Attached files
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, 2010.
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
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(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
8229 Boone Blvd., Suite 802
Vienna, Virginia 22182
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(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 [X]
Non-accelerated filer [ ] Smaller reporting company [ ]
(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,
2010, as quoted on the NYSE Amex, was $128,872,039.
As of November 30, 2010, the Registrant had 205,098,121 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
Combination Immunotherapy because it combines active and passive immunity in one
product. 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 and it is cleared for a global Phase III clinical
trial in advanced primary (previously untreated) head and neck cancer patients.
Multikine is a new type of immunotherapy in that it is a combination
immunotherapy, incorporating both active and passive immune activity. A
combination 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 combination 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
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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.
The following results were seen in CEL-SCI's last Phase II study
conducted with Multikine. This study used the same treatment protocol as will be
used in CEL-SCI's Phase III study:
o 33% improvement in median overall survival: In the last Phase II study
a 33% improvement in median overall survival, at a median of 3.5 years
post surgery, was seen in patients with locally advanced disease
treated with Multikine as first-line therapy (absolute survival rate
63%) as compared to the 3.5 year median overall survival rates of the
same cancer patient population determined from a review of 55 clinical
trials reported in the scientific literature that were conducted
between 1987 and 2007. CEL-SCI's Phase III clinical trial will need to
demonstrate a 10% improvement in overall survival for Multikine to be
successful.
o Average of 50% reduction in tumor cells: The three week Multikine
treatment regimen used in the last Phase II study killed, on average,
approximately half of the cancer cells before the start of standard
therapy such as surgery, radiation and chemotherapy (as determined by
histopathology).
o 12% complete response: In 12% of patients the tumor was completely
eliminated after only a three week treatment with Multikine (as
determined by histopathology).
In January 2007, the US Food and Drug Administration (FDA) concurred with
the initiation of 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 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
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.
However, before starting the Phase III trial, CEL-SCI needed to build a
dedicated manufacturing facility to produce Multikine. CEL-SCI estimates the
cost of the Phase III trial, with the exception of the parts that will be paid
by its licensees, Teva Pharmaceuticals and Orient Europharma, to be
approximately $25 - $26 million. Since CEL-SCI has obtained substantial
financing, CEL-SCI is moving forward rapidly to launch its global Phase III
clinical trial.
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CEL-SCI, together with its development partners Teva Pharmaceutical
Industries and Orient Europharma, has plans to run the study in about 48 medical
centers in 9 countries.
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. 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.
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(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:
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 and 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
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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. Since Multikine may be potentially
useful in treating many tumor types, 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
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 and supply Multikine to
Orient Europharma for distribution in the territory. Both parties will share in
the revenue from the sale of Multikine. Orient Europharma will participate in
the upcoming Phase III clinical trial by enrolling and paying for a substantial
number of patients in its territory. Orient Europharma will also purchase
Multikine for the Phase III trial from CEL-SCI for these patients at a rate
established in the November 2000 agreement.
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Pursuant to an agreement dated May 2003, Eastern Biotech is due a royalty
equal to 2% of CEL-SCI's net sales worldwide 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.
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.
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, made a payment
to CEL-SCI in the amount of $125,000 on March 8, 2010.
As of November 30, 2010, neither Orient Europharma nor Teva had started
any clinical trials.
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. 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
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"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. However, this service will only be offered when
CEL-SCI has the time and resources available, with priority always given to
Multikine.
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
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.
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 LEAPS (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.
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Using the LEAPS technology, CEL-SCI has created a potential peptide
treatment for H1N1 (swine flu) hospitalized patients. This LEAPS 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 LEAPS 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.
On November 6, 2009, CEL-SCI announced that The Johns Hopkins University
School of Medicine had given clearance for CEL-SCI's first clinical study to
proceed using LEAPS-H1N1. This study started one week later. Since the disease
disappeared about one month later, the study has been unable to enroll many
patients.
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.
In February 2010 CEL-SCI announced that its CEL-2000 vaccine demonstrated
that it was able to block the progression of rheumatoid arthritis in a mouse
model. The results were published in the scientific peer-reviewed Journal of
International Immunopharmacology (online edition) in an article titled
"CEL-2000: A Therapeutic Vaccine for Rheumatoid Arthritis Arrests Disease
Development and Alters Serum Cytokine/Chemokine Patterns in the Bovine Collagen
Type II Induced Arthritis in the DBA Mouse Model" with lead author Dr. Daniel
Zimmerman. The study was co-authored by scientists from CEL-SCI, Washington
Biotech, Northeastern Ohio Universities Colleges of Medicine and Pharmacy and
Boulder BioPath.
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
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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.
PATENTS
CEL-SCI currently has six patents issued in the United States and
twenty-two patent applications pending in Europe, Japan, China, India, Hong
Kong, Canada and the United States. One patent covers certain aspects of
Multikine and will expire in 2023. The remaining five patents cover CEL-SCI's
LEAPS technology and will expire between December 2014 and April 2022. CEL-SCI
believes that the greatest level of protection for Multikine is not based on
patents but from the confidential and proprietary process relating to the
manufacture of Multikine.
RESEARCH AND DEVELOPMENT
Since 1983, and through September 30, 2010, approximately $77,243,000 has
been spent on CEL-SCI-sponsored research and development, including $11,911,600,
$6,011,800, and $4,101,600 respectively during the years ended September 30,
2010, 2009 and 2008.
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
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.
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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.
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
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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.
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.
12
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.
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.
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
13
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 at the
end of 2010 or early in 2011. The expected net cost of the clinical trial is
approximately $25 - $26 million (excluding the costs that will be paid by
CEL-SCI's partners).
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 and its manufacturing.
EMPLOYEES
As of November 30, 2010, CEL-SCI had 42 employees. Eight employees are
involved in administration, 31 employees are involved in manufacturing and 3
employees are involved in general research and development with respect to
CEL-SCI's products.
14
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, 2010 CEL-SCI incurred net
losses of approximately $161,800,000. CEL-SCI has relied principally upon the
proceeds of public and private sales of its securities to finance its activities
to date. All of CEL-SCI's potential products, with the exception of Multikine,
are in the early stages of development, and any commercial sale of these
products will be many years away. Even potential product sales from Multikine
are many years away as cancer trials can be lengthy. Accordingly, CEL-SCI
expects to incur substantial losses for the foreseeable future.
Since CEL-SCI does not intend to pay dividends on its common stock, any return
to investors will come only from potential increases in the price of CEL-SCI's
common stock.
At the present time, CEL-SCI intends to use available funds to finance
CEL-SCI's operations. Accordingly, while payment of dividends rests within the
discretion of the Board of Directors, no common stock dividends have been
declared or paid by CEL-SCI and CEL-SCI has no intention of paying any common
stock dividends.
If CEL-SCI cannot obtain additional capital, CEL-SCI may have to postpone
development and research expenditures which will delay CEL-SCI's ability to
produce a competitive product. Delays of this nature may depress the price of
CEL-SCI's common stock.
Clinical and other studies necessary to obtain approval of a new drug can
be time consuming and costly, especially in the United States, but also in
foreign countries. CEL-SCI's estimates of the costs associated with future
clinical trials and research may be substantially lower than the actual costs of
these activities. The different steps necessary to obtain regulatory approval,
especially that of the Food and Drug Administration, involve significant costs
and may require several years to complete. CEL-SCI expects that it will need
substantial additional financing over an extended period of time in order to
fund the costs of future clinical trials, related research, and general and
administrative expenses. This additional funding may come from the exercise of
warrants and options currently outstanding, equity or debt financings or a
partnering arrangement with a larger company.
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.
15
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 will 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, upon meeting the required cash
level, received a refund of $1,575,000 from the landlord in February 2010.
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.
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.
16
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
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.
17
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.
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:
o product design, development and manufacture;
o adverse drug experience;
o product advertising and promotion;
o product manufacturing, including good manufacturing practice
requirements;
o record keeping requirements;
o registration and listing of CEL-SCI's establishments and products
with the FDA and certain state agencies;
o product storage and shipping;
o drug sampling and distribution requirements;
o electronic record and signature requirements; and
o labeling changes or modifications.
18
CEL-SCI and any 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 suppliers, cannot pass a
pre-approval plant inspection, the FDA will not approve the marketing
applications for CEL-SCI's product candidates. In complying with cGMP and
foreign regulatory requirements, CEL-SCI and any of its 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
changes. If CEL-SCI encounters any of the foregoing problems, its business and
results of operations will be harmed and the market price of its 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 treat cancer and have
substantial financial, research and development, and marketing resources and are
capable of providing significant long-term competition either by establishing
19
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.
