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, 2009.
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 Identification No.)
incorporation or organization)
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, $.01 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 whether the registrant has submitted electronically and
posted on its corporate Web site, if any, every Interactive Data File required
to be submitted and posted pursuant to Rule 405 of Regulation S-T (ss.232.405 of
this chapter) during the preceding 12 months (or for such shorter period that
the registrant was required to submit and post such files). Yes [ ] No [ ]
Indicate by check mark 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, a non-accelerated filer, or a smaller reporting company. See
the definitions of "large accelerated filer," "accelerated filer" and "smaller
reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer [ ] Accelerated filer [ ]
Non-accelerated filer [ ] Smaller reporting company [X]
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 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,
2009, as quoted on the NYSE Amex, was $29,732,201.
As of December 31, 2009, the Registrant had 203,455,189 issued and outstanding
shares of common stock.
Documents Incorporated by Reference: None
PART I
ITEM 1. BUSINESS
-----------------
CEL-SCI Corporation (CEL-SCI) 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 business consists of the following:
1) Multikine(R) cancer therapy;
2) New "cold fill" manufacturing service to the pharmaceutical industry;
and
3) LEAPS technology, with two products, H1N1 swine flu treatment for
H1N1 hospitalized patients and CEL-2000, a rheumatoid arthritis
treatment vaccine.
MULTIKINE
---------
CEL-SCI's lead product, Multikine, is being developed for the treatment of
cancer. It is the first of a new class of cancer immunotherapy drugs called
Immune SIMULATORs. It simulates the activities of a healthy person's immune
system, which battles cancer every day. Multikine is multi-targeted; it is the
only cancer immunotherapy that both kills cancer cells in a targeted fashion and
activates the general immune system to destroy the cancer. CEL-SCI believes
Multikine is the first immunotherapeutic agent being developed as a first-line
standard of care treatment for cancer.
In January 2007, the US Food and Drug Administration cleared Multikine for
a global Phase III clinical trial in head and neck cancer patients using
Multikine. The Canadian regulatory agency, the Biologics and Genetic Therapies
Directorate, had previously concurred with the initiation of a global Phase III
clinical trial in head and neck cancer patients using Multikine.
The protocol for the Phase III trial is designed to develop conclusive
evidence of the efficacy of Multikine in the treatment of advanced primary
(previously untreated) 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 extend the
2
overall survival, enhance the local/regional control of the disease and reduce
the rate of disease progression in patients with advanced oral squamous cell
carcinoma.
Now that sufficient funding has been obtained, CEL-SCI expects to commence
the pivotal Phase III clinical trial for Multikine in the summer of 2010. This
follows not only many years of extensive clinical trials, but also a review of
the Phase III submissions by both the FDA and the Canadian regulators.
However, before starting the Phase III clinical trial, CEL-SCI had to
develop and validate the manufacturing process for Multikine as well as build
and fully validate a dedicated manufacturing facility for Multikine. CEL-SCI
took delivery of its new manufacturing facility in October 2008 and completed
validation in January 2010. This dedicated facility will be used to produce the
Multikine that will be used for CEL-SCI's Phase III clinical trial and
subsequently for sale following approval of the drug.
Multikine is a new type of immunotherapy in that it is a comprehensive
immunotherapy, incorporating both active and passive immune activity. A
comprehensive immunotherapy most closely resembles the workings of the natural
immune system in the sense that it works on multiple fronts in the battle
against cancer. A comprehensive immunotherapy causes a direct and targeted
killing of the tumor cells and activates the immune system to produce a more
robust and sustainable anti-tumor response.
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 (previously untreated) head & neck cancer (about 600,000 new
cases per annum). Since Multikine is not tumor specific, it may also be
applicable in many other solid tumors.
Multikine is the first immunotherapeutic agent being developed as a
first-line treatment for cancer. It is administered prior to any other cancer
therapy because that is the period when the anti-tumor immune response can still
be fully activated. Once the patient has had surgery or has received radiation
and/or chemotherapy, the immune system is severely weakened and is less able to
mount an effective anti-tumor immune response. To date, other immunotherapies
have been administered later in cancer therapy (i.e., after radiation,
chemotherapy, surgery).
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. It has been shown to render cancer cells much more susceptible to
radiation therapy (The Laryngoscope, December 2003, Vol.113 Issue
12).
3
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.
(viii) In a Phase II study, using the same drug regimen as will be
used in the Phase III study, the addition of Multikine as
first-line treatment prior to the standard of care treatment
resulted in a 33% improvement in the median overall survival at
3 1/2 years post-surgery, when compared to the results of 55
OSCC clinical trials published in the scientific literature
between 1987 and 2007.
Multikine works in a comprehensive way to marshal an effective killing of
the tumor:
1. Multikine attacks multiple antigens on the cancer cells.
2. Multikine directly kills cancer cells:
4
o The various cytokines present in Multikine, such as TNF, IL-1,
along with other cytokines, are responsible for this activity.
3. Multikine signals the immune system to mount an effective and
sustainable anti-tumor immune response:
o Multikine changes the type of cells that infiltrate and attack
the tumor from the `usual' CD-8 cells to CD-4 cells. These CD-4
cells bring about a more robust anti-tumor response.
- This is extremely important because the tumor is able to
shut down the infiltrating CD-8 cells, but is unable to shut
down the CD-4 cell attack. In addition, CD-4 cells help
break "tumor tolerance," thereby allowing the immune system
to recognize, attack, and destroy the tumor. The normal
immune system is `blind' to tumor cells because the tumor
cells are derived from the body's own cells, and thus the
body `thinks' of the tumor as `self', a phenomenon also
known as `tumor tolerance'.
4. Multikine renders the remaining cancer cells potentially much more
susceptible to radiation and chemotherapy treatment, thereby making
these treatments much more effective.
Multikine is currently being developed as an adjunct (additive) therapy to
the existing treatment of previously untreated head & neck cancer patients with
the goal of killing cancer cells and activating the general immune system to
destroy the cancer. CEL-SCI scientists believe that patients with previously
untreated disease would most likely benefit more from Multikine treatment as
their immune systems are still capable of proper immune response. Head and neck
cancer represents a clear unmet medical need. The recurrence rate is high and
about one out of every two patients die within three years. Currently used
therapies (surgery followed by radiation, chemotherapy or radio-chemotherapy)
fail to completely arrest the disease because they are unable to completely
remove or kill all of the cancer cells. The persistence of these residual cells
is responsible for the cancer's recurrence or metastasis. Multikine is injected
five times a week for three weeks around the tumor (peri-tumorally) as well as
in the vicinity of the local lymph nodes (peri-lymphatically) prior to the
patient's tumor being removed surgically and the patient receiving any other
therapy because these are the areas in which most of the cancer will recur and
from which metastases will develop. Multikine unleashes and then harnesses and
enhances the immune system's ability to target and kill those tumor cells before
they can cause recurrence or metastasize. It is expected that multiple
indications will be pursued over time since it is the same principle for
different cancers.
Proof of efficacy for anti-cancer drugs is a lengthy and complex process.
At this 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
5
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.
Development, Supply and Distribution Agreements
-----------------------------------------------
CEL-SCI has a development, supply and distribution agreement with Orient
Europharma of Taiwan. The agreement gave Orient Europharma the exclusive
marketing rights to Multikine for all cancer indications in Taiwan, Singapore,
Hong Kong and Malaysia. On November 3, 2008, CEL-SCI expanded its exclusive
licensing agreement for Multikine with Orient Europharma. The new agreement
extends the Multikine collaboration to also cover South Korea, the Philippines,
Australia and New Zealand. As part of this new agreement, Orient Europharma
invested an additional $500,000 in CEL-SCI. The agreement provides for Orient
Europharma to fund the clinical trials needed to obtain marketing approvals in
these 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. Orient Europharma will
participate in and pay for part of CEL-SCI's head and neck Phase III clinical
trial.
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, 2009, Orient Europharma had not started any clinical trials and
CEL-SCI agreed in December 2007 with Orient Europharma, that Orient EuroPharma
will participate in the global Phase III clinical trial by enrolling and paying
for a substantial number of patients in its territory. Orient Europharma will
also purchase Multikine from CEL-SCI for these patients at a rate established in
the November 2000 agreement.
Pursuant to an agreement dated May 2003, Eastern Biotech will receive a
royalty equal to 2% of CEL-SCI's net sales of Multikine and CEL-1000 prior to
May 30, 2033.
On August 19, 2008, CEL-SCI entered into an agreement with Teva
Pharmaceutical Industries Ltd. (Teva), a leading global pharmaceutical company,
under which CEL-SCI granted Teva an exclusive license to market and distribute
CEL-SCI's cancer drug Multikine in Israel and Turkey (the "Territory"). Although
the licensing agreement is initially restricted to the areas of head and neck
cancer, Teva has the right, subject to certain conditions, to include other
cancers during the term of the agreement. Multikine is currently thought to be
potentially useful in treating many tumor types.
Pursuant to the agreement, Teva will participate in CEL-SCI's upcoming
global Phase III clinical trial. Teva will fund a portion of the Phase III
clinical study and Teva's clinical group will conduct part of the clinical study
in Israel under the auspices of CEL-SCI and its Clinical Research Organization.
Teva will also be responsible for registering Multikine in the Territory. If
Multikine is approved, CEL-SCI will be responsible for manufacturing the
product, while Teva will be responsible for sales in the Territory. Revenues
will be divided equally between CEL-SCI and Teva.
6
Effective March 6, 2009, CEL-SCI entered into a licensing agreement with
Byron Biopharma LLC ("Byron") under which CEL-SCI granted Byron an exclusive
license to market and distribute Multikine in the Republic of South Africa.
Pursuant to the agreement, Byron will be responsible for registering the
product in South Africa. Once Multikine has been approved for sale, CEL-SCI will
be responsible for manufacturing the product, while Byron will be responsible
for sales in South Africa. Revenues will be divided equally between CEL-SCI and
Byron. To maintain the license Byron, among other requirements, must make
milestone payments to CEL-SCI totaling $125,000 on or before March 15, 2010.
There have been no milestone payments through September 30, 2009.
New Manufacturing Facility
--------------------------
CEL-SCI's new, state-of-the-art manufacturing facility will be used to
manufacture Multikine for CEL-SCI's Phase III clinical trial. Located near
Baltimore, MD, it was designed over several years, and was built out to
CEL-SCI's specifications during the past 18 months. CEL-SCI leased this
specially designed and built out facility, rather than having Multikine produced
by a third party on a contract basis, since regulatory agencies prefer that the
same facility be used to manufacture Multikine for both the Phase III trials and
commercial sales, assuming the Phase III trial is successful. As is customary
with large, complex construction projects, the manufacturing facility required a
number of construction, utility and equipment adjustments as well as "punch
list" items that required additional time to complete. This resulted in a gap
between the time when CEL-SCI took over the facility and the time when
validations and other CEL-SCI specific activities could commence. In addition to
using this facility to manufacture Multikine, CEL-SCI will offer the use of the
facility as a service to pharmaceutical companies and others, particularly those
that need to "fill and finish" their drugs in a cold environment (4 degrees
Celsius, or approximately 39 degrees Fahrenheit). Fill and finish is the process
of filling injectable drugs in a sterile manner and is a key part of the
manufacturing process for many medicines.
The fastest area of growth in the biopharmaceutical and pharmaceutical
markets is biologics, and most recently stem cell products. These compounds and
therapies are derived from or mimic human cells or proteins and other molecules
(e.g., hormones, etc.). Nearly all of the major drugs developed for unmet
medical needs (e.g., Avastin(R), Erbitux(R), Rituxan(R), Herceptin(R),
Copaxon(R), etc.) are biologics. Biologics are usually very sensitive to heat
and quickly lose their biological activity if exposed to room or elevated
temperature. Room or elevated temperatures may also affect the shelf-life of a
biologic with the result that the product cannot be stored for as long as
desired. However, these products do not generally lose activity when kept at 4
degrees Celsius.
The FDA and other regulatory agencies require a drug developer to
demonstrate the safety, purity and potency of a drug being produced for use in
humans. When filling a product at 4 degrees Celsius, minimal to no biological
losses occur and therefore the potency of the drug is maintained throughout the
final critical step of the drug's manufacturing process. If the same temperature
sensitive drug is instead aseptically filled at room temperature, expensive and
time-consuming validation studies must be conducted, first, to be able to obtain
7
a complete understanding of the product's potency loss during the room
temperature fill process, and second, to create solutions to the drug's potency
losses, which require further testing and validation.
CEL-SCI's unique, cold aseptic filling suite can be operated at
temperatures between 2 degrees Celsius and room temperatures, and at various
humidity levels. CEL-SCI's aseptic filling suites are maintained at FDA and EU
ISO classifications of 5/6. CEL-SCI also has the capability to formulate,
inspect, label and package biologic products at cold temperatures.
Since a 4 degrees Celsius fill and finish process can save drug
manufacturers time and money, CEL-SCI believes it will be able to charge
approximately $150,000 for an eight hour fill and finish "run".
See Item 2 of this report for information concerning the terms of the
lease on the manufacturing facility.
LEAPS
-----
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 as well as
autoimmune, allergies, transplantation rejection and cancer, when it cannot do
so on its own. Administered like vaccines, LEAPS 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 has created a potential peptide
treatment for H1N1 (swine flu) hospitalized patients. This L.E.A.P.S. flu
treatment is designed to focus on the conserved, non-changing epitopes of the
different strains of Type A Influenza viruses (H1N1, H5N1, H3N1, etc.),
including "swine", "avian or bird", and "Spanish Influenza", in order to
minimize the chance of viral "escape by mutations" from immune recognition.
CEL-SCI's L.E.A.P.S. flu treatment contains epitopes known to be associated with
immune protection against influenza in animal models.
On September 16, 2009, the U.S. Food and Drug Administration advised
CEL-SCI that it could proceed with its first clinical trial to evaluate the
effect of LEAPS-H1N1 treatment on the white blood cells of hospitalized H1N1
patients. This followed an expedited initial review of CEL-SCI's regulatory
submission for this study proposal. Following completion of manufacturing, the
initiation of this first study will be subject to review and approval by the
Institutional Review Board of any hospital participating in the study.
8
On November 6, 2009, CEL-SCI announced that The Johns Hopkins University
School of Medicine has given clearance for CEL-SCI's first clinical study to
proceed using LEAPS-H1N1. This study started one week later.
To fully consider a next-stage clinical trial to evaluate LEAPS-H1N1
treatment of hospitalized patients with laboratory-confirmed H1N1 Pandemic Flu
under an Exploratory IND, the FDA has asked CEL-SCI to submit a detailed
follow-up regulatory filing with extensive additional data. Thus, in parallel
with preparing for this first study, CEL-SCI is proceeding on an expedited basis
to complete this next submission. Recognizing that it cannot proceed with its
next-stage clinical trial without the FDA's concurrence, CEL-SCI anticipates
engaging in a detailed dialogue with the FDA regarding the proposed LEAPS-H1N1
clinical-development program following this future filing.
With its LEAPS technology, CEL-SCI also discovered a second peptide named
CEL-2000, a potential rheumatoid arthritis vaccine. The data from animal studies
of rheumatoid arthritis using the CEL-2000 treatment vaccine demonstrated that
CEL-2000 is an effective treatment against arthritis with fewer administrations
than those required by other anti-rheumatoid arthritis treatments, including
Enbrel(R). CEL-2000 is also potentially a more disease type specific therapy, is
calculated to be significantly less expensive and may be useful in patients
unable to tolerate or who may not be responsive to existing anti-arthritis
therapies.
None of the products or vaccines which are in development using the LEAPS
technology have been approved by the FDA or any other government agency. Before
obtaining marketing approval from the FDA in the United States, and by
comparable agencies in most foreign countries, these 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
these approvals will be granted.
RESEARCH AND DEVELOPMENT
------------------------
Since 1983, and through September 30, 2009, approximately $65,331,400 has
been spent on CEL-SCI-sponsored research and development, including $6,011,750,
$4,101,600, and $2,529,000 respectively during the years ended September 30,
2009, 2008 and 2007.
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. 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.
GOVERNMENT REGULATION
---------------------
New drug development and approval process
9
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 the
compliance of its 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
or its 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.
10
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.
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.
11
Phase III clinical trials
This phase typically lasts several 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.
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.
12
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.
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 compounds that utilize
cytokines. However, CEL-SCI believes that its main advantage lies in two areas
and that those two areas will allow it to be successful: 1) Multikine is given
prior to surgery, radiation and/or chemotherapy, a time when the immune system
can still be activated effectively. Other companies give their immunotherapy
drugs after these cancer treatments. At that time the immune system is already
so weakened that it can no longer mount a complete immune response. 2) Multikine
simulates the activities of a healthy person's immune system, which battles
cancer every day. Multikine is multi-targeted; it is a cancer immunotherapy that
both kills cancer cells in a targeted fashion and activates the general immune
system to destroy the cancer. In addition, since Multikine is a complex
biologic, CEL-SCI believes that it will be extremely difficult for someone to
copy Multikine.
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.
CEL-SCI has selected a Clinical Research Organization (CRO) for the Phase
III trial with Multikine. The expected start date for the clinical trial is the
summer of 2010. The expected cost of the clinical trial is about $20 million
13
(excluding the costs that will be paid by CEL-SCI's partners).
EMPLOYEES
---------
As of December 31, 2009, CEL-SCI had 29 employees. Seven employees are
involved in administration, 20 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, 2009 CEL-SCI incurred net
losses of approximately $156,071,600. 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.
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
14
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.
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 currently in the process of establishing estimates of the future costs of the
Phase III clinical trial.
In December 2008, CEL-SCI entered into an equity line of credit agreement
with Ascendiant Capital Group, LLC in order to establish a possible source of
funding for CEL-SCI. The equity line of credit agreement establishes what is
sometimes referred to as an equity drawdown facility. Although Ascendiant, under
the equity line of credit agreement, has agreed to provide CEL-SCI with up to
$5,000,000 of funding prior to January 6, 2011, there is no guarantee that
Ascendiant will be able to provide the full $5,000,000 of funding if required by
CEL-SCI.
During fiscal year 2009, CEL-SCI raised gross proceeds from investors
exceeding $39 million through equity financings and conversion of warrants and
received an additional $1.25 million in equity investments from partners.
In accordance with the terms of the manufacturing facility's lease,
CEL-SCI must maintain a certain amount of cash. Should CEL-SCI's cash position
fall below the amount stipulated in the lease CEL-SCI would be required to
deposit with the landlord the equivalent of one year's base rent. CEL-SCI paid
this additional amount of $1,575,000 in 2008 and has the opportunity to recoup
this deposit once its cash balance reaches a certain level. That level has been
reached and will likely be maintained through December 31, at which time CEL-SCI
expects to receive the additional amount of $1,575,000 back from the landlord.
The landlord has the right to declare CEL-SCI in default if CEL-SCI fails to pay
any installment of the base rent when such failure continues for a period of 5
business days after CEL-SCI's receipt of written notice from the landlord,
provided that if CEL-SCI fails to pay any of the foregoing within five business
days more than two times in any twelve-month period during the lease, the
landlord will not be required to provide CEL-SCI with any further notice and
CEL-SCI will be deemed to be in default. As of the date of this filing, CEL-SCI
was not in default on the lease.
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.
No definite plan for marketing of Multikine has been established.
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 sell Multikine itself in certain markets and 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 head and neck cancer.
15
CEL-SCI may encounter problems, delays and additional expenses in
developing marketing plans with outside firms. In addition, even though
Multikine should be very cost effective to use if proven to increase overall
survival, 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.
Potential Future Dilution
To raise additional capital CEL-SCI may have to 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.
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.
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
16
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, from the FDA in the United States and by comparable
agencies in most foreign countries. Before obtaining marketing approval, these
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 the Phase III clinical trial for Multikine.
The clinical trials of CEL-SCI's product candidates may not be completed on
schedule, the FDA or foreign regulatory agencies may order CEL-SCI to stop 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. 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 can vary 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 approved for
marketing. 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.
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.
17
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.
Even if CEL-SCI obtains regulatory approval for its product candidates, CEL-SCI
will be subject to stringent, ongoing government regulation.
If CEL-SCI's products receive regulatory approval, either in the United
States or internationally, CEL-SCI will be subject to extensive regulatory
requirements. These regulations are wide-ranging and govern, among other things:
product design, development and manufacture;
adverse drug experience;
product advertising and promotion;
product manufacturing, including good manufacturing practice requirements;
record keeping requirements;
registration and listing of CEL-SCI's establishments and products with
the FDA and certain state agencies;
product storage and shipping;
drug sampling and distribution requirements;
electronic record and signature requirements; and
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 contract manufacturers or suppliers, cannot pass a pre-approval plant
inspection, the FDA will not approve the marketing applications 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.
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
license suspension or revocation, criminal prosecution, seizure, injunction,
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. 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
18
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.
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 companies are working on drugs designed to cure or treat cancer and
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.
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.
19
Risks Related to CEL-SCI's Common Stock
---------------------------------------
Since the market price for CEL-SCI's common stock is volatile, investors 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 twelve months ended September 30, 2009,
CEL-SCI's stock price has ranged from a low of $0.14 per share to a high of
$2.10 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 outstanding warrants and options 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 convertible notes, options and warrants which as
of December 31, 2009 could potentially allow the holders to acquire over
85,180,000 additional shares of its common stock. Until the options and warrants
expire, and the convertible note is paid off, 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 convertible notes,
options and warrants may convert or exercise these securities at a time when
CEL-SCI could obtain additional capital on terms more favorable than those
provided by the options. The conversion of the notes or the exercise of the
options and warrants will dilute the voting interest of the owners of presently
outstanding shares by adding a substantial number of additional 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.
An unknown number of shares of common stock, which may be sold by means of
a separate registration statement, are issuable under an equity line of credit
arrangement with Ascendiant Capital Group, Inc. As CEL-SCI sells shares of its
common stock to Ascendiant under the equity line of credit, and Ascendiant 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. Since shares sold pursuant
to the equity line will be sold at a 9% discount to the market price of
CEL-SCI's common stock at the time of any draw down, the discount may result in
20
a further decrease in the market price of CEL-SCI's common stock. 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 Ascendiant, 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 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.
Claims by the former holders of CEL-SCI's Series K notes may potentially result
in the issuance of additional shares of CEL-SCI's common stock and the payment
of damages.
