's
common stock at a price of $1.37 per share. The warrants expire May 4, 2009.
26
On July 18, 2005, CEL-SCI sold 1,250,000 shares of its common stock and
375,000 warrants to one investor for $500,000. Each warrant entitles the holder
to purchase one share of CEL-SCI's common stock at a price of $0.65 per share at
any time prior to July 18, 2009. The shares of common stock and warrants are
"restricted" securities as defined in Rule 144 of the Securities and Exchange
Commission.
On October 24, 2005, CEL-SCI entered into an equity line of credit
agreement with Jena Holdings LLC. An unknown number of shares of common stock
are issuable under the equity line of credit agreement between CEL-SCI and Jena
Holdings LLC. As consideration for extending the equity line of credit, CEL-SCI
granted Jena Holdings LLC warrants to purchase 271,370 shares of common stock at
a price of $0.55 per share at any time prior to October 24, 2010.
On February 9, 2006 CEL-SCI sold 2,500,000 shares of its common stock to a
private investor for $1,000,000 or $0.40 per share. The investor also received
warrants which allow the investor to purchase up to 750,000 shares of CEL-SCI's
common stock at a price of $0.56 per share at any time prior to February 9,
2011. CEL-SCI agreed to file a registration statement for the common shares as
well as the common shares underlying the warrants and use its best efforts to
have the registration statement declared effective no later than June 9, 2006.
In connection with this transaction CEL-SCI agreed to lower the exercise price
of 441,176 warrants that the investor had received as part of a financing
several years ago to $0.56 per share, and to extend the life of those warrants
by one year until December 2007.
If CEL-SCI sells any additional shares of common stock, or any securities
convertible into common stock at a price below the then applicable exercise
price of the Series G or H warrants, the warrant exercise price will be lowered
to the price at which the shares were sold or the lowest price at which the
securities are convertible, as the case may be. If the warrant exercise price is
adjusted, the number of shares of common stock issuable upon the exercise of the
warrant will be increased by the product of the number of shares of common stock
issuable upon the exercise of the warrant immediately prior to the sale
multiplied by the percentage by which the warrant exercise price is reduced.
If CEL-SCI sells any additional shares of common stock, or any securities
convertible into common stock at a price below the market price of CEL-SCI's
common stock, the exercise price of the Series G or H warrants will be lowered
by a percentage equal to the price at which the shares were sold or the lowest
price at which the securities are convertible, as the case may be, divided by
the then prevailing market price of CEL-SCI's common stock. If the warrant
exercise price is adjusted, the number of shares of common stock issuable upon
the exercise of the warrant will be increased by the product of the number of
shares of common stock issuable upon the exercise of the warrant immediately
prior to the sale multiplied by the percentage determined by dividing the price
at which the shares were sold by the market price of CEL-SCI's common stock on
the date of sale.
However, neither the exercise price of the Series G or H warrants nor the
shares issuable upon the exercise of the Series G or H warrants will be adjusted
as the result of shares issued in connection with a Permitted Financing. A
Permitted Financing involves shares of common stock issued or sold:
o in connection with a merger or acquisition or a strategic partnership;
27
o upon the exercise of options or the issuance of common stock to CEL-SCI's
employees, officers, directors, consultants and vendors in accordance with
CEL-SCI's equity incentive policies;
o pursuant to the conversion or exercise of securities which were outstanding
prior to July 12, 2002 in the case of the Series G warrants and January 7,
2003 in the case of the Series H warrants;
o to key officers of CEL-SCI in lieu of their respective salaries.
Note B. The options are exercisable at prices ranging from $0.16 to $11.00 per
share. CEL-SCI may also grant options to purchase additional shares under its
Incentive Stock Option and Non-Qualified Stock Option Plans.
Note C. CEL-SCI has granted options for the purchase of 310,000 shares of common
stock to certain investor relations consultants in consideration for services
provided to CEL-SCI. The options are exercisable at prices ranging between $1.00
and $2.00 per share and expire between June 1, 2006 and October 14, 2010.
The shares referred to in Notes B and C are being, or will be, offered
for sale by means of registration statements which have been filed with the
Securities and Exchange Commission.
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with
the more detailed financial statements, related notes and other financial
information included herein. Certain amounts reported in previous years have
been reclassified to conform to the classifications being used as of and for the
year ended September 30, 2005.
For the years ended September 30,
------------------------------------------------------------------
2005 2004 (1) 2003 (1) 2002 (1) 2001 (1)
------------------------------------------------------------------
Grant revenue and other $ 269,925 $ 325,479 $ 318,304 $ 384,939 $ 293,871
Other expenses:
Research and development 2,229,729 1,941,630 1,915,501 4,699,909 7,762,213
Depreciation and amortization 190,420 198,269 199,117 226,514 209,121
General and administrative 1,930,543 2,310,279 2,287,019 1,754,332 3,432,437
Gain (loss) on derivative
instruments 363,028 1,174,660 (2,319,005) 5,053,156 55,739
Other income 625,472 - - - -
Other costs of financing - - (270,664) - (235,563)
Interest income 52,660 51,817 52,502 85,322 376,221
Interest expense - (53,855) (1,365,675) (4,517,716) (7,326,556)
------------- ------------- ------------- ----------- -----------
Net loss $ (3,039,607) $ (2,952,077) $(7,986,175) $(5,675,054) $(18,240,059)
============= ============= ============= ============ =============
Net loss per common share
Basic $ (0.04) $ (0.04) $ (0.16) $ (0.20) $ (0.84)
Diluted $ (0.05) $ (0.06) $ (0.19) $ (0.24) $ (0.84)
Weighted average common
shares outstanding
Basic 72,703,395 67,273,133 50,961,457 28,746,341 21,824,273
Diluted 73,581,925 68,924,099 51,127,439 31,788,281 21,824,273
(1) The results for fiscal years 2001 through 2004 were restated (see Note 2 to
the Consolidated Financial Statements).
28
Balance Sheet Data:
For the years ended September 30,
------------------------------------------------------------------
2005 2004 (1) 2003 (1) 2002 (1) 2001 (1)
------------------------------------------------------------------
Working capital (deficit) $ 2,238,297 $ 4,592,332 $ 205,815 $(1,366,925) $2,758,122
Total assets 3,092,352 5,513,810 2,915,206 3,771,258 4,508,920
Convertible debt (2) - - 194,109 1,673,504 -
Note payable - Covance (2) - - 184,330 - -
Note payable - Cambrex (2) - - 664,910 1,135,017 -
Series E preferred stock (2) - - - 2,001,591 6,692,922
Derivative instruments -
current (2) 1,280 - 319,295 4 4,559
Derivative instruments -
noncurrent (2) 811,180 1,175,488 2,517,131 314,844 556,348
Total liabilities 987,313 1,391,468 4,694,385 6,115,876 7,806,174
Stockholders' equity (deficit) 2,105,039 4,122,342 (1,779,179) (2,344,618) (3,297,254)
(1) The results for fiscal years 2001 through 2004 were restated (see Note 2 to
the Consolidated Financial Statements).
(2) Included in total liabilities
No dividends have been declared on CEL-SCI's common stock.
CEL-SCI's net losses for each fiscal quarter during the two years ended
September 30, 2005 were:
Net income (loss) per share
Net income ----------------------------
Quarter (loss) Basic Diluted
- ------- ------------ ----- -------
12/31/2003 $ (1,381,433) (1) $ (0.02) (1) $(0.02) (1)
3/31/2004 (1,404,976) (1) (0.02) (1) (0.02) (1)
6/30/2004 353,647 (1) 0.01 (1) (0.01) (1)
9/30/2004 (519,315) (1) (0.01) (1) (0.01) (1)
12/31/2004 $ (1,229,443) (2) $ (0.02) (2) (0.02) (2)
3/31/2005 (1,149,440) (2) (0.02) (2) (0.02) (2)
6/30/2005 (653,786) (2) (0.01) (2) (0.01) (2)
9/30/2005 (6,938) - -
(1) The results for fiscal years 2001 through 2004 were restated (see Note 2 to
the Consolidated Financial Statements).
(2)The results for the quarterly periods in fiscal year 2005 have been restated.
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 Notes thereto appearing elsewhere in this report. See
"Risk Factors". As discussed in Note 2 to the consolidated financial statements,
the Company's financial statements have been restated. The accompanying
management's discussion and analysis gives effect to that restatement.
29
OVERVIEW
CEL-SCI's most advanced product, Multikine, manufactured using the
Company's proprietary cell culture technologies, is being developed for the
treatment of cancer. Multikine is designed to target the tumor micro-metastases
that are mostly responsible for treatment failure. The basic idea of Multikine
is to make current cancer treatments more successful. Phase II data indicated
that Multikine treatment resulted in a substantial increase in the survival of
patients. The lead indication is advanced primary head & neck cancer (500,000
new cases per annum). Since Multikine is not tumor specific, it may also be
applicable in many other solid tumors.
CEL-SCI also owns a pre-clinical technology called L.E.A.P.S. (Ligand
Epitope Antigen Presentation System). The lead product derived from this
technology is the CEL-1000 peptide which has shown protection in animals against
herpes, malaria and cancer. With the help of government grants, NIAID and US
Army and US Navy collaborations, CEL-1000 is now being tested against avian flu,
viral encephalitis, West Nile Virus, SARS, Vaccinia, Smallpox, herpes, malaria
and other agents. If the bio-terrorism tests are successful, CEL-SCI is likely
to push CEL-1000 for potential bio-terrorism disease indications to gain
accelerated approval.
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 2005
"Grant revenues and other" decreased by $55,554 during the year ended
September 30, 2005, compared to 2004. This was due to the winding down of the
work funded by the grants in 2005. CEL-SCI is continuing to apply for grants to
support its work.
During the year ended September 30, 2005, research and development
expenses increased by $288,099. The increase in research and development expense
was due largely to an increase in work related to CEL-SCI's Phase III
application for Multikine.
During the year ended September 30, 2005, general and administrative
expenses decreased by $379,736. The decrease was mostly due to a decrease in
public relations and corporate presentation expenses, filing fees, travel
expenses, accounting fees and legal fees, as CEL-SCI's efforts were primarily
focused on the submission of the Phase III clinical trial application for
Multikine.
The Company received $625,472 in settlement of a lawsuit in which the
Company was not a party. The litigation involved a shareholder and three former
investors in CEL-SCI. The lawsuit sought to recover short-swing profits
allegedly obtained by the defendants, their investment advisor and the
investment advisor's principal acting together as a group in trading CEL-SCI
securities.
30
Interest income during the year ended September 30, 2005 increased by $843
as a result of higher balances in interest bearing accounts during the year.
Interest expense decreased to zero as a result of the conversion of the
remaining convertible debt in October 2003. Interest expense for the year ended
September 30, 2004 is primarily for interest related to the convertible debt
payable to Cambrex Biosciences, Inc. and Covance AG.
Gain on derivative instruments for the year ended September 30, 2005
decreased by $811,632 due to a decrease in the number of derivative instruments
outstanding during the year as a result of expiration of certain agreements or
reclassifications of certain instruments to equity.
Fiscal 2004
Grant revenue and other during fiscal year 2004 remained at approximately
the same level as fiscal year 2003 as work continued on the four grants received
during the fiscal year 2003. Interest income also remained approximately at the
same level.
Research and development expense increased by approximately $26,000 as the
Company's research and development costs on L.E.A.P.S. increased during fiscal
2004.
General and administrative expenses increased by approximately $23,000
this year. The Company's cost reduction program continues. This reduction was
substantially offset by an increase in audit and audit-related fees and an
increase in filing and registration fees.
CEL-SCI recognized a gain of $1,174,660 on derivative instruments during
fiscal year 2004 compared to a loss of $2,319,005 for the year ended September
30, 2003. This was due to primarily to a decrease in the trading price of
CEL-SCI's common stock which is a significant component of fair value of the
Company's derivative instruments. Also, during fiscal year 2004, several
derivative instruments met the criteria for equity classification after which
they were no longer marked to market.
Other costs of financing decreased by $270,664 during fiscal year 2004
since the Company did not enter into an equity line of credit financing
arrangement during the year.
Research and Development Expenses
During the five years ended September 30, 2005 CEL-SCI's research and
development efforts involved Multikine, L.E.A.P.S. and an AIDS vaccine. The
table below shows the research and development expenses associated with each
project during this five-year period.
2005 2004 2003 2002 2001
---- ---- ---- ---- ----
MULTIKINE $1,911,615 $1,539,454 $1,653,904 $4,405,678 $7,365,305
L.E.A.P.S. 318,114 402,176 261,597 244,769 280,766
AIDS Vaccine -- -- -- 43,462 94,642
Other -- -- -- 6,000 21,500
---------- ---------- ---------- ---------- ----------
TOTAL $2,229,729 $1,941,630 $1,915,501 $4,699,909 $7,762,213
========== ========== ========== ========== ==========
31
CEL-SCI 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. In 2005, CEL-SCI submitted a protocol to the FDA and the
Canadian regulatory agency, the Biologics and Genetic Therapies Directorate for
Phase III clinical trials. CEL-SCI is unable to estimate the future costs of
research and clinical trials involving Multikine since CEL-SCI has not yet
finalized the protocol with the FDA. Until the scope of these trials is known,
CEL-SCI will not be able to price any future trials.
As explained in Item 1 of this report, as of February 28, 2006, CEL-SCI
was involved in a number of pre-clinical studies with respect to its L.E.A.P.S.
technology. As with Multikine, CEL-SCI does not know what obstacles it will
encounter in future pre-clinical and clinical studies involving its L.E.A.P.S.
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.
Since all of CEL-SCI's projects are under development, CEL-SCI cannot
predict when it will be able to generate any revenue from the sale of any of its
products.
CEL-SCI discontinued its research efforts relating to the AIDS vaccine due
to a lack of government funding in 2000.
Liquidity and Capital Resources
CEL-SCI has had only limited revenues from operations since its inception
in March l983. CEL-SCI has relied primarily upon proceeds realized from the
public and private sale of its common and preferred stock and convertible notes
to meet its funding requirements. Funds raised by CEL-SCI have been expended
primarily 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, the repayment of
debt, the continuation of Company-sponsored research and development,
administrative costs and construction of laboratory facilities. Inasmuch as
CEL-SCI does not anticipate realizing revenues until such time as it enters into
licensing arrangements regarding the technology and know-how licensed to it
(which could take a number of years), CEL-SCI is mostly dependent upon the
proceeds from the sale of its securities to meet all of its liquidity and
capital resource requirements.
In fiscal 2003, CEL-SCI reduced its discretionary expenditures. In fiscal
2004 and 2005 expenditures remained at the 2003 levels. If necessary, CEL-SCI
may reduce discretionary expenditures in fiscal 2006; however such reductions
would further delay the development of CEL-SCI's products.
32
Multikine has an FDA approved shelf life of two years. Consequently,
Multikine can only be used for two years after it is manufactured. Since the
last batch of Multikine was manufactured over two years ago, CEL-SCI does not
currently have any Multikine available for future clinical studies. As a result,
CEL-SCI will be required to manufacture additional quantities of Multikine for
future research and clinical studies. CEL-SCI anticipates that the Multikine
needed for its planned Phase III clinical trial will be manufactured in several
batches over a two to three year period at a cost of between $4 to $5 million.
CEL-SCI's last batch of Multikine was used during the fall of 2002.
Equity Lines of Credit
In order to provide a possible source of funding for CEL-SCI's current
activities and for the development of its current and planned products, CEL-SCI
entered into an equity line of credit agreement with Rubicon Group Ltd. in
December 2003 and ending December 2005.
Under the equity line of credit agreement, Rubicon Group has agreed to
provide CEL-SCI with up to $10,000,000 of funding during a two year period
beginning on December 29, 2003. During this period, CEL-SCI may request a
drawdown under the equity line of credit by selling shares of its common stock
to Rubicon Group, and Rubicon Group will be obligated to purchase the shares.
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. CEL-SCI may request a drawdown once every 22 trading days,
although CEL-SCI is under no obligation to request any drawdowns under the
equity line of credit.
During the 22 trading days following a drawdown request, CEL-SCI will
calculate the number of shares it will sell to Rubicon Group and the purchase
price per share. The purchase price per share of common stock will be based on
the daily volume weighted average price of CEL-SCI's common stock during each of
the 22 trading days immediately following the drawdown date, less a discount of
11%.
As of October 31, 2005 CEL-SCI had received net proceeds of $724,875 from
the sale of shares under the equity line of credit with the Rubicon Group.
In October 2005 CEL-SCI entered into an equity line of credit agreement
with Jena Holdings LLC Ltd.
Under the equity line of credit agreement, Jena Holdings LLC has agreed to
provide CEL-SCI with up to $5,000,000 of funding during a two-year period
beginning on the date the shares to be sold under the line of credit have been
registered with the Securities and Exchange Commission. During this two-year
period, CEL-SCI may request a drawdown under the equity line of credit by
selling shares of its common stock to Jena Holdings LLC, and Jena Holdings LLC
will be obligated to purchase the shares. 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
33
formula contained in the equity line of credit agreement. CEL-SCI may request a
drawdown once every 22 trading days, although CEL-SCI is under no obligation to
request any draw-downs under the equity line of credit.
During the 22 trading days following a drawdown request, CEL-SCI will
calculate the number of shares it will sell to Jena Holdings LLC and the
purchase price per share. The purchase price per share of common stock will be
based on the daily volume weighted average price of CEL-SCI's common stock
during each of the 22 trading days immediately following the drawdown date, less
a discount of 11%.
As of February 28, 2006 the shares to be sold to Jena Holdings had not
been registered with the Securities and Exchange Commission.
Future Capital Requirements
CEL-SCI plans to use its existing financial resources, the proceeds from
the sale of its common stock, and proceeds from the sale of common stock under
the equity line of credit agreement to fund its capital requirements during the
year ending September 30, 2006.
Other than funding operating losses, funding its research and development
program, and paying its liabilities, CEL-SCI does not have any material capital
commitments. Material future liabilities as of September 30, 2005 are as
follows:
Contractual Obligations: Years Ending September 30,
-----------------------------------
Total 2006 2007 2008
----- ---- ---- ----
Operating Leases $ 359,921 $156,067 $132,719 71,136
Employment Contracts 1,247,203 702,703 363,000 181,500
----------- --------- --------- ---------
$1,607,124 $858,770 $495,719 $252,636
========== ======== ======== ========
It should be noted that substantial additional funds will be needed for
more extensive clinical trials which will be necessary before CEL-SCI will be
able to apply to the FDA for approval to sell any products which may be
developed on a commercial basis throughout the United States. 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. It is the opinion of management
that sufficient funds will be available from external financing and additional
capital and/or expenditure reduction in order to meet CEL-SCI's liabilities and
commitments as they come due during fiscal year 2006. Ultimately, CEL-SCI must
complete the development of its products, obtain appropriate regulatory
approvals and obtain sufficient revenues to support its cost structure.
CEL-SCI's cash flow and earnings are subject to fluctuations due to
changes in interest rates on its certificates of deposit, and, to an immaterial
extent, foreign currency exchange rates.
34
Critical Accounting Policies
CEL-SCI's significant accounting policies are more fully described in Note
1 to the consolidated 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 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:
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 is the difference between the
estimated fair value of the asset and its carrying value.
Stock Options and Warrants - In October 1996, the Financial Accounting
Standards Board (FASB) issued Statement of Financial Accounting Standards No.
123, Accounting for Stock-Based Compensation (SFAS No. 123). This statement
encourages but does not require companies to account for employee stock
compensation awards based on their estimated fair value at the grant date with
the resulting cost charged to operations. CEL-SCI 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 - Transaction
and Disclosure" which amends SFAS No. 123. SFAS No. 148 provided 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 Company has elected to continue to account for its
employee stock-based compensation using the intrinsic value method.
Asset Valuations and Review for Potential Impairments - CEL-SCI reviews
its fixed assets every fiscal quarter. This review requires that CEL-SCI 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, CEL-SCI 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. CEL-SCI 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 its determination of fair values or if there is a material change in
economic conditions or circumstances influencing fair value, CEL-SCI could be
required to recognize certain impairment charges in the future. As a result of
the reviews, no changes in asset values were required.