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, 2010,
CEL-SCI's stock price has ranged from a low of $0.43 per share to a high of
$1.79 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
November 30, 2010 could potentially allow the holders to acquire approximately
83,340,300 additional shares of its common stock. Until the options and warrants
20
expire, and the convertible note is repaid, 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 options and warrants
exercise these securities at a time when CEL-SCI could obtain additional capital
on terms more favorable than those provided by the options or warrants. 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 these options or warrants, or the perception that
such sales could occur, may adversely affect the market price of CEL-SCI's
common stock.
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. 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 $9,100. 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 $10,800 per month. The laboratory lease expires in February 2014.
21
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
annual base rent payments of approximately $1,667,000 during the twelve months
ending October 31, 2011, in accordance with the lease agreement. 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. This amount was refunded by the landlord in February 2010. 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. As of the date of this filing, CEL-SCI
was not in default on the lease.
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 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. 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
22
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.
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
CEL-SCI'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 exercisable 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. (REMOVED AND RESERVED)
23
ITEM 5. MARKET FOR CEL-SCI'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
As of November 30, 2010, 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 Amex. 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
12/31/08 $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
12/31/09 $1.79 $0.85
3/31/10 $1.12 $0.50
6/30/10 $0.76 $0.45
9/30/10 $0.84 $0.43
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
general market conditions may have a significant effect on the market price of
CEL-SCI's common stock.
24
The graph below matches the cumulative 5-year total return of holders of
CEL-SCI Corporation's common stock with the cumulative total returns of the NYSE
Amex Composite index and the RDG MicroCap Biotechnology index. The graph assumes
that the value of the investment in the CEL-SCI's common stock and in each of
the indexes (including reinvestment of dividends) was $100 on 9/30/2005 and
tracks it through 9/30/2010. [GRAPHIC OMITTED]
-------------------------------------------------------------------------------
9/05 9/06 9/07 9/08 9/09 9/10
-------------------------------------------------------------------------------
CEL-SCI Corporation 100.00 131.91 133.02 85.11 365.96 137.02
NYSE Amex Composite 100.00 110.90 139.96 108.28 113.40 134.71
RDG MicroCap Biotechnology 100.00 70.80 60.46 32.97 32.69 21.73
The stock price performance included in this graph is not necessarily
indicative of future stock price performance.
25
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.
Statements of Operations 2010 2009 2008 2007 2006
------------------------ ---- ---- ---- ---- ----
Rent and grant revenue
and other $ 153,300 80,093 $ 5,065 $ 57,043 $125,457
Operating expenses:
Research and development 11,911,626 6,011,750 4,101,563 2,528,528 1,896,976
Depreciation and
amortization 516,117 417,205 215,060 176,186 170,903
General and
administrative 6,285,810 5,671,595 5,200,735 6,704,538 3,406,774
Gain (loss) on
derivative instruments 28,843,772 (28,491,650) 1,799,393 868,182 2,325,784
Other costs of financing - - - - (4,791,548)
Interest income 362,236 - 483,252 562,973 92,487
Interest expense (162,326) (397,923) (473,767) (1,708,603) (216,737)
----------- ----------- ---------- ---------- ----------
Net income (loss) 10,483,429 (40,910,030) (7,703,415) (9,629,657) (7,939,210)
----------- ----------- ---------- ---------- ----------
Modification of warrants (1,532,456) (490,728) (424,815) - -
----------- ----------- ---------- ---------- ----------
Net income (loss)
available to common
shareholders $ 8,950,973 (41,400,758) (8,128,230) (9,629,657) (7,939,210)
----------- ----------- ---------- ---------- ----------
Statements of Operations
Net income (loss) per
common share
Basic $ 0.04 $ (0.31) $ $0.07) $ $0.10) $ ($0.10)
Diluted $ 0.05 $ (0.31) $ $0.07) $ $0.10) $ ($0.11)
Weighted average common
shares outstanding
Basic 202,102,859 133,535,050 117,060,866 97,310,488 78,971,290
Diluted (1) 226,277,913 133,535,050 117,060,866 97,310,488 93,834,078
Balance Sheets ----------- ----------- ---------- ---------- ----------
Statements of Operations 2010 2009 2008 2007 2006
------------------------ ---- ---- ---- ---- ----
Working capital 25,799,304 $34,339,772 $(2,492,555) 10,257,568 $7,109,879
Total assets 37,804,985 46,027,598 14,683,672 20,730,802 9,653,277
Derivative instruments -
current (2) 424,286 - 3,018,697 782,732 1,670,234
Derivative instruments -
noncurrent (2) 6,521,765 35,113,970 - 4,831,252 8,645,796
Total liabilities 9,950,220 37,186,954 3,847,637 6,060,703 10,583,878
Stockholders' equity
(deficit) 27,854,765 8,840,644 10,836,035 14,670,099 (930,601)
26
(1) The calculation of diluted earnings per share for the years ended September
30, 2009, 2008 and 2007 excluded the potentially dilutive shares because
their effect 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. In March 2010, CEL-SCI temporarily reduced the exercise
price of the Series M Warrants, increasing the value of the warrants by
$1,432,456. In August 2010, CEL-SCI amended the Series M warrants held by an
investor, increasing the value of those warrants by $100,000. For further
discussion, see Note 10. No actual dividends were paid to shareholders.
CEL-SCI's net income (losses) available to common shareholders for each
fiscal quarter during the two years ended September 30, 2010 were:
Net income (loss) per share
Net income ----------------------------
Quarter (loss) Basic Diluted
------- ------------ ----- -------
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) $(0.19)
12/31/2009 $ 19,159,517 $ 0.10 $ 0.02
3/31/2010 $ (2,176,975) $(0.01) $(0.03)
6/30/2010 $ (601,124) $(0.00) $(0.01)
9/30/2010 $ (7,330,445) $(0.04) $(0.04)
First three quarters of fiscal year 2009 as adjusted.
CEL-SCI has experienced large swings in its quarterly gains and losses in 2010
and 2009. 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 and warrants 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
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.
27
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 2010
During the year ended September 30, 2010, research and development
expenses increased by $5,899,876 compared to the year ended September 30, 2009.
This increase was due to continuing expenses relating to the preparation for the
Phase III clinical trial on Multikine.
During the year ended September 30, 2010, general and administrative
expenses increased by $614,215 compared to the year ended September 30, 2009,
primarily due to legal fees caused by the Iroquois lawsuit.
Interest income during the year ended September 30, 2010 increased by
$362,236 compared to the year ended September 30, 2009. The increase was due to
the greater amount of capital CEL-SCI had for investment in money market funds.
The gain on derivative instruments of $28,843,772 for the year ended
September 30, 2010, was the result of the change in the fair value of the
derivative liabilities on the balance sheet. The Series A-E warrants issued in
conjunction with several financings during the fiscal year ended September 30,
2009, as well as others are considered derivative liabilities and must be valued
at the end of each period. The fluctuation of the price of CEL-SCI's common
stock is a major cause of derivative gains or losses.
The interest expense of $162,326 for the year ended September 30, 2010 was
interest on the related party loan. Previous years included amortization of the
Series K discount and the premium on the related party loan.
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.
28
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 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 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.
Research and Development Expenses
During the five years ended September 30, 2010 CEL-SCI's research and
development efforts involved Multikine and LEAPS. The table below shows the
research and development expenses associated with each project during this
five-year period.
2010 2009 2008 2007 2006
---- ---- ---- ---- ----
MULTIKINE $10,868,046 $5,281,999 $3,765,258 $2,217,108 $1,656,362
LEAPS 1,043,580 729,751 336,305 311,420 240,614
----------- ---------- ---------- ---------- ----------
TOTAL $11,911,626 $6,011,750 $4,101,563 $2,528,528 $1,896,976
=========== ========== ========== ========== ==========
29
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, 2010, CEL-SCI
was involved in a number of pre-clinical studies with respect to its LEAPS
technology. As with Multikine, CEL-SCI does not know what obstacles it will
encounter in future pre-clinical and clinical studies involving its LEAPS
technology. Consequently, CEL-SCI cannot predict with any certainty the funds
required for future research and clinical trials and the timing of future
research and development projects.