In August 2006, CEL-SCI sold Series K notes, plus Series K warrants, to a
group of private investors. The notes were convertible into shares of CEL-SCI's
common stock. In connection with the sale of the Series K notes, the Series K
note holders were granted a security interest in substantially all of CEL-SCI's
assets. One of the Series K note holders, Iroquois Master Fund Ltd., has
indicated that it believes the conversion price of the Series K notes, as well
as the exercise price of the Series K warrants, should be $0.20 as opposed to
$0.40. It is CEL-SCI's position that the correct conversion price was $0.40 and
the correct exercise price of the warrants is $0.40.
On October 21, 2009, Iroquois filed suit against CEL-SCI. In its
complaint, alleging breach of contract, breach of fiduciary duty, conversion,
and negligence, Iroquois seeks actual and punitive damages, the issuance by
CEL-SCI of additional shares and warrants, and a ruling by the court that the
conversion price of the notes and the exercise price of the warrants are both
$0.20. See Item 3 of this report for more information.
ITEM 1B. UNRESOLVED SEC COMMENTS
--------------------------------
None
ITEM 2. PROPERTIES
--------------------
CEL-SCI leases office space at 8229 Boone Blvd., Suite 802, Vienna,
Virginia at a monthly rental of approximately $8,700. The lease on the office
space expires in June 2012. 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 $7,300 per month. The laboratory lease expires in February 2014.
In August 2007, CEL-SCI leased a building near Baltimore, Maryland. The
building, which consists of approximately 73,000 square feet, has been remodeled
in accordance with CEL-SCI's specifications so that it can be used by CEL-SCI to
manufacture Multikine for CEL-SCI's Phase III clinical trial and sales of the
drug if approved by the FDA. The lease expires on October 31, 2028 and requires
21
annual base rent payments of approximately $1,620,000 during the twelve months
ending October 31, 2010. The annual base rent escalates each year thereafter at
3%. CEL-SCI is also required to pay all real and personal property taxes,
insurance premiums, maintenance expenses, repair costs and utilities. The lease
allows CEL-SCI, at its election, to extend the lease for two ten-year periods or
to purchase the building at the end of the 20-year lease. The lease required
CEL-SCI to pay $3,150,000 towards the remodeling costs, which will be recouped
by reductions in the annual base rent of $303,228 beginning in 2014. In July
2008, CEL-SCI was required to deposit $1,575,000 since the amount of CEL-SCI's
cash fell below the amount stipulated in the lease. The landlord has the right
to declare CEL-SCI in default if CEL-SCI fails to pay any installment of the
Base Annual Rent when such failure continues for five business days after
CEL-SCI's receipt of written notice from the Landlord, provided that if CEL-SCI
fails to pay any installment of the Base Annual Rent within five business days
more than twice in any twelve month period, the Landlord will not be required to
provide CEL-SCI with any further notice and CEL-SCI will be deemed to be in
default.
ITEM 3. LEGAL PROCEEDINGS
---------------------------
Pursuant to a Securities Purchase Agreement dated August 4, 2006, CEL-SCI
sold Series K convertible notes, plus Series K warrants, to a group of private
investors for $8,300,000. The notes were subsequently paid in full.
At the holder's option, the Series K notes were convertible into shares of
CEL-SCI's common stock equal in number to the amount determined by dividing each
$1,000 of note principal to be converted by the conversion price. Initially, the
conversion price was $0.86.
The Series K warrants allow the note holders to purchase shares of
CEL-SCI's common stock, initially at a price of $0.95 per share, at any time on
or prior to February 4, 2012.
If CEL-SCI sold any additional shares of common stock, or any securities
convertible into common stock, at a price below the then applicable conversion
price of the notes or the exercise price of the warrants, the conversion price
of the notes and the exercise price of the warrants would be reduced to the
price at which the shares were sold or the lowest price at which the securities
were convertible, as the case may have been.
If the warrant exercise price was decreased, the number of shares of
common stock issuable upon the exercise of the warrant would be increased
proportionately.
However, the conversion price of the Series K notes, the exercise price of
the Series K warrants, and the shares issuable upon the exercise of the warrants
would not be adjusted as the result of shares issued in connection with a
Permitted Financing, as that term was defined in the Securities Purchase
Agreement. A Permitted Financing included shares of common stock issued or sold
in connection with a bona fide licensing agreement, the primary purpose of which
was not to raise cash.
22
In April 2007, the conversion price of the Series K notes and the exercise
price of the Series K warrants were reduced to $0.75 per share as a result of
shares sold by CEL-SCI below the original conversion price of the notes and the
exercise price of the warrants.
On March 6, 2009, CEL-SCI entered into a licensing agreement with an
unrelated third party. In connection with the licensing agreement, CEL-SCI sold
shares of its common stock to the third party for $0.20 per share, a premium to
the Company's share price at the time.
In June 2009, the conversion price of the Series K notes and the exercise
price of the Series K warrants were reduced to $0.40 per share as a result of
shares sold by CEL-SCI below the conversion price of the notes and the exercise
price of the warrants.
As previously disclosed by CEL-SCI in its public filings, one of the
Series K note holders, Iroquois Master Fund, Ltd. ("Iroquois") advised CEL-SCI
that the conversion price of the Series K notes, as well as the exercise price
of the Series K warrants, should be $0.20 since it did not believe that the sale
of CEL-SCI's shares of its common stock on March 6, 2009 was a Permitted
Financing.
It is CEL-SCI's position that the shares sold on March 6, 2009 were sold
in connection with a Permitted Financing and did not cause a reduction in the
conversion price of the Series K notes or the exercise price of the Series K
warrants.
On October 21, 2009, Iroquois filed suit against CEL-SCI in the United
States District Court for the Southern District of New York. In its complaint
Iroquois alleges that CEL-SCI is liable for breach of contract, breach of
fiduciary duty, conversion, and negligence.
Through its lawsuit Iroquois is seeking $30 million in actual damages, $90
million in punitive damages, the issuance of an additional 4,264,681 shares of
CEL-SCI's common stock, the issuance of warrants to purchase an additional
6,460,757 shares of CEL-SCI's common stock, and a ruling by the court that the
conversion price of the notes and the exercise price of the warrants are both
$0.20.
CEL-SCI believes that Iroquois's claims are without merit and has filed a
motion with the District Court seeking the dismissal of Iroquois's lawsuit.
If Iroquois prevails in its suit, CEL-SCI may be required to issue
approximately 1,166,000 additional shares of common stock and issue
approximately 9,616,000 warrants at $0.20 per share to the other holders of the
Series K notes and warrants, assuming all of the warrants are exercised.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
-------------------------------------------------------------
The annual meeting of CEL-SCI's shareholders was held on September 14,
2009.
At the meeting the following persons were elected as directors for the
upcoming year:
23
Name Votes For Votes Withheld
---- --------- --------------
Maximilian de Clara 103,345,994 8,127,666
Geert Kersten 105,674,562 5,831,098
Alexander Esterhazy 105,126,777 6,378,883
C. Richard Kinsolving 105,935,978 5,569,682
Peter R. Young 106,030,003 5,475,657
At the meeting the following proposals were ratified by the shareholders.
1. The adoption of CEL-SCI's 2009 Incentive Stock Option Plan which
provides that up to 5,000,000 shares of common stock may be issued
upon the exercise of options granted pursuant to the Incentive Stock
Option Plan.
2. The adoption of CEL-SCI's 2009 Non-Qualified Stock Option Plan which
provides that up to 15,000,000 shares of common stock may be issued
upon the exercise of options granted pursuant to the Non-Qualified
Stock Option Plan.
3. The adoption of CEL-SCI's 2009 Stock Bonus Plan which provides that up
to 2,000,000 shares of common stock may be issued to persons granted
stock bonuses pursuant to the Stock Bonus Plan.
4. An amendment to CEL-SCI's Stock Compensation Plan to provide for the
issuance of up to 2,000,000 additional restricted shares of common
stock to CEL-SCI's directors, officers, employees and consultants for
services provided to CEL-SCI.
5. An amendment to CEL-SC's Articles of Incorporation such that CEL-SCI
would be authorized to issue 450,000,000 shares of common stock.
6. Subject to the determination of CEL-SCI's directors that a reverse
split would be in the best interest of CEL-SCI's shareholders, to
approve a reverse split of CEL-SCI's common stock.
7. Ratification of the appointment of BDO Seidman, LLP as CEL-SCI's
independent registered public accounting firm for the fiscal year
ending September 30, 2009.
The following is a tabulation of votes cast with respect to these proposals:
Votes
--------------------------------------- Broker
Proposal For Against Abstain Non-Votes
1. 29,845,527 6,516,907 974,690 74,168,536
2. 29,587,024 6,587,595 1,162,505 74,168,536
3. 30,294,490 6,429,371 613,263 74,168,536
4. 29,648,477 6,821,416 867,231 74,168,536
5. 82,115,894 27,368,351 2,021,415
6. 79,068,202 30,554,163 1,883,295
7. 105,118,573 4,600,627 1,786,460
24
ITEM 5. MARKET FOR CEL-SCI'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
-----------------------------------------------------------------------------
As of December 31, 2009, there were approximately 1,100 record holders of
CEL-SCI's common stock. CEL-SCI's common stock is traded on the NYSE Amex
(formerly 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 NYSE Alternext US. The market quotations
reflect inter-dealer prices, without retail mark-up, mark-down or commissions
and may not necessarily represent actual transactions.
Quarter Ended High Low
------------- ---- ---
12/31/07 $0.64 $0.48
3/31/08 $0.74 $0.37
6/30/08 $0.72 $0.60
9/30/08 $0.78 $0.40
12/31/08 $0.50 $0.18
3/31/09 $0.40 $0.14
6/30/09 $0.80 $0.20
9/30/09 $2.10 $0.38
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
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
25
general market conditions may have a significant effect on the market price of
CEL-SCI's common stock.
The following graph compares the cumulative 5-year total return to
shareholders on CEL-SCI Corporation's common stock relative to the cumulative
total returns of the NYSE Amex Composite index, the RDG MicroCap Biotechnology
index and a customized peer group of two companies that includes: Neoprobe Corp.
and Orchestra Therapeutics Inc. IDM Pharma, Inc. ceased trading July 6, 2009 and
therefore has been dropped from the peer group. The graph assumes that the value
of the investment in the company's common stock, in each index, and in the peer
group (including reinvestment of dividends) was $100 on 9/30/2004 and tracks it
through 9/30/2009.
--------------------------------------------------------------------------------
9/04 9/05 9/06 9/07 9/08 9/09
--------------------------------------------------------------------------------
CEL-SCI Corporation 100.00 82.46 108.77 109.68 70.18 301.75
NYSE Amex Composite 100.00 147.13 162.81 205.69 159.20 166.36
RDG MicroCap
Biotechnology 100.00 92.29 64.97 45.09 24.45 22.01
Peer Group 100.00 44.66 21.76 12.24 21.78 53.15
26
The stock price performance included in this graph is not necessarily
indicative of future stock price performance.
PEER GROUP 1
Neoprobe Corp.
Orchestra Therapeutics Inc
ITEM 6. SELECTED FINANCIAL DATA
--------------------------------
The following selected historical consolidated financial data are
qualified by reference to, and should be read in conjunction with the
consolidated financial statements and the related notes thereto, appearing
elsewhere in this report, as well as Item 7 of this report.
For the years ended September 30,
---------------------------------------------------------------
Statements of Operations 2009 2008 2007 2006 2005
------------------------ ---------------------------------------------------------------
Grant revenue and other $ 80,093 $ 5,065 $ 57,043 $ 125,457 $ 269,925
Operating expenses:
Research and development 6,011,750 4,101,563 2,528,528 1,896,976 2,229,729
Depreciation and
amortization 417,205 215,060 176,186 170,903 190,420
General and
administrative 5,671,595 5,200,735 6,704,538 3,406,774 1,930,543
(Loss) Gain on derivative
instruments (28,491,650) 1,799,393 868,182 2,325,784 363,028
Other income - - - - 625,472
Other costs of financing - - - (4,791,548) -
Interest income - 483,252 562,973 92,487 52,660
Interest expense (397,923) (473,767) (1,708,603) (216,737) -
------------- ------------- ------------- ------------- -------------
Net loss (40,910,030) (7,703,415) (9,629,657) (7,939,210) (3,039,607)
------------- ------------- ------------- ------------- -------------
Dividends (490,728) (424,815) - - -
------------- ------------- ------------- ------------- -------------
Net loss available to
common shareholders $(41,400,758) $ (8,128,230) $ (9,629,657) $ (7,939,210) $ (3,039,607)
------------- ------------- ------------- ------------- -------------
Statements of Operations
------------------------
Net loss per common share
Basic $ (0.31) $ (0.07) $ (0.10) $ (0.10) $ (0.04)
Diluted $ (0.31) $ (0.07) $ (0.10) $ (0.11) $ (0.05)
Weighted average common
shares outstanding
Basic 133,535,050 117,060,866 97,310,488 78,971,290 72,703,395
Diluted (1) 133,535,050 117,060,866 97,310,488 93,834,078 73,581,925
27
Balance Sheets
-------------- September 30,
--------------------------------------------------------------------
2009 2008 2007 2006 2005
--------------------------------------------------------------------
Working capital $(1,580,623) $(2,492,555) $10,257,568 $ 7,109,879 $ 2,235,297
Total assets 46,027,598 14,683,672 20,730,802 9,653,277 3,092,352
Derivative instruments -
current (2) 35,113,970 3,018,697 782,732 1,670,234 1,280
Derivative instruments -
noncurrent (2) - - 4,831,252 8,645,796 811,180
Total liabilities 37,186,954 3,847,637 6,060,703 10,583,878 987,313
Stockholders' equity
(deficit) 8,840,644 10,836,035 14,670,099 (930,601) 2,105,039
(1) The calculation of diluted earnings per share for the years ended September
30, 2009, 2008 and 2007 equals the basic earnings per share because the
calculation would have been anti-dilutive.
(2) Included in total liabilities.
No dividends have been declared on CEL-SCI's common stock. However, in
December 2007, warrants held by third parties were extended, resulting in a
$424,815 charge, which was treated as a deemed dividend and is shown as such in
the consolidated financial statements. In the third and fourth quarters of the
fiscal year ended September 30, 2009, additional shares were issued and others
extended in accordance with previous financings, resulting in a $490,728 charge,
which was treated as a deemed dividend and is shown as such in the consolidated
financial statements. No actual dividends were paid to shareholders.
CEL-SCI's net losses for each fiscal quarter during the two years ended
September 30, 2009 were:
Net income Net income (loss) per share
Quarter (loss) Basic Diluted
------- ------------ ----- -------
12/31/2007 $ (2,267,550) $ (0.02) $ (0.02)
3/31/2008 $ (3,210,294) $ (0.03) $ (0.03)
6/30/2008 $ (1,989,278) $ (0.02) $ (0.02)
9/30/2008 $ (661,108) $ (0.01) $ (0.01)
12/31/2008 $ (2,173,513) $ (0.02) $ (0.02)
3/31/2009 $ (2,117,280) $ (0.02) $ (0.02)
6/30/2009 $ (6,705,731) $ (0.05) $ (0.05)
9/30/2009 $(30,404,234) $ (0.19) $ (0.14)
First three quarters of fiscal year 2009 as adjusted. See Footnote 14 for
details.
CEL-SCI has experienced large swings in its quarterly losses in 2009 and
2008. These swings are caused by the changes in the fair value of the
convertible debt and warrants each quarter. These changes in the fair value of
the convertible debt are recorded on the consolidated statements of operations.
In addition, the cost of options granted to consultants, as discussed in the
results of operations in this report, has affected the quarterly losses recorded
by CEL-SCI.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
28
The following discussion should be read in conjunction with the
consolidated financial statements and the related notes thereto appearing
elsewhere in this report.
CEL-SCI's most advanced product, Multikine, which is cleared for a Phase
III clinical trial in the U.S. and in Canada, is being developed for the
treatment of cancer.
CEL-SCI also owns a pre-clinical technology called L.E.A.P.S. (Ligand
Epitope Antigen Presentation System).
All of CEL-SCI's projects are under development. As a result, CEL-SCI
cannot predict when it will be able to generate any revenue from the sale of any
of its products.
Since inception, CEL-SCI has financed its operations through the issuance
of equity securities, convertible notes, loans and certain research grants.
CEL-SCI's expenses will likely exceed its revenues as it continues the
development of Multikine and brings other drug candidates into clinical trials.
Until such time as CEL-SCI becomes profitable, any or all of these financing
vehicles or others may be utilized to assist CEL-SCI's capital requirements.
Results of Operations
---------------------
Fiscal 2009
-----------
During the year ended September 30, 2009, research and development
expenses increased by $1,910,187 compared to the year ended September 30, 2008.
This increase was due to continuing expenses relating to the preparation for the
Phase III clinical trial on Multikine. CEL-SCI is currently hiring and preparing
for the start of the Phase III clinical trial.
During the year ended September 30, 2009, general and administrative
expenses increased by $470,860 compared to the year ended September 30, 2008,
primarily because of an increase in the Codification 718-10-30-3 "Share Based
Payment" costs of approximately $1,138,062. The Codification 718-10-30-3 "Share
Based Payment" cost is a non-cash charge. This increase was primarily offset by
a reduction in travel costs ($51,349), shareholder costs ($82,983) and
presentation costs ($242,497).
Interest income during the year ended September 30, 2009 decreased by
$483,252 compared to the year ended September 30, 2008. The decrease was due to
lower interest rates and a decline in the funds available to invest, until the
later part of the year.
The loss on derivative instruments of $28,491,650 for the year ended
September 30, 2009, was the result of the change in fair value of the Series A-E
Warrants as well as the Series K Notes and Series K Warrants during the period.
The Series A-E warrants issued in conjunction with several financings during the
fiscal year ended September 30, 2009 are considered derivative liabilities and
must be valued at the end of each period. The fair value of these warrants was
calculated to be $29,741,372 at September 30, 2009. In addition, the remaining
Series K warrants were valued at $5,372,598 at September 30, 2009. This loss was
29
due to three factors: 1) an increase in the Company's share price, and 2) the
repricing of the Series K notes to $0.40 as a result of the June 2009 financing,
and 3) the resulting increase in the number of shares and warrants owned by the
Series K investors.
The interest expense of $397,923 for the year ended September 30, 2009 was
composed of five elements: 1) amortization of the Series K discount and short
term loan discount ($438,980), 2) interest paid and accrued on the Series K debt
($115,559), 3) other interest ($81,602), 4) interest on the short term loan
($279,158), and net of 5) amortization of loan premium $517,376. This represents
a decrease of $75,844 from the year ended September 30, 2008 due to the cost of
the warrants issued to the short term note holder, a noncash cost. The
corresponding amounts for the year ended September 30, 2008 are: 1) $249,106, 2)
$217,140, 3) $7,521, 4) $0, and 5) $0.
Fiscal 2008
-----------
Grant revenue and other decreased by $51,978 during the year ended
September 30, 2008, compared to fiscal 2007, due to the completion of the work
funded by the grants. The final grant ended on March 31, 2007. A training grant
in the amount of $3,535 was received from the State of Maryland during the year
ended September 30, 2008. In addition, CEL-SCI received rent on an office sublet
during a portion of the fiscal year 2008.
During the year ended September 30, 2008, research and development
expenses increased by $1,573,035 compared to fiscal 2007. This increase was due
to expenses relating to the preparation for the Phase III clinical trial on
Multikine.
During the year ended September 30, 2008, general and administrative
expenses decreased by $1,503,803 compared to fiscal 2007. This change was
primarily due to stock issued to consultants in 2007 (approximately $1,825,000)
and a reduction in the public relations and presentations (approximately
$43,400) from fiscal 2007. This reduction on stock and public relation costs was
partially offset by an increase in filing fees (approximately $41,600),
insurance ($35,000) and the implementation costs of Sarbanes-Oxley requirements
(approximately $16,700).
Interest income during the year ended September 30, 2008 decreased by
$79,721 compared to fiscal 2007. The decrease was due to fewer funds available
for investment. This decrease was partially offset by interest income accrued on
the deferred rent on the manufacturing facility (approximately $190,500).
The gain on derivative instruments of $1,799,393 for the year ended
September 30, 2008 was the result of the change in fair value of the Series K
Notes and Series K Warrants during the year. These gains were caused by
fluctuations in the share price of CEL-SCI's common stock.
The interest expense of $473,767 for the year ended September 30, 2008 was
composed of three elements: 1) amortization of the Series K discount ($249,106),
2) interest paid and accrued on the Series K debt ($217,140) and 3) loan
interest ($7,521). This is a decline of approximately $1,234,836 from the year
ended September 30, 2007 due to the lower principal balance of Series K notes.
30
Research and Development Expenses
---------------------------------
During the five years ended September 30, 2009 CEL-SCI's research and
development efforts involved Multikine and L.E.A.P.S. The table below shows the
research and development expenses associated with each project during this
five-year period.
2009 2008 2007 2006 2005
---- ---- ---- ---- ----
MULTIKINE $5,281,999 $3,765,258 $2,217,108 $1,656,362 $1,911,615
L.E.A.P.S. 729,751 336,305 311,420 240,614 318,114
---------- ---------- ---------- ---------- ----------
TOTAL $6,011,750 $4,101,563 $2,528,528 $1,896,976 $2,229,729
========== ========== ========== ========== ==========
In January 2007, FDA gave the go-ahead for the Phase III clinical trial
which had earlier been cleared by the Canadian regulatory agency, the Biologics
and Genetic Therapies Directorate.
As explained in Item 1 of this report, as of September 30, 2009, 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.
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, and later purchase of, 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 research and
development sponsored by CEL-SCI, administrative costs and construction of
laboratory facilities. Inasmuch as CEL-SCI does not anticipate realizing
31
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 August 2007, CEL-SCI leased a building near Baltimore, Maryland. The
building, which consists of approximately 73,000 square feet, has been remodeled
in accordance with CEL-SCI's specifications so that it can be used by CEL-SCI to
manufacture Multikine for CEL-SCI's Phase III clinical trials and sales of the
drug if approved by the FDA. The lease expires on October 31, 2028, and requires
annual base rent payments of approximately $1.62 million during the twelve
months ending October 31, 2010. See Item 2 of this report for more information
concerning the terms of this lease.