35
Prepaid Expenses and Laboratory Supplies--The majority of prepaid expenses
consist of bulk purchases of laboratory supplies used on a daily basis in the
lab and items that will be used for future production. The items in prepaid
expenses are expensed when used in production or daily activity as Research and
Development expenses. These items are disposables and consumables and can be
used for both the manufacturing of Multikine for clinical studies and in the
laboratory for quality control and bioassay use. They can be used in training,
testing and daily laboratory activities. Other prepaid expenses are payments for
services over a long period and are expensed over the time period for which the
service is rendered.
Derivative Instruments--The Company enters into financing arrangements
that consist of freestanding derivative instruments or are hybrid instruments
that contain embedded derivative features. The Company accounts for these
arrangement in accordance with Statement of Financial Accounting Standards No.
133, "Accounting for Derivative Instruments and Hedging Activities", ("SFAS No.
133") and Emerging Issues Task Force Issue No. 00-19, "Accounting for Derivative
Financial Instruments Indexed to, and Potentially Settled in, a Company's Own
Stock", ("EITF 00-19"), as well as related interpretations of these standards.
In accordance with accounting principles generally accepted in the United States
("GAAP"), derivative instruments and hybrid instruments are recognized as either
assets or liabilities in the statement of financial position and are measured at
fair value with gains or losses recognized in earnings or other comprehensive
income depending on the nature of the derivative or hybrid instruments. Embedded
derivatives that are not clearly and closely related to the host contract are
bifurcated and recognized at fair value with changes in fair value recognized as
either a gain or loss in earnings if they can be reliably measured. When the
fair value of embedded derivative features can not be reliably measured, the
Company measures and reports the entire hybrid instrument at fair value with
changes in fair value recognized as either a gain or loss in earnings. The
Company determines the fair value of derivative instruments and hybrid
instruments based on available market data using appropriate valuation models,
giving consideration to all of the rights and obligations of each instrument and
precluding the use of "blockage" discounts or premiums in determining the fair
value of a large block of financial instruments. Fair value under these
conditions does not necessarily represent fair value determined using valuation
standards that give consideration to blockage discounts and other factors that
may be considered by market participants in establishing fair value.
Quantitative and Qualitative Disclosure 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. CEL-SCI enters
into financing arrangements that are or include freestanding derivative
instruments or that are or include hybrid instruments that contain embedded
derivative features. CEL-SCI does not enter into derivative instruments for
trading purposes. Additional information is presented in the Notes to
Consolidated Financial Statements. The fair value of these instruments is
affected primarily by volatility of the trading prices of the CEL-SCI's common
stock. For the years ended September 30, 2005, 2004 and 2003, CEL-SCI recognized
a gain of $363,028, a gain of $1,174,660, and a loss of $2,319,005,
respectively, resulting from changes in fair value of derivative instruments.
CEL-SCI has no exposure to risks associated with foreign exchange rate changes
because none of the operations of CEL-SCI are transacted in a foreign currency.
(The interest rate risk on investments is considered immaterial due to the
dollar value of investments as of September 30, 2004 and June 30, 2005.)
36
Recent Accounting Pronouncements
In November 2004 the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 151, "Inventory Costs,
an amendment of Accounting Research Bulletin (ARB) 43, Chapter 4, Inventory
Pricing". This statement amends ARB 43, Chapter 4, to clarify accounting for
abnormal amounts of idle facility expense, freight, handling costs and wasted
material. SFAS No. 151 requires that those items be recognized as current-period
charges in all circumstances. SFAS No. 151 is effective for fiscal years
beginning after June 15, 2005. CEL-SCI does not believe that the adoption of
SFAS No. 151 will have a material effect on its financial position, results of
operations or cash flows.
In December 2004 the FASB issued SFAS No. 123R, "Share-Based Payment".
SFAS No. 123R requires companies to recognize compensation expense in an amount
equal to the fair value of the share-based payment (stock options and restricted
stock) issued to employees. 123R applies to all transactions involving issuance
of equity by a Company in exchange for goods and services, including
transactions with employees. SFAS No. 123R is effective for the first interim
period in the fiscal year beginning after June 15, 2005. As of September 30,
2005, the Company has not determined the impact of adopting SFAS No. 123R.
On December 16, 2004, the FASB issued SFAS No. 153, "Exchange of
Non-monetary Assets", an amendment of Accounting Principles Board ("APB")
Opinion No. 29. Statement No. 153 replaces the exception from fair value
measurement in APB No. 29, with a general exception from fair value measurement
for exchanges of non-monetary assets that do not have commercial substance. The
Statement is to be applied prospectively and is effective for non-monetary asset
exchanges occurring in fiscal periods beginning after June 15, 2005. CEL-SCI
does not believe that SFAS No. 153 will have a material impact on its results of
operations or cash flows.
In March 2005, the FASB issued FIN No. 47, "Accounting for Conditional
Asset Retirement Obligations - an Interpretation of FASB Statement No. 143". The
interpretation clarifies terms used in FASB Statement No. 143 and is effective
no later than the end of fiscals ending after December 15, 2005. CEL-SCI does
not believe that FIN No. 47 will have a material impact on its results of
operations or cash flows.
In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error
Corrections--A replacement of APB Opinion No. 20 and FASB Statement No. 3". The
statement requires that retrospective application of a change in accounting
principle be limited to the direct effects of the change and is part of a
broader effort by the FASB to improve the comparability of cross-border
financial reporting by working with the International Accounting Standards Board
(IASB) toward development of a single set of high-quality accounting standards.
In February 2006, the FASB issued SFAS No. 155, "Hybrid Instruments". The
statement amends SFAS No. 133 and SFAS No. 140, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities". The statement
also resolves issues addressed in Statement 133 Implementation Issue No. D1,
"Application of Statement 133 to Beneficial Interests in Securitized Financial
Assets." The statement: a) permits fair value remeasurement for any hybrid
financial instrument that contains an embedded derivative that otherwise would
require bifurcation, b) clarifies which interest-only strips and principal-only
strips are not subject to the requirements of SFAS No. 133, c) establishes a
requirement to evaluate interests in securitized financial assets to identify
37
interests that are freestanding derivatives or that are hybrid financial
instruments that contain an embedded derivative requiring bifurcation, d)
clarifies that concentrations of credit risk in the form of subordination are
not embedded derivatives, and e) amends Statement 140 to eliminate the
prohibition on a qualifying special purpose entity from holding a derivative
financial instrument that pertains to a beneficial interest other than another
derivative financial instrument. CEL-SCI does not believe that SFAS No. 155 will
have a material impact on its results of operations or cash flows.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See the Financial Statements included with this Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Deloitte & Touche LLP ("Deloitte") notified the Company on February 9,
2005 that it would resign as the Company's independent registered public
accounting firm upon completion of its review of the Company's interim financial
statements for the quarterly period ended December 31, 2004. On February 14,
2005, Deloitte completed its review and its resignation became effective.
Deloitte`s reports on the Company's financial statements for the two most
recent fiscal years did not contain an adverse opinion, or disclaimer of
opinion, but included an explanatory paragraph referring to the restatement of
the financial statements.
During the Company's two most recent fiscal years and the subsequent
interim period through February 14, 2005 there were no disagreements with
Deloitte on any matter of accounting principles or practices, financial
statement disclosure or auditing scope or procedure, which disagreement(s), if
not resolved to the satisfaction of Deloitte, would have caused it to make
reference to the subject matter of such disagreements in connection with its
reports.
On May 3, 2005 the Company retained BDO Seidman, LLP to act as the
Company's independent certified public accountants.
The change in the Company's auditors was recommended and approved by the
Company's board of directors and audit committee.
During the two most recent fiscal years and subsequent interim period
ending May 3, 2005 the Company did not consult with BDO Seidman, LLP regarding
the application of accounting principles to a specified transaction, either
completed or proposed, or the type of audit opinion that might be rendered on
the Company's financial statements, or any matter that was the subject of a
disagreement or a reportable event as defined in the regulations of the
Securities and Exchange Commission.
38
ITEM 9A. CONTROLS AND PROCEDURES
Geert Kersten, CEL-SCI's Chief Executive and Financial Officer, has
evaluated the effectiveness of CEL-SCI's disclosure controls and procedures as
of September 30, 2005 and in his opinion CEL-SCI's disclosure controls and
procedures ensure that material information relating to CEL-SCI, including
CEL-SCI's consolidated subsidiary, is made known to him by others within those
entities, particularly during the period in which this report is being prepared,
so as to allow timely decisions regarding required disclosure. To the knowledge
of Mr. Kersten there have been no significant changes in CEL-SCI's internal
controls or in other factors that could significantly affect CEL-SCI's internal
controls subsequent to the date of evaluation, and as a result, no corrective
actions with regard to significant deficiencies or material weakness in
CEL-SCI's internal controls were required with the exception of accounting for
certain derivatives under FAS 133 and EITF 00-19. Subsequent to September 30,
2005, CEL-SCI adopted additional accounting policies and internal controls to
address the issues raised by the restatement of previously issued financial
statements for the years ended September 30, 2004 and 2003.
ITEM 9B. OTHER INFORMATION
Not applicable.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Officers and Directors
Name Age Position
Maximilian de Clara 75 Director and President
Geert R. Kersten, Esq. 46 Director, Chief Executive Officer and Treasurer
Patricia B. Prichep 53 Senior Vice President of Operations and Secretary
Dr. Eyal Talor 49 Senior Vice President of Research and
Manufacturing
Dr. Daniel H. Zimmerman 64 Senior Vice President of Research, Cellular
Immunology
John Cipriano 63 Senior Vice President of Regulatory Affairs
Alexander G. Esterhazy 60 Director
Dr. C. Richard Kinsolving 69 Director
Dr. Peter R. Young 60 Director
The directors of CEL-SCI serve in such capacity until the next annual
meeting of CEL-SCI's shareholders and until their successors have been duly
elected and qualified. The officers of CEL-SCI serve at the discretion of
CEL-SCI's directors.
Mr. Maximilian de Clara, by virtue of his position as an officer and
director of CEL-SCI, may be deemed to be the "parent" and "founder" of CEL-SCI
as those terms are defined under applicable rules and regulations of the SEC.
The principal occupations of CEL-SCI's officers and directors, during the
past several years, are as follows:
39
Maximilian de Clara. Mr. de Clara has been a Director of CEL-SCI since its
inception in March l983, and has been President of CEL-SCI since July l983.
Prior to his affiliation with CEL-SCI, and since at least l978, Mr. de Clara was
involved in the management of his personal investments and personally funding
research in the fields of biotechnology and biomedicine. Mr. de Clara attended
the medical school of the University of Munich from l949 to l955, but left
before he received a medical degree. During the summers of l954 and l955, he
worked as a research assistant at the University of Istanbul in the field of
cancer research. For his efforts and dedication to research and development in
the fight against cancer and AIDS, Mr. de Clara was awarded the "Pour le Merit"
honorary medal of the Austrian Military Order "Merito Navale" as well as the
honor cross of the Austrian Albert Schweitzer Society.
Geert R. Kersten, Esq. Mr. Kersten was Director of Corporate and Investment
Relations for CEL-SCI between February 1987 and October 1987. In October of
1987, he was appointed Vice President of Operations. In December 1988, Mr.
Kersten was appointed Director of the Company. Mr. Kersten also became CEL-SCI's
Treasurer in 1989. In May 1992, Mr. Kersten was appointed Chief Operating
Officer and in February 1995, Mr. Kersten became CEL-SCI's Chief Executive
Officer. In previous years, Mr. Kersten worked as a financial analyst with
Source Capital, Ltd., an investment advising firm in McLean, Virginia. Mr.
Kersten is a stepson of Maximilian de Clara, who is the President and a Director
of CEL-SCI. Mr. Kersten attended George Washington University in Washington,
D.C. where he earned a B.A. in Accounting and an M.B.A. with emphasis on
International Finance. He also attended law school at American University in
Washington, D.C. where he received a Juris Doctor degree.
Patricia B. Prichep has been the Company's Senior Vice President of
Operations since March 1994. Between December 1992 and March 1994, Ms. Prichep
was the Company's Director of Operations. Ms. Prichep became CEL-SCI's Corporate
Secretary in May 2000. From June 1990 to December 1992, Ms. Prichep was the
Manager of Quality and Productivity for the NASD's Management, Systems and
Support Department. Between 1982 and 1990, Ms. Prichep was Vice President and
Operations Manager for Source Capital, Ltd.
Eyal Talor, Ph.D. has been CEL-SCI's Senior Vice President of Research and
Manufacturing since March 1994. From October 1993 until March 1994, Dr. Talor
was Director of Research, Manufacturing and Quality Control, as well as the
Director of the Clinical Laboratory, for Chesapeake Biological Laboratories,
Inc. From 1991 to 1993, Dr. Talor was a scientist with SRA Technologies, Inc.,
as well as the director of SRA's Flow Cytometry Laboratory (1991-1993) and
Clinical Laboratory (1992-1993). During 1992 and 1993, Dr. Talor was also the
Regulatory Affairs and Safety Officer For SRA. Since 1987, Dr. Talor has held
various positions with the Johns Hopkins University, including course
coordinator for the School of Continuing Studies (1989-Present), research
associate and lecturer in the Department of Immunology and Infectious Diseases
(1987-1991), and associate professor (1991-Present).
Daniel H. Zimmerman, Ph.D. has been CEL-SCI's Senior Vice President of
Cellular Immunology since January 1996. Dr. Zimmerman founded CELL-MED, Inc. and
was its president from 1987-1995. From 1973 to 1987 Dr. Zimmerman served in
various positions at Electronucleonics, Inc. including Scientist, Senior
Scientist, Technical Director and Program Manager. From 1969-1973 Dr. Zimmerman
was a Senior Staff Fellow at NIH.
40
John Cipriano, has been CEL-SCI's Senior Vice President of Regulatory
Affairs since March 2004. Mr. Cipriano brings to CEL-SCI over 30 years of
experience in both biotech and pharmaceutical companies. In addition, he held
positions at the United States Food and Drug Administration (FDA) as Deputy
Director, Division of Biologics Investigational New Drugs, Office of Biologics
Research and Review and was the Deputy Director, IND Branch, Division of
Biologics Evaluation, Office of Biologics. Mr. Cipriano completed his B.S. in
Pharmacy from the Massachusetts College of Pharmacy in Boston, Massachusetts and
his M.S. in Pharmaceutical Chemistry from Purdue University in West Lafayette,
Indiana.
Alexander G. Esterhazy has been an independent financial advisor since
November 1997. Between July 1991 and October 1997 Mr. Esterhazy was a senior
partner of Corpofina S.A. Geneva, a firm engaged in mergers, acquisitions and
portfolio management. Between January 1988 and July 1991 Mr. Esterhazy was a
managing director of DG Bank in Switzerland. During this period Mr. Esterhazy
was in charge of the Geneva, Switzerland branch of the DG Bank, founded and
served as vice president of DG Finance (Paris) and was the President and Chief
Executive officer of DG-Bourse, a securities brokerage firm.
C. Richard Kinsolving, Ph.D. has been a Director of CEL-SCI since April
2001. Since February 1999 Dr. Kinsolving has been the Chief Executive Officer of
BioPharmacon, a pharmaceutical development company. Between December 1992 and
February 1999 Dr. Kinsolving was the President of Immuno-Rx, Inc., a company
engaged in immuno-pharmaceutical development. Between December 1991 and
September 1995 Dr. Kinsolving was President of Bestechnology, Inc. a nonmedical
research and development company producing bacterial preparations for industrial
use. Dr. Kinsolving received his Ph.D. in Pharmacology from Emory University
(1970), his Masters degree in Physiology/Chemistry from Vanderbilt University
(1962), and his Bachelor's degree in Chemistry from Tennessee Tech. University
(1957).
Peter R. Young, Ph.D. has been a Director of CEL-SCI since August 2002.
Dr. Young has been a senior executive within the pharmaceutical industry in the
United States and Canada for most of his career. Over the last 20 years he has
primarily held positions of Chief Executive Officer or Chief Financial Officer
and has extensive experience with acquisitions and equity financings. Since
November 2001 Dr. Young has been the President of Agnus Dei, LLC, which acts as
a partner in an organization managing immune system clinics which treat patients
with diseases such as cancer, multiple sclerosis and hepatitis. Since January
2003 Dr. Young has been the President and Chief Executive Officer of SRL
Technology, Inc., a company involved in the development of pharmaceutical (drug)
delivery systems. Between 1998 and 2001 Dr. Young was the Chief Financial
Officer of Adams Laboratories, Inc. Dr. Young received his Ph.D. in Organic
Chemistry from the University of Bristol, England (1969), and his Bachelor's
degree in Honors Chemistry, Mathematics and Economics also from the University
of Bristol, England (1966).
All of CEL-SCI's officers devote substantially all of their time to
CEL-SCI's business.
CEL-SCI has an audit committee and compensation committee. The members of
the audit committee are Alexander G. Esterhazy, C. Richard Kinsolving and Dr.
Peter Young. Dr. Peter Young serves as the audit committee's financial expert.
In this capacity, Dr. Young is independent, as that term is defined in the
41
listing standards of the American Stock Exchange. The members of the
compensation committee are Maximilian de Clara, Alexander Esterhazy and C.
Richard Kinsolving.
CEL-SCI has adopted a Code of Ethics which is applicable to CEL-SCI'S
principal executive, financial, and accounting officers and persons performing
similar functions. The Code of Ethics is available on CEL-SCI's website, located
at www.cel-sci.com.
If a violation of this code of ethics act is discovered or suspected, the
Senior Officer must (anonymously, if desired) send a detailed note, with
relevant documents, to CEL-SCI's Audit Committee, c/o Dr. Peter Young, 1247
Dogeton Drive, Frisco, TX 75034-1432.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth in summary form the compensation received
by (i) the Chief Executive Officer of CEL-SCI and (ii) by each other executive
officer of CEL-SCI who received in excess of $100,000 during the fiscal year
ended September 30, 2005.
All
Other Other
Annual Restric- Com-
Compen- ted Stock Options pensa-
Name and Princi- Fiscal Salary Bonus sation Awards Granted tion
pal Position Year (1) (2) (3) (4) (5) (6)
- ---------------- ----- ------ ----- -------- --------- -------- -------
Maximilian de Clara, 2005 $363,000 -- $72,041 -- 50,000 --
President 2004 $363,000 -- $60,165 -- 50,000 --
2003 $363,000 -- $65,121 -- 574,999 $72,600
Geert R. Kersten, 2005 $370,585 -- $18,260 $ 12,700 50,000 $ 30
Chief Executive 2004 $366,673 -- $18,690 $ 11,296 50,000 --
Officer and 2003 $354,087 -- $12,558 $ 9,244 1,890,000 $71,068
Treasurer
Patricia B. Prichep 2005 $159,864 -- $ 3,000 $ 9,404 30,000 $ 30
Senior Vice President 2004 $148,942 -- $ 3,000 $ 7,110 50,000 --
of Operations and 2003 $147,904 -- $ 3,000 $ 4,902 580,000 --
Secretary
Eyal Talor, Ph.D. 2005 $201,154 -- $ 3,000 $ 8,400 30,000 $ 30
Senior Vice President 2004 $192,373 -- $ 3,000 $ 4,797 50,000 --
of Research and 2003 $191,574 -- $ 3,000 $ 4,950 374,166 --
Manufacturing
Daniel Zimmerman, Ph.D. 2005 $154,350 -- $ 3,000 $ 9,059 30,000 $ 30
Senior Vice President 2004 $147,613 -- $ 3,000 $ 7,176 50,000 --
Senior Vice President 2003 $147,000 -- $ 3,000 $ 5,005 392,000 --
of Cellular Immunology
John Cipriano 2005 $150,000 -- -- $ 9,000 30,000 $ 30
Senior Vice President
of Regulatory Affairs
42
(1) The dollar value of base salary (cash and non-cash) received. During the
year ended September 30, 2005, $11,089 of the total salaries paid to the
persons shown in the table were paid in restricted shares of CEL-SCI's
common stock.
Information concerning the issuance of these restricted shares is shown in
the following table:
Date Shares Number of Price
Were Issued Shares Issued Per Share
10/07/03 133,390 $1.00
09/15/04 19,511 $0.62
On each date the amount of compensation satisfied through the issuance of
shares was determined by multiplying the number of shares issued by the Price
Per Share. The price per share was equal to the closing price of CEL-SCI's
common stock on the date prior to the date the shares were issued.