Clinical and other studies necessary to obtain regulatory approval of a
new drug involve significant costs and require several years to complete. The
extent of CEL-SCI's clinical trials and research programs are primarily based
upon the amount of capital available to CEL-SCI and the extent to which CEL-SCI
has received regulatory approvals for clinical trials. The inability of CEL-SCI
to conduct clinical trials or research, whether due to a lack of capital or
regulatory approval, will prevent CEL-SCI from completing the studies and
research required to obtain regulatory approval for any products which CEL-SCI
is developing. Without regulatory approval, CEL-SCI will be unable to sell any
of its products.
Liquidity and Capital Resources
CEL-SCI has had only limited revenues from operations since its inception
in March 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
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 $1,667,000 during the twelve months
ending October 31, 2011. 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
30
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 30, 2010, 9,208,642 Series K warrants had been exercised.
The remaining Series K warrants allow the holders to purchase up to 2,638,163
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
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 8, 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 November 30,
2010, 8,813,088 Series A warrants had been exercised. The remaining Series A
warrants allow the holders to purchase up to 1,470,972 shares of CEL-SCI's
common stock. As of September 30, 2010, the fair value of the warrants was
determined to be $676,647.
On July 31, 2009, CEL-SCI borrowed $2,000,000 from two institutional
investors. The loans were repaid on September 29, 2009. The Series B note
holders also received Series B warrants which allow the holders to purchase up
31
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, 2010, the fair value of the warrants was
determined to be $220,000.
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, 2010, the fair value
of the warrants was determined to be $2,480,420.
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, 2010, the fair value of the Series D warrants was
determined to be $424,286. In addition, the broker for the placement agent
received 714,286 Series E warrants. The Series E warrants may be exercised at
any time prior to August 12, 2014, at a price of $1.75. As of September 30,
2010, the fair value of the Series E warrants was determined to be $235,714.
On December 10, 2010 CEL-SCI entered into a sales agreement with McNicoll
Lewis & Vlak LLC relating to the sale of shares of its common stock which have
been registered by means of a shelf registration statement CEL-SCI filed with
the Securities and Exchange Commission in July 2009. In accordance with the
terms of the sales agreement, CEL-SCI may offer and sell shares of its common
stock through McNicoll Lewis & Vlak acting as CEL-SCI's agent.
Under the terms of the sales agreement, CEL-SCI may also sell its common
stock to McNicoll Lewis & Vlak, as principal for its own account, at a price
negotiated at the time of sale.
Sales of CEL-SCI's common stock, if any, may be made in sales deemed to be
"at-the-market" equity offerings as defined in Rule 415 of the Securities and
Exchange Commission, including sales made directly on or through the NYSE Amex,
the existing trading market for CEL-SCI's common stock, sales made to or through
a market maker other than on an exchange or otherwise, in negotiated
transactions at market prices prevailing at the time of sale or at prices
related to such prevailing market prices, and/or any other method permitted by
law. CEL-SCI is not required to sell any shares to McNicoll Lewis & Vlak and
McNicoll Lewis & Vlak is not required to sell any shares on CEL-SCI's behalf or
purchase any of CEL-SCI's shares for its own account.
32
McNicoll Lewis & Vlak will be entitled to a commission in an amount equal
to the greater of 3% of the gross proceeds from each sale of the shares, or
$0.025 for each share sold, provided, that, in no event will McNicoll Lewis &
Vlak receive a commission greater than 8.0% of the gross proceeds from the sale
of the shares. In connection with the sale of the common stock on CEL-SCI's
behalf, McNicoll Lewis & Vlak may be deemed to be an "underwriter" within the
meaning of the Securities Act of 1933, as amended, and the compensation of
McNicoll Lewis & Vlak may be deemed to be underwriting commissions or discounts.
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 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 March 18, 2010, CEL-SCI received approximately
$14,900,000 from the exercise of stock options and other warrants (including a
number of CEL-SCI's Series A, J, K and L warrants) previously issued to private
investors.
Inventory has increased significantly in the fiscal year ended September
30, 2010. CEL-SCI has been purchasing supplies for the manufacturing of
Multikine in order to begin the Phase III trial. In addition, prepaids have
increased with the purchase of insurance for the Phase III trials.
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, 2010 are as
follows:
Contractual Obligations:
Years Ending September 30,
---------------------------------------------------------------------------
Total 2011 2012 2013 2014 2015 2015 & thereafter
----- ---- ---- ---- ---- ---- -----------------
Operating Leases $35,250,284 $1,903,471 $1,896,205 $1,855,889 $1,579,931 1,572,839 $26,441,949
Employment Contracts $2,730,152 1,202,250 797,166 730,736 -- -- --
33
For additional information on employment contracts, see Item 11 of this
report.
In addition, CEL-SCI has an additional contract with a consultant for a
nine-month period ending in fiscal year 2011. This contract totals approximately
$45,000.
Further, CEL-SCI has contingent obligations with vendors for work that
will be completed in relation to the Phase III trial. The timing of these
obligations cannot be determined at this time. The amount of these obligations
for the Phase III trial is approximately $27 million with the net cost to
CEL-SCI being between $25 - $26 million.
CEL-SCI believes that its capital will allow it to enroll the patients in
the Phase III clinical trial. CEL-SCI will need to raise additional funds,
either through its existing warrants/options, through a debt or equity financing
or a partnering arrangement, to complete the Phase III trial and bring Multikine
to market. CEL-SCI management believes that all of the above will be much easier
than it used to be in the past since CEL-SCI will be involved in a very large
Phase III clinical trial for an unmet medical need and should therefore be more
attractive as an investment.
Clinical and other studies necessary to obtain regulatory approval of a
new drug involve significant costs and require several years to complete. The
extent of CEL-SCI's clinical trials and research programs are primarily based
upon the amount of capital available to CEL-SCI and the extent to which CEL-SCI
has received regulatory approvals for clinical trials. The inability of CEL-SCI
to conduct clinical trials or research, whether due to a lack of capital or
regulatory approval, will prevent CEL-SCI from completing the studies and
research required to obtain regulatory approval for any products which CEL-SCI
is developing. Without regulatory approval, CEL-SCI will be unable to sell any
of its products.
In the absence of revenues, CEL-SCI will be required to raise additional
funds through the sale of securities, debt financing or other arrangements in
order to continue with its research efforts. However, there can be no assurance
that such financing will be available or be available on favorable terms.
Ultimately, CEL-SCI must complete the development of its products, obtain
appropriate regulatory approvals and obtain sufficient revenues to support its
cost structure.
Since all of CEL-SCI's projects are under development CEL-SCI cannot
predict with any certainty the funds required for future research and clinical
trials, the timing of future research and development projects, or when it will
be able to generate any revenue from the sale of any of its products.
CEL-SCI's cash flow and earnings are subject to fluctuations due to
changes in interest rates on its 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 included as part of this report.
However, certain accounting policies are particularly important to the portrayal
of financial position and results of operations and require the application of
34
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 reflected
compensation expense in its 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
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
35
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 Inventory--Inventory consists 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 inventory 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. 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 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
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 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
has adopted this statement with no effect on its consolidated financial
statements.
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
36
beginning after December 15, 2008. CEL-SCI has adopted this codification and
reviewed all outstanding options and warrants as of October 1, 2009. See Note 11
in the financial statements included as part of this report for a discussion.
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". The codification 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 has adopted this
codification and it had no impact on its consolidated financial statements.
In April 2009, the FASB issued Codification 825-10-65-1, "Interim
Disclosures about Fair Value of Financial Instruments". The codification 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. The codification 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 this codification in the quarter ended June 30, 2009. There was
no significant impact from this adoption on CEL-SCI's consolidated financial
statements.
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 codification establishes 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. The codification 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 January 2010, the FASB amended Codification 820-10, "Improving
Disclosures about Fair Value Measurement", effective for interim periods
beginning after December 15, 2009. This amendment changes disclosures required
for interim and annual periods with respect to fair value measurements. CEL-SCI
has adopted the change in the disclosure requirements and the effect was
immaterial.
37
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 three years ended September 30, 2010, CEL-SCI recognized a gain or
(loss) of $28,843,772, $(28,491,650) and $1,799,393, 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, 2010 was considered immaterial due to the fact that
the interest rates at that time were nominal at best and CEL-SCI keeps its cash
and cash equivalents in short term maturities.
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. 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, 2010. 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 of September 30, 2010.
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
38
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, 2010 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
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, 2010.