In August 2006, CEL-SCI sold Series K convertible notes, plus Series K
warrants, to independent private investors for $8,300,000. The notes were
convertible into shares of CEL-SCI's common stock. On August 31, 2009, all of
the Series K notes had either been repaid or had been converted into shares of
CEL-SCI's common stock.
As of November 15, 2009, 8,562,711 Series K warrants had been exercised.
The remaining Series K warrants allow the holders to purchase up to 3,814,908
shares of CEL-SCI's common stock at a price of $0.40 per share at any time prior
to February 4, 2012. If CEL-SCI sells any additional shares of common stock, or
any securities convertible into common stock at a price below the $0.40, 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.
One of the Series K note holders, Iroquois Master Fund Ltd., has indicated
that it believes the conversion price of the Series K notes, as well as the
exercise price of the Series K warrants, should be $0.20 as opposed to $0.40. It
is CEL-SCI's position that the correct conversion price was $0.40 and the
correct exercise price of the warrants is $0.40.
On October 21, 2009, Iroquois filed suit against CEL-SCI. In its
complaint, alleging breach of contract, breach of fiduciary duty, conversion,
and negligence, Iroquois seeks actual and punitive damages, the issuance by
CEL-SCI of additional shares and warrants, and a ruling by the court that the
conversion price of the notes and the exercise price of the warrants are both
$0.20. See Item 3 of this report for further information.
On August 18, 2008, CEL-SCI sold 1,383,389 shares of common stock and
2,075,084 warrants in a private financing for $1,037,500. The shares were sold
at $0.75, a significant premium over the closing price of CEL-SCI's common
stock. In June 2009, an additional 1,166,667 shares and 1,815,698 warrants were
issued to the investors. Each warrant entitles the holder to purchase one share
of CEL-SCI's common stock at a price of $0.40 per share at any time prior to
August 18, 2014.
On March 6, 2009, CEL-SCI sold 3,750,000 Units as further consideration
under a licensing agreement to Byron Biopharma at a price of $0.20 per Unit
totaling $750,000. Each Unit consisted of one share of CEL-SCI's common stock
and two warrants. Each warrant entitles the holder to purchase one share of
32
CEL-SCI's common stock at a price of $0.25 per share. The warrants are
exercisable at any time prior to March 6, 2016.
Between June 23 and July 1, 2009, CEL-SCI sold 15,349,346 shares of its
common stock at a price of $0.40 per share totaling $6,139,739. The investors in
this offering also received 10,284,060 Series A warrants. Each Series A warrant
entitles the holder to purchase one share of CEL-SCI's common stock. The Series
A warrants may be exercised at any time on or after December 24, 2009 and on or
prior to December 24, 2014 at a price of $0.50 per share. As of September 30,
2009, the fair value of the warrants was determined to be $15,223,759.
On July 31, 2009, CEL-SCI borrowed $2,000,000 from two institutional
investors. The loans were repaid in on September 29, 2009. The Series B note
holders also received Series B warrants which allow the holders to purchase up
to 500,000 shares of CEL-SCI's common stock at a price of $0.68 per share. The
Series B warrants may be exercised at any time on or after March 3, 2010 and on
or prior to March 3, 2015. The fair value of these warrants was determined to be
$245,000 at the time of issuance. This cost was expensed at the time the loan
was repaid. As of September 30, 2009, the fair value of the warrants was
determined to be $735,000.
On August 20, 2009, CEL-SCI sold 10,784,435 shares of its common stock to
a group of private investors for $4,852,995 or $0.45 per share. The investors
also received Series C warrants which entitle the investors to purchase
5,392,217 shares of CEL-SCI's common stock. The Series C warrants may be
exercised at any time on or after February 20, 2010 and on or prior to February
20, 2015 at a price of $0.55 per share. As of September 30, 2009, the fair value
of the warrants was determined to be $8,088,328.
On September 21, 2009, CEL-SCI Corporation sold 14,285,715 shares of its
common stock to a group of private investors for $20,000,000 or $1.40 per share.
The investors also received Series D warrants which entitle the investors to
purchase up to 4,714,284 shares of CEL-SCI's common stock. The Series D warrants
may be exercised at any time prior to September 21, 2011, at a price of $1.50
per share. As of September 30, 2009, the fair value of the Series D warrants was
determined to be $4,808,570. In addition, the broker received 714,286 Series E
warrants. As of September 30, 2009, the fair value of the Series E warrants was
determined to be $885,715.
In December 2008, CEL-SCI entered into an equity line of credit agreement
as a source of funding for CEL-SCI. For a two-year period, the agreement allows
CEL-SCI, at its discretion, to sell up to $5 million of CEL-SCI's common stock
at the volume weighted average price on the day of the drawdown, less 9%.
CEL-SCI may request a drawdown once every ten trading days, although CEL-SCI is
under no obligation to request any drawdowns under the equity line of credit.
The equity line of credit expires on January 6, 2011. As of November 30, 2009,
CEL-SCI had not sold any shares under the equity line of credit.
Between December 2008 and June 2009, Maximilian de Clara, CEL-SCI's
President and a director, loaned CEL-SCI $1,104,057. The loan was initially
payable at the end of March 2009, but was extended to the end of June 2009. At
the time the loan was due, and in accordance with the loan agreement, CEL-SCI
33
issued Mr. de Clara a warrant which entitles Mr. de Clara to purchase 1,648,244
shares of CEL-SCI's common stock at a price of $0.40 per share. The warrant is
exercisable at any time prior to December 24, 2014. Although the loan was to be
repaid from the proceeds of CEL-SCI's recent financing, CEL-SCI's Directors
deemed it beneficial not to repay the loan and negotiated a second extension of
the loan with Mr. de Clara on terms similar to the June 2009 financing. Pursuant
to the terms of the second extension the note is now due on July 6, 2014, but,
at Mr. de Clara's option, the loan can be converted into shares of CEL-SCI's
common stock. The number of shares which will be issued upon any conversion will
be determined by dividing the amount to be converted by $0.40. As further
consideration for the second extension, Mr. de Clara received warrants which
allow Mr. de Clara to purchase 1,849,295 shares of CEL-SCI's common stock at a
price of $0.50 per share at any time prior to January 6, 2015. The loan from Mr.
de Clara bears interest at 15% per year and is secured by a lien on
substantially all of CEL-SCI's assets. CEL-SCI does not have the right to prepay
the loan without Mr. de Clara's consent.
Between July 29, 2009 and January 5, 2010, CEL-SCI received approximately
$14,700,000 from the exercise of other warrants (including a number of CEL-SCI's
Series A, K and L warrants) previously issued to private investors.
Future Capital Requirements
---------------------------
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, 2009 are as
follows:
Contractual Obligations:
Years Ending September 30,
--------------------------------------------------------------------------
Total 2010 2011 2012 2013 2014 2015 & thereafter
----- ---- ---- ---- ---- ---- -----------------
Operating Leases $36,871,624 $1,809,596 $1,858,471 $1,884,205 $1,855,889 $1,579,930 $27,883,533
Employment
Contracts $1,056,990 651,906 405,084 -- -- -- --
In addition, CEL-SCI has additional contracts with consultants for a nine
month period or less ending in fiscal year 2010. These contracts total
approximately $330,000.
Clinical and other studies necessary to obtain regulatory approval of a
new drug involve significant costs and require several years to complete. The
extent of CEL-SCI's clinical trials and research programs are primarily based
upon the amount of capital available to CEL-SCI and the extent to which CEL-SCI
has received regulatory approvals for clinical trials. The inability of CEL-SCI
to conduct clinical trials or research, whether due to a lack of capital or
regulatory approval, will prevent CEL-SCI from completing the studies and
research required to obtain regulatory approval for any products which CEL-SCI
is developing. Without regulatory approval, CEL-SCI will be unable to sell any
of its products.
In the absence of revenues, CEL-SCI will be required to raise additional
funds through the sale of securities, debt financing or other arrangements in
order to continue with its research efforts. However, there can be no assurance
that such financing will be available or be available on favorable terms.
34
Ultimately, CEL-SCI must complete the development of its products, obtain
appropriate regulatory approvals and obtain sufficient revenues to support its
cost structure.
Since all of CEL-SCI's projects are under development CEL-SCI cannot
predict with any certainty the funds required for future research and clinical
trials, the timing of future research and development projects, or when it will
be able to generate any revenue from the sale of any of its products.
CEL-SCI's cash flow and earnings are subject to fluctuations due to
changes in interest rates on its certificates of deposit, and, to an immaterial
extent, foreign currency exchange rates.
Critical Accounting Policies
----------------------------
CEL-SCI's significant accounting policies are more fully described in Note
1 to the consolidated financial statements. 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 - Codification 718-10-30-3 requires companies
to recognize expense associated with share based compensation arrangements,
including employee stock options, using a fair value-based option pricing model.
Codification 718-10-30-3 applies to all transactions involving issuance of
equity by a company in exchange for goods and services, including employees.
Using the modified prospective transition method of adoption, CEL-SCI reflects
compensation expense in the financial statements beginning October 1, 2005. The
modified prospective transition method does not require restatement of prior
periods to reflect the impact of Codification 718-10-30-3. As such, compensation
expense is recognized for awards that were granted, modified, repurchased or
cancelled on or after October 1, 2005.
Options to non-employees are accounted for in accordance with Codification
505-50-S99-1 Accounting for Equity Instruments That Are Issued to Other Than
Employees for Acquiring, or in Conjunction with Selling, Goods or Services.
Accordingly, compensation is recognized when goods or services are received and
is measured using the Black-Scholes valuation model. The Black-Scholes model
35
requires CEL-SCI's management to make assumptions regarding the fair value of
the options at the date of grant and the expected life of the options.
Asset Valuations and Review for Potential Impairments - CEL-SCI reviews
its fixed assets, intangibles and deferred rent 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.
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--CEL-SCI enters into financing arrangements that
consist of freestanding derivative instruments or are hybrid instruments that
contain embedded derivative features. CEL-SCI accounts for these arrangement in
accordance with Codification 815-10-50, "Accounting for Derivative Instruments
and Hedging Activities", "Accounting for Derivative Financial Instruments
Indexed to, and Potentially Settled in, a Company's Own Stock", 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 cannot be reliably measured, CEL-SCI
measures and reports the entire hybrid instrument at fair value with changes in
fair value recognized as either a gain or loss in earnings. CEL-SCI 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
36
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.
Accounting Pronouncements
-------------------------
In December 2007, the FASB issued Codification 805-40-25-2,
"Noncontrolling Interests in Consolidated Financial Statements, an amendment of
ARB 51", which changes the accounting and reporting for minority interests.
Minority interests will be recharacterized as noncontrolling interests and will
be reported as a component of equity separate from the parent's equity, and
purchases or sales of equity interests that do not result in a change in control
will be accounted for as equity transactions. In addition, net income
attributable to the noncontrolling interest will be included in consolidated net
income on the face of the income statement and, upon loss of control, the
interest sold, as well as any interest retained, will be recorded at fair value
with any gain or loss recognized in earnings. Codification 805-40-25-2 is
effective beginning October 1, 2009 and will apply prospectively, except for the
presentation and disclosure requirements, which will apply retrospectively.
In March 2008, the FASB issued Codification 815-20-50-1, "Disclosures
about Derivative Instruments and Hedging Activities - an amendment of FASB
Statement No. 133", which changes disclosure requirements for derivative
instruments and hedging activities. The statement is effective for periods
ending on or after November 15, 2008, with early application encouraged. CEL-SCI
is currently assessing the additional requirements of this statement.
In June 2008, the FASB finalized Codification 815-40-15-7, "Determining
Whether an Instrument (or Embedded Feature) is Indexed to an Entity's Own
Stock". The EITF lays out a procedure to determine if the debt instrument is
indexed to its own common stock. The EITF is effective for fiscal years
beginning after December 15, 2008. CEL-SCI believes it will have an impact on
the convertible debt and certain warrants and that its impact could be material.
In September 2008, the FASB staff issued Codification 815-10-50-1A,
"Disclosures about Credit Derivatives and Certain Guarantees: An Amendment of
FASB Statement No. 133 and FASB Interpretation No. 45; and Clarification of the
Effective Date of FASB Statement No. 161". This applies to credit derivatives
within the scope of Statement 133 and hybrid instruments that have embedded
credit derivatives. It deals with disclosures related to these derivatives and
is effective for reporting periods ending after November 15, 2008. It also
clarifies the effective date of Codification 815-20-50-1 as any reporting period
beginning after November 15, 2008. CEL-SCI is currently assessing the potential
impact of this staff position on its consolidated financial statements.
In April 2009, the FASB issued Codification 825-10-65-1, "Interim
Disclosures about Fair Value of Financial Instruments".This amends FASB
Statement No. 107, "Disclosures about Fair Values of Financial Instruments", to
require disclosures about fair values of financial instruments for interim
reporting periods of publicly traded companies as well as in annual financial
37
statements. The FSP also amends APB Opinion No. 28, "Interim Financial
Reporting", to require those disclosures in summarized financial information at
interim reporting periods. This Codification topic became effective for interim
and annual reporting periods ending after June 15, 2009. CEL-SCI adopted it for
the period ended June 30, 2009. There was no significant impact from this
adoption.
In May 2009, the FASB issued Codification 855-10-50, "Subsequent Events",
which establishes general standards of accounting for and disclosure of events
that occur after the balance sheet date but before the financial statements are
issued or are available to be issued. It requires the disclosure of the date
through which an entity has evaluated subsequent events and the basis for that
date. The Statement sets forth the period after the balance sheet date during
which management of a reporting entity should evaluate events or transactions
that may occur for potential recognition or disclosure in the financial
statements, the circumstances under which an entity should recognize events or
transactions occurring after the balance sheet date in its financial statements
and the disclosures that an entity should make about events or transactions that
occurred after the balance sheet date. This became effective for CEL-SCI for the
period ended June 30, 2009 and is to be applied prospectively. The impact of the
adoption was not significant.
In June 2009, the FASB issued "The FASB Accounting Standard
CodificationTM" ("Codification") and the Hierarchy of Generally Accepted
Accounting Principles", effective for interim and annual reporting periods
ending after September 15, 2009. This statement establishes the Codification as
the source of authoritative accounting principles used in the preparation of
financial statements in conformity with generally accepted accounting
principles. The Codification does not replace or affect guidance issued by the
SEC or its staff. After the effective date of this statement, all
non-grandfathered non-SEC accounting literature not included in the Codification
will be superseded and deemed non-authoritative.
ITEM 7A. 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, 2009, 2008, and 2007, CEL-SCI
recognized a (loss) or gain of $(28,491,650), $1,799,393, and $868,182,
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 risk on investments on September 30, 2009 was considered immaterial
due to the fact that the interest rates at that time were nominal at best and
the Company keeps its cash and cash equivalents in short term maturities.
38
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
----------------------------------------------------
See the consolidated financial statements included with this Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
------------------------------------------------------------------------------
Not applicable
ITEM 9A. and 9A(T). CONTROLS AND PROCEDURES
---------------------------------------------
Under the direction and with the participation of CEL-SCI's management,
including CEL-SCI's Chief Executive Officer and Chief Financial Officer, CEL-SCI
carried out an evaluation of the effectiveness of the design and operation of
its disclosure controls and procedures as of September 30, 2009. CEL-SCI
maintains disclosure controls and procedures that are designed to ensure that
information required to be disclosed in its periodic reports with the Securities
and Exchange Commission is recorded, processed, summarized and reported within
the time periods specified in the SEC's rules and regulations, and that such
information is accumulated and communicated to CEL-SCI's management, including
its principal executive officer and principal financial officer, as appropriate,
to allow timely decisions regarding required disclosure. CEL-SCI's disclosure
controls and procedures are designed to provide a reasonable level of assurance
of reaching its desired disclosure control objectives. Based on the evaluation,
the Chief Executive and Principal Financial Officer has concluded that CEL-SCI's
disclosure controls were effective as ofSeptember 30, 2009.
Management's Report on Internal Control Over Financial Reporting
CEL-SCI's management is responsible for establishing and maintaining
adequate internal control over financial reporting and for the assessment of the
effectiveness of internal control over financial reporting. As defined by the
Securities and Exchange Commission, internal control over financial reporting is
a process designed by, or under the supervision of CEL-SCI's principal executive
officer and principal financial officer and implemented by CEL-SCI's Board of
Directors, management and other personnel, to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of
CEL-SCI's financial statements in accordance with U.S. generally accepted
accounting principles.
Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may deteriorate.
Geert Kersten, CEL-SCI's Chief Executive and Principal Financial Officer,
evaluated the effectiveness of CEL-SCI's internal control over financial
reporting as of September 30, 2009 based on criteria established in Internal
Control - Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission, or the COSO Framework. Management's
39
assessment included an evaluation of the design of CEL-SCI's internal control
over financial reporting and testing of the operational effectiveness of those
controls.
Based on this evaluation, Mr. Kersten concluded that CEL-SCI's internal
control over financial reporting was effective as of September 30, 2009.
There was no change in CEL-SCI's internal control over financial reporting
that occurred during the quarter ended September 30, 2009 that has materially
affected, or is reasonably likely to materially affect, CEL-SCI's internal
control over financial reporting.
This report does not include an attestation report of CEL-SCI's
independent registered public accounting firm regarding internal control over
financial reporting. Management's report was not subject to attestation by
CEL-SCI's independent registered public accounting firm pursuant to temporary
rules of the SEC that permit CEL-SCI to provide only management's report on
internal control in this report.
ITEM 9B. OTHER INFORMATION
---------------------------
Not applicable.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
------------------------------------------------------------
Officers and Directors
----------------------
Name Age Position
---- --- --------
Maximilian de Clara 79 Director and President
Geert R. Kersten, Esq. 51 Director, Chief Executive Officer and Treasurer
Patricia B. Prichep 58 Senior Vice President of Operations and Secretary
Dr. Eyal Talor 54 Senior Vice President of Research and
Manufacturing
Dr. Daniel H. Zimmerman 68 Senior Vice President of Research, Cellular
Immunology
John Cipriano 67 Senior Vice President of Regulatory Affairs
Alexander G. Esterhazy 67 Director
Dr. C. Richard Kinsolving 73 Director
Dr.Peter R. Young 64 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:
40
Maximilian 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 Kersten has served in his current leadership role at CEL-SCI since
1995. Mr. Kersten has been with CEL-SCI from the early days of its inception
since 1987. He has been involved in the pioneering field of cancer immunotherapy
for almost two decades and has successfully steered CEL-SCI through many
challenging cycles in the biotechnology industry. Mr. Kersten also provides
CEL-SCI with significant expertise in the fields of finance and law and has a
unique vision of how the company's Multikine product will change the way cancer
is treated. Prior to CEL-SCI, Mr. Kersten worked at the law firm of Finley &
Kumble and worked at Source Capital, an investment banking firm located in
McLean, VA. He is a native of Germany, graduated from Millfield School in
England, and completed his studies in the US. Mr. Kersten completed his
Undergraduate Degree in Accounting, received an M.B.A. from George Washington
University, and a law degree (J.D.) from American University in Washington, DC.
Patricia B. Prichep joined CEL-SCI in 1992 and has been CEL-SCI's Senior
Vice President of Operations since March 1994. Between December 1992 and March
1994, Ms. Prichep was CEL-SCI's Director of Operations. Ms. Prichep became
CEL-SCI's Corporate Secretary in May 2000. She is responsible for all day-to-day
operations of the Company, including human resources and is the liaison with the
auditing firm for financial reporting. June 1990 to December 1992, Ms. Prichep
was the Manager of Quality and Productivity for the NASD's Management, Systems
and Support Department. She was responsible for the internal auditing and work
flow analysis of operations. Between 1982 and 1990, Ms. Prichep was Vice
President and Operations Manager for Source Capital, Ltd. She handled all
operations and compliance for the company and was licensed as a securities
broker. Ms. Prichep received her B.A. from the University of Bridgeport in
Connecticut.
Eyal Talor, Ph.D. joined CEL-SCI in October 1993. In October 2009, Dr.
Talor was promoted to Chief Scientific Officer. Prior to this promotion he was
the Senior Vice president of Research and Manufacturing since March of 1994. He
is a clinical immunologist with over 19 years of hands-on management of clinical
research and drug development for immunotherapy application; pre-clinical to
Phase III, in the biopharmaceutical industry. His expertise includes;
biopharmaceutical R&D and Biologics product development, GMP (Good Manufacturing
Practices) manufacture, Quality Control testing, and the design and building of
GMP manufacturing and testing facilities. He served as Director of Clinical
Laboratories (certified by the State of Maryland) and has experience in the
design of clinical trials (Phase I - III) and GCP (Good Clinical Practices)
requirements. He also has broad experience in the different aspects of
biological assay development, analytical methods validation, raw material
specifications, and QC (Quality Control) tests development under FDA/GMP, USP,
41
and ICH guidelines. He has extensive experience in the preparation of
documentation for IND and other regulatory submissions. His scientific area of
expertise encompasses immune response assessment. He is the author of over 25
publications and has published a number of reviews on immune regulations in
relation to clinical immunology. Before coming to CEL-SCI, he was Director of
R&D and Clinical Development at CBL, Inc., Principal Scientist - Project
Director, and Clinical Laboratory Director at SRA Technologies, Inc. Prior to
that he was a full time faculty member at The Johns Hopkins University, Medical
Intuitions; School of Public Health. He holds two US patents; one on Multikine's
composition of matter and method of use in cancer, and one on a platform Peptide
technology (`Adapt') for the treatment of autoimmune diseases, asthma, allergy,
and transplantation rejection. He also has numerous product and process
inventions as well as a number of pending US and PCT patent applications. He
received his Ph.D. in Microbiology and Immunology from the University of Ottawa,
Ottawa, Ontario, Canada, and had post-doctoral training in clinical and cellular
immunology at The John Hopkins University, Baltimore, Maryland, USA. He holds an
Adjunct Associate teaching position at the Johns Hopkins University Medical
Institutions.