(2) The dollar value of bonus (cash and non-cash) received.
(3) Any other annual compensation not properly categorized as salary or bonus,
including perquisites and other personal benefits, securities or property.
Amounts in the table represent automobile, parking and other transportation
expenses, plus, in the case of Maximilian de Clara and Geert Kersten,
director's fees of $8,000 each.
(4) During the periods covered by the table, the value of the shares of
restricted stock issued as compensation for services to the persons listed
in the table. In the case of all other persons listed in the table, the
shares were issued as CEL-SCI's contribution on behalf of the named officer
to CEL-SCI's 401(k) retirement plan.
As of September 30, 2005, the number of shares of CEL-SCI's common stock,
owned by the officers included in the table above, and the value of such shares
at such date, based upon the market price of CEL-SCI's common stock were:
Name Shares Value
Maximilian de Clara 537,527 $ 252,638
Geert R. Kersten 2,663,868 $1,252,018
Patricia B. Prichep 519,485 $ 244,158
Eyal Talor, Ph.D. 423,796 $ 199,184
Daniel Zimmerman, Ph.D. 445,616 $ 209,440
John Cipriano 24,287 $ 11,415
43
Dividends may be paid on shares of restricted stock owned by CEL-SCI's
officers and directors, although CEL-SCI has no plans to pay dividends.
(5) The shares of Common Stock to be received upon the exercise of all stock
options granted during the periods covered by the table. Includes certain
options issued in connection with CEL-SCI's Salary Reduction Plans as well
as certain options purchased from CEL-SCI. See "Options Granted During
Fiscal Year Ended September 30, 2005" below.
(6) All other compensation received that CEL-SCI could not properly report in
any other column of the table including annual Company contributions or
other allocations to vested and unvested defined contribution plans, and
the dollar value of any insurance premiums paid by, or on behalf of,
CEL-SCI with respect to term life insurance for the benefit of the named
executive officer, and the full dollar value of the remainder of the
premiums paid by, or on behalf of, CEL-SCI. Amounts in the table for fiscal
2003 represent the value of CEL-SCI's common stock issued at below market
prices and discussed in (1) above.
Long Term Incentive Plans - Awards in Last Fiscal Year
None.
Employee Pension, Profit Sharing or Other Retirement Plans
During 1993 CEL-SCI implemented a defined contribution retirement plan,
qualifying under Section 401(k) of the Internal Revenue Code and covering
substantially all the Company's employees. Prior to January 1, 1998 CEL-SCI's
contribution was equal to the lesser of 3% of each employee's salary, or 50% of
the employee's contribution. Effective January 1, 1998 the plan was amended such
that the Company's contribution is now made in shares of CEL-SCI's common stock
as opposed to cash. Each participant's contribution is matched by CEL-SCI with
shares of common stock which have a value equal to 100% of the participant's
contribution, not to exceed the lesser of $1,000 or 6% of the participant's
total compensation. CEL-SCI's contribution of common stock is valued each
quarter based upon the closing price of the Company's common stock. The fiscal
2005 expenses for this plan were $79,406. Other than the 401(k) Plan, CEL-SCI
does not have a defined benefit, pension plan, profit sharing or other
retirement plan.
Compensation of Directors
Standard Arrangements. CEL-SCI currently pays its directors $2,000 each
per quarter, plus expenses. CEL-SCI has no standard arrangement pursuant to
which directors of CEL-SCI are compensated for any services provided as a
director or for committee participation or special assignments.
Other Arrangements. CEL-SCI has from time to time granted options to its
outside directors. See Stock Options below for additional information concerning
options granted to CEL-SCI's directors.
44
Employment Contracts.
In April 2005 the Company entered into a three-year employment agreement
with Mr. de Clara which expires April 30, 2008. The employment agreement
provides that CEL-SCI will pay Mr. de Clara an annual salary of $363,000 during
the term of the agreement. In the event that there is a material reduction in
Mr. de Clara's authority, duties or activities, or in the event there is a
change in the control of the Company, then the agreement allows Mr. de Clara to
resign from his position at the Company and receive a lump-sum payment from
CEL-SCI equal to 18 months salary. For purposes of the employment agreement, a
change in the control of CEL-SCI means the sale of more than 50% of the
outstanding shares of CEL-SCI's Common Stock, or a change in a majority of
CEL-SCI's directors.
The Employment Agreement will also terminate upon the death of Mr. de
Clara, Mr. de Clara's physical or mental disability, the conviction of Mr. de
Clara for any crime involving fraud, moral turpitude, or CEL-SCI's property, or
a breach of the Employment Agreement by Mr. de Clara. If the Employment
Agreement is terminated for any of these reasons, Mr. de Clara, or his legal
representatives, as the case may be, will be paid the salary provided by the
Employment Agreement through the date of termination.
Effective September 1, 2003, CEL-SCI entered into a three-year employment
agreement with Mr. Kersten. The employment agreement provides that during the
term of the employment agreement CEL-SCI will pay Mr. Kersten an annual salary
of $370,585. In the event there is a change in the control of CEL-SCI, the
agreement allows Mr. Kersten to resign from his position at CEL-SCI and receive
a lump-sum payment from CEL-SCI equal to 24 months salary. For purposes of the
employment agreement a change in the control of CEL-SCI means: (1) the merger of
CEL-SCI with another entity if after such merger the shareholders of CEL-SCI do
not own at least 50% of voting capital stock of the surviving corporation; (2)
the sale of substantially all of the assets of CEL-SCI; (3) the acquisition by
any person of more than 50% of CEL-SCI's common stock; or (4) a change in a
majority of CEL-SCI's directors which has not been approved by the incumbent
directors.
The Employment Agreement will also terminate upon the death of Mr.
Kersten, Mr. Kersten's physical or mental disability, willful misconduct, an act
of fraud against CEL-SCI, or a breach of the Employment Agreement by Mr.
Kersten. If the Employment Agreement is terminated for any of these reasons Mr.
Kersten, or his legal representatives, as the case may be, will be paid the
salary provided by the Employment Agreement through the date of termination.
Compensation Committee Interlocks and Insider Participation
CEL-SCI has a compensation committee comprised of all of CEL-SCI's
directors, with the exception of Mr. Kersten. During the year ended September
30, 2005, Mr. de Clara was the only officer participating in deliberations of
CEL-SCI's compensation committee concerning executive officer compensation.
During the year ended September 30, 2005, no director of CEL-SCI was also
an executive officer of another entity, which had an executive officer of
CEL-SCI serving as a director of such entity or as a member of the compensation
committee of such entity.
45
Stock Options
The following tables set forth information concerning the options granted
during the fiscal year ended September 30, 2005, to the persons named below, and
the fiscal year-end value of all unexercised options (regardless of when
granted) held by these persons.
Options Granted During Fiscal Year Ended September 30, 2005
Potential Realizable
% of Total Value at Assumed
Options Annual Rates of Stock
Granted to Exercise Price Appreciation
Options Employees in Price Per Expiration for Option Term (1)
Name Granted (#) Fiscal Year Share Date 5% 10%
- ------ ----------- ------------ --------- ---------- ----- ----
10%
Maximilian de Clara 50,000 11.16% $0.48 9/21/2015 $12,007 $24,014
Geert R. Kersten 50,000 11.16% $0.48 9/21/2015 $12,007 $24,014
Patricia B. Prichep 30,000 6.70% $0.48 9/21/2015 $7,204 $14,408
Eyal Talor, Ph.D. 30,000 6.70% $0.48 9/21/2015 $7,204 $14,408
Daniel Zimmerman, Ph.D. 30,000 6.70% $0.48 9/21/2015 $7,204 $14,408
John Cipriano 30,000 6.70% $0.48 9/21/2015 $7,204 $14,408
(1) The potential realizable value of the options shown in the table assuming
the market price of CEL-SCI's Common Stock appreciates in value from the
date of the grant to the end of the option term at 5% or 10%.
Option Exercises and Year-End Option Values
Value (in $) of
Unexercised
Number of In-the-Money
Unexercised Options at Fiscal
Shares Options (3) Year-End (4)
Acquired On Value Exercisable/ Exercisable/
Name Exercise (1) Realized (2) Unexercisable Unexercisable
- ---- ------------ ------------ ------------- -----------------
Maximilian de Clara -- -- 939,999/274,999 $ 95,833/$ 47,917
Geert R. Kersten -- -- 2,794,667/713,333 $315,000/$157,500
Patricia Prichep -- -- 886,334/256,666 $103,667/$ 48,333
Eyal Talor -- -- 613,277/188,055 $ 69,361/$ 31,181
Daniel Zimmerman -- -- 611,001/193,999 $ 72,334/$ 32,667
John Cipriano -- -- 40,001/109,999 $ --/$ 0
(1) The number of shares received upon exercise of options during the fiscal
year ended September 30, 2005.
(2) With respect to options exercised during CEL-SCI's fiscal year ended
September 30, 2005, the dollar value of the difference between the option
exercise price and the market value of the option shares purchased on the
date of the exercise of the options.
(3) The total number of unexercised options held as of September 30, 2005,
separated between those options that were exercisable and those options
that were not exercisable.
46
(4) For all unexercised options held as of September 30, 2005, the market value
of the stock underlying those options as of September 30, 2005.
Stock Option and Bonus Plans
CEL-SCI has Incentive Stock Option Plans, Non-Qualified Stock Option Plans
and Stock Bonus Plans. All Stock Option and Bonus Plans have been approved by
the stockholders. A summary description of these Plans follows. In some cases
these Plans are collectively referred to as the "Plans".
Incentive Stock Option Plan. The Incentive Stock Option Plans authorize
the issuance of shares of CEL-SCI's common stock to persons who exercise options
granted pursuant to the Plan. Only Company employees may be granted options
pursuant to the Incentive Stock Option Plan.
To be classified as incentive stock options under the Internal Revenue
Code, options granted pursuant to the Plans must be exercised prior to the
following dates:
(a) The expiration of three months after the date on which an option
holder's employment by CEL-SCI is terminated (except if such
termination is due to death or permanent and total disability);
(b) The expiration of 12 months after the date on which an option
holder's employment by CEL-SCI is terminated, if such termination is
due to the Employee's permanent and total disability;
(c) In the event of an option holder's death while in the employ of
CEL-SCI, his executors or administrators may exercise, within three
months following the date of his death, the option as to any of the
shares not previously exercised;
The total fair market value of the shares of Common Stock (determined at
the time of the grant of the option) for which any employee may be granted
options which are first exercisable in any calendar year may not exceed
$100,000.
Options may not be exercised until one year following the date of grant.
Options granted to an employee then owning more than 10% of the Common Stock of
CEL-SCI may not be exercisable by its terms after five years from the date of
grant. Any other option granted pursuant to the Plan may not be exercisable by
its terms after ten years from the date of grant.
The purchase price per share of Common Stock purchasable under an option
is determined by the Committee but cannot be less than the fair market value of
the Common Stock on the date of the grant of the option (or 110% of the fair
market value in the case of a person owning more than 10% of CEL-SCI's
outstanding shares).
Non-Qualified Stock Option Plans. The Non-Qualified Stock Option Plans
authorize the issuance of shares of CEL-SCI's common stock to persons that
exercise options granted pursuant to the Plans. CEL-SCI's employees, directors,
47
officers, consultants and advisors are eligible to be granted options pursuant
to the Plans, provided however that bona fide services must be rendered by such
consultants or advisors and such services must not be in connection with the
offer or sale of securities in a capital-raising transaction. The option
exercise price is determined by the Committee but cannot be less than the market
price of CEL-SCI's Common Stock on the date the option is granted.
Stock Bonus Plan. Under the Stock Bonus Plans shares of CEL-SCI's common
stock may be issued to CEL-SCI's employees, directors, officers, consultants and
advisors, provided however that bona fide services must be rendered by
consultants or advisors and such services must not be in connection with the
offer or sale of securities in a capital-raising transaction.
Other Information Regarding the Plans. The Plans are administered by
CEL-SCI's Compensation Committee ("the Committee"), each member of which is a
director of the Company. The members of the Committee were selected by CEL-SCI's
Board of Directors and serve for a one-year tenure and until their successors
are elected. A member of the Committee may be removed at any time by action of
the Board of Directors. Any vacancies which may occur on the Committee will be
filled by the Board of Directors. The Committee is vested with the authority to
interpret the provisions of the Plans and supervise the administration of the
Plans. In addition, the Committee is empowered to select those persons to whom
shares or options are to be granted, to determine the number of shares subject
to each grant of a stock bonus or an option and to determine when, and upon what
conditions, shares or options granted under the Plans will vest or otherwise be
subject to forfeiture and cancellation.
In the discretion of the Committee, any option granted pursuant to the
Plans may include installment exercise terms such that the option becomes fully
exercisable in a series of cumulating portions. The Committee may also
accelerate the date upon which any option (or any part of any options) is first
exercisable. Any shares issued pursuant to the Stock Bonus Plan and any options
granted pursuant to the Incentive Stock Option Plan or the Non-Qualified Stock
Option Plan will be forfeited if the "vesting" schedule established by the
Committee administering the Plan at the time of the grant is not met. For this
purpose, vesting means the period during which the employee must remain an
employee of CEL-SCI or the period of time a non-employee must provide services
to CEL-SCI. At the time an employee ceases working for CEL-SCI (or at the time a
non-employee ceases to perform services for CEL-SCI), any shares or options not
fully vested will be forfeited and cancelled. At the discretion of the Committee
payment for the shares of Common Stock underlying options may be paid through
the delivery of shares of CEL-SCI's Common Stock having an aggregate fair market
value equal to the option price, provided such shares have been owned by the
option holder for at least one year prior to such exercise. A combination of
cash and shares of Common Stock may also be permitted at the discretion of the
Committee.
Options are generally non-transferable except upon death of the option
holder. Shares issued pursuant to the Stock Bonus Plan will generally not be
transferable until the person receiving the shares satisfies the vesting
requirements imposed by the Committee when the shares were issued.
The Board of Directors of CEL-SCI may at any time, and from time to time,
amend, terminate, or suspend one or more of the Plans in any manner they deem
appropriate, provided that such amendment, termination or suspension will not
adversely affect rights or obligations with respect to shares or options
48
previously granted. The Board of Directors may not, without shareholder
approval: make any amendment which would materially modify the eligibility
requirements for the Plans; increase or decrease the total number of shares of
Common Stock which may be issued pursuant to the Plans except in the case of a
reclassification of CEL-SCI's capital stock or a consolidation or merger of
CEL-SCI; reduce the minimum option price per share; extend the period for
granting options; or materially increase in any other way the benefits accruing
to employees who are eligible to participate in the Plans.
Summary. The following sets forth certain information, as of September 30,
2005, concerning the stock options and stock bonuses granted by CEL-SCI. Each
option represents the right to purchase one share of CEL-SCI's common stock.
Total Shares
Shares Reserved for Shares Remaining
Reserved Outstanding Issued as Options/Shares
Name of Plan Under Plans Options Stock Bonus Under Plans
- ------------ ----------- ----------- ----------- --------------
Incentive Stock Option
Plans 6,100,000 3,972,633 N/A 1,999,115
Non-Qualified Stock
Option Plans 9,760,000 6,215,363 N/A 2,018,005
Stock Bonus Plans 3,940,000 N/A 1,442,000 1,498,000
Of the shares issued pursuant to CEL-SCI's Stock Bonus Plans 704,884
shares were issued as part of CEL-SCI's contribution to its 401(k) plan.
The following table shows the weighted average exercise price of the
outstanding options granted pursuant to the Company's Incentive and
Non-Qualified Stock Option Plans as of September 30, 2005, CEL-SCI's most recent
fiscal year end. CEL-SCI's Incentive and Non-Qualified Stock Option Plans have
been approved by CEL-SCI's shareholders.
Number of Securities
Number Remaining Available
of Securities For Future Issuance
to be Issued Weighted-Average Under Equity
Upon Exercise Exercise Price of Compensation Plans,
of Outstanding of Outstanding Excluding Securities
Plan category Options Options Reflected in Column (a)
- -------------------------------------------------------------------------------------------
(a)
Incentive Stock Option Plans 3,972,633 $0.67 1,999,115
Non-Qualified Stock Option Plans 6,215,363 $0.66 2,018,005
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The following table sets forth, as of February 28, 2006, information with
respect to the only persons owning beneficially 5% or more of the outstanding
Common Stock and the number and percentage of outstanding shares owned by each
director and officer and by the officers and directors as a group. Unless
otherwise indicated, each owner has sole voting and investment powers over his
shares of Common Stock.
49
Name and Address Number of Shares (1) Percent of Class (3)
- ---------------- ---------------- ----------------
Maximilian de Clara 1,349,742 1.7%
Bergstrasse 79
6078 Lungern,
Obwalden, Switzerland
Geert R. Kersten 6,094,963 7.4%
8229 Boone Blvd., Suite 802
Vienna, VA 22182
Patricia B. Prichep 1,602,619 2.0%
8229 Boone Blvd., Suite 802
Vienna, VA 22182
Eyal Talor, Ph.D. 1,166,692 1.5%
8229 Boone Blvd., Suite 802
Vienna, VA 22182
Daniel H. Zimmerman, Ph.D. 1,192,008 1.5%
8229 Boone Blvd., Suite 802
Vienna, VA 22182
John Cipriano 102,212 0.1%
8229 Boone Blvd., Suite 802
Vienna, VA 22182
Alexander G. Esterhazy 181,666 0.2%
20 Chemin du Pre-Poiset
CH- 1253 Vandoeuvres
Geneve, Switzerland
C. Richard Kinsolving 410,757 0.5%
P.O. Box 20193
Bradenton, FL 34204-0193
Peter R. Young, Ph.D. 182,934 0.2%
1247 Dodgeton Drive
Frisco, TX 75034-1432
All Officers and Directors 12,283,593 14.2%
as a Group (9 persons)
* Less than 1%
(1) Includes shares issuable prior to June 30, 2006 upon the exercise of
options or warrants granted to the following persons:
50
Options or Warrants Exercisable
Name Prior to June 30, 2006
---- -------------------------------
Maximilian de Clara 1,131,665
Geert R. Kersten 3,424,667
Patricia B. Prichep 1,078,167
Eyal Talor, Ph.D. 737,999
Daniel H. Zimmerman, Ph.D. 741,667
John Cipriano 73,334
Alexander G. Esterhazy 181,666
C. Richard Kinsolving, Ph.D. 341,667
Peter R. Young, Ph.D. 168,333
(2) Amount includes shares held in trust for the benefit of Mr. Kersten's minor
children. Geert R. Kersten is the stepson of Maximilian de Clara.
(3) Amount includes shares referred to in (1) above but excludes shares which
may be issued upon the exercise or conversion of other options, warrants
and other convertible securities previously issued by CEL-SCI.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- --------------------------------------------------------
None.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
- ------------------------------------------------
Deloitte & Touche LLP served as CEL-SCI's auditors for the years ended
September 30, 2004 and 2003. The following table shows the aggregate fees billed
to CEL-SCI for these years by Deloitte & Touche LLP:
Year Ended September 30,
2005 2004
---- ----
Audit Fees $124,388 $131,000
Audit-Related Fees 24,500 91,787
Financial Information Systems -- --
Design and Implementation Fees -- --
Tax Fees -- --
All Other Fees -- --
Audit fees represent amounts billed for professional services rendered for
the audit of the CEL-SCI's annual financial statements and the reviews of the
financials statements included in CEL-SCI's 10-Q reports for the fiscal year.
Audit Related Fees represent amounts charged for reviewing various registration
statements filed with the SEC by CEL-SCI during the year as well as the
successor auditor review work. Before Deloitte & Touche LLP was engaged by
CEL-SCI to render audit or non-audit services, the engagement was approved by
CEL-SCI's audit committee.
51
BDO Seidman, LLP served as CEL-SCI's auditors for the year ended September
30, 2005. The following table shows the aggregate fees billed to CEL-SCI during
this year by BDO Seidman, LLP:
Year Ended September 30, 2005
Audit Fees $53,500
Audit-Related Fees 9,773
Financial Information Systems --
Design and Implementation Fees --
Tax Fees --
All Other Fees --
Audit fees represent amounts billed for professional services rendered for
the audit of the CEL-SCI's annual financial statements and the reviews of the
financials statements included in CEL-SCI's 10-Q reports for the fiscal year.