There was no change in CEL-SCI's internal control over financial reporting
that occurred during the quarter ended September 30, 2010 that has materially
affected, or is reasonably likely to materially affect, CEL-SCI's internal
control over financial reporting.
CEL-SCI's independent registered public accounting firm BDO USA, LLP has
issued an attestation report on CEL-SCI's internal control over financial
reporting.
ITEM 9B. SUBMISSION OF MATTTERS TO A VOTE OF SECURITY HOLDERS
The annual meeting of CEL-SCI's shareholders was held on July 16, 2010.
At the meeting the following persons were elected as directors for the upcoming
year:
Name Votes For Votes Withheld
Maximilian de Clara 32,097,084 11,280,445
Geert Kersten 34,808,573 8,568,956
Alexander Esterhazy 34,664,725 8,712,804
C. Richard Kinsolving 35,236,897 8,140,632
Peter R. Young 35,223,756 8,153,773
At the meeting the following proposals were ratified by the shareholders.
(1) to approve the adoption of CEL-SCI's 2010 Incentive Stock Option
Plan which provides that up to 2,000,000 shares of common stock may be issued
upon the exercise of options granted pursuant to the Incentive Stock Option
Plan;
39
(2) to approve the adoption of CEL-SCI's 2010 Non-Qualified 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 Non-Qualified Stock
Option Plan;
(3) to approve the adoption of CEL-SCI's 2010 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) to approve 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 the Company;
(5) to ratify the appointment of BDO USA, LLP as CEL-SCI's
independent registered public accounting firm for the fiscal year ending
September 30, 2010.
The following is a tabulation of votes cast with respect to these
proposals:
Votes
----------------------------------- Broker
Proposal For Against Abstain Non-Votes
--------- --- ------ ------- ---------
1. 29,741,736 13,177,965 457,828 113,983,024
2. 27,610,822 14,884,483 882,224 113,983,024
3. 28,725,699 13,840,290 811,540 113,983,024
4. 27,898,687 14,166,249 1,312,593 113,983,024
5. 150,860,671 4,347,654 2,152,228 0
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Officers and Directors
Name Age Position
----- --- ---------
Maximilian de Clara 80 Director and President
Geert R. Kersten, Esq. 51 Director, Chief Executive Officer
and Treasurer
Patricia B. Prichep 59 Senior Vice President of Operations and
Secretary
Dr. Eyal Talor 54 Chief Scientific Officer
Dr. Daniel H. Zimmerman 69 Senior Vice President of Research,
Cellular Immunology
John Cipriano 68 Senior Vice President of Regulatory Affairs
Alexander G. Esterhazy 68 Director
Dr. C. Richard Kinsolving 73 Director
Dr. Peter R. Young 65 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.
40
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.
All of CEL-SCI's directors have served as directors for a significant
period of time. Consequently, their long-standing experience with CEL-SCI
benefits both CEL-SCI and its shareholders.
The principal occupations of CEL-SCI's officers and directors, during the
past several years, are as follows:
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 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
Multikine will change the way cancer is treated. Prior to his association with
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, and completed his studies in the U.S.
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 CEL-SCI, including human resources and is the liaison with the
auditing firm for financial reporting. Between June 1990 and December 1992, Ms.
Prichep was the Manager of Quality and Productivity for the NASD's Management,
Systems and Support Department where 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. where
she was responsible for 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.
41
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), 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,
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., was 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.
John Cipriano, was 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
42
companies. In addition, he held positions at the United States Food and Drug
Administration (FDA) as Deputy Director, Division of Biologics Investigational
New Drugs, Office of Biologics Research and Review and was the Deputy Director,
IND Branch, Division of Biologics Evaluation, Office of Biologics. Mr. Cipriano
completed his B.S. in Pharmacy from the Massachusetts College of Pharmacy in
Boston, Massachusetts and his M.S. in Pharmaceutical Chemistry from Purdue
University in West Lafayette, Indiana.
Alexander G. Esterhazy has been 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.
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.
Alexander G. Esterhazy, Dr. C. Richard Kinsolving and Dr. Peter R.
Young are independent directors as that term is defined in section 803 of the
listing standards of the NYSE Amex.
43
CEL-SCI has an audit committee and compensation committee. The members
of the audit committee are Alexander G. Esterhazy, Dr. C. Richard Kinsolving
and Dr. Peter Young. Dr. Peter Young serves as the audit committee's
financial expert. The members of the compensation committee are Alexander
Esterhazy, Dr. C. Richard Kinsolving and Dr. Peter Young.
CEL-SCI's Board of Directors does not have a "leadership structure", as
such, since each director is entitled to introduce resolutions to be considered
by the Board and each director is entitled to one vote on any resolution
considered by the Board. CEL-SCI's Chief Executive Officer is not the Chairman
of CEL-SCI's Board of Directors.
CEL-SCI's Board of Directors has the ultimate responsibility to evaluate
and respond to risks facing CEL-SCI. CEL-SCI's Board of Directors fulfills its
obligations in this regard by meeting on a regular basis and communicating, when
necessary, with CEL-SCI's officers.
CEL-SCI has adopted a Code of Ethics which is applicable to CEL-SCI'S
principal executive, financial, and accounting officers and persons performing
similar functions. The Code of Ethics is available on CEL-SCI's website, located
at www.cel-sci.com.
If a violation of this code of ethics act is discovered or suspected, the
Senior Officer must (anonymously, if desired) send a detailed note, with
relevant documents, to CEL-SCI's Audit Committee, c/o Dr. Peter Young, 5458
Beacon Hill Drive, Frisco, TX 75034.
For purposes of electing directors at its annual meeting CEL-SCI does not
have a nominating committee or a committee performing similar functions.
CEL-SCI's Board of Directors does not believe a nominating committee is
necessary since CEL-SCI's Board of Directors is small and the Board of Directors
as a whole performs this function. CEL-SCI's Directors have adopted a policy
which provides that nominees to the Board of Directors are selected by a
majority vote of CEL-SCI's independent directors.
CEL-SCI does not have any policy regarding the consideration of director
candidates recommended by shareholders since a shareholder has never recommended
a nominee to the Board of Directors. However, CEL-SCI's Board of Directors will
consider candidates recommended by shareholders. To submit a candidate for the
Board of Directors the shareholder should send the name, address and telephone
number of the candidate, together with any relevant background or biographical
information, to CEL-SCI's Chief Executive Officer, at the address shown on the
cover page of this report. The Board has not established any specific
qualifications or skills a nominee must meet to serve as a director. Although
the Board does not have any process for identifying and evaluating director
nominees, the Board does not believe there would be any differences in the
manner in which the Board evaluates nominees submitted by shareholders as
opposed to nominees submitted by any other person.
CEL-SCI does not have a policy with regard to Board member's attendance at
annual meetings. All Board members, with the exception of Mr. de Clara and Mr.
Esterhazy, attended the last annual shareholder's meeting held on July 16, 2010.
44
Holders of CEL-SCI's common stock can send written communications to
CEL-SCI's entire Board of Directors, or to one or more Board members, by
addressing the communication to "the Board of Directors" or to one or more
directors, specifying the director or directors by name, and sending the
communication to CEL-SCI's offices in Vienna, Virginia. Communications addressed
to the Board of Directors as whole will be delivered to each Board member.
Communications addressed to a specific director (or directors) will be delivered
to the director (or directors) specified.
Security holder communications not sent to the Board of Directors as a
whole or to specified Board members are not relayed to Board members.
ITEM 11. EXECUTIVE COMPENSATION
Compensation Discussion and Analysis
This Compensation Discussion and Analysis (CD&A) outlines CEL-SCI's
compensation philosophy, objectives and process for its executive officers. This
CD&A includes information on how compensation decisions are made, the overall
objectives of CEL-SCI's compensation program, a description of the various
components of compensation that are provided, and additional information
pertinent to understanding CEL-SCI's executive officer compensation program.
The Compensation Committee determines the compensation of CEL-SCI's Chief
Executive Officer and President and delegates to the Chief Executive Officer the
responsibility to determine the base salaries of all officers other than himself
under the constraints of an overall limitation on the total amount of
compensation to be paid to them.
Compensation Philosophy
CEL-SCI's compensation philosophy extends to all employees, including
executive officers, and is designed to align employee and shareholder interests.