Daniel H. Zimmerman, Ph.D., has been CEL-SCI's Senior Vice President of
Cellular Immunology between 1996 and December 2008 and again since November
2009. He joined CEL-SCI in January 1996 as the Vice President of Research,
Cellular Immunology. Dr. Zimmerman founded CELL-MED, Inc. and was its president
from 1987-1995. From 1973-1987, Dr. Zimmerman served in various positions at
Electronucleonics, Inc. His positions included: Scientist, Senior Scientist,
Technical Director and Program Manager. Dr Zimmerman held various teaching
positions at Montgomery College between 1987 and 1995. Dr. Zimmerman holds over
a dozen US patents as well as many foreign equivalent patents. He is the author
of over 40 scientific publications in the area of immunology and infectious
diseases. He has been awarded numerous grants from NIH and DOD. From 1969-1973,
Dr. Zimmerman was a Senior Staff Fellow at NIH. For the following 25 years, he
continued on at NIH as a guest worker. Dr Zimmerman received a Ph.D. in
Biochemistry in 1969, a Masters in Zoology in 1966 from the University of
Florida and a B.S. in Biology from Emory and Henry College in 1963. Dr.
Zimmerman ended his full time employment with the Company on December 3, 2008.
John Cipriano, has been CEL-SCI's Senior Vice President of Regulatory
Affairs between March 2004 and December 2008 and again since October 2009. 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. Mr. Cipriano ended
his full time employment with the Company on December 3, 2008.
Alexander G. Esterhazy has been a Director of CEL-SCI since December 1999
and 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.
42
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 listing standards of the NYSE Amex. The members of the compensation
committee are Alexander Esterhazy, Dr. C. Richard Kinsolving and Dr. Peter
Young.
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.
43
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, 6600
Preston Road, Apt. 2322, Plano, TX 75024.
ITEM 11. EXECUTIVE COMPENSATION
--------------------------------
Compensation Discussion and Analysis
CEL-SCI's Compensation Committee is empowered to review and approve the
annual compensation and compensation procedures for CEL-SCI's executive officers
and annually determines the total compensation level for our President and Chief
Executive Officer. The total proposed compensation of CEL-SCI's named executive
officers is formulated and evaluated by its Chief Executive Officer and
submitted to the Compensation Committee for consideration.
The key components of CEL-SCI's executive compensation program include
annual base salaries and long-term incentive compensation consisting of stock
options. It is CEL-SCI's policy to target compensation (i.e., base salary, stock
option grants and other benefits) at approximately the median of comparable
companies in the biotechnology field. Accordingly, data on compensation
practices followed by other companies in the biotechnology industry is
considered.
Objectives and Components of the Compensation Program
The primary objective of CEL-SCI's compensation program is to attract,
motivate and retain talented executives who are enthusiastic about our mission.
The components of CEL-SCI's compensation practices are:
o CEL-SCI's base salary levels are commensurate with those of comparable
positions at other biotechnology companies given the level of
seniority and skills possessed by the executive officer and which
reflect the individual's performance with us over time. The base
salary of CEL-SCI's President, CEO and its other named executive
officers is reviewed annually. Current employment agreements with
Maximilian de Clara and Geert Kersten set minimums for their base
salary rates.
o CEL-SCI's long-term stock option incentive program consists
exclusively of periodic grants of stock options with an exercise price
equal to the fair market value of CEL-SCI's common stock on the date
of grant. To encourage retention, the ability to exercise options
granted under the program is subject to vesting restrictions.
Decisions made regarding the timing and size of option grants take
into account the performance of both CEL-SCI and the employee,
"competitive market" practices, and the size of the option grants made
in prior years. The weighting of these factors varies and is
subjective. Current option holdings are not considered when granting
options.
o CEL-SCI's stock-based incentive awards are intended to strengthen the
mutuality of interests between the executive officers and our
stockholders.
44
o CEL-SCI has a defined contribution retirement plan, qualifying under
Section 401(k) of the Internal Revenue Code and covering substantially
all CEL-SCI's employees. CEL-SCI's contribution to the plan is made in
shares of CEL-SCI's common stock. 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 6% of
the participant's total 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 three fiscal
years ended September 30, 2009.
All
Other
Restric- Annual
ted Stock Option Compen-
Name and Princi- Fiscal Salary Bonus Awards Awards sation
pal Position Year (1) (2) (3) (4) (5) Total
-------------------- ----- ------ ------ --------- -------- ------- ---------
Maximilian de Clara, 2009 $334,720 -- $267,000 $380,121 $ 83,274 $1,065,114
President 2008 363,000 -- 543,174 103,320 89,268 1,098,762
2007 363,000 -- 418,327 105,460 64,693 951,480
Geert R. Kersten, 2009 408,691 -- 81,700 526,366 34,892 1,051,649
Chief Executive 2008 404,900 -- 156,674 103,320 39,901 704,795
Officer and 2007 389,637 -- 31,752 105,460 16,114 542,963
Treasurer
Patricia B. Prichep 2009 174,913 -- 41,603 235,467 4,225 456,208
Senior Vice President 2008 185,780 -- 82,558 51,660 4,225 324,223
of Operations and 2007 179,574 -- 19,520 52,730 4,225 256,049
Secretary
Eyal Talor, Ph.D. 2009 212,265 -- 36,627 137,878 4,225 390,994
Chief Scientific 2008 229,353 -- 81,187 51,660 4,225 366,425
Officer 2007 218,587 -- 18,764 52,730 4,225 294,306
Daniel Zimmerman, Ph.D. 2009 47,124 -- 16,892 -- 875 64,890
Senior Vice President of 2008 175,988 -- 46,186 38,745 4,225 265,144
Research. Cellular 2007 169,127 -- 14,469 39,548 4,225 227,369
Immunology (6)
John Cipriano 2009 48,594 -- 15,840 -- 25 64,458
Senior Vice President 2008 171,028 -- 45,893 38,745 25 255,691
of Regulatory Affairs (7) 2007 165,400 -- 14,196 39,548 25 219,169
(1) The dollar value of base salary (cash and non-cash) earned. During the
years ended September 30, 2009, 2008 and 2007, $0.00, $18,730 and $28,429,
respectively, of the total salaries paid to the persons shown in the table
45
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
Issued Shares Issued Per Share
----------- ------------- ---------
09/20/2006 49,016 $0.52
01/15/2008 36,020 $0.52
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) earned.
(3) 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 Mr. de Clara, during the years ended September
30, 2009, 2008 and 2007 $200,000, $400,000 and $400,000, respectively, were
paid in restricted shares of CEL-SCI's common stock which cannot be sold in
the public market for a period of three years after the date of issuance. 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 and restricted shares issued from the Stock Compensation
Plan.
(4) The greatest part of the value in FY 2009 is derived from options awarded to
employees who did not collect a salary, reduced or deferred their salary
between the period of September 15, 2008 and June 30, 2009. For example, Mr.
de Clara, Mr. Kersten and Ms. Prichep did not collect any salary between
September 30, 2008 and June 30, 2009. The value of all stock options granted
during the periods covered by the table are calculated according to SFAS
123R requirements.
(5) All other compensation received that CEL-SCI could not properly report in
any other column of the table including annual 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. Includes board of directors fees for Mr. de Clara
and Mr. Kersten.
(6) Dr. Zimmerman was CEL-SCI's Senior Vice President of Research, Cellular
Immunology between January 1996 and December 2008 and since November 2009.
46
(7) Mr. Cipriano was CEL-SCI's Senior Vice President of Regulatory Affairs
between March 2004 and December 2008 and since October 2009.
Long Term Incentive Plans - Awards in Last Fiscal Year
------------------------------------------------------
See footnote 6 to the financial statements.
Employee Pension, Profit Sharing or Other Retirement Plans
----------------------------------------------------------
CEL-SCI has a defined contribution retirement plan, qualifying under
Section 401(k) of the Internal Revenue Code and covering substantially all
CEL-SCI's employees. CEL-SCI's contribution to the plan is made in shares of
CEL-SCI's common stock. 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 its common stock. The fiscal
2009 expenses for this plan were $61,517. 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 During Year Ended September 30, 2009
--------------------------------------------------------------
Stock Option
Name Paid in Cash Awards (1) Awards (2) Total
---- ------------ ---------- ---------- -----
Maximilian de Clara $20,000 $ 5,000 $380,121 $405,121
Geert Kersten $20,000 $ 5,000 $526,366 $551,366
Alexander Esterhazy $20,000 $ 5,000 $ 62,753 $ 87,753
C. Richard Kinsolving $20,000 $ 5,000 $ 62,753 $ 87,753
Peter R. Young $20,000 $ 5,000 $ 62,753 $ 87,753
(1) The fair value of stock issued for services.
(2) The greatest part of the value for Mr. de Clara and Mr. Kersten is derived
from options awarded to them since they did not collect a salary, reduced
or deferred their salary between the period of September 15, 2008 and June
30, 2009. The fair value of options granted computed in accordance with FAS
123R on the date of grant.
Directors' fees paid to Maximilian de Clara and Geert Kersten are included
in the Executive Compensation table.
Employment Contracts.
---------------------
In April 2005, CEL-SCI entered into a three-year employment agreement with
Mr. de Clara. The employment agreement provided that CEL-SCI will pay Mr. de
Clara an annual salary of $363,000 during the term of the agreement. On
September 8, 2006, Mr. de Clara's Employment Agreement was amended and extended
to April 30, 2010. The terms of the amendment to Mr. de Clara's employment
47
agreement are referenced in a report on Form 8-K filed with the Securities and
Exchange Commission on September 8, 2006. 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 CEL-SCI, then the agreement allows Mr. de
Clara to resign from his position at CEL-SCI and receive a lump-sum payment from
CEL-SCI equal to 18 months salary ($544,500) and the unvested portion of any
stock options would vest immediately ($409,666). 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 plus any increases approved by the Board of Directors during the
period of the employment agreement. 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
($883,818) and the unvested portion of any stock options would vest immediately
($1,758,666). 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. Effective September 1,
2006, Mr. Kersten's employment agreement was extended to September 1, 2011.
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 Alexander Esterhazy,
Dr. C. Richard Kinsolving and Dr. Peter Young, all of which are outside
directors.
During the year ended September 30, 2009, 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.
48
Stock Options
-------------
The following tables show information concerning the options granted
during the fiscal year ended September 30, 2009, to the persons named below.
Options Granted
---------------
Exercise
Grant Options Price Per Expiration
Name Date Granted (#) Share Date
---- ----- ----------- --------- ----------
Maximilian de Clara 4/24/09 1,436,250(2) 0.25 4/23/19
7/06/09 500,000(3) 0.38 7/06/19
7/21/09 250,000 0.38 7/20/19
Geert Kersten 4/24/09 1,838,609(2) 0.25 4/23/19
7/06/09 4,000,000(3) 0.38 7/06/19
7/21/09 300,000 0.38 7/20/19
Patricia B. Prichep 4/24/09 717,096(2) 0.25 4/23/19
7/06/09 3,000,000(3) 0.38 7/06/19
7/21/09 150,000 0.38 7/20/19
Eyal Talor, Ph.D. 4/24/09 240,820(2) 0.25 4/23/19
7/06/09 3,000,000(3) 0.38 7/06/19
7/21/09 150,000 0.38 7/20/19
Daniel Zimmerman, Ph.D. 7/16/09 200,000(4) 0.38 7/15/14
John Cipriano -- -- -- --
Options Exercised
-----------------
Shares
Date of Acquired On Value
Exercise Exercise Realized
-------- ------------ --------
John Cipriano 9/21/09 100,000 $113,000
Shares Underlying Unexercised
Options Which are:
--------------------------- Exercise Expiration
Name Exercisable Unexercisable Price Date
---- ----------- ------------- -------- ----------
Maximilian de Clara 23,333 2.87 07/31/13
95,000 (1) 1.94 08/31/13
70,000 1.05 09/25/12
49
Shares Underlying Unexercised
Options Which are:
--------------------------- Exercise Expiration
Name Exercisable Unexercisable Price Date
---- ----------- ------------- -------- ----------
56,666 1.05 05/01/10
50,000 1.05 05/01/13
50,000 1.05 04/12/12
60,000 1.05 04/19/10
60,000 1.38 03/22/11
75,000 0.54 03/14/12
50,000 0.61 09/02/14
50,000 0.48 09/21/15
100,000 0.58 09/12/16
133,334 0.63 09/13/17
66,667 0.62 03/04/18
1,436,250 (2) 0.25 04/23/19
---------
2,376,250
66,666 0.63 09/13/17
133,333 0.62 03/04/18
500,000 (3) 0.38 07/06/19
250,000 0.38 07/20/19
-------
949,999
--------------------------------------------------------------------------------
Geert R. Kersten 50,000 1.05 11/01/13
14,000 1.05 10/31/13
50,000 1.05 07/31/13
224,000 (1) 1.05 06/10/13
50,000 1.05 09/25/12
150,000 1.05 05/01/10
50,000 1.05 05/01/13
50,000 1.05 04/12/12
95,000 (1) 1.94 08/31/13
60,000 1.05 04/19/10
60,000 1.38 03/22/11
560,000 (1) 1.05 10/16/13
105,000 0.54 03/14/12
1,890,000 0.22 04/01/13
50,000 0.61 09/02/14
50,000 0.48 09/21/15
200,000 0.58 09/12/16
133,334 0.63 09/13/17
66,667 0.62 03/04/18
1,838,609 (2) 0.25 04/23/19
---------
5,746,610
50
Shares Underlying Unexercised
Options Which are:
--------------------------- Exercise Expiration
Name Exercisable Unexercisable Price Date
---- ----------- ------------- -------- ----------
Geert R. Kersten (cont'd) 66,666 0.63 09/13/17
133,333 0.62 03/04/18
4,000,000 (3) 0.38 07/06/19
300,000 0.38 07/20/19
-------
4,499,999
--------------------------------------------------------------------------------
Patricia B. Prichep 6,000 1.05 12/01/13
10,000 1.05 11/30/13
9,500 1.05 07/31/13
3,000 1.05 12/31/12
35,000 1.05 03/01/10
17,000 1.05 12/01/13
15,000 1.05 04/12/12
47,500 (1) 1.94 08/31/13
23,000 1.05 02/02/10
25,000 1.18 12/08/10
30,000 1.00 12/03/11
200,000 (1) 1.05 10/16/13
10,500 0.54 03/14/12
50,000 0.33 04/26/12
243,000 0.22 04/01/13
337,000 0.22 04/01/13
50,000 0.61 09/02/14
30,000 0.48 09/21/15
90,000 0.58 09/12/16
66,667 0.63 09/13/17
33,334 0.62 03/04/18
717,096 (2) 0.25 04/23/19
-------
2,048,597
33,333 0.63 09/13/17
66,666 0.62 03/04/18
3,000,000 (3) 0.38 07/06/19
150,000 0.38 07/20/19
-------
3,249,999
--------------------------------------------------------------------------------
Eyal Talor, Ph.D. 15,500 1.05 07/31/13
16,666 1.05 03/16/10
15,000 1.05 08/03/13
10,000 (1) 1.94 08/31/13
20,000 1.05 08/02/12
25,000 1.76 11/10/10
35,000 1.00 12/03/11
51
Shares Underlying Unexercised
Options Which are:
--------------------------- Exercise Expiration
Name Exercisable Unexercisable Price Date
---- ----------- ------------- -------- ----------
Eyal Talor, Ph.D. 160,000 (1) 1.05 10/16/13
(cont'd) 50,000 0.33 04/26/12
374,166 0.22 04/01/13
50,000 0.61 09/02/14
30,000 0.48 09/21/15
80,000 0.58 09/12/16
66,667 0.63 09/13/17
33,334 0.62 03/04/18
240,820 (2) 0.25 04/23/19
-------
1,222,153
33,333 0.63 09/13/17
66,666 0.62 03/04/18
3,000,000 (3) 0.38 07/06/19
150,000 0.38 07/20/19
-------
3,249,999
--------------------------------------------------------------------------------
Daniel Zimmerman, Ph.D.12,000 1.05 12/31/13
3,000 1.05 12/31/09
7,000 1.05 06/19/10
15,000 1.05 02/19/13
30,000 (1) 1.94 08/31/13
15,000 1.05 12/03/09
20,000 1.05 02/02/10
20,000 1.85 01/26/11
120,000 (1) 1.05 10/16/13
41,000 0.54 03/14/12
50,000 0.33 04/16/12
392,000 0.22 04/01/13
50,000 0.61 09/02/14
30,000 0.48 09/21/15
60,000 0.58 09/12/16
75,000 0.63 09/13/17
75,000 0.62 03/04/18
200,000 (4) 0.38 07/15/14
-----------
1,215,000
--------------------------------------------------------------------------------
John Cipriano
20,000 0.61 09/02/14
30,000 0.48 09/21/15
60,000 0.58 09/12/16
75,000 0.63 09/13/17
75,000 0.62 03/04/18
------
260,000
100,000 1.93 09/30/19
-------
100,000
--------------------------------------------------------------------------------
52
(1) Options purchased by Employee through the Salary Reduction Plan.
(2) Options awarded to employees who did not collect a salary, reduced or
deferred their salary between the period of September 15, 2008 and June
30, 2009. For example, Mr. de Clara, Mr. Kersten and Ms. Prichep did not
collect any salary between September 30, 2008 and June 30, 2009.
(3) Long-term performance options: The Board of Directors has identified the
successful Phase III clinical trial for Multikine to be the most
important corporate event to create shareholder value. Therefore, one
third of the options can be exercised when the first 400 patients are
enrolled in CEL-SCI's Phase III head and neck cancer clinical trial. One
third of the options can be exercised when all of the patients have been
enrolled in the Phase III clinical trial. One third of the options can
be exercised when the Phase III trial is completed.
(4) Options awarded to employee during the period that he was a consultant
to CEL-SCI.
Stock Option, Bonus and Compensation Plans
------------------------------------------
CEL-SCI has Incentive Stock Option Plans, Non-Qualified Stock Option,
Stock Bonus and Stock Compensation Plans. All Stock Option, Bonus and
Compensation 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 CEL-SCI's employees may be granted options
pursuant to the Incentive Stock Option Plan.
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,
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 CEL-SCI's Board of Directors.
53
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.
Stock Compensation Plan. Under the Stock Compensation Plan, shares of
CEL-SCI's common stock may be issued to CEL-SCI's employees, directors,
officers, consultants and advisors in payment of salaries, fees and other
compensation owed to these persons. However, 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 CEL-SCI. 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.
54
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
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 shows certain information as of December 31, 2009
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 15,100,000 9,680,874 n/a 4,920,225
Non-Qualified Stock
Option Plans 28,760,000 20,313,966 n/a 4,909,886
Stock Bonus Plans 9,940,000 n/a 7,069,010 2,869,231
Stock Compensation Plan 7,500,000 n/a 5,386,531 2,113,469
Of the shares issued pursuant to CEL-SCI's Stock Bonus Plans 1,297,033
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 CEL-SCI's Incentive and Non-Qualified
Stock Option Plans as of September 30, 2009, 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 (a) Options Reflected in Column (a)
------------------------------------------------------------------------------------------------
Incentive Stock Option Plans 9,598,874 $0.39 5,020,225
Non-Qualified Stock Option Plans 20,320,591 $0.49 4,965,485
55
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The following table shows, as of December 31, 2009, 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.
Name and Address Number of Shares (1) Percent of Class (3)
---------------- ---------------- -------------------
Maximilian de Clara 6,311,866 3.0%
Bergstrasse 79
6078 Lungern,
Obwalden, Switzerland
Geert R. Kersten 9,073,192 (2) 4.3%
8229 Boone Blvd., Suite 802
Vienna, VA 22182
Patricia B. Prichep 2,847,134 1.4%
8229 Boone Blvd., Suite 802
Vienna, VA 22182
Eyal Talor, Ph.D. 1,412,567 0.7%
8229 Boone Blvd., Suite 802
Vienna, VA 22182
Daniel H. Zimmerman, Ph.D. 1,506,775 0.7%
8229 Boone Blvd., Suite 802
Vienna, VA 22182
John Cipriano 446,693 0.2%
8229 Boone Blvd., Suite 802
Vienna, VA 22182
Alexander G. Esterhazy 678,333 0.3%
20 Chemin du Pre-Poiset
CH- 1253 Vandoeuvres
Geneve, Switzerland
C. Richard Kinsolving, Ph.D. 907,424 0.4%
P.O. Box 20193
Bradenton, FL 34204-0193
56
Name and Address Number of Shares (1) Percent of Class (3)
---------------- ---------------- -------------------
Peter R. Young, Ph.D. 679,601 0.3%
6600 Preston Road, Apt. 2322
Plano, TX 75024
All Officers and Directors 23,863,585 10.8%
as a Group (9 persons)
(1) Includes shares issuable prior to February 28, 2010 upon the exercise of
options or warrants granted to the following persons:
Options or Warrants Exercisable
Name Prior to February 28, 2010
---- --------------------------
Maximilian de Clara 5,873,789
Geert R. Kersten 5,746,610
Patricia B. Prichep 2,048,597
Eyal Talor, Ph.D. 888,000
Daniel Zimmerman 1,197,000
John Cipriano 260,000
Alexander G. Esterhazy 458,333
C. Richard Kinsolving, Ph.D. 618,334
Peter R. Young, Ph.D. 445,000
(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
------------------------------------------------
BDO Seidman, LLP served as CEL-SCI's independent registered public
accountant for the two years ended September 30, 2009. The following table shows
the aggregate fees billed to CEL-SCI for these years by BDO Seidman, LLP:
57
Year Ended September 30,
2009 2008
---- ----
Audit Fees $219,675 $173,052
Audit-Related 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
financial statements included in CEL-SCI's 10-Q reports for the fiscal year and
all regulatory filings. 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
-------------------------------------------------
(a) See the Financial Statements attached to this Report.
Exhibits
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.
3(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.
3(c) Amended Articles Filed as Exhibit 3(c) to CEL-SCI's
(Name change only) Registration Statement on Form S-1
Registration Statement (No. 33-34878).
3(d) Bylaws Incorporated by reference to
Exhibit 3(b) of CEL-SCI's Registration
Statement on Form S-1, Registration Nos.
2-85547-D and 33-7531.
4 Shareholders Rights Agreement Incorporated by reference to Exhibit 4
of CEL-SCI'S report on Form 8-K dated
November 7, 2007.
58
10(d) Employment Agreement with Incorporated by reference to Exhibit
Maximilian de Clara 10(d) of CEL-SCI's report on Form 8-K
(dated April 21, 2005) and Exhibit 10(d)
to CEL-SCI's report on Form 8-K dated
September 8, 2006.