Audit Related Fees represent amounts charged for acceptance procedures and
services performed concerning a financing. Before BDO Seidman, LLP was engaged
by CEL-SCI to render audit or non-audit services, the engagement was approved by
CEL-SCI's audit committee. CEL-SCI's Board of Directors is of the opinion that
the Audit Related Fees charged by BDO Seidman, LLP are consistent with BDO
Seidman, LLP maintaining its independence from CEL-SCI.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
- --------------------------------------------------------------------------
(a) See the Financial Statements attached to this Report.
(b) Exhibits Page Number
-------- -----------
3(a) Articles of Incorporation Incorporated by reference to Exhibit
3(a) of CEL-SCI's combined Registration
Statement on Form S-1 and Post-Effective
Amendment ("Registration Statement"),
Registration Nos. 2-85547-D and 33-7531.
(b) Amended Articles Incorporated by reference to Exhibit
3(a) of CEL-SCI's Registration Statement
on Form S-1, Registration Nos. 2-85547-D
and 33-7531.
52
(c) Amended Articles (Name Filed as Exhibit 3(c) to CEL-SCI's
change only) Registration Statement on Form S-1
Registration Statement (No. 33-34878).
(d) Bylaws Incorporated by reference to Exhibit
3(b) of CEL-SCI's Registration
Statement on Form S-1, Registration No.
33-7531.
10(d) Employment Agreement with Incorporated by reference to Exhibit
Maximilian de Clara 10(d) filed with CEL-SCI's 10-K Report
for the year ended September 30, 2004
10(e) Employment Agreement with Incorporated by reference to Exhibit
Geert Kersten 10(e) of CEL-SCI's Registration
Statement on Form S-3 (Commission File
#106879).
10(q) Common Stock Purchase Agreement Incorporated by reference to Exhibit
with Rubicon Group Ltd. 10(q) to CEL-SCI's Registration
statement on Form S-1 (Commission File
No. 333-109070).
10(r) Stock Purchase Warrant issued to Incorporated by reference to Exhibit
Rubicon Group Ltd. 10(r) to CEL-SCI's Registration
statement on Form S-1 (Commission File
No. 333-109070).
10(w) Master Production Agreement Incorporated by reference to Exhibit
between Company and Bio 10(w) of CEL-SCI's annual report on Form
Science Contract Production 10-K for the year ended September
Corp. 30, 2003.
10(x) Distribution and Royalty Incorporated by reference to Exhibit
Agreement with Eastern Biotech 10(x) to Amendment No. 2 to CEL-SCI's
Registration statement on Form S-3
(Commission File No. 333-106879).
23 (a) Consent of Deloitte & Touche LLP -------------------------------
23(b) Consent of BDO Seidman, LLP
31 Rule 13a-14(a) Certifications
-------------------------------
32 Section 1350 Certifications
-------------------------------
(c) No financial statement schedules are filed with this report.
(d) During the three months ended September 30, 2005 the Company filed the
following reports on Form 8-K:
Date Filed Disclosure Item
---------- ---------------
7-19-05 Sale of securities in a private placement.
53
CEL-SCI CORPORATION
Consolidated Financial Statements for the Years
Ended September 30, 2005, 2004 (as restated), and 2003 (as
restated), and
Reports of Independent Registered Public Accounting Firms
CEL-SCI CORPORATION
TABLE OF CONTENTS
Page
----
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM F-2
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM F-3
CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS
ENDED SEPTEMBER 30, 2005, 2004 (AS RESTATED), AND 2003 (AS RESTATED):
Consolidated Balance Sheets F-4
Consolidated Statements of Operations F-5
Consolidated Statements of Stockholders' Equity F-6 - F-7
Consolidated Statements of Cash Flows F-8 - F-11
Notes to Consolidated Financial Statements F-12 - F-44
F - 1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
CEL-SCI Corporation
Vienna, Virginia
We have audited the accompanying consolidated balance sheet of CEL-SCI
Corporation as of September 30, 2005 and the related consolidated statements of
operations, stockholders' equity, and cash flows for the year then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of CEL-SCI Corporation
at December 31, 2005, and the results of its operations and its cash flows for
the year ended December 31, 2005, in conformity with accounting principles
generally accepted in the United States of America.
/s/ BDO SEIDMAN LLP
Bethesda, Maryland
April 6, 2006
F - 2
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
CEL-SCI Corporation
Vienna, Virginia
We have audited the accompanying consolidated balance sheet of CEL-SCI
Corporation and subsidiary (the "Company") as of September 30, 2004, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for the years ended September 30, 2004 and 2003. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company as of September 30,
2004, and the results of its operations and its cash flows for the years ended
September 30, 2004 and 2003, in conformity with accounting principles generally
accepted in the United States of America.
As discussed in Note 2 to the consolidated financial statements, the 2004 and
2003 consolidated financial statements have been restated.
/s/ DELOITTE & TOUCHE LLP
McLean, Virginia
January 6, 2005 (April 21, 2006 as to the effects of the restatement discussed
in Note 2)
F - 3
CEL-SCI CORPORATION
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2005 AND 2004
- ---------------------------------------------------------------------------
ASSETS 2005 2004
(as restated,
see Note 2)
CURRENT ASSETS:
Cash and cash equivalents $ 1,957,614 $ 4,263,631
Interest and other receivables 21,164 21,256
Prepaid expenses 432,652 508,597
Deposits - 14,828
------------- -------------
Total current assets 2,411,430 4,808,312
RESEARCH AND OFFICE EQUIPMENT--Less
accumulated depreciation of $1,690,788
and $1,651,759 181,541 233,612
PATENT COSTS--Less accumulated
amortization of $816,169 and $745,321 484,553 471,886
DEPOSITS 14,828 -
------------- -------------
$ 3,092,352 $ 5,513,810
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 74,354 $ 143,300
Accrued expenses 74,619 64,360
Due to employees 22,880 5,320
Deposits held - 3,000
Derivative instruments - current portion 1,280 -
------------- -------------
Total current liabilities 173,133 215,980
Derivative instruments - noncurrent
portion 811,180 1,175,488
Deposits held 3,000 -
------------- -------------
Total liabilities 987,313 1,391,468
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value--authorized,
200,000,000 shares; issued and
outstanding, 74,494,206 and 72,147,367
shares at September 30, 2005 and 2004,
respectively 744,942 721,474
Unearned compensation - (14,237)
Additional paid-in capital 100,359,296 99,374,697
Accumulated deficit (98,999,199) (95,959,592)
------------- -------------
Total stockholders' equity 2,105,039 4,122,342
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 3,092,352 $ 5,513,810
============= =============
See notes to consolidated financial statements.
F-4
CEL-SCI CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED SEPTEMBER 30, 2005, 2004, AND
2003
- --------------------------------------------------------------------------------
2005 2004 2003
(as restated, (as restated,
see Note 2) see Note 2)
---------- ------------- ------------
GRANT REVENUE AND OTHER $ 269,925 $ 325,479 $ 318,304
OPERATING EXPENSES:
Research and development (excluding
R&D depreciation of $96,442, $110,297
and $115,420 respectively,
included below) 2,229,729 1,941,630 1,915,501
Depreciation and amortization 190,420 198,269 199,117
General and administrative 1,930,543 2,310,279 2,287,019
------------ ----------- -----------
Total operating expenses 4,350,692 4,450,178 4,401,637
------------ ------------ ------------
NET OPERATING LOSS (4,080,767) (4,124,699) (4,083,333)
GAIN (LOSS) ON DERIVATIVE INSTRUMENTS 363,028 1,174,660 (2,319,005)
OTHER INCOME 625,472 - -
OTHER COSTS OF FINANCING - - (270,664)
INTEREST INCOME 52,660 51,817 52,502
INTEREST EXPENSE - (53,855) (1,365,675)
----------- ----------- -----------
NET LOSS (3,039,607) (2,952,077) (7,986,175)
============ ============ ===========
NET LOSS PER COMMON SHARE
BASIC $ (0.04) $ (0.04) $ (0.16)
DILUTED $ (0.05) $ (0.06) $ (0.19)
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING
BASIC 72,703,395 67,273,133 50,961,457
DILUTED 73,581,925 68,924,099 51,127,439
See notes to consolidated financial statements.
F-5
CEL-SCI CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(DEFICIT)
YEARS ENDED SEPTEMBER 30, 2005, 2004, AND
2003
- -----------------------------------------------------------------------------------------------------------------------------------
Preferred Additional
Series E Stock Common Stock Paid-In Unearned Accumulated
Shares Amount Shares Amount Capital Compensation Deficit Total
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE, October 1, 2002, as
previously reported 1,192 $ 12 37,255,142 $ 372,551 $80,871,758 $ - $(80,182,150) $1,062,171
Prior period corrections
(see Note 2) (1,192) (12) 1,432,413 (4,839,190) (3,406,789)
-------------- ----------- ---------- --------- ----------- ---------- ------------- -----------
BALANCE, October 1, 2002
(as restated, see Note 2) - - 37,255,142 372,551 82,304,171 - (85,021,340) (2,344,618)
Exercise of warrants (as
restated, see Note 2) 1,435,500 14,355 1,043,327 1,057,682
Stock issued to employees
for service 4,409,932 44,099 920,117 964,216
Stock options issued to
nonemployees for service 6,727 6,727
Stock issued to nonemployees
for service 559,089 5,591 123,100 128,691
Conversion of Preferred
Series E Stock to common stock
(as restated, see Note 2) 1,018,439 10,184 282,339 292,523
Dividends on Preferred Series
E Stock paid in common stock
(as restated, see Note 2) 97,389 974 98,650 99,624
Conversion of Series F convertible
debt (as restated, see Note 2) 979,670 9,797 206,525 216,322
Interest on Series F convertible
debt paid in common stock (as
restated, see Note 2) 22,608 226 844 1,070
Conversion of Series G
convertible debt (as restated,
see Note 2) 8,076,420 80,764 2,119,830 2,200,594
Interest on Series G convertible
debt paid in common stock (as
restated, see Note 2) 109,428 1,094 31,677 32,771
Conversion of Series H
convertible debt (as
restated, see Note 2) 3,003,929 30,039 2,562,145 2,592,184
Interest on Series H
convertible debt paid in
common stock (as restated,
see Note 2) 80,010 800 56,988 57,788
Costs for equity related
transactions (40,600) (40,600)
Sale of common stock to
Eastern Biotech (as
restated, see Note 2) 1,100,000 11,000 10,306 21,306
Exercise of stock options 6,667 67 2,133 2,200
401(k) contributions paid
in common stock 134,336 1,344 45,707 47,051
Issuance of common stock
for equity line of credit
(as restated, see Note 2) 2,877,786 28,778 842,687 871,465
Net loss (as restated,
see Note 2) (7,986,175) (7,986,175)
-------------- ----------- ---------- --------- ----------- ---------- ------------- -----------
BALANCE, SEPTEMBER 30, 2003
(as restated, see Note 2) - $ - 61,166,345 $ 611,663 $90,616,673 $ - $(93,007,515)$(1,779,179)
See notes to consolidated financial statements.
F-6
CEL-SCI CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED SEPTEMBER 30, 2005, 2004, AND
2003
- -----------------------------------------------------------------------------------------------------------------------------------
Preferred Additional
Series E Stock Common Stock Paid-In Unearned Accumulated
Shares Amount Shares Amount Capital Compensation Deficit Total
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE, SEPTEMBER 30, 2003
(as restated, see Note 2) - $ - 61,166,345 $ 611,663 $90,616,673 $ - $(93,007,515)$(1,779,179)
Exercise of warrants (as
restated, see Note 2) 614,520 6,145 893,277 899,422
Stock issued to employees
for service 180,959 1,810 169,630 (14,237) 157,203
Stock issued to nonemployees
for service 7,414 74 7,859 7,933
Conversion of Series H
convertible debt (as
restated, see Note 2) 179,436 1,794 184,819 186,613
Interest on Series H
convertible debt paid in
common stock (as restated,
see Note 2) 3,210 32 3,306 3,338
Exercise of stock options 213,503 2,135 103,731 105,866
Modification of employee
stock options 7,597 7,597
401(k) contributions paid
in common stock 72,495 725 51,751 52,476
Issuance of common stock
for equity line of credit
(as restated, see Note 2) 307,082 3,071 341,994 345,065
Sale of common stock (as
restated, see Note 2) 9,402,403 94,025 6,899,679 6,993,704
Costs for equity related
transactions (591,611) (591,611)
Reclassification of derivative
instruments to equity (as
restated, see Note 2) 685,992 685,992
Net loss (as restated,
see Note 2) (2,952,077) (2,952,077)
-------------- ----------- ---------- --------- ----------- ---------- ------------- -----------
BALANCE, SEPTEMBER 30, 2004
(as restated, see Note 2) - - 72,147,367 721,474 99,374,697 (14,237) (95,959,592) 4,122,342
Stock issued to nonemployees
for service 8,687 86 4,084 4,170
Exercise of stock options 200,669 2,007 47,778 49,785
Issuance of stock options
to nonemployees 7,972 7,972
401(k) contributions paid
in common stock 144,469 1,445 77,423 78,868
Issuance of common stock
for equity line of credit 743,014 7,430 359,842 367,272
Expense of unearned compensation 14,237 14,237
Private placement 1,250,000 12,500 487,500 500,000
Net loss (3,039,607) (3,039,607)
-------------- ----------- ---------- --------- ----------- ---------- ------------- -----------
BALANCE, SEPTEMBER 30, 2005 - $ - 74,494,206 $ 744,942 $100,359,296 $ - $(98,999,199) $2,150,039
============== =========== ========== ========= ============ ========== ============= ===========
See notes to consolidated financial statements.
F-7
CEL-SCI CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED SEPTEMBER 30, 2005, 2004, AND 2003
- --------------------------------------------------------------------------------
2005 2004 2003
(as (as
restated, restated,
see Note 2) see Note 2)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (3,039,607) $ (2,952,077) $ (7,986,175)
Adjustments to reconcile net
loss to net cash used for
operating activities:
Depreciation and amortization 190,420 198,269 199,117
Issuance of stock options to
nonemployees for services 7,972 - 6,727
Issuance of common stock for services 4,170 165,136 1,092,907
Modification of stock options - 7,597 -
Common stock contributed to 401(k) plan 78,868 52,476 47,051
Decrease in unearned compensation 14,237 - -
Impairment loss on abandonment of patents 3,716 43,351 9,828
(Gain) loss on retired equipment 1,806 - (5,913)
Gain on sale of equipment - - (26,463)
Amortization of deferred financing costs - 16,243 385,170
Amortization of discount on note payable - - 37,500
Accretion of Series E Stock to
redemption value - - 98,791
Debt issuance discount charged to
interest expense - - 699,802
Amortization of discount on
convertible note - 22,082 62,025
(Gain) loss on derivative instruments (363,028) (1,174,660) 2,319,005
Other costs of financing, noncash
expenses - - 270,664
Changes in assets and liabilities:
Decrease (increase) in interest
and other receivables 92 25,795 (15,574)
Decrease (increase) in prepaid
expenses 75,945 (151,066) 87,752
Decrease in accounts payable (71,782) (385,952) (65,548)
Increase (decrease) in accrued
expenses 10,259 (30,055) 59,195
Increase (decrease) in due to
employees 17,560 (221,795) 197,523
Increase in deposits held - - 3,000
Decrease in deferred rent - (5,540) (15,192)
------------- ------------ ------------
Net cash used for operating activities (3,069,372) (4,390,196) (2,538,808)
------------- ------------ ------------
CASH FLOWS USED FOR INVESTING ACTIVITIES:
Proceeds from disposal of equipment - - 7,812
Purchases of equipment (65,736) (52,175) (6,905)
Expenditures for patent costs (87,966) (121,430) (93,509)
------------- ------------ ------------
Net cash used for investing activities (153,702) (173,605) (92,602)
------------- ------------ ------------
(Continued)
See notes to consolidated financial statements.
F-8
CEL-SCI CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED SEPTEMBER 30, 2005, 2004, AND 2003
- --------------------------------------------------------------------------------
2005 2004 2003
(as (as
restated, restated,
see Note 2) see Note 2)
CASH FLOWS PROVIDED BY
FINANCING ACTIVITIES:
Proceeds from issuance of common stock 500,000 7,799,970 500,000
Proceeds from exercise of warrants - 291,222 269,382
Draw-downs on equity line of credit 367,272 340,000 725,000
Proceeds from exercise of stock options 49,785 105,866 2,200
Proceeds from short-term loan - - 25,000
Payment on short-term loan - - (25,000)
Payments on notes payable - (871,322) (276,122)
Proceeds from convertible debt - - 1,350,000
Costs for convertible debt transactions - - (224,419)
Costs for equity related transactions - (591,611) (40,600)
------------- ------------ -----------
Net cash provided by financing activities 917,057 7,074,125 2,305,441
------------- ------------ ------------
NET (DECREASE) INCREASE IN CASH (2,306,017) 2,510,324 (325,969)
CASH, BEGINNING OF YEAR 4,263,631 1,753,307 2,079,276
------------- ------------ ------------
CASH, END OF YEAR $ 1,957,614 $ 4,263,631 $1,753,307
============= ============ =============
(continued)
See notes to consolidated financial statements.
F-9
CEL-SCI CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED SEPTEMBER 30, 2005, 2004, AND 2003
- --------------------------------------------------------------------------------
2005 2004 2003
(as (as
restated, restated,
see Note 2) see Note 2)
----------- ------------ -------------
CONVERSION OF PREFERRED STOCK INTO COMMON STOCK:
Decrease in preferred stock $ - $ - $ (292,523)
Increase in common stock - - 10,184
Increase in additional paid-in capital - - 282,339
----------- ------------ -------------
$ - $ - $ -
=========== ============ =============
COMMON STOCK IN LIEU OF CASH DIVIDENDS AND INTEREST
ON PREFERRED STOCK:
Decrease in accrued liabilities $ - $ - $ (99,625)
Increase in common stock - - 974
Increase in additional paid-in capital - - 98,651
----------- ------------ -------------
$ - $ - $ -
=========== ============ =============
CONVERSION OF CONVERTIBLE DEBT INTO COMMON STOCK:
Decrease in convertible debt $ - $ (186,613) $(5,009,100)
Increase in common stock - 1,794 120,600
Increase in additional paid-in capital - 184,819 4,888,500
----------- ------------ -------------
$ - $ - $ -
=========== ============ =============
CONVERSION OF INTEREST ON CONVERTIBLE DEBT
INTO COMMON STOCK:
Decrease in accrued liabilities $ - $ (3,338) $ (91,629)
Increase in common stock - 32 2,120
Increase in additional paid-in capital - 3,306 89,509
----------- ------------ -------------
$ - $ - $ -
=========== ============ =============
MODIFICATION OF CAMBREX NOTE:
Increase in derivative instruments $ - $ - $ 84,107
Decrease in Cambrex note - - (84,107)
----------- ------------ -------------
$ - $ - $ -
=========== ============ =============
EXERCISE OF WARRANTS
Decrease in derivative instruments $ - $ (77,900) $ (788,300)
Increase in additional paid-in capital - 77,900 788,300
----------- ------------ -------------
$ - $ - $ -
=========== ============ =============
SETTLEMENT OF DERIVATIVE INSTRUMENTS ON DRAW DOWNS
OF EQUITY LINES OF CREDIT
Decrease in derivative instruments $ - $ (5,065) $ (146,465)
Increase in additional paid-in capital - 5,065 146,465
----------- ------------ -------------
$ - $ - $ -
=========== ============ =============
See notes to consolidated financial statements. (continued)
F-10
See notes to consolidated financial statements.