The philosophy's objective is to pay fairly based upon the employee's position,
experience and individual performance. Employees may be rewarded through
additional compensation when CEL-SCI meets or exceeds targeted business
objectives. Generally, under CEL-SCI's compensation philosophy, as an employee's
level of responsibility increases, a greater portion of his or her total
potential compensation becomes contingent upon annual performance.
A substantial portion of an executive's compensation incorporates
performance criteria that support and reward achievement of CEL-SCI's long term
business goals.
The fundamental principles of CEL-SCI's compensation philosophy are
described below:
o Market-driven. Compensation programs are structured to be competitive
both in their design and in the total compensation that they offer.
o Performance-based. Certain officers have some portion of their
incentive compensation linked to CEL-SCI's performance. The
45
application of performance measures as well as the form of the reward
may vary depending on the employee's position and responsibilities.
Based on a review of its compensation programs, CEL-SCI does not believe
that such programs encourage any of its employees to take risks that would be
likely to have a material adverse effect on CEL-SCI. CEL-SCI reached this
conclusion based on the following:
o The salaries paid to employees are consistent with the employees'
duties and responsibilities.
o Employees who have high impact relative to the expectations of their
job duties and functions are rewarded.
o CEL-SCI retains employees who have skills critical to its long term
success.
Review of Executive Officer Compensation
CEL-SCI's current policy is that the various elements of the compensation
package are not interrelated in that gains or losses from past equity incentives
are not factored into the determination of other compensation. For instance, if
options that are granted in a previous year become underwater the next year, the
Committee does not take that into consideration in determining the amount of the
options or restricted stock to be granted the next year. Similarly, if the
options or restricted shares granted in a previous year become extremely
valuable, the Committee does not take that into consideration in determining the
options or restricted stock to be awarded for the next year.
CEL-SCI does not have a policy with regard to the adjustment or recovery
of awards or payments if our relevant performance measures upon which they are
based are restated or otherwise adjusted in a manner that would reduce the size
of an award or payment.
Components of Compensation--Executive Officers
CEL-SCI's executive officers are compensated through the following three
components:
o Base Salary
o Long-Term Incentives (stock options and/or grants of stock)
o Benefits
These components provide a balanced mix of base compensation and
compensation that is contingent upon each executive officer's individual
performance. A goal of the compensation program is to provide executive officers
with a reasonable level of security through base salary and benefits. CEL-SCI
wants to ensure that the compensation programs are appropriately designed to
encourage executive officer retention and motivation to create shareholder
value. The Compensation Committee believes that CEL-SCI's stockholders are best
served when CEL-SCI can attract and retain talented executives by providing
compensation packages that are competitive but fair.
46
In past years, base salaries, benefits and incentive compensation
opportunities were generally targeted near the median of general survey
market data derived from indices covering similar biotech/pharmaceutical
companies. The companies included Achillion Pharmaceuticals, Inc., Acura
Pharmaceutical, Inc., Alimera Sciences, Inc., Amorfix Life Sciences Ltd.,
Antigenics, Inc., ARCA biopharma (ARCA Discovery), ARYx Therapeutics, Inc.,
Avanir Pharmaceuticals, Bellus Health, Inc., Cadence Pharmaceuticals, Inc.
,Capstone Therapeutics, Chelsea Therapeutics, Inc., Cortex Pharmaceuticals,
Inc., EpiCept Corp., EXACT Sciences Corp., Helix BioPharma, IGI Laboratories
Inc., Inhibitex, Inc., Isotechnika Pharma Inc., Medicis Technologies Corp.,
NeurogesX, Inc., Novavax, Inc., Orbus Pharma Inc., Orexigen Therapeutics
Inc., OXiGENE, Inc., Pharmacyclics, Inc., Quest PharmaTech Inc., Reata
Pharmaceuticals, Inc., Resverlogix Corp., SCOLR Pharma, Inc., StemCells, Inc.
and Threshold Pharmaceuticals, Inc. CEL-SCI has not used third party
consultants to provide it with recommendations or reports.
Base Salaries
Base salaries generally have been targeted to be competitive when compared
to the salary levels of persons holding similar positions in other
pharmaceutical companies and other publicly traded companies of comparable size.
Each executive officer's respective responsibilities, experience, expertise and
individual performance are considered.
A further consideration in establishing compensation for the senior
employees is their long term history with CEL-SCI. Taken into consideration are
factors that have helped CEL-SCI survive in times when it was financially
extremely weak, such as: willingness to accept salary cuts, willingness not to
be paid at all for extended time periods, and in general an attitude that helped
CEL-SCI survive during financially difficult times. For example, Geert Kersten,
Maximilian de Clara and Patricia Prichep were without any salary between
September 2008 and June 2009. Other senior members took substantial salary cuts,
all geared towards helping CEL-SCI survive. In all of these cases the officers
continued to work without any guarantee of payment.
Long-Term Incentives
Stock grants and option grants help to align the interests of CEL-SCI's
employees with those of its shareholders. Options and stock grants are made
under CEL-SCI's Stock Option, Stock Bonus and Stock Compensation Plans. Options
are granted with exercise prices equal to the closing price of CEL-SCI's common
stock on the day immediately preceding the date of grant, with pro rata vesting
at the end of each of the following three years.
CEL-SCI believes that grants of equity-based compensation:
o Enhance the link between the creation of shareholder value and
long-term executive incentive compensation;
o Provide focus, motivation and retention incentive; and
o Provide competitive levels of total compensation.
47
CEL-SCI's management believes that the pricing for biotechnology stocks is
highly inefficient until the time of product sales. As such any long term
compensation tied to progress as measured by share price is not as efficient as
it should be. However, CEL-SCI's Compensation Committee has not been able to
substitute a better measurement and therefore continues to believe that stock
grants and option grants best align the needs of the corporation and the
employee with those of the shareholders.
Benefits
In addition to cash and equity compensation programs, executive officers
participate in the health and welfare benefit programs available to other
employees. In a few limited circumstances, CEL-SCI provides other benefits to
certain executive officers, such as car allowances.
All executive officers are eligible to participate in CEL-SCI's 401(k)
plan on the same basis as its other employees. CEL-SCI matches 100% of each
employee's contribution up to the first 6% of his or her salary.
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, 2010.
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, 2010 $363,000 -- $26,499 136,197 $102,219 $ 627,882
President 2009 334,720 -- 267,000 380,121 83,274 1,065,114
2008 363,000 -- 543,174 103,320 89,268 1,098,762
Geert R. Kersten, 2010 454,009 220,995 37,524 359,089 55,309 1,126,510
Chief Executive 2009 408,691 -- 81,700 526,366 34,892 1,051,649
Officer and 2008 404,900 -- 156,674 103,320 39,901 704,795
Treasurer
Patricia B. Prichep 2010 199,898 -- 25,039 237,090 6,027 468,054
Senior Vice President 2009 174,913 -- 41,603 235,467 4,225 456,208
of Operations and 2008 185,780 -- 82,558 51,660 4,225 324,223
Secretary
Eyal Talor, Ph.D. 2010 239,868 -- 28,872 237,090 6,027 511,857
Chief Scientific 2009 212,265 -- 36,627 137,878 4,225 390,994
Officer 2008 229,353 -- 81,187 51,660 4,225 366,425
48
Daniel Zimmerman, Ph.D. 2010 165,800 -- 15,857 64,455 5,027 251,139
Senior Vice President 2009 47,124 -- 16,892 -- 875 64,890
of Research. Cellular 2008 175,988 -- 46,186 38,745 4,225 265,144
Immunology (6)
John Cipriano 2010 175,952 -- 6,625 240,711 27 423,315
Senior Vice President 2009 48,594 -- 15,840 -- 25 64,458
of Regulatory Affairs(7) 2008 171,028 -- 45,893 38,745 25 55,691
(1) The dollar value of base salary (cash and non-cash) earned. During three
years ended September 30, 2010, $0.00, $0.00 and $18,730, respectively, of
the total salaries paid to the persons shown in the table were paid in
restricted shares of CEL-SCI's common stock.
Information concerning the issuance of these restricted shares is shown in
the following table:
Date Shares Number of Price
Issued Shares Issued Per Share
01/15/2008 36,020 $0.52
On January 15, 2008 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 three years ended
September 30, 2010, $0.00, $200,000 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 at the market price from the
Stock Compensation Plan. The value of all stock awarded during the periods
covered by the table are calculated in accordance with Codification
718-10-30-3 requirements.