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) and Exhibit 10(c) to CEL-SCI's
report on Form 8-K dated September 8,
2006.
10(f) 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).
10(g) Securities Purchase Agreement Incorporated by reference to Exhibit 10
(together with schedule required to CEL-SCI's report on Form 8-K dated
by Instruction 2 to Item 601 of August 4, 2006.
Regulation S-K) pertaining to
Series K notes and warrants,
together with The exhibits to the
Securities Purchase Agreement.
10(h) Subscription Agreement Incorporated by reference to Exhibit 10
(together with Schedule required of CEL-SCI's report on Form 8-K dated
by Instruction 2 to Item 601 April 18, 2007.
of Regulation S-K) pertaining to
April 2007 sale of 20,000,000
shares of CEL-SCI's common stock,
10,000,000 Series L warrants and
10,000,000 Series M Warrants.
23 Consent of BDO Seidman, LLP
-------------------------------
31 Rule 13a-14(a) Certifications
-------------------------------
32 Section 1350 Certifications
-------------------------------
59
CEL-SCI CORPORATION
Consolidated Financial Statements for the Years
Ended September 30, 2009, 2008, and 2007, and
Report of Independent Registered Public Accounting Firm
CEL-SCI CORPORATION
TABLE OF CONTENTS
Page
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM F- 2
CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED
SEPTEMBER 30, 2009, 2008, AND 2007:
Consolidated Balance Sheets F- 3
Consolidated Statements of Operations F- 4
Consolidated Statements of Stockholders' Equity F- 5
Consolidated Statements of Cash Flows F- 7
Notes to Consolidated Financial Statements F- 10
Report of Independent Registered Public Accounting Firm
Board of Directors and Stockholders
CEL-SCI Corporation
Vienna, VA
We have audited the accompanying consolidated balance sheets of CEL-SCI
Corporation as of September 30, 2009 and 2008 and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
three years in the period ended September 30, 2009. 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 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 audits 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 audits provide 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 September 30, 2009 and 2008, and the results of its operations and its cash
flows for each of the three years in the period ended September 30, 2009, in
conformity with accounting principles generally accepted in the United States of
America.
/s/ BDO SEIDMAN LLP
Bethesda, Maryland
January 13, 2010
CEL-SCI CORPORATION
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2009 AND 2008
ASSETS 2009 2008
---- ----
CURRENT ASSETS:
Cash and cash equivalents $ 33,567,516 $ 711,258
Short-term investments - 200,000
Prepaid expenses 39,972 27,209
Inventory used for R&D and manufacturing 399,474 395,170
Deposits 1,585,064 14,828
-------------- -----------
Total current assets 35,592,026 1,348,465
RESEARCH AND OFFICE EQUIPMENT AND
LEASEHOLD IMPROVMENTS - less accumulated
depreciation of $2,259,237 and $1,964,597 1,200,611 1,324,686
PATENT COSTS--less accumulated amortization of
$1,132,612 and $1,091,597 423,104 587,439
RESTRICTED CASH 68,552 987,652
DEPOSITS - 1,575,000
DEFERRED RENT 8,743,305 8,860,430
-------------- -----------
TOTAL ASSETS $ 46,027,598 $14,683,672
============== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 793,148 $ 427,509
Accrued expenses 98,665 113,179
Due to employees 49,527 36,077
Accrued interest on convertible debt - 45,558
Related party loan 1,107,339 -
Short-term loan - 200,000
Deposits held 10,000 -
Derivative instruments - current portion 35,113,970 3,018,697
-------------- -----------
Total current liabilities 37,172,649 3,841,020
Deferred rent 14,305 6,617
-------------- -----------
Total liabilities 37,186,954 3,847,637
-------------- -----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value -
authorized 100,000 shares, issued and
outstanding, -0- - -
Common stock, $.01 par value - authorized
450,000,000 shares; issued and outstanding,
191,972,021 and 120,796,094 shares at
September 30, 2009 and 2008, respectively 1,919,720 1,207,961
Additional paid-in capital 173,017,978 134,324,370
Accumulated deficit (166,097,054) (124,696,296)
-------------- -----------
Total stockholders' equity 8,840,644 10,836,035
-------------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 46,027,598 $ 14,683,672
============= ============
See notes to consolidated financial statements
F-3
CEL-SCI CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED SEPTEMBER 30, 2009, 2008 AND 2007
2009 2008 2007
---- ---- ----
RENT INCOME AND OTHER $ 80,093 $ 5,065 $ 57,043
OPERATING EXPENSES:
Research and development (excluding
R&D depreciation of $329,866,
$91,292 and $74,043 respectively,
included below) 6,011,750 4,101,563 2,528,528
Depreciation and amortization 417,205 215,060 176,186
General & administrative 5,671,595 5,200,735 6,704,538
---------- ---------- -----------
Total operating expenses 12,100,550 9,517,358 9,409,252
---------- ---------- -----------
OPERATING LOSS (12,020,457) (9,512,293) (9,352,209)
(LOSS)/GAIN ON DERIVATIVE INSTRUMENTS (28,491,650) 1,799,393 868,182
INTEREST INCOME - 483,252 562,973
INTEREST EXPENSE (397,923) (473,767) (1,708,603)
---------- ---------- -----------
NET LOSS (40,910,030) (7,703,415) (9,629,657)
DIVIDENDS (490,728) (424,815) -
---------- ---------- -----------
NET LOSS AVAILABLE TO COMMON $(41,400,758) $(8,128,230) $(9,629,657)
============= =========== ===========
NET LOSS PER COMMON SHARE
BASIC AND DILUTED $ (0.31) $ (0.07) $ (0.10)
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING BASIC AND DILUTED 133,535,050 117,060,866 97,310,488
See notes to consolidated financial statements.
F-4
CEL-SCI CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED SEPTEMBER 30, 2008, 2007 AND 2006
Additional
Common Stock Paid-In Unearned Accumulated
Shares Amount Capital Compensation Deficit Total
-----------------------------------------------------------------------------------
BALANCE, SEPTEMBER 30, 2006 82,697,428 826,974 105,180,834 - (106,938,409) (930,601)
Private placement 20,043,331 200,433 14,832,067 15,032,500
401(k) contributions paid in
common stock 137,546 1,376 88,347 89,723
Issuance of common stock to
employees 1,663,830 16,638 308,140 324,778
Exercise of stock options 1,337,364 13,374 599,092 612,466
Penalty shares issued 245,000 2,450 153,900 156,350
Stock issued to non-employees for
service 3,466,300 34,663 2,512,736 2,547,399
Issuance of stock options to
non-employees 1,556,228 1,556,228
Payment of principal on
convertible debt in
common stock 343,099 3,431 229,724 233,155
Conversion of convertible debt
into common stock 5,744,764 57,448 4,323,279 4,380,727
SFAS 123R cost of employee options 307,201 307,201
Financing costs (10,170) (10,170)
Net loss (9,629,657) (9,629,657)
---------- --------- ----------- --------- ---------- -----------
BALANCE, SEPTEMBER 30, 2007 115,678,662 1,156,787 130,081,378 - 116,568,066) 14,670,099
Sale of common stock 1,383,389 13,834 1,023,708 1,037,542
401(k) contributions paid in
common stock 205,125 2,051 106,539 108,590
Issuance of common stock to
employees 1,789,451 17,894 1,306,580 1,324,474
Exercise of stock options 50,467 505 13,898 14,403
Correction of stock overpayment
pricing 1,471 1,471
Stock issued to non-employees
for service 1,689,000 16,890 251,858 268,748
Issuance of stock options to
non-employees 12,342 12,342
SFAS 123R cost of employee options 561,387 561,387
Modification of stock options 564,189 564,189
Financing costs (23,795) (23,795)
Dividends 424,815 (424,815) -
Net loss (7,703,415) (7,703,415)
---------- --------- ----------- ----------- ----------- ----------
BALANCE, SEPTEMBER 30, 2008 120,796,094 1,207,961 134,324,370 - (124,696,296) 10,836,035
F-5
CEL-SCI CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (cont'd)
YEARS ENDED SEPTEMBER 30, 2008, 2007 AND 2006
Additional
Common Stock Paid-In Unearned Accumulated
Shares Amount Capital Compensation Deficit Total
-----------------------------------------------------------------------------------
Sale of common stock 45,451,547 454,515 31,788,201 - 32,242,716
401(k) contributions paid in
common stock 91,766 917 56,912 57,829
Exercise of stock options 15,659,116 156,591 8,524,663 8,681,254
Stock issued to non-employees
for service 3,316,438 33,164 1,528,179 1,561,343
Stock issued to employees 1,324,385 13,244 672,614 685,858
Stock issued for principal
payments on Series K notes 972,753 9,728 275,272 285,000
Stock issued for interest on
Series K 177,403 1,774 41,111 42,885
Issuance of stock options and
warrants to non-employees 449,641 449,641
Loss on conversion of convertible
stock 2,145,754 2,145,754
Issuance of warrants for short
term loan 65,796 65,796
Modification of warrants 6,142 6,142
SFAS 123R cost of employee options 1,699,448 1,699,448
Premium on loan from shareholder 489,776 489,776
Conversion of convertible debt
into common stock 3,015,852 30,159 1,176,182 1,206,341
Cost of derivative liabilities (8,632,217) (8,632,217)
Financing costs (2,072,927) (2,072,927)
Dividends 1,166,667 11,667 479,061 (490,728) -
Net loss (40,910,030) (40,910,030)
----------- --------- ----------- ---------- ----------- -----------
191,972,021 1,919,720 173,017,978 - (166,097,054) 8,840,644
=========== ========= =========== ========== ============ ===========
See notes to consolidated financial statements
F-6
CEL-SCI CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (Cont'd)
YEARS ENDED SEPTEMBER 30, 2009, 2008 AND 2007
2009 2008 2007
---------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(40,910,030) $ (7,703,415) $(9,629,657)
Adjustments to reconcile net loss to net
cash used for operating activities:
Depreciation and amortization 417,205 215,060 176,186
Issuance of stock options and warrants
to non-employees for services 449,641 12,342 191,455
Issuance of common stock for services 1,561,343 268,748 2,547,399
Correction of stock overpayment pricing - 1,471 -
Premium on loan 341,454
Loan premium adjustment 489,776 - -
Amortization of loan premium (338,172) - -
Penalty shares issued to non-employees - - 156,350
Modification of stock options 6,142 564,189 -
Issuance of stock to employees 685,858 1,324,474 324,778
Loss on conversion of convertible notes 2,145,754 - -
Employee option cost 1,699,448 561,387 307,201
Common stock contributed to 401(k) plan 57,829 108,590 89,723
Warrants issued in consideration for loan 65,796 - -
Amortization of deferred rent on
manufacturing facility 882,338 - -
Impairment loss on abandonment of patents 138,525 8,114 34,122
Loss on retired equipment 270 595 -
Deferred rent 7,688 5,151 1,466
Amortization of discount on convertible note 193,980 249,106 1,180,421
Loss/(gain) on derivative instruments 25,514,667 (1,799,393) (868,182)
Change in assets and liabilities:
Decrease/(increase) in deposits 4,764 (1,575,000) -
Decrease/(increase) in deferred rent (259,988) (142,117) (14,753)
(Increase)/decrease in prepaid expenses (12,763) 7,369 491,920
(Increase)/decrease in inventory used in
R&D and Manufacturing (4,304) (9,520) 4,994
Increase/(decrease) in accounts payable 343,208 (36,622) 89,159
(Decrease)/increase in accrued expenses (14,514) 14,576 23,709
Decrease in accrued interest on
convertible debt (2,674) (23,237) (5,678)
Increase in due to employees 13,450 9,342 9,310
Increase/(decrease) in deposits held 10,000 (3,000) -
---------- --------- --------
Net cash used in operating activities (6,513,309) (7,941,790) (4,890,077)
---------- --------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Deferred rent on manufacturing facility - - (4,936,591)
Additional investment in manufacturing
facility (505,225) (2,359,473) -
Decrease/(increase) in restricted cash 919,100 1,180,977 (2,168,629)
Investment in available-for-sale securities - (6,000,000) -
Sale of investments in available-for-sale
securities 200,000 5,800,000 -
Purchases of equipment (191,868) (1,023,011) (181,459)
Expenditures for patent costs (53,290) (121,616) (137,884)
---------- --------- ----------
Net cash provided by (used in)
investing activities 368,717 (2,523,123) (7,424,563)
---------- --------- ----------
(continued)
F-7
CEL-SCI CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (Cont'd)
YEARS ENDED SEPTEMBER 30, 2009, 2008 AND 2007
2009 2008 2007
---------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Proceeds from issuance of common stock $ 32,242,716 $ 1,037,542 $15,032,500
Proceeds from exercise of warrants and
stock options 8,681,254 14,403 612,466
Proceeds from short-term loan 3,104,057 1,956,803 -
Repayment of short-term loan (2,200,000) (1,756,803) -
Principal payments on convertible debt (754,250) (1,045,000) (407,500)
Costs for equity related transactions (2,072,927) (23,795) (10,170)
---------- --------- ----------
Net cash provided by financing activities 39,000,850 183,150 15,227,296
---------- --------- ----------
NET INCREASE (DECREASE)
IN CASH AND CASH EQUIVALENTS 32,856,258 (10,281,763 2,912,656
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 711,258 10,993,021 8,080,365
---------- --------- ----------
CASH AND CASH EQUIVALENTS, END OF YEAR $33,567,516 $ 711,258 $10,993,021
=========== =========== ===========
CONVERSION OF CONVERTIBLE DEBT INTO COMMON STOCK:
Decrease in convertible debt $ 1,206,341 $ - $ 4,373,631
Increase in receivables - - 7,096
Increase in common stock (30,159) - (57,448)
Increase in additional paid-in capital (1,176,182) - (4,323,279)
---------- ----------- -----------
$ - $ - $ -
========== =========== ===========
CONVERSION OF INTEREST ON CONVERTIBLE DEBT INTO
COMMON STOCK:
Decrease in convertible debt $ 42,885 $ - $ -
Increase in receivables (1,774) - -
Increase in common stock (41,111) - -
---------- ----------- -----------
Increase in additional paid-in capital $ - $ - $ -
========== =========== ===========
PAYMENT OF CONVERTIBLE DEBT PRINCIPAL WITH COMMON
STOCK:
Decrease in convertible debt $ 285,000 $ - $ 233,155
Increase in common stock (9,728) - (3,431)
Increase in additional paid-in capital (275,272) - (229,724)
---------- ----------- -----------
$ - $ - $ -
========== =========== ===========
ISSUANCE OF WARRANTS:
Increase in derivative liabilities $(8,877,217) $ (891,336) $(5,598,655)
Increase in discount on notes payable 245,000 - -
Decrease in additional paid-in capital 8,632,217 891,336 5,598,655
---------- ----------- -----------
$ - $ - $ -
========== =========== ===========
(continued)
F-8
CEL-SCI CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (Cont'd)
YEARS ENDED SEPTEMBER 30, 2009, 2008 AND 2007
2009 2008 2007
---------------------------------------------
WARRANTS ISSUED TO LESSOR:
Increase in deferred rent $ - $ - $ 1,364,773
Increase in additional paid-in capital - - (1,364,773)
---------- ----------- -----------
$ - $ - $ -
========== =========== ===========
MODIFICATION OF WARRANTS:
Increase in additional paid-in capital $ (24,061) $ (173,187) $ -
Decrease in additional paid-in capital 24,061 173,187 -
---------- ----------- -----------
$ - $ - $ -
========== =========== ===========
PATENT COSTS INCLUDED IN ACCOUNTS PAYABLE:
Increase in patent costs $ 7,285 $ 14,013 $ 8,429
Increase in accounts payable (7,285) (14,013) (8,429)
---------- ----------- -----------
$ - $ - $ -
========== =========== ===========
EQUIPMENT COSTS INCLUDED IN ACCOUNTS PAYABLE:
Increase in research and office equipment $ 15,147 $ 201,998 $ 52,476
Increase in accounts payable (15,147) (201,998) (52,476)
---------- ----------- -----------
$ - $ - $ -
========== =========== ===========
WARRANTS ISSUED FOR LOAN:
Increase in debt discount $ 65,796 $ - $ -
Increase in additional paid-in capital (65,796) - -
---------- ----------- -----------
$ - $ - $ -
========== =========== ===========
STOCK MODIFICATION RECORDED AS DIVIDEND
Increase in common stock $ (11,667) $ - $ -
Increase additional paid-in capital (479,061) (424,815) -
Increase accumulated deficit 490,728 424,815 -
---------- ----------- -----------
$ - $ - $ -
========== =========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOWS
INFORMATION:
Cash expenditure for interest expense $ 115,559 $ 224,662 $ 528,182
See notes to consolidated financial statements.
F-9
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.
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 the 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. Since Multikine is not tumor specific, it may also be applicable in
many other solid tumors.
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). 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, as cash
and cash equivalents.
c. Restricted Cash--The restricted cash is money held in escrow pursuant to the
lease agreement for the manufacturing facility.
d. Prepaid Expenses and Inventory--Prepaid expenses consist of expenses which
benefit a substantial period of time. Inventory consists of manufacturing
production advances and bulk purchases of laboratory supplies to be consumed
in the manufacturing of the Company's product for clinical studies.
e. Deposits--The deposit is on the manufacturing facility ($1,575,000) required
by the lease agreement. Also included in deposits is the balance of the
restricted cash related to the manufacturing facility of $10,064.
F-10
f. 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. The fixed assets are reviewed on a quarterly basis to
determine if any of the assets are impaired. Depreciation expense for the
years ended September 30, 2009, 2008 and 2007 totaled $330,820, $133,604 and
$92,176, respectively.
g. Patents--Patent expenditures are capitalized and amortized using the
straight-line method over the shorter of the expected useful life or the
legal life of the patent (17 years). In the event changes in technology or
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. During the years ended September 30, 2009, 2008 and 2007, the Company
recorded patent impairment charges of $138,525, $8,114 and $34,122,
respectively, for the net book value of patents abandoned during the year.
These abandonments included the write off in the year ended September 30,
2007 of the unamortized patent costs in Viral Technologies, Inc., the
Company's wholly owned subsidiary, totaling $34,122. These amounts are
included in general and administrative expenses. Amortization expense for the
years ended September 30, 2009, 2008 and 2007 totaled $86,385, $81,456 and
$84,010, respectively. The Company estimates that amortization expense will
be $85,000 for each of the next five years, totaling $425,000.
h. Deferred Rent--On September 30, 2009, the Company has included in deferred
rent the following: 1) deposit on the manufacturing facility ($3,150,000); 2)
the fair value of the warrants issued to lessor ($1,731,667); 3) additional
investment ($2,864,698); 4) deposit on the cost of the leasehold improvements
for the manufacturing facility ($1,786,591); 5) amortization of deferred rent
($(882,338)); and 6) accrued interest on deposit ($92,687).
On September 30, 2008, the Company has included in deferred rent the
following: 1) deposit on the manufacturing facility ($3,150,000); 2) the fair
value of the warrants issued to lessor ($1,364,773); 3) additional investment
($2,359,473); 4) deposit on the cost of the leasehold improvements for the
manufacturing facility ($1,786,591) and 5) accrued interest on deposit
($199,593).
i. Deferred Rent (liability)--The deferred rent (liability) is amortized on a
straight-line basis over the term of the lease with the offset going against
rent expense.
j. Derivative Instruments--The Company has entered into financing arrangements
that consist of freestanding derivative instruments or are hybrid instruments
that contain embedded derivative features. The Company accounts for these
arrangement in accordance with Codification 815-10-50 , "Accounting for
Derivative Instruments and Hedging Activities", "Accounting for Derivative
Financial Instruments Indexed to, and Potentially Settled in, a Company's Own
F-11
Stock". In accordance with accounting principles generally accepted in the
United States ("GAAP"), derivative instruments and hybrid instruments are
recognized as either assets or liabilities in the balance sheet and are
measured at fair value with gains or losses recognized in earnings or other
comprehensive income depending on the nature of the derivative or hybrid
instruments. 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 cannot
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 including the use of "blockage" discounts
or premiums in determining the fair value of a large block of financial
instruments. The convertible debt associated with the Series K convertible
notes was all either repaid or converted into the Company's common stock
before September 30, 2009. The remaining warrants associated with Series K
are valued at $5,372,598 on September 30, 2009 and are in current
liabilities.
The Company has issued other warrants during the year ended September 30,
2009 that are accounted for as derivative liabilities. See Note 6. At
September 30, 2009, the fair value of these derivative instruments totaled
$29,741,372 and is shown on the balance sheet in current liabilities. The
fair value of these derivative liabilities will be adjusted at the end of
each interim accounting period as well as at the end of each fiscal year as
long as they are outstanding.
k. 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. The grants which the
Company had been receiving have been exhausted in fiscal year 2007 and the
Company is currently not receiving funds from any grants.
l. Research and Development Costs--Research and development expenditures are
expensed as incurred.
m. 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 included in the calculation unless it was antidilutive. Excluded
from the computations of weighted average shares for diluted net loss per
share were options and warrants to purchase 23,384,797, 14,488,124 and
11,054,492 shares of common stock as of September 30, 2009, 2008 and 2007,
respectively. These securities were excluded because their inclusion would
have an anti-dilutive effect on net loss per share. The calculation of
diluted earnings per share for the year ended September 30, 2009 equals the
basic earnings per share because the calculation would have been
anti-dilutive.