CEL-SCI CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED SEPTEMBER 30, 2005, 2004, AND 2003
- --------------------------------------------------------------------------------
SUPPLEMENTAL INFORMATION ON NONCASH TRANSACTIONS 2005 2004 2003
(as (as
restated, restated,
see Note 2) see Note 2)
------------ --------------------------
ISSUANCE OF WARRANTS ON SALE OF COMMON STOCK
Increase in derivative instruments $ - $ 806,266 478,694
Decrease in additional paid-in capital - (806,266) (478,694)
------------ ------------ ------------
$ - $ - $ -
============ ============ ============
EQUIPMENT COSTS INCLUDED IN ACCOUNTS PAYABLE:
Increase in research and office equipment $ (268) $ (31,728) $ (157)
Increase in accounts payable 268 31,728 157
------------ ------------ ------------
$ - $ - $ -
============ ============ ============
PATENT COSTS INCLUDED IN ACCOUNTS PAYABLE:
Increase in patent costs $ (2,568) $ (15,539) $ (11,659)
Increase in accounts payable 2,568 15,539 11,659
------------ ------------ ------------
$ - $ - $ -
============ ============ ============
SURRENDER OF DEPOSIT AND SALE OF EQUIPMENT TO
REDUCE NOTE PAYABLE:
Decrease in deposits $ - $ - $ 125,000
Decrease in research equipment, net - - 100,000
Decrease in notes payable - - (225,000)
------------ ------------ ------------
$ - $ - $ -
============ ==========================
CONVERSION OF ACCOUNTS PAYABLE INTO NOTES PAYABLE:
Decrease in accounts payable $ - $ - $ (199,928)
Increase in notes payable - - 199,928
------------ ------------ ------------
$ - $ - $ -
============ ============ ============
RECLASS OF INVENTORY TO EQUIPMENT:
Decrease in inventory $ - $ - $ 6,839
Increase in research equipment - - (6,839)
------------ ------------ ------------
$ - $ - $ -
============ ============ ============
CASHLESS EXERCISE OF WARRANTS:
Decrease in derivative instruments $ - $ (530,300) $ -
Increase in common stock - 3,698 -
Increase in additional paid-in capital - 526,602 -
------------ ------------ ------------
$ - $ - $ -
============ ============ ============
RECLASSIFICATION OF DERIVATIVE INSTRUMENTS
Decrease in derivative instruments $ - $ (685,992) $ -
Increase in additional paid-in capital - 685,992 -
------------ ------------ ------------
$ - $ - $ -
============ ============ ============
See notes to consolidated financial statements.
F-11
CEL-SCI CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 2005, 2004 and 2003
- --------------------------------------------------------------------------------
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CEL-SCI Corporation (the "Company") was incorporated on March 22, 1983, in
the state of Colorado, to finance research and development in biomedical
science and ultimately to engage in marketing and selling products.
Significant accounting policies are as follows:
a. Principles of Consolidation--The consolidated financial statements
include the accounts of the Company and its wholly owned subsidiary,
Viral Technologies, Inc. (VTI). VTI discontinued its research efforts
in 2000 due to a lack of government funding. All significant
intercompany transactions have been eliminated upon consolidation.
b. Cash and Cash Equivalents--For purposes of the statements of cash
flows, cash and cash equivalents consists principally of unrestricted
cash on deposit and short-term money market funds. The Company
considers all highly liquid investments with a maturity when purchased
of less than three months, and those investments that are readily
convertible to known amounts of cash and are so close to maturity that
they bear no interest rate risk, as cash and cash equivalents.
c. 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. For the years ended September 30, 2005, 2004
and 2003 there were no realized or unrealized gains or losses.
d. Prepaid Expenses--The majority of prepaid expenses consist of
manufacturing production advances and bulk purchases of laboratory
supplies to be consumed in the manufacturing of the Company's product
for clinical studies. During the year ended September 30, 2004,
$43,184 in expired (but still useable) inventory was returned to the
vendor and replaced by the vendor at no cost.
e. 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 which do not
extend the life of the asset are expensed when incurred.
f. 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
F-12
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 is the difference between the
estimated fair value of the asset and its carrying value. During the
years ended September 30, 2005, 2004 and 2003, the Company recorded
patent impairment charges of $3,716, $43,351 and $9,828, respectively,
for the net book value of patents abandoned during the year. These
amounts are included in general and administrative expenses.
g. Derivative Instruments--The Company enters into financing arrangements
that consist of freestanding derivative instruments or are hybrid
instruments that contain embedded derivative features. The Company
accounts for these arrangement in accordance with Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities", ("SFAS No. 133") and Emerging
Issues Task Force Issue No. 00-19, "Accounting for Derivative
Financial Instruments Indexed to, and Potentially Settled in, a
Company's Own Stock", ("EITF 00-19"), as well as related
interpretations of these standards. In accordance with accounting
principles generally accepted in the United States ("GAAP"),
derivative instruments and hybrid instruments are recognized as either
assets or liabilities in the statement of financial position and are
measured at fair value with gains or losses recognized in earnings or
other comprehensive income depending on the nature of the derivative
or hybrid instruments. Embedded derivatives that are not clearly and
closely related to the host contract are bifurcated and recognized at
fair value with changes in fair value recognized as either a gain or
loss in earnings if they can be reliably measured. When the fair value
of embedded derivative features can not be reliably measured, the
Company measures and reports the entire hybrid instrument at fair
value with changes in fair value recognized as either a gain or loss
in earnings. The Company determines the fair value of derivative
instruments and hybrid instruments based on available market data
using appropriate valuation models, giving consideration to all of the
rights and obligations of each instrument and precluding the use the
"blockage" discounts or premiums in determining the fair value of a
large block of financial instruments. Fair value under these
conditions does not necessarily represent fair value determined using
valuation standards that give consideration to blockage discounts and
other factors that may be considered by market participants in
establishing fair value.
h. 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.
i. Research and Development Costs--Research and development expenditures
are expensed as incurred. The Company has an agreement with an
unrelated corporation for the production of Multikine, which is the
Company's only product source. Total research and development costs,
excluding depreciation, were $2,326,171, $2,051,927 and $2,030,921 for
the years ended September 30, 2005, 2004 and 2003.
j. Other Costs of Financing--Other costs of financing represent the
excess fair value of warrants issued in conjunction with financing
arrangements where the warrants are required to be recorded as
derivatives over the proceeds of the financing received at issuance.
F-13
k. Net Loss Per Common Share--Net loss per common share is computed by
dividing the net loss by the weighted average number of common shares
outstanding during the period. Potentially dilutive common stock
equivalents, including convertible preferred stock, convertible debt
and options to purchase common stock, were excluded from the
calculation for all periods presented as they were antidilutive.
l. Income Taxes--Income taxes are accounted for using the asset and
liability method under which deferred tax liabilities or assets are
determined based on the difference between the financial statement and
tax basis of assets and liabilities (i.e., temporary differences) and
are measured at the enacted tax rates. Deferred tax expense is
determined by the change in the liability or asset for deferred taxes.
The difference in the Company's U.S. Federal statutory income tax rate
and the Company's effective tax rate is primarily attributable to the
recording of a valuation allowance due to the uncertainty of the
amount of future tax benefits that will be realized because it is more
likely than not that future taxable income will not be sufficient to
realize such tax benefits.
m. 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. Accounting for derivatives is based upon valuations of
derivative instrument determined using various valuation techniques
including the Black-Scholes and binomial pricing methodologies. The
Company considers such valuations to be significant estimates.
n. Recent Accounting Pronouncements--In November 2004 the Financial
Accounting Standards Board ("FASB") issued Statement of Financial
Accounting Standards ("SFAS") No. 151, "Inventory Costs, an amendment
of Accounting Research Bulletin (ARB) 43, Chapter 4, Inventory
Pricing". This statement amends ARB 43, Chapter 4 "Inventory Pricing",
to clarify accounting for abnormal amounts of idle facility expense,
freight, handling costs and wasted material. SFAS No. 151 requires
that those items be recognized as current-period charges in all
circumstances. SFAS No. 151 is effective for fiscal years beginning
after June 15, 2005. The Company does not believe that the adoption of
SFAS No. 151 will have a material effect on its financial position,
results of operations or cash flows.
In December 2004 the FASB issued SFAS No. 123R, "Share-Based Payment".
SFAS No. 123R requires companies to recognize compensation expense in
an amount equal to the fair value of the share-based payment (stock
options and restricted stock) issued to employees. 123R applies to all
transactions involving issuance of equity by a Company in exchange for
goods and services, including transactions with employees. SFAS No.
123R is effective for the first fiscal period in the fiscal year
beginning after June 15, 2005. The Company has not determined the
impact of adopting SFAS No. 123R.
On December 16, 2004, the FASB issued SFAS No. 153, "Exchange of
Nonmonetary Assets", an amendment of Accounting Principles Board
("APB") Opinion No. 29, which differed from the International
Accounting Standards Board's ("IASB") method of accounting for
exchanges of similar productive assets. Statement No. 153 replaces the
exception from fair value measurement in APB No. 29, with a general
exception from fair value measurement for exchanges of non-monetary
assets that do not have commercial substance. The Statement is to be
F-14
applied prospectively and is effective for nonmonetary asset exchanges
occurring in fiscal periods beginning after June 15, 2005. The Company
does not believe that SFAS No. 153 will have a material impact on its
results of operations or cash flows.
In March 2005, the FASB issued FIN No. 47, "Accounting for Conditional
Asset Retirement Obligations - an Interpretation of FASB Statement No.
143". The interpretation clarifies terms used in FASB Statement No.
143 and is effective no later than the end of fiscal periods ending
after December 15, 2005. The Company does not believe that FIN No. 47
will have a material impact on its results of operations or cash
flows.
In February 2006, the FASB issued SFAS No. 155, "Hybrid Instruments".
The statement amends SFAS No. 133 and SFAS No. 140, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities". The statement also resolves issues addressed in
Statement 133 Implementation Issue No. D1, "Application of Statement
133 to Beneficial Interests in Securitized Financial Assets." The
statement: a) permits fair value remeasurement for any hybrid
financial instrument that contains an embedded derivative that
otherwise would require bifurcation, b) clarifies which interest-only
strips and principal-only strips are not subject to the requirements
of SFAS No. 133, c) establishes a requirement to evaluate interests in
securitized financial assets to identify interests that are
freestanding derivatives or that are hybrid financial instruments that
contain an embedded derivative requiring bifurcation, d) clarifies
that concentrations of credit risk in the form of subordination are
not embedded derivatives, and e) amends Statement 140 to eliminate the
prohibition on a qualifying special purpose entity from holding a
derivative financial instrument that pertains to a beneficial interest
other than another derivative financial instrument. CEL-SCI does not
believe that SFAS No. 155 will have a material impact on its results
of operations or cash flows.
o. Stock-Based Compensation-- In October 1996, the FASB issued SFAS No.
123, "Accounting for Stock-Based Compensation". 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 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 SFAS No. 123. 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. The Company has elected to continue to account for its employee
stock-based compensation using the intrinsic value method. 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:
F-15
Year ended September 30,
2005 2004 2003
--------- --------- --------
Net loss:
As reported $ (3,039,607) $ (2,952,077) $ (7,986,175)
Add: Compensation expense for
stock-based performance awards
included in reported net loss,
net of related tax effects - 63,755 48,437
Subtract: Total stock-based
employee compensation expense
determined under fair-value
based method for all awards,
net of related tax effects (575,716) (1,106,271) (1,019,513)
--------------- ------------- ------------
Pro forma net loss $ (3,615,323) $ (3,994,593) (8,957,251)
=============== ============= ============
Net loss per common share:
As reported $ (0.04) $ (0.04) $ (0.16)
Pro forma $ (0.05) $ (0.06) $ (0.18)
The weighted average fair value at the date of grant for options granted
during fiscal years 2005, 2004 and 2003 was $0.48, $0.48, and $0.22 per
option, respectively.
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following assumptions:
2005 2004 2003
---- ---- ----
Expected stock risk volatility 74% 88% 77%
Risk-free interest rate 4.21% 3.13-4.25% 3.12%
Expected life options 5 Years 5 Years 5 Years
Expected dividend yield - - -
The effects of applying SFAS No. 123 in this pro forma disclosure are not
necessarily indicative of the effect on future amounts.
The Company's stock options are not transferable, and the actual value of the
stock options that an employee may realize, if any, will depend on the excess
of the market price on the date of exercise over the exercise price. The
Company has based its assumption for stock price volatility on the variance
of monthly closing prices of the Company's stock. The risk-free rate of
return used for fiscal years 2005 and 2004 equals the yield on five-year
zero-coupon U.S. Treasury issues on the grant date. The risk-free rate of
return used for fiscal year 2003 equals the yield on one to six year
zero-coupon U.S. Treasury issues on the date of grant. No discount was
applied to the value of the grants for non-transferability or risk of
forfeiture.
F-16
2. RESTATEMENT OF FINANCIAL STATEMENTS
Subsequent to the issuance of the Company's September 30, 2004 consolidated
financial statements, the Company determined that it had erroneously
accounted for certain financial instruments, including free-standing and
embedded derivatives within such instruments, issued by the Company from
fiscal year 1992 through November 2003. Specifically, the instruments
erroneously accounted for were: the Series E Preferred Stock, the Cambrex
Convertible Note Payable, Series F, G and H Convertible Debt, the equity line
of credit agreements, as well as Series I and J warrants and various other
warrants. The Company has concluded that these instruments were either
freestanding derivative instruments in their entirety, or contained embedded
derivatives, and should have been accounted for under SFAS No. 133 and EITF
00-19, as well as related interpretations of these standards. All such
derivatives were required to be recognized as either assets or liabilities in
the statement of financial position and measured at fair value in the
statement of operations, unless a scope exception applied. The Company's
assessment of each instrument is as follows:
Series E Convertible Preferred Stock ("Series E Stock") and Series E Callable
and Non-Callable Stock Purchase Warrants -The Company issued Series E
Convertible Preferred Stock, with detachable Series E Callable Stock Purchase
Warrants, and contingently issuable Series E Non-Callable Stock Purchase
Warrants in August 2001, in exchange for shares of common stock and other
warrants. The Series E Stock was originally accounted for at par value as an
equity restructuring. In connection with the restructuring, the Company
determined the total implied value of the equity securities received and
allocated the proceeds between the Series E Stock and Callable Warrants based
on their relative fair values. The Company also calculated a beneficial
conversion discount, which included the fair value of the Non-Callable
Warrants, as they were to be issued on the Automatic Conversion Date. This
discount was accreted to additional paid-in capital over the two-year period
to the Automatic Conversion Date, and was adjusted for conversions of the
Series E Stock to common stock. Periodic accretion was recognized as a deemed
dividend to the holders of the Series E Stock. Dividends, which accrued on
the preferred stock at a rate of 6% per annum, were recorded as additional
paid-in capital.
The Company has now determined that the Series E Stock was a hybrid
instrument that had characteristics of a debt host agreement and contained
embedded derivative features that had characteristics and risks that were not
clearly and closely associated with the debt host. Certain of the embedded
derivatives could not be reliably measured and therefore, the Series E Stock
should have been recorded as a liability at the fair value of the hybrid
instrument with changes in fair value recognized in earnings as either a gain
or loss. The Series E Stock was immediately convertible into a variable
number of shares of common stock at a fixed percentage of stated value. The
fixed percentage doubled after the passage of two years. The Company
determined that the Series E Stock should have been recorded at the fair
value of the common shares into which it was convertible. The Series E Stock
should also have been accreted to the percentage the stock was convertible
into after two years. The accretion and dividends recorded on the stock
should have been recorded as interest expense, consistent with the
classification of a debt host.
The Company has also now determined that the Series E Callable Warrants and
Non-Callable Warrants were freestanding derivative instruments while
outstanding, because the Company was required to maintain an effective
registration statement covering the underlying shares. As freestanding
F-17
derivative instruments, the warrants should have been carried at fair value
with changes in fair value recognized in earnings as either a gain or loss.
Series F, G, and H Convertible Notes and Warrants- The Company issued Series
F, G and H convertible notes and detachable stock purchase warrants in fiscal
years 2002 and 2003. The proceeds from the notes were originally allocated
between the notes and warrants based on the relative fair value of the notes
and the warrants. The fair value of the warrants, as well as the beneficial
conversion feature related to the notes, were recorded as discounts on the
notes and amortized to interest expense over the term of the notes and
accelerated on a pro-rata basis as the notes were converted.
The Company has now determined that each of the Series F, G, and H Notes were
hybrid instruments that had the characteristics of a debt host agreement and
that contained embedded derivative features that should have been bifurcated
and accounted for separately. The Company determined that certain of the
embedded derivatives could not be reliably measured and therefore, the notes
should have been recorded at the fair value of the hybrid instrument as a
derivative liability with changes in fair value recognized in earnings as
either a gain or loss. As the notes were immediately convertible into a
variable number of shares based on a discount applied to the lowest three
trading prices in a set period preceding the date of conversion, the Company
determined that it should have recorded the notes at the fair value of the
common shares into which the notes were convertible. The notes also bore
interest that was convertible into a variable number of common shares at a
fixed percentage. The Company has now determined that it should have accrued
interest on the notes at the fair value of the shares into which the interest
was convertible.
The Company has now determined that the Series F, G and H warrants were
freestanding derivative instruments because exercise of the individual
warrants was required to be settled in registered shares, at issuance the
number of potentially issuable shares of common stock required to satisfy
exercise of the warrants and all other commitments that may require issuance
of common stock was not determinable, and under certain circumstances the
holders could require the Company to settle the warrants in cash. As
freestanding derivative instruments, the warrants should have been carried at
fair value with changes in fair value recognized in earnings as either a gain
or loss.
Cambrex Note - The Company issued a convertible note to Cambrex which was
convertible into a variable number of shares at a fixed percentage discount
in December 2003. The Company had originally recorded a beneficial conversion
feature as a discount on the note, which was amortized to interest expense
over the term of the note and also accelerated on a pro-rata basis as the
note was repaid.
The Company has now determined that the Cambrex note was a hybrid instrument
that had the characteristics of a debt host agreement and that contained an
embedded derivative conversion feature that should have been bifurcated and
accounted for separately as an embedded derivative as it was not clearly and
closely related to the debt host. The conversion feature should have been
carried at fair value with changes in fair value recognized in earnings as
either a gain or loss in earnings.
2001 and 2003 Equity Lines of Credit and Stock Purchase Warrants- In April
2001 and September 2003, the Company entered into two equity lines of credit
F-18
with detachable stock purchase warrants. The lines of credit were originally
accounted for only upon the issuance of common stock by recording shares
issued at at the fair value of the common stock drawn. The warrants were
recorded as additional paid-in capital as a cost of obtaining equity
financing.
The Company has now determined that both equity lines of credit are
freestanding derivative instruments because, under certain conditions, the
Company could be required to compensate the investor for any decreases in the
common stock price during the terms of the agreements. As freestanding
derivative instruments, these equity lines of credit should have been carried
as an asset or liability at fair value with changes in fair value recognized
in earnings as either a gain or loss.
The Company has now determined that the warrants issued with both equity
lines of credit are freestanding derivative instruments. Warrants issued with
the 2001 Equity Line of Credit should have been accounted for as derivative
liabilities because the common shares underlying the warrants are required to
be registered. Warrants issued with the 2003 Equity Line of Credit should
have been accounted for as derivative liabilities because, under certain
conditions, the Company could be required to compensate the investor for any
decreases in the common stock price underlying the warrants during the term
of the agreement.
Series I Warrants - In May 2003, the Company issued Series I stock purchase
warrants in conjunction with the sale of common stock. The proceeds from the
sale of common shares and warrants was originally allocated between the
shares and warrants based on relative fair value, with the value of the
warrants recorded as additional paid-in capital as a cost of obtaining equity
financing.
The Company has now determined that these warrants were freestanding
derivative instruments because exercise of the individual warrants was
required to be settled in registered shares, at issuance the number of
potentially issuable shares of common stock required to satisfy exercise of
the warrants and all other commitments that may require issuance of common
stock was not determinable, and under certain circumstances the holders could
require the Company to settle the warrants in cash. As freestanding
derivative instruments, the warrants should have been carried at fair value
with changes in fair value recognized in earnings as either a gain or loss.
Series J Warrants - In December 2003, the Company issued Series J stock
purchase warrants in conjunction with the sale of common stock. The proceeds
from the sale of common shares and warrants was originally allocated between
the shares and warrants based on relative fair value, with the value of the
warrants recorded as additional paid-in capital as a cost of obtaining equity
financing.
The Company has now determined that the Series J warrants were freestanding
derivative instrument from the date of issuance, December 2003, until the
shares were registered in May 2004, because the warrants were required to be
settled in registered shares.