(4) The greatest part of the value in FY 2009 was derived from options awarded
to employees who did not collect a salary, or reduced or deferred their
salary between 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 fair value of all stock options
granted during the periods covered by the table are calculated on the grant
date in accordance with Codification 718-10-30-3 requirements.
49
(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.
(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 included as part of this
report.
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
2010 expenses for this plan were $123,500. 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, 2010
Stock Option
Name Paid in Cash Awards (1) Awards (2) Total
---- ------------ ---------- ---------- ----------
Maximilian de Clara $ 40,000 - $ 136,197 $ 176,197
Geert Kersten $ 40,000 - $ 359,089 $ 399,089
Alexander Esterhazy $ 41,000 - $ 64,455 $ 105,455
C. Richard Kinsolving $ 41,000 - $ 64,455 $ 105,455
Peter R. Young $ 41,000 - $ 64,455 $ 105,455
(1) The fair value of stock issued for services.
(2) The fair value of options granted computed in accordance with Codification
718-10-30-3 on the date of grant. Also includes the fair value of the
milestone options expensed during fiscal year 2010 that were issued to Mr.
de Clara and Mr. Kersten in 2009.
50
Directors' fees paid to Maximilian de Clara and Geert Kersten are included
in the Executive Compensation table.
Employment Contracts.
Maximilian de Clara
In April 2005, CEL-SCI entered into a three-year employment agreement with
Maximilian de Clara, CEL-SCI's President. The employment agreement provided that
CEL-SCI would 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 agreement are referenced in a report on Form 8-K filed with
the Securities and Exchange Commission on September 8, 2006. On August 30, 2010,
Mr. de Clara's employment agreement, as amended on September 8, 2006, was
extended to August 30, 2013.
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, 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 ($284,794). 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.
Geert Kersten
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
($1,172,265). 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.
51
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.
Patricia B. Prichep / Eyal Talor, Ph.D.
On August 30, 2010, CEL-SCI entered into a three-year employment agreement
with Patricia B. Prichep, CEL-SCI's Senior Vice President of Operations. The
employment agreement with Ms. Prichep provides that during the term of the
agreement CEL-SCI will pay Ms. Prichep an annual salary of $194,298 plus any
increases approved by the Board of Directors during the period of the employment
agreement.
On August 30, 2010, CEL-SCI also entered into a three-year employment
agreement with Eyal Talor, Ph.D., CEL-SCI's Chief Scientific Officer. The
employment agreement with Dr. Talor provides that during the term of the
agreement CEL-SCI will pay Dr. Talor an annual salary of $239,868 plus any
increases approved by the Board of Directors during the period of the employment
agreement.
If Ms. Prichep or Dr. Talor resigns within ninety (90) days of the
occurrence of any of the following events: (i) a relocation (or demand for
relocation) of employee's place of employment to a location more than
thirty-five (35) miles from the employee's current place of employment, (ii) a
significant and material reduction in the employee's authority, job duties or
level of responsibility or (iii) the imposition of significant and material
limitations on the employee's autonomy in her or his position, the employment
agreement will be terminated and the employee will be paid the salary provided
by the employment agreement through the date of termination and the unvested
portion of any stock options held by the employee will vest immediately.
In the event there is a change in the control of CEL-SCI, the employment
agreements with Ms. Prichep and Dr. Talor allow Ms. Prichep and/or Dr. Talor (as
the case may be) to resign from her or his position at CEL-SCI and receive a
lump-sum payment from CEL-SCI equal to 18 months salary ($291,447 and $359,802
respectively). In addition, the unvested portion of any stock options held by
the employee will vest immediately ($830,817 and $830,062 respectively). For
purposes of the employment agreements, a change in the control of CEL-SCI means:
(1) the merger of CEL-SCI with another entity if after such merger the
shareholders of CEL-SCI do not own at least 50% of voting capital stock of the
surviving corporation; (2) the sale of substantially all of the assets of
CEL-SCI; (3) the acquisition by any person of more than 50% of CEL-SCI's common
stock; or (4) a change in a majority of CEL-SCI's directors which has not been
approved by the incumbent directors.
The employment agreements with Ms. Prichep and Dr. Talor will also
terminate upon the death of the employee, the employee's physical or mental
52
disability, willful misconduct, an act of fraud against CEL-SCI, or a breach of
the employment agreement by the employee. If the employment agreement is
terminated for any of these reasons the employee, or her 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 whom are outside
directors.
During the year ended September 30, 2010, 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.
Stock Options
The following tables show information concerning the options granted
during the fiscal year ended September 30, 2010, to the persons named below.
Options Granted
Exercise
Grant Options Price Per Expiration
Name Date Granted (#) Share Date
Maximilian de Clara 7/21/10 250,000 $ 0.48 7/20/20
Geert Kersten 7/21/10 300,000 $ 0.48 7/20/20
Patricia B. Prichep 7/21/10 150,000 $ 0.48 7/20/20
Eyal Talor, Ph.D. 7/21/10 150,000 $ 0.48 7/20/20
Daniel Zimmerman, Ph.D. 7/21/10 150,000 $ 0.48 7/20/20
John Cipriano 7/21/10 150,000 $ 0.48 7/20/20
Options Exercised
Shares
Date of Acquired On Value
Exercise Exercise Realized
- - -
53
The following lists the outstanding options held by the persons named
below:
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
56,666 1.05 05/01/13
50,000 1.05 05/01/13
50,000 1.05 04/12/12
60,000 1.05 04/19/13
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
200,000 0.63 09/13/17
133,334 0.62 03/04/18
1,436,250 (2) 0.25 04/23/19
83,334 0.38 07/20/19
---------
2,592,917
66,666 0.62 03/04/18
500,000 (3) 0.38 07/06/19
166,666 0.38 07/20/19
250,000 0.48 07/20/20
-------
983,332
-------------------------------------------------------------------------------
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 05/01/13
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 04/19/13
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
200,000 0.63 09/13/17
133,334 0.62 03/04/18
1,838,609 (2) 0.25 04/23/19
54
Shares Underlying Unexercised
Options Which are:
----------------------------- Exercise Expiration
Name Exercisable Unexercisable Price Date
Geert R. Kersten (cont'd) 100,000 0.38 07/20/19
-------
5,979,943
66,666 0.62 03/04/18
4,000,000 (3) 0.38 07/06/19
200,000 0.38 07/20/19
300,000 0.48 07/20/20
-------
4,566,666
-------------------------------------------------------------------------------
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 03/01/13
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 02/02/13
25,000 1.18 12/08/13
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
100,000 0.63 09/13/17
66,667 0.62 03/04/18
717,096 (2) 0.25 04/23/19
50,000 0.38 07/20/19
------
2,165,263
33,333 0.62 03/04/18
3,000,000 (3) 0.38 07/06/19
100,000 0.38 07/20/19
150,000 0.48 07/20/20
-------
3,283,333
-------------------------------------------------------------------------------
Eyal Talor, Ph.D. 15,500 1.05 07/31/13
16,666 1.05 03/16/13
15,000 1.05 08/03/13
10,000 (1) 1.94 08/31/13
20,000 1.05 08/02/12
55
Shares Underlying Unexercised
Options Which are:
----------------------------- Exercise Expiration
Name Exercisable Unexercisable Price Date
Eyal Talor, Ph.D.(cont'd) 25,000 1.76 11/10/13
35,000 1.00 12/03/11
160,000 (1) 1.05 10/16/13
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
100,000 0.63 09/13/17
66,667 0.62 03/04/18
240,820 (2) 0.25 04/23/19
50,000 0.38 07/20/19
-------
1,338,819
33,333 0.62 03/04/18
3,000,000 (3) 0.38 07/06/19
100,000 0.38 07/20/19
150,000 0.48 07/20/20
---------
3,283,333
-------------------------------------------------------------------------------
Daniel Zimmerman, Ph.D. 12,000 1.05 12/31/13
7,000 1.05 06/19/13
15,000 1.05 02/19/13
30,000 (1) 1.94 08/31/13
20,000 1.05 02/02/13
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
---------
1,197,000
150,000 0.48 07/20/20
-------
150,000
-------------------------------------------------------------------------------
John Cipriano
20,000 0.61 09/02/14
30,000 0.48 09/21/15
60,000 0.58 09/12/16
56
Shares Underlying Unexercised
Options Which are:
----------------------------- Exercise Expiration
Name Exercisable Unexercisable Price Date
John Cipriano (cont'd) 75,000 0.63 09/13/17
75,000 0.62 03/04/18
33,334 1.93 09/30/19
------
293,334
66,666 1.93 09/30/19
150,000 0.48 07/20/20
-------
216,666
(1) Options purchased by Employee through the Salary Reduction Plan.