F-12
n Concentration of Credit Risk--Financial instruments, which potentially
subject the Company to concentrations of credit risk, consist of cash and
cash equivalents. The Company maintains its cash and cash equivalents with
high quality financial institutions. At times, these accounts may exceed
federally insured limits. The Company has not experienced any losses in such
bank accounts. The Company believes it is not exposed to significant credit
risk related to cash and cash equivalents.
o. Income Taxes--The Company adopted the provisions of Codification 740-10,
Accounting for Uncertainty in Income Taxes, on October 1, 2007. The Company
has net operating loss carryforwards at September 30, 2009 of approximately
$104,033,320. The Company uses the asset and liability method of accounting
for income taxes. Under the asset and liability method, deferred tax assets
and liabilities are recognized for future tax consequences attributable to
differences between the financial statement carrying amounts of existing
assets and liabilities and their respective tax bases and operating and tax
loss carryforwards. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled. The
effect on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date. The
Company records a valuation allowance to reduce the deferred tax assets to
the amount that is more likely than not to be recognized. There has been no
change in the Company's financial position and results of operations due to
the adoption of Codification 740-10.
p. 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 instruments determined using various
valuation techniques including the Black-Scholes and binomial pricing
methodologies. The Company considers such valuations to be significant
estimates.
q. Recent Accounting Pronouncements--In December 2007, the FASB issued
Codification 805-40-25-2 "Noncontrolling Interests in Consolidated Financial
Statements, an amendment of ARB 51", which changes the accounting and
reporting for minority interests. Minority interests will be recharacterized
as noncontrolling interests and will be reported as a component of equity
separate from the parent's equity, and purchases or sales of equity interests
that do not result in a change in control will be accounted for as equity
transactions. In addition, net income attributable to the noncontrolling
interest will be included in consolidated net income on the face of the
income statement and, upon loss of control, the interest sold, as well as any
interest retained, will be recorded at fair value with any gain or loss
recognized in earnings. Codification 805-40-25-2 is effective beginning
October 1, 2009 and will apply prospectively, except for the presentation and
disclosure requirements, which will apply retrospectively.
F-13
In March 2008, the FASB issued Codification 815-20-50-1, "Disclosures about
Derivative Instruments and Hedging Activities - an amendment of FASB
Statement No. 133", which changes disclosure requirements for derivative
instruments and hedging activities. The statement is effective for periods
ending on or after November 15, 2008, with early application encouraged. The
Company is currently assessing the additional requirements of this statement.
In June 2008, the FASB finalized Codification 815-40-15-7, "Determining
Whether an Instrument (or Embedded Feature) is Indexed to an Entity's Own
Stock". The topic lays out a procedure to determine if the debt instrument is
indexed to its own common stock. The topic is effective for fiscal years
beginning after December 15, 2008. The Company believes it will have an
impact on certain warrants. The Company is reviewing this topic and the
impact will likely be material.
In September 2008, the FASB staff issued Codification 815-10-50-1A,
"Disclosures about Credit Derivatives and Certain Guarantees: An Amendment of
FASB Statement No. 133 and FASB Interpretation No. 45; and Clarification of
the Effective Date of FASB Statement No. 161". This applies to credit
derivatives within the scope of Statement 133 and hybrid instruments that
have embedded credit derivatives. It deals with disclosures related to these
derivatives and is effective for reporting periods ending after November 15,
2008. It also clarifies the effective date of Codification 815-20-50-1 as any
reporting period beginning after November 15, 2008. The Company is currently
assessing the potential impact of this staff position on its consolidated
financial statements, but does not expect that the impact will be material.
In April 2009, the FASB issued Codification 825-10-65-1, "Interim
Disclosures about Fair Value of Financial Instruments". This topic amends
FASB Statement No. 107, "Disclosures about Fair Values of Financial
Instruments", to require disclosures about fair values of financial
instruments for interim reporting periods of publicly traded companies as
well as in annual financial statements. This topic became effective for
interim and annual reporting periods ending after June 15, 2009. The Company
adopted it for the period ended June 30, 2009. There was no significant
impact from this adoption.
In May 2009, the FASB issued Codification 855-10-50, "Subsequent Events"
which establishes general standards of accounting for and disclosure of
events that occur after the balance sheet date but before the financial
statements are issued or are available to be issued. It requires the
disclosure of the date through which an entity has evaluated subsequent
events and the basis for that date. The Statement sets forth the period after
the balance sheet date during which management of a reporting entity should
evaluate events or transactions that may occur for potential recognition or
disclosure in the financial statements, the circumstances under which an
entity should recognize events or transactions occurring after the balance
sheet date in its financial statements and the disclosures that an entity
should make about events or transactions that occurred after the balance
sheet date. This topic became effective for the Company for the period ended
June 30, 2009 and is to be applied prospectively. The impact of the adoption
was not significant.
F-14
In June 2009, the FASB issued SFAS No. 168, "The FASB Accounting Standard
CodificationTM" ("Codification") and the Hierarchy of Generally Accepted
Accounting Principles", effective for interim and annual reporting periods
ending after September 15, 2009. This statement replaces SFAS No. 162, "The
Hierarchy of Generally Accepted Accounting Principles" and establishes the
Codification as the source of authoritative accounting principles used in the
preparation of financial statements in conformity with generally accepted
accounting principles. The Codification does not replace or affect guidance
issued by the SEC or its staff. After the effective date of this statement,
all non-grandfathered non-SEC accounting literature not included in the
Codification will be superseded and deemed non-authoritative.
r. Stock-Based Compensation-- The Company follows Codification 718-10-30-3,
"Share Based Payment" and recognized expense of $1,699,448 for options issued
or vested during the fiscal year ended September 30, 2009, expense of
$561,387 for options issued or vested during the fiscal year ended September
30, 2008 and expense of $307,201 for options issued or vested during the
fiscal year ending September 30, 2007. This expense was recorded as general
and administrative expense. The following table summarizes stock option
activity for the year ended September 30, 2009.
A summary of the status of the Company's non-vested options as of September
30, 2009 is presented below:
Non-Qualified Stock Option Plan
Outstanding Exercisable
----------------------------------------- ------------------------------------------
Weighted Weighted
Average Average
Weighted Remaining Weighted Remaining
Number Average Contractual Aggregate Number Average Contractual Aggregate
of Exercise Term Intrinsic of Exercise Term Intrinsic
Shares Price (Years) Value Shares Price (Years) Value
---------------------------------------------------------------------------------------------------------------------
Outstanding at
October 1, 2008 7,852,265 $0.65 5.30 $293,449 5,998,939 $0.66 4.15 $293,449
Vested 1,566,280 $0.49
Granted 11,895,614 $0.37 9.82 $16,007,203 11,895,614 $0.37 9.82 $16,007,203
Exercised (132,253) $0.33 5.26 $183,634 (132,253) $0.33 5.26 $183,634
Forfeited (5,000) $0.64 (5,000) $0.64
Expired (32,535) $1.63 (32,535) $1.63
Outstanding at
September 30, 2009 19,578,091 $0.48 7.70 $23,979,937 7,400,431 $0.61 4.18 $7,676,815
F-15
Incentive Stock Option Plan
---------------------------
Outstanding Exercisable
----------------------------------------- ------------------------------------------
Weighted Weighted
Average Average
Weighted Remaining Weighted Remaining
Number Average Contractual Aggregate Number Average Contractual Aggregate
of Exercise Term Intrinsic of Exercise Term Intrinsic
Shares Price (Years) Value Shares Price (Years) Value
---------------------------------------------------------------------------------------------------------------------
Outstanding at
October 1, 2008 4,745,266 $0.53 5.30 $454,200 4,121,935 $0.52 4.45 $454,200
Vested 4,556,108 $0.28
Granted 4,982,775 $0.27 9.62 $7,227,179 4,982,775 $0.27 9.62 $7,227,179
Exercised (100,000) $1.13 4.50 $59,000 (100,000) $1.13 4.50 $59,000
Forfeited
Expired (29,167) $1.70 (29,167) $1.70
Outstanding at
September 30, 2009 9,598,874 $0.39 7.03 $12,859,317 8,548,876 $0.38 6.99 $11,525,3
The total intrinsic value of options exercised during the fiscal years 2009,
2008 and 2007 was $242,634, $5,784 and $257,463, respectively.
The weighted average fair value at the date of grant for options granted
during fiscal years 2009, 2008 and 2007 was $0.28, $0.51 and $0.53,
respectively.
A summary of the status of the Company's non-vested options as of September
30, 2009 is presented below:
Non-qualified Stock Option Plan:
Weighted
Number of Average
Shares Price
Nonvested at September 30, 2006 1,124,649 $0.23
Vested (554,663)
Granted 870,000
Forfeited -
---------
Nonvested at September 30, 2007 1,439,986 $0.51
Vested (616,328)
Granted 1,039,000
Forfeited (9,332)
---------
Nonvested at September 30, 2008 1,853,326 $0.61
Vested (1,566,280)
Granted 11,895,614 $0.31
Forfeited (5,000)
---------
Nonvested at September 30, 2009 12,177,660 $0.40
F-16
Incentive Stock Option Plan:
Weighted
Number of Average
Shares Price
Nonvested at September 30, 2006 516,666 $0.46
Vested (213,334)
Granted 300,000
Forfeited -
---------
Nonvested at September 30, 2007 603,332 $0.49
Vested (280,001)
Granted 300,000
Forfeited -
---------
Nonvested at September 30, 2008 623,331 $0.62
Vested (4,556,108)
Granted 4,982,775 $0.22
Forfeited -
---------
Nonvested at September 30, 2009 1,049,998 $0.45
In fiscal year 2009, CEL-SCI issued 16,878,389 stock options to employees and
directors at a fair value of $4,725,949 ($0.28 fair value per option), at a
weighted average conversion price of $0.343 per share. The weighted average
fair value at the date of grant for options granted during fiscal years 2009,
2008 and 2007 was $0.28, $0.51 and $0.53, respectively. On September 30,
2009, CEL-SCI had 13,227,658 options that were unvested at a fair value of
$4,399,519 which is a weighted average fair value of $0.3326 per share with a
weighted average remaining vesting life of 4.62 years.
In fiscal year 2008, CEL-SCI issued 1,339,000 stock options to employees and
directors at a fair value of $677,661, or weighted average $0.51 per share.
In September 2007, CEL-SCI issued 1,170,000 stock options to employees and
directors at a fair value of $616,977, or $0.53 per share. The fair value of
each option grant was estimated on the date of grant using the Black-Scholes
option-pricing model with the following assumptions:
2009 2008 2007
---- ---- ----
Expected stock risk volatility 79.5 - 80.2% 79-81% 80%
Risk-free interest rate 2.82 - 3.72% 3.68-4.53% 4.67%
Expected life options 10 Years 10 Years 10 Years
Expected dividend yield - - -
F-17
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 2009, 2008 and 2007 equals the yield on ten-year
zero-coupon U.S. Treasury issues on the grant date. Historical data was used
to estimate option exercise and employee termination within the valuation
model. The expected term of options represents the period of time that
options granted are expected to be outstanding and has been determined based
on an analysis of historical exercise behavior. No discount was applied to
the value of the grants for non-transferability or risk of forfeiture.
2. SERIES K CONVERTIBLE DEBT
In August 2006, the Company issued $8,300,000 in aggregate principal amount
of convertible notes (the "Series K Notes") together with warrants to
purchase 4,825,581 shares of the Company's common stock (the "Series K
Warrants"). Additionally, in connection with issuance of the Series K Notes
and Series K Warrants, the placement agent received a fee of $498,000 and
386,047 fully vested warrants (the "Placement Agent Warrants") to purchase
shares of the Company's common stock. Net proceeds were $7,731,290, net of
$568,710 in direct transaction costs, including the placement agent fee.
Features of the Convertible Debt Instrument and Warrants
The Series K Notes were convertible into 9,651,163 shares of the Company's
common stock at the option of the holder at any time prior to maturity at a
conversion price of $0.86 per share, subject to adjustment for certain
events described below. The Series K Warrants were exercisable over a
five-year period from February 4, 2007 through February 4, 2012 at $0.95
per share.
The Series K Notes bore interest at the greater of 8% or LIBOR plus 300
basis points, and were required to be repaid in thirty equal monthly
installments of $95,000 beginning on March 4, 2007 and continuing through
September 4, 2010. The remaining principal balance of $950,000 was required
to be repaid on August 4, 2011; however, holders of the Series K Notes were
permitted to require repayment of the entire remaining principal balance at
any time after August 4, 2009. Interest had been payable quarterly
beginning in September 30, 2006. Each payment of principal and accrued
interest could be settled in cash or in shares of common stock at the
option of the Company. The number of shares deliverable under the
share-settlement option was determined based on the lower of (a) $0.86 per
share, as adjusted pursuant to the terms of the Series K Notes or (b) 90%
applied to the arithmetic average of the volume-weighted-average trading
prices for the twenty day period immediately preceding each share
settlement.
In the event of default, as defined in the Series K Notes, all amounts due
and outstanding thereunder were to become, at the option of the holders,
immediately due and payable in cash, in an amount that equals the sum of
(i) the greater of (a) 115% of the outstanding balance plus all accrued and
unpaid interest or (b) 115% of the arithmetic average of the
volume-weighted-average trading prices for the five day period immediately
F-18
preceding notice requiring repayment, and (ii) all other amounts due in
connection with the Series K Notes and associated agreements. Additionally,
if a certain breach occurs under a related registration rights agreement,
the Company was required to pay, as liquidated damages, 1.5% per month of
the outstanding balance of the Series K Notes, until such default was cured
(or 2% per month if such breach occurred after 180 days following closing
of the transaction). Events of default included circumstances in which the
Company either failed to have a registration statement for shares into
which the Series K Notes can be converted be declared effective by the SEC
within 180 days of the issuance date of the Series K Notes or that the
registration statement's effectiveness lapses for any reason.
The Company was not allowed to make payments in shares if such payments
would result in the cumulative issuance of shares of its common stock
exceeding 19.999% of the shares outstanding on the day immediately
preceding the issuance date of the Series K Notes, unless prior approval is
given by vote of at least a majority of the shares outstanding. The Company
received such approval on November 17, 2006. The conversion price of the
Series K Notes and exercise price of the Series K Warrants were each
subject to certain anti-dilution protections, including for stock splits,
stock dividends, change in control events and dilutive issuances of common
stock or common stock equivalents, such as stock options, at an effective
price per share that is lower than the then conversion price. In the event
of a dilutive issuance of common stock or common stock equivalents, the
conversion price and exercise price would be reduced to equal the lower per
share price of the subsequent transaction.
Accounting for the Convertible Debt Instrument and Warrants
The Company accounted for the Series K Warrants as derivative liabilities
in accordance with Codification 815-10. The Company determined that the
Series K Notes constituted a hybrid instrument that had the characteristics
of a debt host contract containing several embedded derivative features
that would require bifurcation and separate accounting as a derivative
instrument pursuant to the provisions of the topic. The Company determined
that certain of these features cannot be reliably measured and, in
accordance with the requirements of the topic, measured the entire hybrid
instrument at fair value with changes in fair value recognized as either a
gain or loss.
Upon issuance of the Series K Notes and Series K Warrants, the Company
allocated proceeds received to the Series K Notes and the Series K Warrants
on a relative fair value basis. As a result of such allocation, the Company
determined the initial carrying value of the Series K Notes to be
$6,565,528. The Series K Notes were immediately marked to fair value
resulting in a derivative liability in the amount of $9,728,793 and
recognized a charge of $3,163,265, which was recorded as costs associated
with convertible debt. As of September 30, 2008, the fair value of the
Series K Notes was $1,943,240, and the Company recognized a total gain of
$1,799,393 on the convertible debt and associated warrants during the year
ended September 30, 2008. A debt discount in the amount of $1,734,472 was
amortized to interest expense using the effective interest method over the
expected term of the Series K Notes. During the year ended September 30,
2009, the Company recorded interest expense of $193,980 in related
amortization of the debt discount. During the year ended September 30,
2008, the Company recorded interest expense of $249,106 in related
amortization of the debt discount over the term of the Series K Notes.
F-19
During the year ended September 30, 2007, the Company recorded interest
expense of $1,183,728 in related amortization of the debt discount.
Upon issuance, the Series K Warrants and Placement Agent Warrants did not
meet the requirements for equity classification set forth in Codification
815-10-50, "Accounting for Derivative Financial Instruments Indexed to, and
Potentially Settled in, a Company's Own Stock," because such warrants (a)
must be settled in registered shares and (b) are subject to substantial
liquidated damages if the Company is unable to maintain the effectiveness
of the resale registration of the shares. Therefore such warrants were
accounted for as freestanding derivative instruments pursuant to the
provisions of Codification 815-10. Accordingly, the Company allocated
$2,570,138 of the initial proceeds to the Series K Warrants and immediately
marked them to fair value resulting in a derivative liability of $2,570,138
and recognized a charge of $835,666, which was recorded as costs associated
with convertible debt. As of September 30, 2008, the fair value of the
Series K Warrants was $995,793. The Company paid $568,710 in cash
transaction costs and incurred another $223,907 in costs based upon the
fair value of the Placement Agent Warrants, which was recorded as costs
associated with convertible debt. Such costs were expensed immediately as
part of fair value adjustments required in connection with the convertible
debt instrument and the Company's irrevocable election to initially and
subsequently measure the Series K Notes at fair value. As of September 30,
2008, the fair value of the Placement Agent Warrants was $79,664. In
connection with the June 2009 financing, the Series K notes and warrants
were repriced to $0.40. As of September 30, 2009, the fair value of the
remaining investor and broker warrants was $5,372,598.
During the year ended September 30, 2007, $4,399,285 in convertible debt
was converted into 5,744,764 shares of common stock. No debt was converted
into common stock during the year ended September 30, 2008.
During the year ended September 30, 2009, all remaining convertible debt
was converted into common stock or was repaid in accordance with the terms
of the agreement. $24,375 was repaid at 120% and $1,206,341 in convertible
debt was converted into 3,015,852 shares of common stock during the year
ended September 30, 2009.
The following summary comprises the total of the fair value of the
convertible debt and related warrants at September 30, 2009 and 2008:
2009 2008
---- ----
Face value of debt $ - $2,240,715
Discount on debt - (193,980)
Investor warrants 1,734,472 1,734,472
Placement agent warrants - 79,664
Fair value adjustment-convertible debt - (103,495)
Fair value adjustment-investor warrants 3,638,126 (738,679)
---------- ---------
Total fair value $5,372,598 $3,018,697
========== ==========
F-20
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. To date, the Company has not generated
any revenue from product sales. The ability of the Company to complete the
necessary clinical trials and obtain Federal Drug Administration (FDA)
approval for the sale of products to be developed on a commercial basis is
uncertain. Ultimately, the Company must complete the development of its
products, obtain the appropriate regulatory approvals and obtain sufficient
revenues to support its cost structure. CEL-SCI believes it has sufficient
funds to support its operations for more than the next twelve months.
CEL-SCI has two partners who have agreed to participate in and pay for part
of the Phase III clinical trial for Multikine. Since CEL-SCI was able to
raise substantial capital during 2009, the Company is currently preparing the
Phase III trial for Multikine. The net cost of the clinical trial is
estimated to total $20 million.
4. RESEARCH AND OFFICE EQUIPMENT
Research and office equipment at September 30, 2009 and 2008, consists of the
following:
2009 2008
---- ----
Research equipment $3,292,472 $3,125,983
Furniture and equipment 122,957 118,881
Leasehold improvements 44,419 44,419
---------- ----------
$3,459,848 $3,289,283
Less: Accumulated depreciation and
amortization (2,259,237) (1,964,597)
------------ ----------
Net research and office equipment $1,200,611 $1,324,686
========== ===========
5. INCOME TAXES
At September 30, 2009, the Company had a federal net operating loss
carryforward of approximately $104 million expiring from 2010 through 2029.
In addition, the Company has a general business credit as a result of the
credit for increasing research activities of approximately $2,341,000 and
$2,342,000 at September 30, 2009 and 2008, respectively. These tax credits
begin expiring after twenty years from the year in which the credit was
generated. The components of the deferred taxes at September 30, 2009 and
2008 are comprised of the following:
F-21
2009 2008
---- ----
Net operating loss $39,491,048 $37,235,972
R&D credit 2,340,614 2,341,994
Amortization of debt discount 658,406 584,771
Codification 718-10-30-3,
"Share Based Payments" 683,245 207,635
Derivative loss 8,919,951 -
Vacation 9,127 5,533
----------- -----------
Total deferred tax assets 52,102,392 40,375,905
Derivative gain - (1,895,479)
----------- -----------
Total deferred tax liability - (1,895,479)
Valuation allowance (52,102,392) (38,480,426)
----------- -----------
Net deferred tax asset $ - $ -
=========== ============
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 in the future. 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:
2009 2008 2007
---- ---- ----
Federal Rate 34.0% 34.0% 35.0%
State tax rate, net of federal benefit 3.96% 3.96% 3.96%
R&D credit 2.01% 5.06% 0%
R&D credit true-up (0.40%) 0% 0%
Nondeductible expenses (0.00%) (0.04%) (0.10%)
Valuation allowance (39.57%) (42.98%) (38.86%)
Effective tax rate 0.0% 0.0% 0.0%
F-22
The Company adopted the provisions of Codification 740-10, "Accounting for
Uncertainty in Income Taxes" on October 1, 2007 which requires financial
statement benefits be recognized for positions taken for tax return purposes,
when it is more likely than not that the position will be sustained. The
Company has concluded that it has properly filed its tax returns and does not
believe that any of the positions it has taken would result in a disallowance
of any of these tax positions. Therefore, the Company has concluded that
adoption of this topic had no impact on its financial positions. No interest
or penalties were accrued as of October 1, 2007 or through September 30, 2009
as a result of adoption of this requirement. In the United States, the
Company is still open to examination from 2005 forward.
6. STOCK OPTIONS, BONUS PLAN AND WARRANTS
Non-Qualified Stock Option Plan--At September 30, 2009, the Company has
collectively authorized the issuance of 28,760,000 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, September 30, 2006 7,511,362 $0.66 6,011,713 $0.69
Options granted 1,395,000 $0.66
Options exercised (1,403,664) $0.47
Options forfeited (40,000) $2.15
-----------
Options outstanding, September 30, 2007 7,462,698 $0.69 5,972,712 $0.67
Options granted 1,039,000 $0.60
Options exercised (50,467) $0.29
Options forfeited (43,966) $0.96
-----------
Options outstanding, September 30, 2008 8,407,265 $ 0.68 6,553,939 $0.64
Options granted 12,538,114 $0.38
Options exercised (162,253) $0.38
Options forfeited (462,535) $0.82
-----------
Options outstanding, September 30,2009 20,320,591 $0.49 8,142,931 $0.64
==========
F-23
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, 2009, 1,622,833 options remain outstanding.
In September 2006, the Company extended the expiration date on 126,666
options from the Nonqualified Stock Option Plan with an exercise price of
$1.05. The options originally would have expired from September 2006 to May
2007 and were extended for three years to expiration dates ranging from
September 2009 to May 2010. This extension was considered a new measurement
date with respect to the modified options. At the date of modification,
compensation expense of $30,468 was recorded. As of September 30, 2009, all
of these options remain outstanding.