Other Warrants - The Company issued certain other warrants in connection with
equity financings that closed during fiscal years 1992 through 2001. These
warrants were originally recorded as additional paid-in capital as costs of
obtaining equity funding.
The Company has now determined that these warrants were freestanding
derivative instruments during the period August 16, 2001 through October 2,
2003, because as of August 16, 2001 there were not sufficient authorized and
F-19
unissued shares of common stock to satisfy exercise of the warrants, as the
number of shares that could potentially be issued to satisfy all other
commitments that may require the issuance of common stock was not
determinable. As freestanding derivative instruments, the warrants should
have been recorded at fair value with changes in fair value recognized in
earnings as either a gain or loss in earnings. Warrants still outstanding
were reclassified to equity on October 2, 2003, as there were sufficient
authorized and unissued shares to satisfy all other commitments that may
require the issuance of common stock at that date.
As a result, the accompanying consolidated financial statements as of
September 30, 2004 and for the years ended September 30, 2004 and 2003 have
been restated from amounts previously reported to correct the accounting for
these transactions. The following is a summary of the effects of the
restatement on the Company's consolidated financial statements.
As previously
reported As restated
-------------- -----------
Year ended September 30, 2004
- ---------------------------------------
Gain (loss) on derivative instruments $ - $ 1,174,660
Interest expense (126,840) (53,855)
Net loss (4,199,722) (2,952,077)
Net loss attributable to common
shareholders (4,199,722) (2,952,077)
Loss per common share - basic (0.06) (0.04)
Loss per common share - diluted (0.06) (0.06)
Year ended September 30, 2003
- ---------------------------------------
Gain (loss) on derivative instruments $ - $ (2,319,005)
Other costs of financing - (270,664)
Interest expense (2,340,667) (1,365,675)
Net loss (6,371,498) (7,986,175)
Accrued dividends on preferred stock (32,101) -
Accretion of beneficial conversion
feature on preferred stock (76,720) -
Net loss attributable to common
shareholders (6,480,319) (7,986,175)
Loss per common share - basic (0.13) (0.16)
Loss per common share - diluted (0.13) (0.19)
As of September 30, 2004
- ---------------------------------------
Derivative instruments - noncurrent $ - $ 1,175,488
Total liabilities 215,981 1,391,468
Additional paid-in capital 95,343,962 99,374,697
Accumulated deficit (90,753,370) (95,959,592)
Total stockholders' equity 5,297,829 4,122,342
Total liabilities and stockholders' equity 5,513,810 5,513,810
F-20
As previously
reported As restated
-------------- -----------
Year ended September 30, 2004
- ---------------------------------------
Cash flow from operating activities
Net loss $ (4,199,722) $ (2,952,077)
Adjustments to reconcile net loss
to net cash used for operating
activities:
Repricing of stock options - 7,597
Amortization of discount on
note payable 30,916 -
Amortization of discount on
convertible note 67,118 22,082
(Gain) loss on derivative
instruments - (1,174,660)
Changes in assets and liabilities:
Increase (decrease) in accrued expenses (33,022) (30,055)
Net cash used for operating activities (4,397,793) (4,390,196)
Cash flow from financing activities
activities
Proceeds from exercise of stock options 113,463 105,866
Net cash provided by financing activities 7,081,722 7,074,125
Year ended September 30, 2003
- ---------------------------------------
Cash flow from operating activities
Net loss $ (6,371,498) $ (7,986,175)
Adjustments to reconcile net loss
to net cash used for operating
activities:
Amortization of discount on note
payable 113,300 37,500
Accretion of Series E Stock to
redemption value - 98,791
Debt issuance discount charged to
interest expense - 699,802
Amortization of discount on
convertible note 1,738,241 62,025
(Gain) loss on derivative
instruments - 2,319,005
Other costs of financing, noncash
expenses - 270,664
Changes in assets and liabilities:
Decrease in accounts payable (65,548) (65,548)
Increase (decrease) in accrued expenses 80,764 59,195
The effects of the restatement on the accounting for certain noncash
transactions are reflected in the supplementary information on noncash
transactions in the accompanying consolidated statements of cash flows.
F-21
3. OPERATIONS AND FINANCING
The Company has incurred significant costs since its inception in connection
with the acquisition of certain patented and unpatented proprietary
technology and know-how relating to the human immunological defense system,
patent applications, research and development, administrative costs,
construction of laboratory facilities, and clinical trials. The Company has
funded such costs with proceeds realized from the public and private sale of
its common and preferred stock. The Company will be required to raise
additional capital or find additional long-term financing in order to
continue with its research efforts. The Company expects to receive additional
funding from private investors subsequent to September 30, 2005; however,
there can be no assurances that the Company will be able to raise additional
capital or obtain additional financing. 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 year 2003, the Company reduced its
discretionary expenditures. Fiscal year 2005 expenditures remained in line
with fiscal year 2004 expenditures. If necessary, the Company plans to
further reduce discretionary expenditures in fiscal year 2006; 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 2006. Ultimately, the Company must complete the
development of its products, obtain the appropriate regulatory approvals and
obtain sufficient revenues to support its cost structure.
4. RESEARCH AND OFFICE EQUIPMENT
Research and office equipment at September 30, 2005 and 2004, consists of the
following:
2005 2004
------ ------
Research equipment $ 1,718,895 $1,619,780
Furniture and equipment 110,393 222,549
Leasehold improvements 43,041 43,041
----------- ----------
1,872,329 1,885,370
Less: Accumulated depreciation and
amortization (1,690,788) (1,651,758)
----------- ----------
Net research and office equipment $ 181,541 $ 233,612
=========== ==========
F-22
5. INCOME TAXES
At September 30, 2005 the Company had a federal net operating loss
carryforward of approximately $80.3 million expiring from 2006 through 2025.
The Company has deferred tax assets of approximately $32.4 million and $30.8
million at September 30, 2005 and 2004, respectively. The deferred tax assets
are principally a result of the net operating loss carryforwards.
At both September 30, 2005 and 2004, the Company has recognized a valuation
allowance to the full extent of its deferred tax assets. In assessing the
realization of the deferred tax assets, management considered whether it was
more likely than not that some portion or all of the deferred tax asset will
be realized. The ultimate realization of the deferred tax assets are
dependent upon the generation of future taxable income. Management has
considered the history of the Company's operating losses and believes that
the realization of the benefit of the deferred tax assets cannot be
determined. In addition, under the Internal Revenue Code Section 382, the
Company's ability to utilize these net operating loss carryforwards may be
limited or eliminated in the event of a change in ownership. Internal Revenue
Code Section 382 generally defines a change in ownership as the situation
where there has been a more than 50 percent change in ownership of the value
of the Company within the last three years.
The Company's effective tax rate is different from the applicable federal
statutory tax rate. The reconciliation of these rates for the years ended
September 30 is as follows:
2005 2004 2003
---- ---- ----
Expected statutory rate (35.0%) (35.0%) (34.0%)
State tax rate, net of federal benefit (3.9%) (3.9%) (4.0%)
Nondeductible interest 0.0% 0.3% 4.2%
Nondeductible (nontaxable) derivative
losses (gains) (4.6%) (15.5%) 11.0%
Other nondeductible expenses 15.2% 0.2% 1.4%
Increase in valuation allowance 28.3% 53.9% 21.4%
------- -------- --------
Effective tax rate 0.0% 0.0% 0.0%
======= ======== ========
F-23
6. STOCK OPTIONS, BONUS PLAN AND WARRANTS
Non-Qualified Stock Option Plan--At September 30, 2005, the Company has
collectively authorized the issuance of 9,760,000 shares of common stock
under the Non-Qualified Stock Option Plan. Options typically vest over a
three-year period and expire no later than ten years after the grant date.
Terms of the options are to be determined by the Company's Compensation
Committee, which administers all of the plans. The Company's employees,
directors, officers, and consultants or advisors are eligible to be granted
options under the Non-Qualified Stock Option Plan.
Information regarding the Company's Non-Qualified Stock Option Plan is
summarized as follows:
Outstanding Exercisable
-------------------- ---------------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
------- -------- ------ --------
Options outstanding,
October 1, 2002 4,073,434 $ 1.10 3,159,938 $ 1.25
Options granted 2,582,165 0.22
Options exercised (6,667) 0.33
Options forfeited (194,959) 1.44
------------
Options outstanding,
September 30, 2003 6,453,973 0.74 3,319,317 1.18
Options granted 670,000 0.61
Options exercised (198,503) 0.43
Options forfeited (26,332) 0.28
-------------
Options outstanding,
September 30, 2004 6,899,138 0.74 4,288,847 0.98
-----------
Options granted 278,000 0.48
Options exercised (174,001) 0.24
Options forfeited (787,774) 1.35
--------------
Options outstanding,
September 30, 2005 6,215,363 0.66 4,642,893 0.76
===========
F-24
At September 30, 2005, options outstanding and exercisable were as follows:
Weighted
Weighted Weighted Average
Range of Average Average Exercise
Exercise Number Exercise Price Remaining Number Price
Prices Outstanding Outstanding Contractual Life Exercisable Exercisable
------- ----------- -------------- ---------------- ----------- -----------
$0.16 - $0.24 2,282,996 $ 0.22 7.49 years 1,445,184 $ 0.22
$0.33 - $0.50 659,666 0.40 8.04 years 371,666 0.33
$0.54 - $0.81 961,500 0.59 8.19 years 514,842 0.57
$1.05 - $1.58 1,976,266 1.07 3.02 years 1,976,266 1.07
$1.67 - $2.51 310,835 1.93 3.24 years 310,835 1.93
$3.25 - $4.88 23,300 3.29 1.76 years 23,300 3.29
$6.25 - $9.38 800 6.25 3.00 years 800 6.25
During March 2000, the Company agreed to restore and vest 40,000 options at
prices ranging from $5.25 to $5.62, to one former Director and one Director
as part of a settlement agreement. The options will expire on September 25,
2006. As of September 30, 2005, 20,000 options had been exercised.
In July 2001, the Company repriced 1,298,098 outstanding employee and
director stock options under the Nonqualified Plans that were priced over
$2.00 down to $1.05. In accordance with FASB Interpretation No. 44 (FIN 44),
such repriced options are considered to be variable options. Changes in the
fair market value of the Company's stock may result in future charges to
compensation expense. There was no expense recorded during the years ended
September 30, 2005, 2004 and 2003 because the exercise price of the options
exceeded the fair market value of the Company's common stock. As of September
30, 2005, 777,266 of these options remain outstanding.
In November 2001, the Company extended the expiration date on 242,000 options
at $1.05 from the Nonqualified Plans. The options were to expire between June
2002 and October 2002 and were extended by one year to June 2003 through
October 2003. The options had originally been granted between October 1989 to
December 1995. These dates were considered a new measurement date with
respect to all of the modified options. In addition, in February, April, and
July 2002, the Company modified options outstanding to employees who had been
terminated in conjunction with their change in employee status so that all
options vested on the date of termination. These dates were considered a new
measurement date with respect to all of the newly vested options. At each of
the dates of modification, the exercise price of the options exceeded the
fair market value of the Company's common stock and no compensation expense
was recorded.
F-25
In November 2002 and March 2003, the Company extended the expiration date on
897,000 options from the Nonqualified Stock Option Plan with exercise prices
ranging from $1.05 to $1.94. The options originally would have expired from
January 2003 to October 2003, but were extended to expiration dates ranging
from January 2005 to October 2005. Each of these extension dates was
considered a new measurement date. At each of the dates of modification, the
exercise price of the options exceeded the fair market value of the Company's
common stock and no compensation expense was recorded.
In June 2004, the vesting of 10,700 nonqualified stock options was
accelerated for an employee leaving the Company. Compensation expense of
$7,597 was recorded for the modification.
In April 2005, the Company extended the expiration date on 1,625,333 options
from the Nonqualified Stock Option Plan with exercise prices ranging from
$1.05 to $1.94. The options originally would have expired from June 2005 to
October 2005 and were extended for three years to expiration dates ranging
from June 2008 to October 2008. This extension was considered a new
measurement date with respect to the modified options. At the date of
modification, the exercise price of the options exceeded the fair market
value of the Company's common stock and no compensation expense was recorded.
As of September 30, 2005, all of these options remain outstanding.
Incentive Stock Option Plan--At September 30, 2005, the Company has
collectively authorized the issuance of 6,100,000 shares of common stock
under the Incentive Stock Option Plan. Options vest after a one-year to
three-year period and expire no later than ten years after the grant date.
Terms of the options are to be determined by the Company's Compensation
Committee, which administers all of the plans. Only the Company's employees
and directors are eligible to be granted options under the Incentive Plan.
Information regarding the Company's Incentive Stock Option Plan is summarized
as follows:
Outstanding Exercisable
-------------------- ---------------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
------- -------- ------ --------
Options outstanding,
October 1, 2002 1,251,100 $1.62 1,062,769 $1.69
Options granted 2,550,000 0.22
Options exercised -
Options forfeited -
-------------
Options outstanding,
September 30, 2003 3,801,100 0.68 1,162,768 1.65
Options granted 100,000 1.13
Options exercised (15,000) 1.05
F-26
Options forfeited (53,000) 1.15
-------------
Options outstanding,
September 30, 2004 3,833,100 0.68 2,006,435 1.05
Options granted 170,000 0.48
Options exercised (26,667) 0.22
Options forfeited (3,800) 2.16
-------------
Options outstanding,
September 30, 2005 3,972,633 0.68 2,885,968 0.81
=============
At September 30, 2005, options outstanding and exercisable were as follows:
Weighted
Weighted Weighted Average
Range of Average Average Exercise
Exercise Number Exercise Price Remaining Number Price
Prices Outstanding Outstanding Contractual Life Exercisable Exercisable
------- ----------- -------------- ---------------- ----------- -----------
$0.22 - $0.33 2,523,333 $ 0.22 7.50 years 1,673,334 $ 0.22
$0.48 - $0.72 170,000 0.48 9.98 years 0 0.00
$1.00 - $1.50 1,038,766 1.08 3.78 years 972,100 1.08
$1.85 - $2.78 81,167 2.00 1.87 years 81,167 2.00
$2.87 - $4.31 28,667 3.38 0.58 years 28,667 3.38
$4.50 - $6.75 129,600 5.06 2.69 years 129,600 5.06
$9.00 - $13.50 1,100 10.09 0.73 years 1,100 10.09
During fiscal year 2001, the Company extended the expiration date on 50,000
options at $2.87 from the Incentive Stock Option Plan. The options were to
expire November 1, 2001, and were extended to November 1, 2002. The options
had originally been granted in November 1991. November 1, 2001 was considered
a new measurement date; however, the exercise price on all the options
modified exceeded the fair market value of the Company's common stock, and
therefore, no compensation expense was recorded. In March 2003, the options
were further extended to November 1, 2005. There was no compensation expense
recorded because the exercise price on these options exceeded the fair market
value of the Company's common stock.
In July 2001, the Company repriced 816,066 outstanding employee and director
stock options under the Incentive Stock Option Plan that were priced over
$2.00 down to $1.05. In accordance with FIN 44, such repriced options are
F-27
considered to be variable options. No expense was recorded during the years
ended September 30, 2003, 2004 or 2005 related to these options because the
exercise price of these options exceeded the fair market value of the
Company's common stock. As of September 30, 2005, 748,766 of these options
remain outstanding. Changes in the fair market value of the Company's common
stock may result in future changes in compensation expenses.
In November 2001, the Company extended the expiration date on 56,000 options
at $1.05 from the Incentive Stock Option Plan. The options were to expire
between November 2002 and December 2002, and were extended by one year to
November 2003 and December 2003. The options had originally been granted
between November 1999 and December 1992. This date was considered a new
measurement date with respect to the modified options. At each of the dates
of modification, the exercise price of the options exceeded the fair market
value of the Company's common stock and no compensation expense was recorded.
In March 2003, the Company extended the expiration date on 105,500 options
from the Incentive Stock Option Plan with exercise prices ranging from $1.05
to $1.94. The options originally would have expired from August 2003 to March
2004 but were extended to expiration dates ranging from August 2005 to March
2006. This was considered a new measurement date with respect to all of the
modified options. At each of the dates of modification, the exercise price of
the options exceeded the fair market value of the Company's common stock and
no compensation expense was recorded.
In April 2005, the Company extended the expiration date on 128,100 options
from the Incentive Stock Option Plan with exercise prices ranging from $1.05
to $1.94. The options originally would have expired from July 2005 to
December 2005 and were extended for three years to expiration dates ranging
from July 2008 to December 2008. This was considered a new measurement date
with respect to all of the modified options. At each of the dates of
modification, the exercise price of the options exceeded the fair market
value of the Company's common stock and no compensation expense was recorded.
As of September 30, 2005, all options remain outstanding.
Other Options and Warrants--In connection with the 1992 public offering,
5,175,000 Public Warrants were issued. Every ten warrants entitled the holder
to purchase one share of common stock at a price of $15.00 per share.
Subsequently, the expiration date of the warrants was extended to February
1998. Effective June 1, 1997, the exercise price of warrants was lowered from
$15 to $6 and only five warrants, rather than 10 warrants, were required to
purchase one share of common stock. Warrant holders who tendered five
warrants and $6.00 between January 9, 1998, and February 7, 1998, would
receive one share of the Company's common stock and one New Warrants. The New
Warrants would permit the holder to purchase one share of the Company's
common stock at a price of $10.00 per share prior to February 7, 2000. During
fiscal year 1998, the expiration date of the Public Warrants was extended to
July 31, 1998, and 582,025 Public warrants were tendered for 116,405 common
shares and 116,405 New Warrants. All remaining Public Warrants expired as of
September 30, 1999. In January 2001, the Company extended the expiration date
on the 116,405 New Warrants to August 2001 and repriced them from $10.00 to
$3.00 per share. In July 2001, the Company extended the expiration date
further to February 2002. On August 16, 2001, the New Warrants no longer met
the requirements for equity classification, because there were not sufficient
authorized and unissued shares of the Company's common stock to satisfy
F-28
exercise of the warrants, as the number of potentially issuable shares of
common stock required to satisfy all other commitments that may require the
issuance of common stock was not determinable. The fair value of the warrants
as of August 16, 2001, of $12,157 was reclassified from equity to a
liability. During the year ended September 30, 2003, the Company recognized a
gain on derivative of $4 arising from changes in the fair value of the
warrants. All New Warrants expired on February 6, 2003.
During fiscal year 1999, the Company granted a consultant options to purchase
a total of 50,000 shares of the Company's common stock. The fair value of the
options is expensed over the life of the consultant's contract. All 50,000
options became exercisable during fiscal year 1999 at $2.50 per share. All
options expired unexercised February 4, 2004.
During fiscal year 2001, the Company granted options to consultants to
purchase a total of 180,000 shares of the Company's common stock at exercise
prices ranging from $1.05 to $1.63 expiring from June to July of 2006. As of
September 30, 2005, all of these options were outstanding.
In connection with the April 2001 Equity Line of Credit stock sale agreement
discussed in Note 13, the Company issued 200,800 common stock purchase
warrants. Each warrant entitled the holder to purchase one share of common
stock at $1.64 per share. The warrants represented derivative instruments and
were recorded as a liability upon issuance, as the common shares underlying
the warrants were required to be registered. The fair value of the warrants
totaling $235,562 was recorded as a derivative liability and a cost of
financing. For the years ended September 30, 2004 and 2003, the Company
recognized a gain of $36,597 and a loss of $34,307, respectively, resulting
from changes in fair value of the warrants. The warrants expired unexercised
in April 2004.
In August 2001, the Company issued 272,108 common stock purchase warrants in
connection with a private offering of common stock as discussed in Note 14.
Each warrant entitled the holder to purchase one share of common stock at
$1.75 per share. The warrants would have expired in July 2004, but were
extended to July 2007. At issuance the warrants did not meet the requirements
for equity classification because there were not sufficient authorized and
unissued shares of the Company's common stock to satisfy exercise of the
warrants, as the number of potentially issuable shares of common stock
required to satisfy all other commitments that may require the issuance of
common stock was not determinable. The fair value of the warrants totaling
$286,617 was recorded as a liability and offset against the proceeds from the
sale of stock as a cost of obtaining equity capital. On October 2, 2003, as
there were sufficient unauthorized and unissued shares to satisfy all other
commitments that may require the issuance of common stock, the fair value of
the warrants of $111,418 was reclassified from liabilities to equity. During
the years ended September 30, 2004 and 2003, the Company recognized losses of
$38,561 and $68,245, respectively, arising from changes in the fair value of
the warrants. As of September 30, 2005, 272,108 warrants remain outstanding.