(2) Options awarded to employees who did not collect a salary, or reduced or
deferred their salary between 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
Plans, Stock Bonus Plans and a Stock Compensation Plan, all of which have been
approved by CEL-SCI's stockholders. A summary description of these Plans
follows. In some cases these Plans are collectively referred to as the "Plans".
Incentive Stock Option Plans. 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 Plans. Only CEL-SCI's employees may be granted options
pursuant to the Incentive Stock Option Plans.
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
57
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.
Stock Bonus Plans. 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 Plans and any options
granted pursuant to the Incentive Stock Option Plans or the Non-Qualified Stock
Option Plans will be forfeited if the "vesting" schedule established by the
Committee administering the Plans 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
58
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 Plans will generally not be
transferable until the person receiving the shares satisfies the vesting
requirements imposed by the Committee when the shares were issued.
The Board of Directors of CEL-SCI may at any time, and from time to time,
amend, terminate, or suspend one or more of the Plans in any manner they deem
appropriate, provided that such amendment, termination or suspension will not
adversely affect rights or obligations with respect to shares or options
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 November 30, 2010
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 17,100,000 10,593,041 N/A 5,920,225
Non-Qualified Stock
Option Plans 33,760,000 21,691,146 N/A 8,468,436
Stock Bonus Plans 11,940,000 N/A 7,400,920 4,537,321
Stock Compensation Plan 9,500,000 N/A 5,386,531 2,113469
Of the shares issued pursuant to CEL-SCI's Stock Bonus Plans 1,454,543
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, 2010, 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.
59
Number of
Securities
Remaining
Available
For Future
Issuance
Under Equity
Number Compensation
of Securities Plans,
to be Issued Weighted-Average Excluding
Upon Exercise Exercise Price of Securities
of Outstanding of Outstanding Reflected in
Plan category Options (a) Options Column (a)
------------- ------------- ----------------- --------------
Incentive Stock Option Plans 10,593,041 $ 0.40 5,920,225
Non-Qualified Stock
Option Plans 21,720,414 $ 0.50 8,468,436
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The following table shows, as of November 30, 2010, information with
respect to the only persons owning beneficially 5% or more of CEL-SCI's
outstanding common stock and the number and percentage of outstanding shares
owned by each director and officer of CEL-SCI 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.
Percent of
Name and Address Number of Shares (1) Class (3)
---------------- ---------------- -----------
Maximilian de Clara 6,441,690 3.1%
Bergstrasse 79
6078 Lungern,
Obwalden, Switzerland
Geert R. Kersten 9,355,855 (2) 4.4%
8229 Boone Blvd., Suite 802
Vienna, VA 22182
Patricia B. Prichep 2, 992,116 1.4%
8229 Boone Blvd., Suite 802
Vienna, VA 22182
Eyal Talor, Ph.D. 1,787,122 0.9%
8229 Boone Blvd., Suite 802
Vienna, VA 22182
Daniel H. Zimmerman, Ph.D. 1,531,522 0.7%
8229 Boone Blvd., Suite 802
Vienna, VA 22182
60
John Cipriano 480,027 0.2%
8229 Boone Blvd., Suite 802
Vienna, VA 22182
Alexander G. Esterhazy 808,156 0.4%
20 Chemin du Pre-Poiset
CH- 1253 Vandoeuvres
Geneve, Switzerland
C. Richard Kinsolving, Ph.D. 983,914 0.5%
P.O. Box 20193
Bradenton, FL 34204-0193
Peter R. Young, Ph.D. 809,424 0.4%
5458 Beacon Hill Drive
Frisco, TX 75034
All Officers and Directors 25,189,826 11.2%
as a Group (9 persons)
(1) Includes shares issuable prior to February 28, 2011 upon the exercise of
options or warrants granted to the following persons:
Options or Warrants Exercisable
Name Prior to February 28, 2011
----- --------------------------------
Maximilian de Clara 6,090,456
Geert R. Kersten 5,979,943
Patricia B. Prichep 2,165,263
Eyal Talor, Ph.D. 1,338,819
Daniel Zimmerman 1,197,000
John Cipriano 293,334
Alexander G. Esterhazy 574,999
C. Richard Kinsolving, Ph.D. 681,667
Peter R. Young, Ph.D. 561,666
(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.
61
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
BDO USA, LLP served as CEL-SCI's independent registered public accountant
for the two years ended September 30, 2010. The following table shows the
aggregate fees billed to CEL-SCI for these years by BDO USA, LLP:
Year Ended September 30,
2010 2009
---- ----
Audit Fees $232,725 $219,675
Audit-Related Fees -- --
Tax Fees -- --
All Other Fees $ 44,126 --
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. All other fees were for services in connection with the
preparation of the application for the PPACA grant. See Note 15 to the financial
statements included with this report for more information.
Before BDO USA, 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
USA, LLP are consistent with BDO USA, 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.
62
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.
5 Opinion of Counsel
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 (together Incorporated by reference to Exhibit 10
with Schedule required by CEL-SCI's report on Form 8-K dated April
Instruction 2 to Item 601 of 18, 2007.
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.
10(i)Warrant Adjustment Agreement with Incorporated by reference to Exhibit
Laksya Ventures 10(i) of CEL-SCI's report on Form 8-K
dated August 3, 2010.
63
10(j) Employment Agreement with Incorporated by reference to Exhibit
Patricia Prichep 10(j) of CEL-SCI's report on Form 8-K
dated August 30, 2010.
10(k)Employment Agreement with Eyal Incorporated by reference to Exhibit
Taylor 10(k) of CEL-SCI's report on Form 8-K
dated August 30, 2010.
10(l) Amendment to Employment Agreement Incorporated by reference to Exhibit
with Maximilian de Clara 10(l) of CEL-SCI's report on Form 8-K
dated August 30, 2010.
10(m) Amendment to Development Supply
and Distribution Agreement with
Orient Europharma. (part of Exhibit
10(m) has been omitted pursuant to
a request for confidential treatment).
10(n) Licensing Agreement with Teva
Pharmaceutical Industries Ltd. (parts
of Exhibit 10(n) have been omitted
pursuant to a request for confidential
treatment.)
10(o) Lease Agreement (parts of Exhibit
10(o) have been omitted pursuant to
a request for confidential treatment).
10(p) Loan Agreements with Maximilian de
Clara
10(q) Licensing Agreement with Byron Incorporated by reference to
Biopharma Exhibit 10(i) of CEL-SCI's report on
Form 8-K dated March 27, 2009.
10(r) At Market Issuance Sales Agreement
with McNicoll, Lewis & Vlak LLC
10(z) Development, Supply and Incorporated by reference to Exhibit
Distribution Agreement with Exhibit 10(z) filed with the
Orient Europharma Company's report on Form 10-K for the
year ended September 30, 2003.
23.1 Consent of BDO USA, LLP
23.2 Consent of Hart & Trinen, LLP
31 Rule 13a-14(a) Certifications
32 Section 1350 Certifications
64
CEL-SCI CORPORATION
Consolidated Financial Statements for the Years
Ended September 30, 2010, 2009, and 2008, 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, 2010, 2009, AND 2008:
Consolidated Balance Sheets F-3
Consolidated Statements of Operations F-5
Consolidated Statements of Stockholders' Equity F-6
Consolidated Statements of Cash Flows F-8
Notes to Consolidated Financial Statements F-12
Report of Independent Registered Public Accounting Firm
Board of Directors and Stockholders
CEL-SCI Corporation
Reston, VA
We have audited the accompanying consolidated balance sheets of CEL-SCI
Corporation as of September 30, 2010 and 2009 and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
three years in the period ended September 30, 2010. 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. An audit 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, 2010 and 2009, and the results of its operations and its cash
flows for each of the three years in the period ended September 30, 2010, in
conformity with accounting principles generally accepted in the United States of
America.
As described in Note 10, effective October 1, 2009, the Company adopted ASC
815-40, "Determining Whether an Instrument (or Embedded Feature) Is Indexed to a
Company's Own Stock".
We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), CEL-SCI Corporation's internal
control over financial reporting as of September 30, 2010, based on criteria
established in Internal Control - Integrated Framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission (COSO) and our report
dated December 10, 2010 expressed an unqualified opinion thereon.