In December 2007, the Company extended the expiration date on 1,680,533
options from the Nonqualified Stock Option Plan with exercise prices ranging
from $1.05 to $1.94. The options originally would have expired between
February 2008 to October 2008 and were extended for five years to expiration
dates ranging from February 2013 to October 2013. This extension was
considered a new measurement date with respect to the modified options. At
the date of modification, the additional cost of the options was $410,471. As
of September 30, 2009, all of these options remain outstanding.
In April 2009, the Company extended the expiration date on 147,000 options
from the Nonqualified Stock Option Plan with the exercise prices ranging from
$1.05 to $1.87. The options originally would have expired between May 2009 to
September 2009 and were extended for three years to expiration dates ranging
from May 2012 to September 2012. This extension was considered a new
measurement date with respect to the modified options. At the date of
modification, the additional cost of the options was $2,904. As of September
30, 2009, all of these options remain outstanding.
Incentive Stock Option Plan--At September 30, 2009, the Company has
collectively authorized the issuance of 15,100,100 shares of common stock
under the Incentive Stock Option Plan. Options vest over 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.
F-24
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, September 30, 2006 4,326,933 $0.65 3,810,267 $0.66
Options granted 300,000 $0.63
Options exercised -
Options forfeited (25,000) $3.12
----------
Options outstanding, September 30, 2007 4,601,933 $0.64 3,998,601 $0.63
Options granted 300,000 $0.62
Options exercised
Options forfeited (156,667) $3.83
----------
Options outstanding, September 30, 2008 4,745,266 $0.53 4,121,935 $0.52
Options granted 4,982,775 $0.27
Options exercised (100,000) $1.13
Options forfeited (29,167) $1.70
----------
Options outstanding, September 30, 2009 9,598,874 $0.39 8,548,876 $0.38
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, 2009, all options remain outstanding.
In September 2006, the Company extended the expiration date on 268,166
options from the Incentive Stock Option Plan with an exercise price of $1.05.
The options originally would have expired from September 2006 to August 2007
and were extended for three years to expiration dates ranging from September
2009 to August 2010. This extension was considered a new measurement date
with respect to the modified options. At the date of modification,
compensation expense of $56,396 was recorded. As of September 30, 2009,
267,666 of these options remain outstanding.
In December 2007, the Company extended the expiration date on 225,100 options
from the Incentive Stock Option Plan with exercise prices ranging from $1.05
to $1.94. The options originally would have expired between February 2008 to
December 2008 and were extended for five years to expiration dates ranging
from February 2013 to December 2013. This extension was considered a new
F-25
measurement date with respect to the modified options. At the date of
modification, the additional cost of the options was $54,537. As of September
30, 2009, all of these options remain outstanding.
In April 2009, the Company extended the expiration date on 153,000 options
from the Incentive Stock Option Plan with the exercise price of $1.05. The
options originally would have expired between April 2009 to December 2009 and
were extended for three years to expiration dates ranging from April 2012 to
December 2012. This extension was considered a new measurement date with
respect to the modified options. At the date of modification, the additional
cost of the options was $3,238. As of September 30, 2009, all of these
options remain outstanding.
Other Options and Warrants
The Company accounts for options to non-employees in accordance with
Codification 505-50-05-5, "Equity Based Payments to Non-Employees". The
warrants are valued using the Black-Scholes methodology and are either
expensed as the warrants are vested or as a debit and a credit to additional
paid-in capital if an equity transaction. If the warrants are expensed, they
are revalued each quarter before they are fully vested and the difference in
the value of the warrants is recorded in the income statement. Warrants
issued in connection with some financings are classified as derivative
liabilities due to their terms. See Note 11 for further discussion. Details
of the transactions follow.
In February 2007, 50,000 options were issued to each of two consultants to
purchase shares of common stock at $0.70 and $0.81. The options vested in 3
months and 3 1/2 months respectively and expire in 1.5 and two years. The
options were valued at $30,375 using the Black Scholes pricing methodology,
using the following assumptions, and the cost was recorded as a debit to
general and administrative expense. In August 2008, 50,000 of these options
were extended for one year. The revaluing of the options was valued at less
than the original value, so no additional cost needed to be recognized.
Original Extended
Warrants Warrants
-------- --------
Expected stock risk volatility 74.0% 74.0%
Risk-free interest rate 4.85% 4.85%
Expected life of warrant 1.5 and 2 Years 1 Year
On April 5, 2007, 375,000 options were issued to a consultant to purchase
shares of common stock at $0.72 per share and vested immediately. The options
were valued at $76,617 using the Black Scholes pricing methodology, using the
following assumptions, and the cost was recorded as a debit to general and
administrative expense. In December 2007, these warrants were extended for
five years. The revaluing of the warrants was valued at an additional $99,181
and recorded as general and administrative expense. The Black Scholes pricing
methodology was used with the following assumptions:
F-26
Original Extended
Warrants Warrants
-------- --------
Expected stock risk volatility 68.02% 68.02%
Risk-free interest rate 4.73% 4.73%
Expected life of warrant 1 Year 5.33 Years
On May 29, 2007, 100,000 options were issued to a consultant to purchase
shares of common stock at $0.84 and vested immediately. The options were
valued at $45,583 using the Black Scholes pricing methodology, using the
following assumptions, and the cost was recorded as a debit to general and
administrative expense:
Expected stock risk volatility 66.93%
Risk-free interest rate 4.60%
Expected life of warrant 4 Years
In July 2007, the Company issued 3,000,000 warrants to VIF II CEL-SCI
Partners LLC in connection with the manufacturing facility lease agreement.
The warrants vested immediately. The cost of the warrants, $1,364,773 was
recorded as an increase in deferred rent and will be expensed over the life
of the lease.
In September 2007, 50,000 options were issued to a consultant and valued at
$12,342. The options vested and were recorded as a general and administrative
expense in January 2008.
In November and December 2007, the Company extended 2,016,176 investor and
consultant warrants. The options and warrants were due to expire from
December 1, 2007 through December 31, 2008. All options and warrants were
extended for an additional five years from the original expiration date. The
cost of the extension of investor warrants of $424,815 was recorded as a
debit to accumulated deficit (dividend) and a credit to additional paid-in
capital. The cost of the extension of the consultant warrants of $99,181 is
recorded as a debit to general and administrative expense and a credit to
additional paid-in capital. The additional cost of the extension of investor
and consultant warrants was determined using the Black Scholes method.
In January 2009, as part of an amended lease agreement on the manufacturing
facility, the Company repriced 3,000,000 warrants issued to the lessor in
July 2007 at $1.25 per share and which were to expire on July 12, 2013. These
warrants are now repriced at $0.75 per share and expire on January 26, 2014.
The cost of this repricing and extension of the warrants is $70,515 and will
be accounted for as a debit to the deferred rent asset and a credit to
additional paid-in capital. In addition, 787,500 additional warrants were
given to the lessor of the manufacturing facility on the same date at $0.75
and will expire on January 26, 2014. The cost of these warrants was $45,207
and will be accounted for as a debit to the deferred rent asset and a credit
to additional paid-in capital. The cost of the warrant extension and the new
warrants was determined using the Black Scholes method using the following
assumptions.
F-27
Expected stock risk volatility 61.63%
Risk-free interest rate 1.52%
Expected life of warrant 5 Years
In March 2009, as further consideration for its rights under the licensing
agreement, Byron Biopharma purchased 3,750,000 Units from the Company at a
price of $0.20 per Unit. Each Unit consisted of one share of the Company's
common stock and two warrants. Each warrant entitles the holder to purchase
one share of the Company's common stock at a price of $0.25 per share. The
warrants will be exercisable at any time after September 8, 2009 and prior to
March 6, 2016. The fair value of the warrants was calculated to be $1,015,771
using the Black Scholes method using the following assumptions and was
recorded as both a debit and a credit to additional paid-in capital.
Expected stock risk volatility 83.12%
Risk-free interest rate 2.30%
Expected life of warrant 7 Years
Between March 31 and June 30, 2009, 2,296,875 new warrants were issued to the
leaseholder on the manufacturing facility in consideration for the deferment
of rent payments. The cost of these new warrants of $251,172 was recorded as
a debit to research and development and a credit to additional paid in
capital. The cost the new warrants was determined using the Black Scholes
method using the following assumptions.
Expected stock risk volatility 63.03 - 64.46%
Risk-free interest rate 1.82 - 2.13%
Expected life of warrant 5 Years
In June 2009, 2,075,084 warrants issued to two investors in connection with a
financing in August 2008 were reset from $0.75 to $0.40. The additional cost
of the warrants of $123,013 was recorded as a debit and a credit to
additional paid in capital. In addition, the investors were issued 1,815,698
warrants at $0.40 at a cost of $404,460. The additional cost of the warrants
was recorded as a debit and a credit to paid in capital. The costs were
determined using the Black Scholes method using the following assumptions.
Expected stock risk volatility 63.75%
Risk-free interest rate 2.13%
Expected life of warrant 5.17 Years
In June 2009, the Company issued 10,284,060 warrants at $0.50 in connection
with the June financing. The cost of the warrants of $2,775,021 was recorded
as a debit and a credit to additional paid in capital. See Note 11.
Expected stock risk volatility 62.59%
Risk-free interest rate 2.13-2.71%
Expected life of warrant 5 Years
F-28
In connection with the reset of the Series K notes and warrants from $0.75 to
$0.40 after the June 2009 financing, the Series K note holders received
5,348,357 additional warrants. The cost of these additional warrants is
included in the fair value of the remaining warrants at September 30, 2009.
See Note 2.
In June 2009, the Company issued 1,648,244 warrants at $0.40 to the holder of
a note from the Company. These warrants were valued at $65,796 using the
Black Scholes method using the following assumptions. In July 2009, the
Company issued 1,849,295 warrants at $0.50 to the holder of the note that was
amended for the second time. These warrants were valued at $341,454 using the
Black Scholes method using the following assumptions. The first warrants were
recorded as a discount to the loan and a credit to additional paid-in
capital. The second warrants were recorded as a debit to derivative loss of
$831,230, a premium of $341,454 on the loan and a credit to additional paid
in capital of $489,776. The first warrants were amortized as interest expense
at the time of the second amendment. On the second amendment, $338,172 of the
premium has been amortized as a reduction to interest expense as of September
30, 2009.
June 2009 July 2009
--------- ---------
Expected stock risk volatility 90% 90%
Risk-free interest rate 2.4% 2.4%
Expected life of warrant 5 Years 5 Years
In July 2009, 375,000 warrants held by an investor were extended for two
years. The additional value of the warrants of $24,061 was calculated using
the Black Scholes method using the following assumptions. This cost was
accounted for as a dividend.
Original Extended
Warrants Warrants
-------- --------
Expected stock risk volatility 57.14% 57.14%
Risk-free interest rate 1.76% 1.76%
Expected life of warrant 0.08 Year 2.08 Years
In July 2009, 192,500 options were issued between $0.40 and $0.60 to three
consultants, for past services, at a cost of $35,911 using the Black Scholes
method. The options were accounted for as a debit to general and
administrative expense and a credit to additional paid in capital. Also in
July 2009, the Company issued 200,000 options to a consultant at a price of
$0.38. The cost of these options, $43,702, was calculated using the Black
Scholes method using the following assumptions and accounted for as a debit
to research and development and a credit to additional paid in capital.
Expected stock risk volatility 66.74%
Risk-free interest rate 2.71%
Expected life of warrant 5 Years
F-29
In July 2009, the Company issued warrants to a private investor. The 167,500
warrants were issued at $0.50 and valued at $43,550 using the Black Scholes
method using the following assumptions. The cost of the warrants was
accounted for as a debit to additional paid in capital and a credit to
derivative liabilities.
Expected stock risk volatility 90%
Risk-free interest rate 2.90%
Expected life of warrant 5.5 Years
In July 2009, 100,000 warrants were extended for one year. The cost of the
extension of $3,134 was calculated using the Black Scholes method using the
following assumptions. The cost was accounted for as a debit to general and
administrative expenses and a credit to additional paid in capital.
Original Extended
Warrants Warrants
-------- --------
Expected stock risk volatility 57.14% 57.14%
Risk-free interest rate 1.76% 1.76%
Expected life of warrant 0.17 Year 1.17 Years
In August 2009, the Company received additional financing. In connection with
the financing, the Company issued 4,850,501 warrants at $0.55. The cost of
the warrants of $1,455,150 was calculated using the Black Scholes method
using the following assumptions and was recorded as a debit to additional
paid in capital and a credit to derivative liabilities. See Note 11.
Expected stock risk volatility 90%
Risk-free interest rate 2.59%
Expected life of warrant 5.51 Years
Also in August, the Company completed an offering to the original Series K
investors. Issued at $0.55, the 541,717 warrants were valued at $249,190
using the Black Scholes method using the following assumptions. The warrants
were accounted for as a debit to additional paid in capital and a credit to
derivative liabilities.
Expected stock risk volatility 90 %
Risk-free interest rate 2.61%
Expected life of warrant 5.5 Years
In September 2009, the Company received a $2,000,000 loan. In connection with
the loan, the Company issued 500,000 warrants at $0.68. The cost of the
warrants of $245,000 was recorded as a debit to discount on note payable and
a credit to additional paid in capital. This cost was amortized to interest
expense when the loan was repaid. See Note 11.
F-30
Expected stock risk volatility 90%
Risk-free interest rate 2.54%
Expected life of warrant 5.5 Years
In September 2009, the Company issued 4,714,284 warrants at $1.50 in
connection with a financing. The cost of the warrants of $3,488,570 was
calculated using the Black Scholes method using the following assumptions and
was recorded as a debit and a credit to additional paid in capital. See Note
11. In addition, 714,286 warrants were issued at $1.75 to the placement agent
on the transaction. The cost of $642,857 was calculated using the Black
Scholes method using the following assumptions and was accounted for as a
debit to additional paid in capital and a credit to derivative liabilities.
Financing Placement Agent
Warrants Warrants
--------- ---------------
Expected stock risk volatility 110% 110%
Risk-free interest rate 1.01% 2.42%
Expected life of warrant 2 Years 4.91 Years
In accordance with Codification 815-40-15-7, derivative liabilities must be
revalued at the end of each interim period and at the end of the fiscal year,
as long as they remain outstanding. The Company recorded a fair value
adjustment at June 30, 2009 and September 30, 2009. As of September 30, 2009,
the fair value adjustment to these new derivative liabilities totals
$20,885,584.
Stock Bonus Plan -- At September 30, 2009, the Company had been authorized to
issue up to 9,940,000 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, 2007, 137,546 shares were
issued to the Company's 401(k) plan for a cost of $89,722. During the year
ended September 30, 2008, 205,125 shares were issued to the Company's 401(k)
plan for a cost of $108,590. During the year ended September 30, 2009, 91,766
shares were issued to the Company's 401(k) plan for a cost of $57,829.
Stock Compensation Plan-- At September 30, 2009, 7,500,000 shares were
authorized for use in the Company's stock compensation plan. During the year
ended September 30, 2007, 1,075,000 shares were issued at $0.63 per share for
a total cost of $677,250. During the year ended September 30, 2008, 1,789,451
shares were issued at the weighted average $0.62 per share for a total cost
of $1,324,474. During the year ended September 30, 2009, 1,324,385 shares
were issued at the weighted average of $0.24 per share for a total cost of
$312,016.
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
F-31
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, 2009,
2008, and 2007, in connection with this Plan was $61,517, $110,670, and
$92,035, respectively.
8. 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,
2010 1,809,596
2011 1,858,471
2012 1,884,205
2013 1,855,889
2014 1,579,930
2015 and thereafter 27,883,533
-------------
Total minimum lease payments: $36,871,624
=============
Rent expense for the years ended September 30, 2009, 2008, and 2007, was
$2,759,332, $253,526 and $240,914, respectively. Rent increased substantially
during the fiscal year ended September 30, 2009 because CEL-SCI took delivery
of the new building in October of 2008; see discussion below. Minimum
payments have not been reduced by minimum sublease rental receivable under
future cancelable subleases. These leases expire between June 2012 and August
2028.
In August 2007, CEL-SCI leased a building near Baltimore, Maryland. The
building was be remodeled in accordance with CEL-SCI's specifications so that
it can be used by CEL-SCI to manufacture Multikine for CEL-SCI's Phase III
clinical trial and sales of the drug if approved by the FDA. The Company took
possession of the building in October 2008.
The lease is for a term of twenty years and required annual base rent
payments of $1,575,000 during the first year of the lease. The annual base
rent escalates each year at 3%. CEL-SCI is also required to pay all real and
personal property taxes, insurance premiums, maintenance expenses, repair
costs and utilities. The lease allows CEL-SCI, at its election, to extend the
lease for two ten-year periods or to purchase the building at the end of the
20-year lease. The lease required CEL-SCI to pay $3,150,000 towards the
remodeling costs, which will be recouped by reductions in the annual base
rent of $303,228 in years six through twenty of the lease, subject to CEL-SCI
maintaining compliance with the lease covenants. Included on the consolidated
balance sheet is an asset of $8,743,305 shown as deferred rent. Included in
deferred rent are the following: 1) deposit on the manufacturing facility
($3,150,000); 2) warrants issued to lessor ($1,731,667); 3) additional
investment ($2,864,698); 4) deposit on the cost of the leasehold improvements
for the manufacturing facility ($1,786,591); 5) amortization of deferred rent
($(882,338)); and 6) accrued interest on deposit ($92,687). Also included on
the consolidated balance sheet is restricted cash of $68,552.
F-32
In December 2008, CEL-SCI was not in compliance with certain lease
requirements (i.e., failure to pay an installment of Base Annual Rent). The
landlord did not declare CEL-SCI in default and CEL-SCI is now current with
all of its lease payments. In July 2008, the Company was required to deposit
the equivalent of one year of base rent in accordance with the contract. The
$1,575,000 included in current assets was required to be deposited when the
amount of cash the Company had dipped below the amount stipulated in the
contract. CEL-SCI has now been in compliance with the cash requirements of
the contract and expects to receive a refund of the $1,575,000 during the
fiscal year ended September 30, 2010.
Employment Contracts--In April 2005 the Company entered into a three year
employment agreement with its President and Chairman of the Board which
expired April 30, 2008. However, on September 8, 2006 CEL-SCI agreed to
extend its employment agreement with Maximilian de Clara, CEL-SCI's
President, to April 30, 2010. During the term of the employment agreement,
CEL-SCI will pay Mr. de Clara an annual salary of $363,000.
The employment agreement, as amended, also provided that on September 8,
2006, March 8, 2007, September 8, 2007, March 8, 2008, September 8, 2008 and
March 8, 2009, each date being a "Payment Date", CEL-SCI issued Mr. de Clara
shares of its common stock equal in number to the amount determined by
dividing $200,000 by the average closing price of CEL-SCI's common stock for
the twenty trading days preceding the Payment Date. A total of 1,030,928
shares were issued to Mr. de Clara during the fiscal year ended September
30, 2009.
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 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.
In September 2006, CEL-SCI agreed to extend its employment agreement with
Geert R. Kersten, CEL-SCI's Chief Executive Officer, to September 2011. The
employment agreement, which is essentially the same as Mr. Kersten's prior
employment agreement, provides that during the term of the agreement CEL-SCI
will pay Mr. Kersten an annual salary of $370,585 plus any increases approved
by the Board of Directors during the period of the employment agreement. 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.
F-33
Iroquois Lawsuit - On October 21, 2009, Iroquois filed suit against the
Company in the United States District Court for the Southern District
of New York. In its complaint Iroquois alleges that the Company is liable
for breach of contract, breach of fiduciary duty, conversion, and
negligence.
Through its lawsuit Iroquois is seeking $30 million in actual damages, $90
million in punitive damages, the issuance of an additional 4,264,681
shares of the Company's common stock, the issuance of warrants to
purchase an additional 6,460,757 shares of the Company's common stock, and
a ruling by the court that the conversion price of the notes and the
exercise price of the warrants are both $0.20.
The Company believes that Iroquois's claims are without merit and has filed
a motion with the District Court seeking the dismissal of Iroquois's
lawsuit.
9. SERIES K CONVERTIBLE DEBT
During the year ended September 30, 2009, the Series K convertible debt was
either repaid at a premium in accordance with the original agreement or
converted into the Company's common stock. As of September 30, 2009, the
Company had no Series K convertible debt. As of September 30, 2008, the
Company had outstanding Series K convertible debt with a fair value of
$3,018,697. In August 2006, the Company sold Series K Notes and Series K
warrants to a group of private investors for proceeds of $8,300,000, less
transaction costs of $568,710. For a further discussion of this transaction,
see Note 2.
10. SHORT-TERM INVESTMENTS/AND LOANS FROM OFFICER AND INVESTOR
At September 30, 2008, the Company had $200,000 of a short-term investment in
Auction Rate Cumulative Preferred Shares (ARPs), liquidation preference of
$25,000 per share, of an income mutual fund. On May 6, 2008, the fund company
announced the redemption of $300 million or, 85.7% of the ARPs on various
dates between May 19, 2008 and May 23, 2008 subject to the investment fund
lottery system. All of the Company's ARPs were redeemed.
In conjunction with the ARPs, the Company has a line of credit to borrow up
to 100% of the ARPs at an interest rate of prime minus 1% (prime equals 5% on
September 30, 2008). During the fiscal year, the Company borrowed $1,956,803
against the ARPs and paid back $1,756,803 in May 2008. On September 30, 2008,
the Company had a $200,000 outstanding loan balance secured by the investment
balance of ARPs. On November 4, 2008, the $200,000 loan was repaid when the
ARPs were redeemed at face value. During the fiscal year, the Company paid
$813 in interest expense on the loan.