In October 2001, the Company issued 150,000 shares of common stock in a
private offering for proceeds of $150,000. The investor also received
warrants which entitled the holder to purchase 75,000 shares of common stock
at $1.50 per share, expiring October 2004. Upon issuance, the warrants did
not meet the requirements for equity classification because there were not
sufficient authorized and unissued shares of the Company's common stock to
F-29
satisfy exercise of the warrants, as the number of potentially issuable
shares of common stock required to satisfy all other commitments that may
require the issuance of common stock was not determinable. Accordingly, the
warrants were accounted for as freestanding derivative instruments from the
date of issuance. Changes in the fair value of the warrants was recognized in
earnings as either a gain or loss in such period as the change occurred. The
warrants had a fair value of the warrants at issuance of $88,045 was recorded
as a liability and offset against proceeds from the sale of stock as a cost
of obtaining equity capital. On October 2, 2003, as there were sufficient
unauthorized and unissued shares to satisfy all other commitments that may
require the issuance of common stock, the fair value of the warrants of
$37,236 was reclassified from liabilities to equity. During the years ended
September 30, 2004 and 2003, the Company recognized losses of $12,031 and
$23,415, respectively, arising from changes in the fair value of the
warrants.
Series E Callable Warrants were issued in connection with the issuance of
Series E Preferred Stock in August 2001. The Series E Callable Warrants
allowed the holders to purchase up to 815,351 shares of the Company's common
stock at a price of $1.19 per share expiring August 16, 2004. During the year
ended September 30, 2004, 244,724 warrants were exercised for proceeds of
$291,222. Upon issuance, the warrants did not meet the requirements for
equity classification because the Company was required to maintain an
effective registration statement covering the underlying shares. Accordingly,
the Series E Callable Warrants were accounted for as freestanding derivative
instruments from the date of issuance. As there were no proceeds associated
with the issuance of the Series E Preferred Stock, the fair value of the
warrants totaling $119,434 was recorded as a liability and charged to other
costs of financing. For the years ended September 30, 2004 and 2003, the
Company recognized a gain of $59,156 and a loss of $125,204, respectively,
arising from changes in fair value of the warrants.
In August 2003, in accordance with the Series E Stock agreement discussed in
Note 14 the Company issued 23,758 of Series E Non-Callable Warrants to
purchase shares of common stock at a price of $0.77 per share expiring August
16, 2006. The Series E Non-Callable Warrants are exercisable at any time
prior to August 17, 2006 and, upon issuance, did not meet the requirements
for equity classification because the Company was required to maintain an
effective registration statement covering the underlying shares. Accordingly,
the Series E Non-Callable Warrants were accounted for as freestanding
derivative instruments from date of issuance. As there were no proceeds from
the issuance, the fair value of the warrants totaling $12,374 was recorded as
a liability and charged to other costs of financing. For the years ended
September 30, 2005, 2004 and 2003, the Company recognized a gain of $5,042, a
gain of $9,363 and a loss of $3,311, respectively, arising from changes in
fair value of the warrants.
Series F Warrants were issued in connection with the issuance of convertible
debt in December 2001. The Series F Warrants allowed the holders to purchase
up to 960,000 shares of the Company's common stock at $0.76 per share for
seven years from date of issuance. The warrant price was adjustable if the
Company sold 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 exercise price was adjusted
every three months to an amount equal to 110% of the conversion price on such
date, provided that the adjusted price was lower than the exercise price on
that date. During the year ended September 30, 2003, 435,500 warrants were
exercised for proceeds of $66,632. During the year ended September 30, 2004,
F-30
420,000 warrants were exercised in a cashless exercise. As of September 30,
2004 there were no remaining Series F warrants outstanding. Upon issuance,
the warrants did not meet the requirements for equity classification because
exercise of the individual warrants was required to be settled in registered
shares, at issuance the number of potentially issuable shares of common stock
required to satisfy exercise of the warrants and all other commitments that
may require issuance of common stock was not determinable, and under certain
circumstances the holders could require the Company to settle the warrants in
cash. Accordingly, the Series F Warrants were accounted for as a derivative
liability and a discount on the debt which was immediately accreted to
interest expense. At each subsequent period, through November 19, 2003, when
all Series F warrants had been exercised, the warrants were marked to market
with changes in fair value recognized in earnings as gains or losses on
derivatives. During the years ended September 30, 2004 and 2003, the Company
recognized losses of $167,000 and $394,500, respectively, arising from
changes in the fair value of the Series F Warrants.
Series G Warrants were issued in connection with the issuance of convertible
debt in July 2002. The Series G Warrants allowed the holders to purchase up
to 900,000 shares of the Company's common stock at a price equal to $0.25 per
share at any time prior to July 12, 2009. If the Company sells any additional
shares of common stock, or any securities convertible into common stock at a
price below the then applicable warrant exercise price, the warrant exercise
price will be lowered to the price at which the shares were sold or the
lowest price at which the securities were convertible, as the case may be.
The warrant exercise price is adjusted every three months to an amount equal
to 110% of the Series G note conversion price on such date, provided that the
adjusted price is lower than the warrant exercise price on that date. If the
warrant exercise price is adjusted, the number of shares of common stock
issuable upon the exercise of the warrant would be increased by the product
of the number of shares of common stock issuable upon the exercise of the
warrant immediately prior to the sale multiplied by the percentage by which
the warrant exercise price was reduced. In accordance with the terms of the
warrants, the exercise price was adjusted to $0.18 on December 9, 2002. The
exercise price was adjusted to $0.145 on March 9, 2003. In accordance with
the terms of the warrants, there were no further adjustments since the price
would have been higher. During the year ended September 30, 2003, 450,000
warrants were exercised for proceeds of $65,250. Upon issuance, the warrants
did not meet the requirements for equity classification because exercise of
the individual warrants was required to be settled in registered shares, at
issuance the number of potentially issuable shares of common stock required
to satisfy exercise of the warrants and all other commitments that may
require issuance of common stock was not determinable, and under certain
circumstances the holders could require the Company to settle the warrants in
cash. Accordingly, the Series G warrants were recorded at fair value as a
derivative liability and a discount on debt which was immediately accreted to
interest expense. Subsequent changes in fair value are recognized in earnings
as either a gain or loss. As of September 30, 2005, 450,000 Series G Warrants
remain outstanding. As of September 30, 2005 and 2004, the fair value of the
Series G warrants was $186,200 and $235,100, respectively. During the years
ended September 30, 2005, 2004 and 2003, the Company recognized a gain of
$48,900, a gain of $172,100, and a loss of $468,300, respectively, arising
from changes in the fair value of the Series G warrants.
Series H Warrants were issued in connection with the issuance of convertible
debt in January 2003. The Series H Warrants allowed the holders to purchase
up to 1,100,000 shares of the Company's common stock at a price equal to
F-31
$0.25 per share at any time prior to January 7, 2010. If the Company sells
any additional shares of common stock, or any securities convertible into
common stock at a price below the then applicable exercise price of the
Series H warrants, the exercise price of the Series H warrants will be
lowered to the price at which the shares were sold or the lowest price at
which the securities are convertible. If the exercise price of the Series H
warrants is adjusted, the number of shares of common stock issuable upon the
exercise of the Series H warrants will be increased by the product of the
number of shares of common stock issuable upon the exercise of the warrant
immediately prior to the sale multiplied by the percentage by which the
warrant exercise price is reduced. However, neither the exercise price nor
the shares issuable upon the exercise of the Series H warrants will be
adjusted as the result of shares issued in connection with a permitted
financing, as defined in the agreement. Every three months after June 26,
2003, the exercise price of the Series H warrants will be adjusted to an
amount equal to 110% of the Series H notes conversion price on such date,
provided that the adjusted price is lower than the warrant exercise price on
that date. During the year ended September 30, 2003, 550,000 warrants were
exercised at $0.25 for proceeds of $137,500. Upon issuance, the warrants did
not meet the requirements for equity classification because exercise of the
individual warrants was required to be settled in registered shares, at
issuance the number of potentially issuable shares of common stock to satisfy
exercise of the warrants and all other commitments that may require issuance
of common stock was not determinable, and under certain circumstances the
holders could require the Company to settle the warrants in cash.
Accordingly, the Series H warrants were initially recorded at fair value as a
derivative liability and a discount on debt which was immediately accreted to
interest expense. Subsequent changes in fair value are recognized in earnings
as either a gain or loss in the period such change occurs. As of September
30, 2005, 550,000 Series H Warrants remain. As of September 30, 2005 and
2004, the fair value of the Series H warrants was $223,500 and $290,800,
respectively. During the years ended September 30, 2005, 2004 and 2003, the
Company recognized a gain of $67,300, a gain of $193,500, and loss of
$697,100, respectively, arising from changes in the fair value of the Series
H warrants.
Warrants were issued in connection with obtaining an equity line of credit in
September 2003, discussed in Note 13. There were 395,726 warrants issued at
an exercise price of $0.83, which expire in September 2008. Upon issuance,
the warrants did not meet the requirements for equity classification because,
under certain conditions, the Company could be required to compensate the
investor for any decreases in the common stock price underlying the warrants
and are therefore accounted for as a derivative liability. Subsequent changes
in fair value are recognized in earnings as either a gain or loss in the
period such change occurs. The warrants were initially classified in
liabilities upon issuance at fair value of $258,290, as determined using the
Black-Scholes pricing methodology and the Company recognized a charge of
$258,290 which was included in other costs of financing as there were no
proceeds from the issuance of the agreement. As of September 30, 2005 and
2004, the fair value of the warrants was $93,745 and $165,359, respectively.
During the years ended September 30, 2005, 2004 and 2003, the Company
recognized a gain of $71,613, a gain of $151,943, and a loss of $59,012,
respectively, arising from changes in the fair value of the warrants.
In May 2003, 30,000 options were issued to a consultant at a price of $0.41
per share. The options vest over a three year period and expire in May 2013.
The compensation expense for these options was determined using the Black
F-32
Scholes pricing methodology with the following assumptions:
Expected stock risk volatility 84%
Risk-free interest rate 2.0%
Expected life of warrant 3 Years
Expected dividend yield -0-
The fair value of the options was recorded as a general and administrative
expense. Compensation expense of $6,727 was recorded for the year ended
September 30, 2003.
In connection with an agreement with a private investor in May 2003,
1,100,000 Series I Warrants were issued with an exercise price of $0.47. The
warrants were to initially expire May 30, 2006. In accordance with the terms
of the agreement, the warrant expiration was extended to May 30, 2008 on
September 30, 2003. Upon issuance, the warrants did not meet the requirements
for equity classification because exercise of the individual warrants was
required to be settled in registered shares, at issuance the number of
potentially issuable shares of common stock required to satisfy exercise of
the warrants and all other commitments that may require issuance of common
stock was not determinable, and under certain circumstances the holders could
require the Company to cash settle the warrants and are therefore accounted
for as freestanding derivative liabilities. Subsequent changes in fair value
are recognized in earnings as either a gain or loss. The fair value of the
warrants of $478,694 was recorded as a liability and offset against the
proceeds from the sale of stock as a cost of obtaining equity capital. As of
September 30, 2005 and 2004, the fair value of the warrants was $307,734 and
$477,904, respectively. For the years ended September 30, 2005, 2004 and
2003, the Company recognized a loss of $170,173, a gain of $426,232 and a
loss of $425,445, respectively, arising from changes in fair value of the
warrants.
On December 1, 2003, CEL-SCI sold 2,999,964 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 Series J Warrants which allow the investors to purchase
991,003 shares of CEL-SCI's common stock exercisable at a price of $1.32 per
share exercisable at any time prior to December 1, 2006. Additionally, an
investment broker received warrants totaling 5% of the investment of its
clients in the common stock of the Company at $1.32 per share at any time
prior to December 1, 2006. Upon issuance, the warrants did not meet the
requirements for equity classification until the shares were registered in
May 2004, because the warrants are required to be settled in registered
shares and were therefore accounted for as freestanding derivative
instruments. The fair value of the warrants of $806,266 was recorded as a
liability and offset against the proceeds from the sale as a cost of
obtaining equity capital. Subsequent changes in fair value were recognized in
earnings as either a gain or loss. On May 8, 2004 the criteria for equity
classification were met, as a registration statement covering the underlying
common shares was declared effective, and the fair value of the warrants
totaling $537,338 was reclassified from liabilities to equity. For the year
ended September 30, 2004, the Company recognized a gain of $268,928 arising
from changes in fair value of the warrants.
On May 4, 2004, the Company sold 6,402,439 shares of its common stock to a
group of private institutional investors for $5,250,000 and total offering
costs of $498,452. As part of this transaction, the investors in the private
offering received warrants which allow the investors to purchase 76,642
F-33
shares of the Company's common stock at a price of $1.37 per share at any
time prior to May 4, 2009. These warrants were valued at $38,127. This fair
value was determined using the Black-Scholes pricing methodology with the
following assumptions:
Expected stock risk volatility 87%
Risk-free interest rate 2.00%
Expected life of options 3 Years
Expected dividend yield -0-
In February 2005, the Company granted a consultant options to purchase 15,000
shares of the Company's common stock at a price of $0.73 per share. The
options vest over a three year period and expire in February 2015. The
compensation expense for these options was determined using the Black Scholes
pricing methodology with the following assumptions:
Expected stock risk volatility 93%
Risk-free interest rate 3.89%
Expected life of warrant 5 Years
Expected dividend yield -0-
The fair value of the options was recorded as general and administrative
expense. Compensation expense of $7,972 was recorded for the year ended
September 30, 2005.
On July 18, 2005, CEL-SCI sold 1,250,000 shares of its common stock and
375,000 warrants to one investor for $500,000. Each warrant entitles the
holder to purchase one share of CEL-SCI's common stock at a price of $0.65
per share at any time prior to July 18, 2009. The shares of common stock and
warrants are "restricted" securities as defined in Rule 144 of the Securities
and Exchange Commission. The warrants were valued at $155,671. The value was
determined using the Black Scholes pricing methodology with the following
assumptions:
Expected stock risk volatility 75%
Risk-free interest rate 3.92%
Expected life of warrant 5 Years
Expected dividend yield -0-
Stock Bonus Plan -- At September 30, 2005, the Company had been authorized to
issue up to 3,940,000 shares of common stock under the Stock Bonus Plan. All
employees, directors, officers, consultants, and advisors are eligible to be
granted shares. During the year ended September 30, 2003, 134,336 shares with
a fair value of $47,051 were issued under the Plan and recorded in the
consolidated statement of operations. During the year ended September 30,
2004, 72,495 shares were issued under the Plan with a fair value of $52,476.
During the year ended September 30, 2005, 144,469 shares were issued to the
Company's 401(k) plan for a cost of $78,868.
Stock Compensation Plan-- During the year ended September 30, 2005, 1,500,000
shares were authorized for use in the Company's stock compensation plan.
During the year ended September 30, 2004, 1,000,000 shares were authorized
for use in the Company's stock compensation plan. Of these shares, 25,050
shares were issued during the year ended September 30, 2004 as compensation
in lieu of salary increases extending through August 31, 2005. The shares
F-34
were issued at $0.62 per share for a total cost of $15,531. Of this, $14,237
was recorded as unearned compensation in the consolidated balance sheet
during the year ended September 30, 2004. This amount was recorded as expense
during the year ended September 30, 2005.
7. EMPLOYEE BENEFIT PLAN
The Company maintains a defined contribution retirement plan, qualifying
under Section 401(k) of the Internal Revenue Code, subject to the Employee
Retirement Income Security Act of 1974, as amended, and covering
substantially all Company employees. Each participant's contribution is
matched by the Company with shares of common stock that have a value equal to
100% of the participant's contribution, not to exceed the lesser of $10,000
or 6% of the participant's total compensation. The Company's contribution of
common stock is valued each quarter based upon the closing bid price of the
Company's common stock. The expense for the years ended September 30, 2005,
2004, and 2003, in connection with this Plan was $79,406, $56,158, and
$48,437, respectively.
8. OPTIONAL SALARY ADJUSTMENT PLAN
In July 2001, the Company adopted an "Optional Salary Adjustment Plan" (the
"Plan"). In accordance with the Plan, employees received 40,000 stock options
for each salary increment of $6,000 that they elect to forgo. The total
amount of options to be granted under the Plan is limited to 1,200,000.
During the years ended September 30, 2005, 2004 and 2003, there were no
options issued in lieu of compensation.
9. COMMITMENTS AND CONTINGENCIES
Operating Leases-The future minimum annual rental payments due under
noncancelable operating leases for office and laboratory space are as
follows:
Year Ending September 30,
------------------------
2006 $156,067
2007 132,719
2008 71,136
2009 29,640
2010 -
----------
Total minimum lease payments $389,562
==========
Rent expense for the years ended September 30, 2005, 2004, and 2003, was
$253,180, $282,138 and $276,564, respectively. Minimum payments have not been
reduced by minimum sublease rental receivable under future cancelable
subleases.
Employment Contracts--In April 2005 the Company entered into a three year
employment agreement with its President and Chairman of the Board which
expires April 30, 2008. The employment agreement provides that CEL-SCI will
pay him an annual salary of $363,000 during the term of the agreement. In the
event that there is a material reduction in his authority, duties or
activities, or in the event there is a change in the control of the Company,
then the agreement allows him to resign from his position at the Company and
F-35
receive a lump-sum payment from CEL-SCI equal to 18 months salary. For
purposes of the employment agreement, a change in the control of CEL-SCI
means the sale of more than 50% of the outstanding shares of CEL-SCI's Common
Stock, or a change in a majority of CEL-SCI's directors.
Effective September 1, 2003, the Company entered into a three-year employment
agreement with its Chief Executive and Financial Officer. The employment
agreement provides that during the term of the employment agreement the
Company will pay him an annual salary of $370,585. In the event there is a
change in the control of the Company, the agreement allows him to resign from
his position at the Company and receive a lump-sum payment from the Company
equal to 24 months of salary. For purposes of the employment agreement a
change in the control of the Company means: (1) the merger of the Company
with another entity if after such merger the shareholders of the Company do
not own at least 50% of voting capital stock of the surviving corporation;
(2) the sale of substantially all of the assets of the Company; (3) the
acquisition by any person of more than 50% of the Company's common stock; or
(4) a change in a majority of the Company's directors which has not been
approved by the incumbent directors.
10. CAMBREX NOTE
On November 15, 2001, the Company signed an agreement with Cambrex Bio
Science, Inc., (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 $1,172,517 note, which included imputed
interest of $300,000. In December 2001, the note was amended to extend the
due date to January 2, 2003. Unpaid principal began accruing interest on
November 16, 2002, at the Prime Rate plus 3%. The note was collateralized by
certain equipment. The imputed interest on this note was capitalized and was
expensed over the life of the loan. In December 2002, the Company negotiated
an extension of the note with Cambrex. Per the agreement, the Company gave
Cambrex certain equipment and surrendered a security deposit, which reduced
the amount owed by $225,000. The remaining balance was payable pursuant to a
note due January 2, 2004. In addition, the agreement required the Company to
pay $150,000 from the Series H convertible debt and 10% of all other future
financing transactions, including draws on the equity line-of-credit. There
were also conversion features added with the amendment 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. During the year ended
September 30, 2003, the Company paid down the note by $485,524. The Company
also recorded interest expense of $49,486 and amortized the remaining
discount of $37,500 relating to the imputed interest.
The Company accounted for the amendment of the Cambrex note in December 2002
as a modification of the existing note under EITF 96-19, "Debtor's Accounting
for a Modification or Exchange of Debt Instruments". No gain or loss was
recorded at the time of the amendment. The Cambrex note was accounted for as
a hybrid instrument that had the characteristics of a debt host agreement and
contained an embedded conversion feature that was not clearly and closely
related to the debt host, and required bifurcation. The Company recorded a
liability of $84,107, the fair value of the embedded derivative feature in
F-36
connection with the December 2002 note modification, with a corresponding
offset to the note payable as a discount. The discount was amortized to
interest expense over the term of the note. As of September 30, 2003, the
remaining unamortized discount of $22,082 was amortized and recorded as
interest expense through December 23, 2003, when the note was paid in full.