Between December 2008 and June 2009, Maximilian de Clara, CEL-SCI's
President and a director, loaned CEL-SCI $1,104,057. The loan was initially
payable at the end of March, 2009, but was extended to the end of June,
2009. At the time the loan was due, and in accordance with the loan
agreement, CEL-SCI issued Mr. de Clara warrants which entitle Mr. de Clara
to purchase 1,648,244 shares of CEL-SCI's common stock at a price of $0.40
per share. The warrant is exercisable at any time prior to December 24,
2014. Pursuant to Codification paragraph 470-50-40-17, the fair value of the
F-34
warrants issuable under the first amendment was recorded as a discount on
the note payable with a credit recorded to additional paid-in capital. The
discount was amortized from April 30, 2009, through June 27, 2009. Although
the loan was to be repaid from the proceeds of CEL-SCI's recent financing,
CEL-SCI's Directors deemed it beneficial not to repay the loan and
negotiated a second extension of the loan with Mr. de Clara on terms similar
to the June 2009 financing. Pursuant to the terms of the second extension
the note is now due on July 6, 2014, but, at Mr. de Clara's option, the loan
can be converted into shares of CEL-SCI's common stock. The number of shares
which will be issued upon any conversion will be determined by dividing the
amount to be converted by $0.40. As further consideration for the second
extension, Mr. de Clara received warrants which allow Mr. de Clara to
purchase 1,849,295 shares of CEL-SCI's common stock at a price of $0.50 per
share at any time prior to January 6, 2015. The loan from Mr. de Clara bears
interest at 15% per year and is secured by a second lien on substantially
all of CEL-SCI's assets. CEL-SCI does not have the right to prepay the loan
without Mr. de Clara's consent.
In accordance with Codification Subtopic 470-50, the second amendment to the
loan was accounted for as an extinguishment of the first amendment debt. The
extinguishment of the loan requires that the new loan be recorded at fair
value and a gain or loss must be recognized, including the warrants issued
in connection with the second amendment. This resulted in a premium of
$341,454, which is being amortized over the period from July 6, 2009, the
date of the second amendment, to October 1, 2009, the date at which the loan
holder may demand payment of the loan. At September 30, 2009, the remaining
premium is $3,282.
In early September 2009, the Company received a short term loan of
$2,000,000, with associated costs of $73,880, from two investors. The
Company repaid the loan at the end of September, along with $200,000 in
interest. In addition, the Company issued 500,000 warrants at $0.68 at a
cost of $245,000 in connection with the loan. This cost was recorded as a
debit to discount on note payable and a credit to derivative liabilities.
When the loan was repaid, this discount was written off as interest expense.
On September 30, 2009, the fair value of the warrants was $735,000.
11. STOCKHOLDERS' EQUITY
On April 18, 2007, the Company completed a $15 million private financing.
Shares were sold at $0.75, a premium over the closing price of the previous
two weeks. The financing was accompanied by 10 million warrants with an
exercise price of $0.75 and 10 million warrants with an exercise price of
$2.00. The warrants are known as Series L and Series M warrants,
respectively. The shares were registered in May 2007.
The financing resulted in the issuance of 19,999,998 shares of common stock
to the investors. The warrants issued with the financing qualified for equity
treatment. The Series L warrants were recorded as a debit and a credit to
additional paid-in capital at a value of $5,164,355 and the Series M warrants
were recorded as a debit and a credit to additional paid-in capital at a fair
value of $434,300.
F-35
In September 2008, 2,250,000 of the original Series L warrants were repriced
at $0.56 and extended for one year to April 17, 2013. The increase in the
value of the warrants of $173,187 was recorded as a debit and a credit to
additional paid-in capital in accordance with the original accounting for the
Series L warrants.
As a result of the financing, and in accordance with the original Series K
agreement, the Series K conversion price of the shares were repriced to $0.75
from the original $0.86 and the warrants were repriced to $0.75 from the
original $0.95. The Series K convertible debt and warrants were revalued with
the new conversion price and were adjusted to their new fair value.
On August 18, 2008, the Company sold 1,383,389 shares of common stock and
2,075,084 warrants in a private financing for $1,037,542. The shares were
sold at $0.75, a significant premium over the closing price of the Company's
common stock. The warrants were valued at $891,336 and recorded as a debit
and a credit to additional paid-in capital. Each warrant entitles the holder
to purchase one share of CEL-SCI's common stock at a price of $0.75 per share
at any time prior to August 18, 2014. The shares have no registration rights.
On February 26, 2008, the Company issued a total of 258,000 shares of
restricted common stock to two consultants at $0.53 per share for a total
cost of $136,740 of which $70,312 had been expensed at September 30, 2008.
This stock will be expensed over the period of the contracts with the
consultants. In April 2008, an additional 258,000 shares of restricted common
stock to two consultants were issued at $0.69 for a total cost of $178,020,
of which $86,984 had been expensed at September 30, 2008. The stock will be
expensed over the remaining period of the contracts with the consultants.
During the fourth quarter of fiscal year 2008, an additional 1,173,000 shares
were issued to consultants at prices ranging from $0.55 to $0.578. The total
cost of $649,994 will be expensed to general and administrative expense. At
September 30, 2008, $111,452 had been expensed to general and administrative
expense.
During the year ended September 30, 2009, the Company issued 4,483,105 shares
of common stock in payment of invoices totaling $1,573,010. Common stock was
also issued to pay interest and principal on the convertible debt. See Note
2. In addition, the balance of the shares issued to the Company's president
in September 2008 were expensed at a cost of $200,000. An additional
1,030,928 shares were issued to the president in March 2009 at a cost of
$200,000. An additional 12,672 shares were issued to an employee for
expenses. The shares were expensed at a cost of $3,168.
In November 2008, the Company extended its licensing agreement for Multikine
with Orient Europharma. The new agreement extends the Multikine collaboration
to also cover South Korea, the Philippines, Australia and New Zealand. The
licensing agreement initially focuses on the areas of head and neck cancer,
nasopharyngeal cancer and potentially cervical cancer. The agreement expires
15 years after the commencement date which is defined as the date of the
first commercial sale of Multikine in any country within their territory. As
a result of the agreement, Orient Europharma purchased 1,282,051 shares of
common stock at a cost of $0.39 per share, for a total to the Company, after
expenses, of $499,982.
F-36
On December 30, 2008, the Company entered into an Equity Line of Credit
agreement as a source of funding for the Company. For a two-year period, the
agreement allows the Company, at its discretion, to sell up to $5 million of
the Company's common stock at the volume weighted average price of the day
minus 9%. The Company may request a drawdown once every ten trading days,
although the Company is under no obligation to request any draw-downs under
the equity line of credit. The equity line of credit expires on January 6,
2011. There were no draw-downs during the year ended September 30, 2009.
On March 6, 2009, the Company entered into a licensing agreement with Byron
Biopharma LLC ("Byron") under which the Company granted Byron an exclusive
license to market and distribute the Company's cancer drug Multikine in the
Republic of South Africa. The Company has existing licensing agreements for
Multikine with Teva Pharmaceuticals and Orient Europharma. Pursuant to the
agreement Byron will be responsible for registering the product in South
Africa. Once Multikine has been approved for sale, the Company will be
responsible for manufacturing the product, while Byron will be responsible
for sales in South Africa. Revenues will be divided equally between the
Company and Byron. To maintain the license Byron, among other requirements,
must make milestone payments to the Company totaling $125,000 on or before
March 15, 2010. On March 30, 2009, and as further consideration for its
rights under the licensing agreement, Byron purchased 3,750,000 Units from
the Company at a cost of $0.20 per Unit. Each Unit consisted of one share of
the Company's common stock and two warrants. Each warrant entitles the holder
to purchase one share of the Company's common stock at a price of $0.25 per
share. The warrants will be exercisable at any time after September 8, 2009
and prior to March 6, 2016. The shares of common stock included as a
component of the Units were registered by the Company under the Securities
Act of 1933. The Company will file a new registration statement to register
the shares issuable upon the exercise of the warrants. The Units were
accounted for as an equity transaction using the Black Scholes method to
value the warrants. The fair value of the warrants was calculated to be
$1,015,771 and was recorded as both a debit and a credit to additional
paid-in capital.
In April 2009, the Company extended 300,000 employee options. The options
were due to expire from April 11, 2009 through December 31, 2009. All options
were extended for an additional three years from the current expiration date.
The additional cost of $6,142 was recorded as a debit to option expense and a
credit to additional paid-in capital. The value of the employee options was
determined using the Black Scholes method.
In late June and early July of 2009, the Company raised $6,139,739, less
associated costs of $296,576. The Company issued 15,349,346 shares at $0.40
per share to the investors. The Company also issued 10,284,060 warrants at
$0.50 to the investors at a fair value of $2,775,021 and this cost is shown
on the balance sheet as a derivative liability. As of September 30, 2009, the
fair value of the warrants was $15,223,759.
As a result of the June 2009 financing, the conversion price of the Series K
notes and the exercise price of the Series K warrants were reduced to $0.40
per share because the shares sold by CEL-SCI were below the conversion price
of the notes and the exercise price of the warrants. Also in conjunction with
F-37
the June 2009 financing, a prior financing was reset to $0.40 per share,
resulting in the issuance of an additional 1,166,667 shares of common stock.
The issuance of these shares was accounted for as a dividend of $466,667.
On July 27, 2009, 215,000 shares were issued to employees at $0.39. These
shares will vest at specified milestones; 20% of them had vested by September
30, 2009. $16,770 of the cost was expensed during the year ended September
30, 2009. In addition, on August 5, 2009, 65,785 shares were issued at $0.38
to the Board of Directors. The cost of $24,998 was expensed during the year
ended September 30, 2009.
In late August of 2009, the Company raised an additional $4,852,995, less
associated costs of $248,037. The Company issued 10,784,435 shares at $0.45
per share to the investors. The Company also issued 5,392,217 warrants at
$0.55 per share to the investors at a fair value of $1,704,340 and this cost
is shown on the balance sheet as a derivative liability. As of September 30,
2009, the fair value of these warrants was $8,088,328.
In September of 2009, the Company raised an additional $20,000,000, less
associated costs of $1,423,743. The Company issued 14,285,715 shares at $1.40
per share to the investors. The Company also issued 4,714,284 warrants at
$1.50 to the investors at a fair value of $3,488,570. The Company also issued
714,286 warrants at $1.75 to the placement agent at a fair value of $642,857.
The cost of the warrants is shown on the balance sheet as a derivative
liability. As of September 30, 2009, the fair value of these warrants was
$5,694,285.
In accordance with Codification 815-40-15-7, derivative liabilities must be
revalued at the end of each interim period and at the end of the fiscal year,
as long as they remain outstanding. These warrants do not qualify for equity
accounting and must be accounted for as a derivative liability since the
Warrant Agreement provides the holder with the right, at its option, to
require the Company to a cash settlement of the warrant at Black-Scholes
value in the event of a Fundamental Transaction, as defined in the Warrant
Agreement. Since the occurrence of a Fundamental Transaction is not entirely
within the Company's control, there exist circumstances that would require
net-cash settlement of the warrants while holders of shares would not receive
a cash settlement. The Company recorded a fair value adjustment at June 30,
2009 and September 30, 2009. As of September 30, 2009, the fair value of the
new derivative liabilities totals $29,741,372.
12. FAIR VALUE MEASUREMENTS
Effective October 1, 2008, the Company adopted the provisions of Codification
820-10, "Fair Value Measurements", which defines fair value, establishes a
framework for measuring fair value and expands disclosures about such
measurements that are permitted or required under other accounting
pronouncements. While topic 820-10 may change the method of calculating fair
value, it does not require any new fair value measurements. The adoption of
Codification 820-10 did not have a material impact on our results of
operations, financial position or cash flows.
In accordance with the topic, the Company determines fair value as the price
that would be received to sell an asset or paid to transfer a liability in an
orderly transaction between market participants at the measurement date. The
F-38
Company generally applies the income approach to determine fair value. This
method uses valuation techniques to convert future amounts to a single
present amount. The measurement is based on the value indicated by current
market expectations about those future amounts.
Codification 820-10 establishes a fair value hierarchy that prioritizes the
inputs used to measure fair value. The hierarchy gives the highest priority
to active markets for identical assets and liabilities (Level 1 measurement)
and the lowest priority to unobservable inputs (Level 3 measurement). We
classify fair value balances based on the observability of those inputs. The
three levels of the fair value hierarchy are as follows:
o Level 1 - Observable inputs such as quoted prices in active markets
for identical assets or liabilities
o Level 2 - Inputs other than quoted prices that are observable for the
asset or liability, either directly or indirectly. These include
quoted prices for similar assets or liabilities in active markets,
quoted prices for identical or similar assets or liabilities in
markets that are not active and amounts derived from valuation models
where all significant inputs are observable in active markets
o Level 3 - Unobservable inputs that reflect management's assumptions
For disclosure purposes, assets and liabilities are classified in their
entirety in the fair value hierarchy level based on the lowest level of input
that is significant to the overall fair value measurement. Our assessment of
the significance of a particular input to the fair value measurement requires
judgment and may affect the placement within the fair value hierarchy levels.
The table below sets forth the assets and liabilities measured at fair value
on a recurring basis, by input level, in the condensed consolidated balance
sheet at September 30, 2009:
Quoted Prices in Significant
Active Markets for Other Significant
Identical Assets or Observable Unobservable
Liabilities (Level 1) Inputs (Level 2) Inputs (Level 3) Total
--------------------- ---------------- ---------------- -----
Derivative instruments $ - $ 35,113,970 $ - $ 35,113,970
============== ============== ============== ==============
The fair values of the Company's derivative instruments disclosed above are
primarily derived from valuation models where significant inputs such as
historical price and volatility of the Company's stock as well as U.S.
Treasury Bill rates are observable in active markets.
13. 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
F-39
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.
14. QUARTERLY INFORMATION (UNAUDITED)
The following quarterly data are derived from the Company's consolidated
statements of operations.
Financial Data
Fiscal 2009
Three Three Three Three
Months Months Months Months
ended ended ended ended Year ended
December 31, March 31, June 30, September 30, September 30,
2008 2009 2009 2009 2009
---------------------------------------------------------------------------
Revenue $ - $ 19,643 $ 30,450 $ 30,000 $ 80,093
Operating expenses 2,551,823 2,384,760 3,243,576 3,920,391 12,100,550
Nonoperating
expenses (income) (13,379) 16,717 376,445 18,140 397,923
Gain/loss on derivative
instruments 391,689 264,554 (2,649,493) (26,498,400) (28,491,650)
Net loss (2,173,513) (2,117,280) (6,239,064) (30,380,173) (40,910,030)
Dividends - - (466,667) (24,061) (490,728)
Net loss available to
common shareholders $(2,173,513) $(2,117,280) $(6,705,731) $(30,404,234) $(41,400,758)
Net loss per share-basic
& diluted $ (0.02) $ (0.02) $ (0.05) $ (0.19) $ (0.31)
As adjusted by quarter. See below for detail.
Three Months Ended December 31, 2008:
As reported Adjustments As adjusted
----------- ----------- -----------
Revenue $ - $ - $ -
Operating expenses 2,329,296 222,527 2,551,823
Nonoperating expenses (income) (13,379) - (13,379)
Gain/loss on derivative instruments 391,689 - 391,689
Net loss (1,950,986) (222,527) (2,173,513)
Dividends - - -
Net loss available to common
shareholders $(1,950,986) (222,527) $(2,173,513)
Net loss per share-basic & diluted $ (0.02) - $ (0.02)
F-40
Three Months Ended March 31, 2009:
As reported Adjustments As adjusted
----------- ----------- -----------
Revenue $ 19,643 $ - $ 19,643
Operating expenses 2,162,233 222,527 2,384,760
Nonoperating expenses (income) 16,717 - 16,717
Gain/loss on derivative instruments 264,554 - 264,554
Net loss (1,894,753) (222,527) (2,117,280)
Dividends - - -
Net loss available to common
shareholders $(1,950,986) (222,527) $(2,117,280)
Net loss per share-basic & diluted $ (0.02) - $ (0.02)
Three Months Ended June 30, 2009:
As reported Adjustments As adjusted
----------- ----------- -----------
Revenue $ 30,450 $ - $ 30,450
Operating expenses 3,688,630 (445,054) 3,243,576
Nonoperating expenses (income) 376,445 - 376,445
Gain/loss on derivative instruments (2,548,327) (101,166) (2,649,493)
Net loss (6,582,952) (343,888) (6,239,064)
Dividends (11,667) (455,000) (466,667)
Net loss available to common
shareholders $(6,594,619) $ (111,112) $(6,705,731)
Net loss per share-basic & diluted $ (0.05) - $ (0.05)
Adjustments consist of the following:
Three months Three months Three months
ended ended ended
December 31, March 31, June 30,
2008 2009 2009
------------ ------------ ------------
Amortization of deferred rent $222,527 $222,527 $ (445,054)
Gain/loss on derivative Instruments - - (101,166)
Dividends - - (455,000)
CEL-SCI will be restating its 10-Qs for each of the three quarters for fiscal
year 2009.
F-41
Fiscal 2008
-----------
Three Three Three Three
Months Months Months Months
ended ended ended ended Year ended
December 31, March 31, June 30, September 30, September 30,
2007 2008 2008 2008 2008
--------------------------------------------------------------------------
Revenue $ 1,530 $ - $ 3,535 $ - $ 5,065
Operating expenses 2,868,968 2,085,098 2,180,214 2,383,078 9,517,358
Non-operating
(expense) income 34,715 35,741 (18,705) (42,266) 9,485
Gain (loss) on
derivative Instruments 989,988 (1,160,937) 206,106 1,764,236 1,799,393
Net loss (1,842,735) (3,210,294) (1,989,278) (661,108) (7,703,415)
Dividends (424,815) - - - (424,815)
Net loss available to
common shareholders (2,267,550) (3,210,294) (1,989,278) (661,108) (8,128,230)
Loss per common
share - basic &
diluted $ (0.02) $ (0.03) $ (0.02) $ (0.01) $ (0.07)
The Company has experienced large swings in its quarterly losses in 2009 and
2008. These swings are caused by the changes in the fair value of warrants
and the Series K convertible debt each quarter. These changes in the fair
value of the debt are recorded on the consolidated statements of operations.
In addition, the cost of options granted to consultants has affected the
quarterly losses recorded by the Company.
15. SUBSEQUENT EVENTS
In accordance with Codification 855-50, "Subsequent Events", the Company
has reviewed subsequent events through the January 13, 2010, the date of
filing. The Company has received approximately $6,360,000 in warrant
conversions from October 1, 2009 through the filing date. During the
period, 11,830,466 warrants were exercised at prices ranging from $0.25 to
$1.05.
F-42
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 13th day of January 2010.
CEL-SCI CORPORATION
By: /s/ Maximilian de Clara
-------------------------------
Maximilian de Clara, President
By: /s/ Geert R. Kersten
-------------------------------
Geert R. Kersten, Chief Executive,
Principal Accounting 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
/s/ Maximilian de Clara Director January 13, 2010
----------------------
Maximilian de Clara
/s/ Geert R. Kersten Director January 13, 2010
----------------------
Geert R. Kersten
Director
----------------------
Alexander G. Esterhazy
/s/ Dr. C. Richard Kinsolving Director January 13, 2010
----------------------
Dr. C. Richard Kinsolving
/s/ Dr. Peter R. Young Director January 13, 2010
----------------------
Dr. Peter R. Young
CEL-SCI CORPORATION
FORM 10-K
EXHIBITS
EXHIBIT 23
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
CEL-SCI Corporation
Vienna, Virginia
We hereby consent to the incorporation by reference in the Registration
Statements on S-8 (Nos. 333-27579, 333-03750, 333-57649, 333-69678, 333-84756,
333-31652, 333-117088, 333-140792 and 333-162265) and the Registration
Statements on Form S-3 (Nos. 333-151667, 333-160181, 333-160794, 333-162039,
333-161504 and 333-162792) of CEL-SCI Corporation of our report dated January
13, 2010, relating to the consolidated financial statements which appears in
this Form 10-K.
/s/ BDO SEIDMAN LLP
BDO Seidman, LLP
Bethesda, Maryland
January 13, 2010
EXHIBIT 31
CERTIFICATIONS
I, Geert Kersten, of CEL-SCI Corporation, certify that:
1. I have reviewed this annual report on Form 10-K of CEL-SCI Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15 and 15d-15(e)) and internal control over financial
reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the
registrant and have:
a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this report is being prepared;
b) designed such internal control over financial reporting, or cause such
internal control over financial reporting to be designed under our supervision,
to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles;
c) evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this report our conclusions about the effectiveness
of the disclosure controls and procedures, as of the end of the period covered
by this report based on such evaluation; and
d) disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's most
recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an
annual report) that has materially affected, or is reasonably likely to
materially affect, the registrant's internal control over financial reporting;
and
5. The registrant's other certifying officer(s) and I have disclosed, based on
our most recent evaluation of the internal control over financial reporting, to
the registrant's auditors and the audit committee of the registrant's board of
directors (or persons performing the equivalent functions):
a) all significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant's ability to record, process,
summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other
employees who have significant role in the registrant's internal control over
financial reporting.
January 13, 2010 /s/ Geert R. Kersten
------------------------------
Geert R. Kersten
Chief Executive Officer
CERTIFICATIONS
I, Geert Kersten, of CEL-SCI Corporation, certify that:
1. I have reviewed this annual report on Form 10-K of CEL-SCI Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15 and 15d-15(e)) and internal control over financial
reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the
registrant and have:
a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this report is being prepared;
b) designed such internal control over financial reporting, or cause such
internal control over financial reporting to be designed under our supervision,
to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles;
c) evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this report our conclusions about the effectiveness
of the disclosure controls and procedures, as of the end of the period covered
by this report based on such evaluation; and
d) disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's most
recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an
annual report) that has materially affected, or is reasonably likely to
materially affect, the registrant's internal control over financial reporting;
and
5. The registrant's other certifying officer(s) and I have disclosed, based on
our most recent evaluation of the internal control over financial reporting, to
the registrant's auditors and the audit committee of the registrant's board of
directors (or persons performing the equivalent functions):
a) all significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant's ability to record, process,
summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other
employees who have significant role in the registrant's internal control over
financial reporting.
January 13, 2010 /s/ Geert R. Kersten
------------------------------
Geert R. Kersten
Principal Accounting and Financial
Officer
EXHIBIT 32
In connection with the Annual Report of CEL-SCI Corporation (the
"Company") on Form 10-K for the period ending September 30, 2009 as filed with
the Securities and Exchange Commission (the "Report"), Geert Kersten, the Chief
Executive and Principal Financial Officer of the Company, certifies, pursuant to
18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002, that to the best of his knowledge:
(1) The Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects the financial condition and results of the Company.
January 13, 2010 By: /s/ Geert Kersten
-------------------------------
Geert Kersten, Chief Executive and
Principal Financial Officer