During the years ended September 30, 2004 and 2003, the Company recognized a
gain of $72,785 and $11,322 resulting from changes in fair value of the
derivative liability. The Company also recognized additional interest expense
of $22,082 and $99,525, for the years ended September 30, 2004 and 2003, from
amortization of the discounts.
11. COVANCE NOTE
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 as of June 30, 2003 were converted to a note
payable. The note was payable on January 2, 2004. Interest was payable at an
annual rate of 8%. Until the entire amount was paid to Covance, Covance was
entitled to receive 2% of any draw-down of the Company's equity credit line,
2% of any net funds received from outside financings of less than $1 million,
3% of any net funds received from outside financings greater than $1 million
but less than $2 million and 4% of any net funds received from outside
financings greater than $2 million. During the year ended September 30, 2003,
the Company paid $15,598 on the note payable to Covance in accordance with
the agreement. In December 2003, the note was repaid along with accrued
interest of $2,581.
12. CONVERTIBLE DEBT
As of September 30, 2005, there is no outstanding convertible debt.
In December 2001, the Company sold Series F 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 contained features that constituted embedded
derivatives, certain of which could not be reliably measured. As a result,
the Company accounted for the entire instrument at fair value. The Series F
Notes were immediately convertible into a variable number of shares based on
76% applied to the average of the lowest three trading prices in a twenty day
period immediately preceding such conversion. The Company determined the fair
value of the notes for accounting purposes was equal to the fair value of the
shares into which it was convertible at each measurement date. No additional
value has been ascribed to the other embedded derivative features of the
Series F Notes in determining fair value of the Series F Notes as the Company
believes that the value of such features can not be reasonably estimated or
reliably measured due to the contingent nature of their occurrence. The notes
were recorded at the fair value of 131.58%, and accordingly, the discount
associated with the warrants was immediately accreted to interest expense.
The Company has also accrued interest on the notes at a rate of 9.2%
representing the stated 7% interest rate adjusted for the 76% rate at which
the interest was convertible into common shares. During the year ended
September 30, 2003 the Company recognized a loss of $43,923 arising from
changes in the fair value of the Series F Notes. As of November 30, 2002, all
convertible debt had been converted into a total of 6,592,461 shares of
common stock. The Series F Warrants are discussed in Note 6.
F-37
In July and September 2002, CEL-SCI sold Series G Notes, plus Series G
Warrants, to a group of private investors for $1,300,000. The notes bore
interest at 7% per year and were due and payable in July and September 2004.
The notes contained features that constituted embedded derivatives, certain
of which could not be reliably measured. As a result, the Company accounted
for the entire instrument at fair value. The Series G Notes were immediately
convertible into a variable number of shares based on a factor of 76% applied
to the average of the lowest three trading prices in a fifteen day period
immediately preceding such conversion. The Company determined the fair value
of the notes for accounting purposes was equal to the fair value of the
shares into which it was convertible at each measurement date. No additional
value has been ascribed to the other embedded derivative features of the
Series G Notes in determining fair value of the Series G Notes as the Company
believes that the value of such features can not be reasonably estimated or
reliably measured due to the contingent nature of their occurrence. The notes
were recorded at the fair value of 131.58%, and accordingly, the discount
associated with the warrants was immediately accreted to interest expense.
The Company has also accrued interest on the notes at a rate of 9.2%
representing the stated 7% interest rate adjusted for the 76% rate at which
the interest was convertible into common shares. During the year ended
September 30, 2003, the Company recognized a loss of $701,001 arising from
changes in the fair value of the Series G Notes. As of June 30, 2003 all of
the Series G Notes had been converted into 8,390,746 shares of CEL-SCI's
common stock. The Series G Warrants are discussed in Note 6.
In January and July 2003, CEL-SCI sold Series H Notes, plus Series H
Warrants, to a group of private investors for $1,350,000. The notes bore
interest at 7% per year and were due and payable in January and July 2005.
The notes contained features that constituted embedded derivatives, certain
of which could not be reliably measured. Because certain of the embedded
derivatives could not be reliably measured, the Company accounted for the
entire instrument at fair value. The Series H Notes were immediately
convertible into a variable number of shares based on a factor of 76% applied
to the average of the lowest three trading prices in a fifteen day period
immediately preceding such conversion. The Company determined the fair value
of the notes for accounting purposes was equal to the fair value of the
shares into which it was convertible at each measurement date. No additional
value has been ascribed to the other embedded derivative features of the
Series H Notes in determining fair value of the Series H Notes as the Company
believes that the value of such features can not be reasonably estimated or
reliably measured due to the contingent nature of their occurrence. The notes
were recorded at the fair value of 131.58%, and accordingly, the discount
associated with the warrants was immediately accreted to interest expense.
The Company has also accrued interest on the notes at a rate of 9.2%
representing the stated 7% interest rate adjusted for the 76% rate at which
the interest was convertible into common shares. On May 30, 2003, fair value
for accounting purposes was adjusted to 142.86% of outstanding face value due
to a change in the discount factor used to compute the conversion price of
the Series H Notes, triggered by the failure of the Company to have a
registration statement declared effective. During the years ended September
30, 2004 and 2003, the Company recognized a gain of $6,703 and a loss of
$947,963, respectively, arising from changes in the fair value of the Series
H Notes. As of October 2, 2003 all of the Series H Notes had been converted
into 3,233,229 shares of CEL-SCI's common stock. The Series H Warrants are
discussed in Note 6.
F-38
13. EQUITY LINES OF CREDIT
In April 2001, the Company entered into the 2001 Equity Line of Credit that
allowed the Company at its discretion to sell up to $10 million of common
stock in increments of a minimum of $100,000 and a maximum of $2 million for
general operating requirements. The Company was restricted from entering into
any other equity line of credit arrangement and the agreement expired in June
2003. As discussed in Note 6, the Company issued 200,800 warrants to the
issuer pursuant to this agreement. The Company accounted for the 2001 Equity
Line of Credit as a freestanding derivative instrument as the Company could
be required to compensate the investor for any decreases in the price of the
Company's common stock during the term of the agreement. For the year ended
September 30, 2003, the Company recognized a loss of $146,465 resulting from
changes in fair value of the 2001 Equity Line of Credit.
In September 2003, the Company entered into the 2003 Equity Line of Credit
that allows the Company at its discretion to sell up to $10 million of common
stock in increments of a minimum of $100,000 and a maximum amount that can be
drawn down at any one time that will be determined at the time of the
drawdown request, using a formula contained in the 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 of the shares underlying the agreement. As discussed in
Note 6, the Company issued 395,726 warrants to the issuer at a price of $0.83
exercisable through September 16, 2008. The Company accounted for the 2003
Equity Line of Credit as a freestanding derivative instrument as the Company
could be required to compensate the investor for any decreases in the price
of the Company's common stock during the term of the agreement. The Company
determined that the instrument had no fair value as of September 30, 2005 and
2004. For the years ended September 30, 2005 and 2004, the Company recognized
a gain of $16,223 and a loss of $5,065, respectively resulting from changes
in fair value of the 2003 Equity Line of Credit. Expenses of $40,600 were
charged to additional paid-in capital as a cost of equity related transaction
during the year ended September 30, 2003. During the year ended September 30,
2005, the Company sold 743,014 shares of its common stock pursuant to this
agreement for gross proceeds of $366,238, net of related costs of $1,035.
During the year ended September 30, 2004, the Company sold 307,082 shares of
its common stock pursuant to this agreement for gross proceeds of $340,000,
net of related costs of $4,090. During the year ended September 30, 2003, the
Company sold 2,877,786 shares of its common stock pursuant to this agreement
for net proceeds of $725,000.
14. STOCKHOLDERS' EQUITY
In October 2001, the Company issued 150,000 shares of common stock in a
private offering for proceeds of $150,000. The investor also received
warrants which entitled the holder to purchase 75,000 shares of common stock
at $1.50 per share. These warrants expired unexercised October 5, 2004 and
are discussed in Note 6.
In May 2003, the Company sold 1,100,000 shares of common stock and an
additional 1,100,000 warrants to purchase common stock in conjunction with a
marketing agreement. The Company received proceeds of $500,000 for the stock
and warrants. The warrants are exercisable at a price of $0.47 per share. The
warrants initially expired May 30, 2006. In accordance with the terms of the
F-39
agreement, the expiration was extended to May 30, 2008. The warrants are
discussed in Note 6.
On December 1, 2003, CEL-SCI sold 2,999,964 shares of its common stock, to a
group of private institutional investors for approximately $2,550,000, or
$0.85 per share. There were associated costs of $93,159. As part of this
transaction, the investors in the private offering received Series J Warrants
which allow the investors to purchase 991,003 shares of CEL-SCI's common
stock at a price of $1.32 per share at any time prior to December 1, 2006.
See discussion of accounting for the Series J Warrants in Note 6.
On May 4, 2004, the CEL-SCI sold 6,402,439 shares of its common stock to a
group of private institutional investors at $0.82 per share for $5,250,000
and associated costs of $498,452. As part of this transaction, the investment
banker of the private offering received warrants which allow the investors to
purchase 76,642 shares of CEL-SCI's common stock at a price of $1.37 per
share at any time prior to May 4, 2009. See discussion of accounting for
warrants in Note 6.
On July 18, 2005, CEL-SCI sold 1,250,000 shares of its common stock and
375,000 warrants to one investor for $500,000. Each warrant entitles the
holder to purchase one share of CEL-SCI's common stock at a price of $0.65
per share at any time prior to July 18, 2009. The shares of common stock and
warrants are "restricted" securities as defined in Rule 144 of the Securities
and Exchange Commission.
15. SERIES E PREFERRED STOCK
During August 2001, three private investors exchanged shares of the Company's
common stock and remaining Series D Warrants for 6,288 shares of the
Company's Series E preferred stock ("Series E Stock"). These investors also
exchanged their Series A and Series C Warrants for new Series E Callable
Warrants discussed in Note 6. During the year ended September 30, 2002, 4,671
shares of the Series E Stock were converted into 4,282,150 shares of common
stock. During the year ended September 30, 2003, 1,192 shares of the Series E
Stock were converted into 1,018,439 shares of common stock. As of September
30, 2003, there were no shares of Series E Preferred stock remaining. The
Series E Stock contained features that constituted embedded derivatives,
certain of which could not be reliably measured. As a result, Company
recorded the entire instrument at fair value. The Series E Stock was recorded
at 107.53% of outstanding stated value. This represents the estimated fair
value of the common shares that were deliverable upon conversion. The Series
E Stock was immediately convertible into a variable number of shares based on
a factor of 93% applied to the volume weighted average price for a period of
five days preceding such conversion. No additional value has been ascribed to
the other embedded derivative features of the Series E Stock in determining
fair value of the Series E Stock as the Company believes that the value of
such features can not be reasonably estimated or reliably measured due to the
contingent nature of their occurrence. Additionally, the Company accreted the
accounting fair value of the Series E Stock from 107.53% of stated value to
215.06% of stated value over a two-year period through August 16, 2003,
since, as of that date, the Company was required to deliver to holders of
Series E Stock shares of common stock having a value of 215.06% of stated
value under the automatic conversion provisions of the Series E Stock. During
the year ended September 30, 2003, the Company recognized a gain of
$1,807,859 arising from changes in the fair value of the Series E Stock. The
Company also incurred $109,580 of interest expense on the Series E Stock
F-40
representing accretion of $98,791 and dividends classified as interest
expense of $10,789. During the year ended September 30, 2003, $99,624 in
accrued dividends and interest were converted into 97,389 shares of common
stock. All outstanding shares of the Company's Series E Preferred Stock, 39
shares, were automatically converted on August 17, 2003, into 47,531 common
shares. In addition, on August 17, 2003, the Company issued 23,758 Series E
Non-Callable common stock purchase warrants. See Note 6 for further
discussion of the Series E Non-Callable Warrants.
16. NET LOSS PER COMMON SHARE
Basic earnings per share (EPS) excludes dilution and is computed by dividing
net income by the weighted average of common shares outstanding for the
period. Diluted EPS reflects the potential dilution that could occur if
securities or other common stock equivalents (convertible preferred stock,
convertible debt, warrants to purchase common stock and common stock options)
were exercised or converted into common stock. The following table provides a
reconciliation of the numerators and denominators of the basic and diluted
per-share computations.
2005 2004 2003
------------- ------------ ------------
Net loss - basic $(3,039,607) $(2,952,077) $(7,986,175)
Add: Interest on convertible
preferred stock - - 75,574
Interest on convertible debt - 12,950 -
Gain on derivative instruments (286,373) (1,033,418) (1,807,859)
------------- ------------ ------------
Net loss - diluted $(3,325,980) $(3,972,545) $(9,718,460)
============= ============ ============
Weighted average number of
shares - basic 72,703,395 67,273,133 50,961,457
Incremental shares from:
Warrants 878,530 1,461,552 -
Convertible preferred stock - - 165,982
Convertible debt - 189,414 -
------------- ------------ ------------
Weighted average number of
shares - diluted 73,581,925 68,924,099 51,127,439
============= ============ ============
Earnings per share - basic $ (0.04) $ (0.04) $ (0.16)
Earnings per share - diluted $ (0.05) $ (0.06) $ (0.19)
Excluded from the above computations of weighted-average shares for diluted
net loss per share were options and warrants to purchase 10,787,480,
13,429,012 and 14,689,497 shares of common stock as of September 30, 2005,
2004 and 2003, respectively and convertible notes and accrued interest which
are convertible to 4,236,901 shares of common stock as of September 30, 2003.
These securities were excluded because their inclusion would have an
anti-dilutive effect on net loss per share.
F-41
17. SEGMENT REPORTING
SFAS No. 131, "Disclosure about Segments of an Enterprise and Related
Information" establishes standards for reporting information regarding
operating segments in annual financial statements and requires selected
information for those segments to be presented in interim financial reports
issued to stockholders. SFAS No. 131 also establishes standards for related
disclosures about products and services and geographic areas. Operating
segments are identified as components of an enterprise about which separate
discrete financial information is available for evaluation by the chief
operating decision maker, or decision-making group, in making decisions how
to allocate resources and assess performance. The Company's chief decision
maker, as defined under SFAS No. 131, is the Chief Executive Officer. To
date, the Company has viewed its operations as principally one segment, the
research and development of certain drugs and vaccines. As a result, the
financial information disclosed herein, materially represents all of the
financial information related to the Company's principal operating segment.
18. SUBSEQUENT EVENTS
In order to provide a possible source of funding for CEL-SCI's current
activities and for the development of its current and planned products,
CEL-SCI entered into an equity line of credit agreement with Jena Holdings
LLC on October 31, 2005.
Under the equity line of credit agreement, Jena Holdings LLC has agreed to
provide CEL-SCI with up to $5,000,000 of funding for a two year period which
will begin on the date that a registration statement filed by CEL-SCI to
register the shares to be sold to Jena Holdings LLC is declared effective by
the Securities and Exchange Commission. During this two year period, CEL-SCI
may request a drawdown under the equity line of credit by selling shares of
its common stock to Jena Holdings LLC, and Jena Holdings LLC will be
obligated to purchase the shares. 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. CEL-SCI may request
a drawdown once every 22 trading days, although CEL-SCI is under no
obligation to request any drawdowns under the equity line of credit.
During the 22 trading days following a drawdown request, CEL-SCI will
calculate the amount of shares it will sell to Jena Holdings LLC and the
purchase price per share. The purchase price per share of common stock will
be based on the daily volume weighted average price of CEL-SCI's common stock
during each of the 22 trading days immediately following the drawdown date,
less a discount of 11%.
As consideration for extending the equity line of credit, CEL-SCI granted
Jena Holdings LLC warrants to purchase 271,370 shares of common stock at a
price of $0.55 per share at any time prior to October 24, 2010.
CEL-SCI will be registering the shares of common stock issuable to Jena
Holdings under the equity line of credit, as well as 271,370 shares
underlying the warrants that CEL-SCI granted to Jena Holdings LLC.
F-42
19. QUARTERLY INFORMATION (UNAUDITED)
The following quarterly data are derived from the Company's Consolidated
Statements of Operations and have been restated to reflect the effect of
adjustments discussed in Note 2 to the consolidated financial statements.
Financial Data
Fiscal 2004
Three Three Three Three
months months months months
ended ended ended ended Year ended
December September September
31, March 31, June 30, 30, 30
2003 2004 2004 2004 2004
------------------------------------------------------------
Revenue $ 73,235 $ 99,214 $ 81,532 $ 71,498 $ 325,479
Operating expenses 1,063,715 1,313,234 988,965 1,084,264 4,450,178
Nonoperating (expense) income
as previously reported (115,613) 8,747 13,823 18,020 (75,023)
Nonoperating (expense) income
(as restated, see Note 2) (390,953) (190,956) 1,261,080 493,451 1,172,622
Net loss as previously reported (1,106,093) (1,205,273) (893,610) (994,746) (4,199,722)
Net income (loss) (as restated,
see Note 2) (1,381,433) (1,404,976) 353,647 (519,315) (2,952,077)
Net loss attributable to common
shareholders as previously
reported (1,106,093) (1,205,273) (893,610) (994,746) (4,199,722)
Net income (loss) attributable
to common shareholders
(as restated, see Note 2) (1,381,433) (1,404,976) 353,647 (519,315) (2,952,077)
Loss per common share - basic
as previously reported (0.02) (0.02) (0.01) (0.01) (0.06)
Income (loss) per common share
- basic (as restated,
see Note 2) (0.02) (0.02) 0.01 (0.01) (0.04)
Loss per common share - diluted
as previously reported (0.02) (0.02) (0.01) (0.01) (0.06)
Income ( loss) per common share
- diluted (as restated,
see Note 2) (0.02) (0.02) (0.01) (0.01) (0.06)
Fiscal 2005
Three Three Three Three
months months months months
ended ended ended ended Year ended
December September September
31, March 31, June 30, 30, 30
2004 2005 2005 2005 2005
------------------------------------------------------------
Revenue $ 75,507 $ 109,785 $ 38,103 $ 46,530 $ 269,925
Operating expenses 1,289,997 1,198,617 1,022,474 839,604 4,350,692
Nonoperating (expense) income
as previously reported 17,820 14,474 11,015 * *
Nonoperating (expense) income
(as restated, see Note 2) (14,953) (60,608) 330,585 786,136 1,041,160
Net loss as previously reported (1,196,670) (1,074,358) (973,356) * *
Net income (loss) (as restated,
see Note 2) (1,229,443) (1,149,440) (653,786) (6,938) (3,039,607)
Net loss attributable to
common shareholders as
previously reported (1,196,670) (1,074,358) (973,356) * *
Net income (loss) attributable
to common shareholders
(as restated, see Note 2) (1,229,443) (1,149,440) (653,786) (6,938) (3,039,607)
Loss per common share - basic
as previously reported (0.02) (0.01) (0.01) * *
Income ( loss) per common share
- basic (as restated,
see Note 2) (0.02) (0.02) (0.01) - (0.04)
Loss per common share - diluted
as previously reported (0.02) (0.01) (0.01) * *
Income ( loss) per common share
- diluted (as restated,
see Note 2) (0.02) (0.02) (0.01) - (0.05)
* Amounts for the three months ended September 30, 2005 and for the year ended
September 30, 2005 have not been previously reported or restated.
SIGNATURES
In accordance with Section 13 or 15(a) of the Exchange Act, the Registrant
has caused this Report to be signed on its behalf by the undersigned, thereunto
duly authorized on the 21st day of April 2006.
CEL-SCI CORPORATION
By:
------------------------------
Maximilian de Clara, President
By:
-------------------------------
Geert R. Kersten, Chief Executive,
Principal Accounting Officer and
Principal Financial Officer
Pursuant to the requirements of the Securities Act of l934, this Report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
Signature Title Date
Director April 21, 2006
- ----------------------
Maximilian de Clara
Director April 21, 2006
- ----------------------
Geert R. Kersten
Director April 21, 2006
- ----------------------
Alexander G. Esterhazy
Director April 21, 2006
- ----------------------
C. Richard Kinsolving
Director April 21, 2006
- ----------------------
Dr. Peter R. Young
CEL-SCI CORPORATION
FORM 10-K
EXHIBITS