/s/ BDO USA, LLP
----------------
Bethesda, Maryland
December 10, 2010
Report of Independent Registered Public Accounting Firm
Board of Directors and Stockholders
CEL-SCI Corporation
Vienna, VA
We have audited CEL-SCI Corporation's internal control over financial reporting
as of September 30, 2010, based on criteria established in Internal Control -
Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (the COSO criteria). CEL-SCI Corporation's management is
responsible for maintaining effective internal control over financial reporting
and for its assessment of the effectiveness of internal control over financial
reporting, included in the accompanying Item 9A, Management's Report on Internal
Control Over Financial Reporting. Our responsibility is to express an opinion on
the company's internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness exists, and
testing and evaluating the design and operating effectiveness of internal
control based on the assessed risk. Our audit also included performing such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed 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. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.
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.
In our opinion, CEL-SCI Corporation maintained, in all material respects,
effective internal control over financial reporting as of September 30, 2010,
based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the consolidated balance sheets of
CEL-SCI Corporation as of September 30, 2010 and 2009, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the three years in the period ended September 30, 2010 and our report
dated December 10, 2010 expressed an unqualified opinion thereon.
/s/ BDO USA, LLP
----------------
Bethesda, Maryland
December 10, 2010
CEL-SCI CORPORATION
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2010 AND 2009
ASSETS 2010 2009
------ ------
CURRENT ASSETS:
Cash and cash equivalents $26,568,243 $33,567,516
Prepaid expenses 298,719 39,972
Inventory used for R&D and manufacturing 1,476,234 399,474
Deferred rent - current portion 751,338 806,425
Deposits - 1,585,064
----------- -----------
Total current assets 29,094,534 36,398,451
RESEARCH AND OFFICE EQUIPMENT AND
LEASEHOLD IMPROVEMENTS-- less accumulated
depreciation of $2,626,759 and $2,259,237 1,264,831 1,200,611
PATENT COSTS--less accumulated
amortization of $1,205,690 and $1,132,612 356,079 423,104
RESTRICTED CASH 21,357 68,552
DEFERRED RENT - net of current portion 7,068,184 7,936,880
----------- -----------
TOTAL ASSETS $37,804,985 $46,027,598
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 1,497,383 $ 793,148
Accrued expenses 223,696 98,665
Due to employees 45,808 49,527
Related party loan 1,104,057 1,107,339
Deposits held - 10,000
Derivative instruments - current portion 424,286 -
---------- -----------
Total current liabilities 3,295,230 2,058,679
Derivative instruments - net of
current portion 6,521,765 35,113,970
Deferred revenue 125,000 -
Deferred rent 8,225 14,305
----------- -----------
Total liabilities 9,950,220 37,186,954
----------- -----------
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,
204,868,853 and 191,972,021 shares at
September 30, 2010 and 2009, respectively 2,048,689 1,919,720
Additional paid-in capital 187,606,044 173,017,978
Accumulated deficit (161,799,968) (166,097,054)
----------- -----------
Total stockholders' equity 27,854,765 8,840,644
----------- -----------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 37,804,985 $46,027,598
============ ===========
See notes to consolidated financial statements
F-3
CEL-SCI CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED SEPTEMBER 30, 2010, 2009 AND 2008
2010 2009 2008
----------- ---------- ---------
RENT INCOME AND OTHER $ 153,300 $ 80,093 $ 5,065
OPERATING EXPENSES:
Research and development (excluding
R&D depreciation of $434,030, $329,866
and $91,292 respectively, included
below) 11,911,626 6,011,750 4,101,563
Depreciation and amortization 516,117 417,205 215,060
General & administrative 6,285,810 5,671,595 5,200,735
----------- ----------- ----------
Total operating expenses 18,713,553 12,100,550 9,517,358
----------- ----------- ----------
OPERATING LOSS (18,560,253) (12,020,457) (9,512,293)
GAIN (LOSS) ON DERIVATIVE INSTRUMENTS 28,843,772 (28,491,650) 1,799,393
INTEREST INCOME 362,236 - 483,252
INTEREST EXPENSE (162,326) (397,923) (473,767)
----------- ----------- ----------
NET INCOME (LOSS) 10,483,429 (40,910,030) (7,703,415)
MODIFICATIONS OF WARRANTS (1,532,456) (490,728) (424,815)
----------- ----------- ----------
NET INCOME (LOSS) AVAILABLE TO COMMON
SHAREHOLDERS $ 8,950,973 $(41,400,758 $(8,128,230)
=========== ============ ===========
NET INCOME (LOSS) PER COMMON SHARE
BASIC $ 0.04 $ (0.31) $ (0.07)
DILUTED $ (0.05) $ (0.31) $ (0.07)
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING
BASIC 202,102,859 133,535,050 117,060,866
DILUTED 226,277,913 133,535,050 117,060,866
See notes to consolidated financial statements.
F-4
CEL-SCI CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED SEPTEMBER 30, 2010, 2009 AND 2008
Additional
Common Stock Paid-In Accumulated
Shares Amount Capital Deficit Total
---------- --------- ------------ ------------ ---------
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
nonemployees for service 1,689,000 16,890 251,858 268,748
Issuance of stock options
to nonemployees 12,342 12,342
Employee option cost 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
(continued)
F-5
CEL-SCI CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (cont'd)
YEARS ENDED SEPTEMBER 30, 2010, 2009 AND 2008
Additional
Additional
Common Stock Paid-In Accumulated
Shares Amount Capital 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
nonemployees 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 Notes 177,403 1,774 41,111 42,885
Issuance of stock options
and warrants to
nonemployees 449,641 449,641
Loss on conversion of
convertible debt 2,145,754 2,145,754
Issuance of warrants for
short term loan 65,796 65,796
Modification of options 6,142 6,142
Employee option cost 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)
---------- --------- ----------- ----------- -----------
BALANCE, SEPTEMBER 30,
2009 191,972,021 1,919,720 173,017,978 (166,097,054) 8,840,644
401(k) contributions paid
in common stock 182,233 1,822 110,503 112,325
Exercise of warrants and
stock options 12,249,441 122,495 6,186,379 6,308,874
Stock issued to employees and
nonemployees for service 465,158 4,652 1,236,374 1,241,026
Exercise of derivative
liabilities 5,510,490 5,510,490
Modification of stock
options and warrants 227,921 227,921
Employee option cost 1,316,399 1,316,399
Adoption of ASC 815-40 (6,186,343) (6,186,343)
Net income 10,483,429 10,483,429
---------- --------- ----------- ----------- ---------
BALANCE, SEPTEMBER 30,
2010 204,868,853 $2,048,689 $187,606,044 $(161,799,968) $27,854,765
=========== ========== ============ ============= ===========
See notes to consolidated financial statements
F-6
CEL-SCI CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED SEPTEMBER 30, 2010, 2009 AND 2008
2010 2009 2008
---------- ---------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $10,483,429 $(40,910,030) $(7,703,415)
Adjustments to reconcile net
income (loss) to net cash
used for operating activities:
Depreciation and amortization 516,117 417,205 215,060
Issuance of stock options and
warrants to nonemployees for
services - 449,641 12,342
Issuance of common stock for
services 1,241,026 1,561,343 268,748
Correction of stock overpayment
pricing - - 1,471
Premium on loan - 341,454 -
Loan premium adjustment - 489,776 -
Amortization of loan premium (3,282) (338,172) -
Modification of stock options
and warrants 227,921 6,142 564,189
Issuance of stock to employees - 685,858 1,324,474
Loss on conversion of
convertible notes - 2,145,754 -
Employee option cost 1,316,399 1,699,448 561,387
Common stock contributed to
401(k) plan 112,325 57,829 108,590
Warrants issued in
consideration for loan - 65,796 -
Impairment loss on abandonment
of patents 13,877 138,525 8,114
Loss on retired equipment 2,323 270 595
Deferred rent (6,080) 7,688 5,151
Amortization of discount on
convertible note - 193,980 249,106
(Gain)/loss on derivative
instruments (28,843,772) 25,514,667 (1,799,393)
Change in assets and
liabilities:
Decrease/(increase) in deposits 1,585,064 4,764 (1,575,000)
Decrease/(increase) in deferred
rent 955,842 622,350 (142,117)
(Increase)/decrease in prepaid
expenses (258,747) (12,763) 7,369
Increase in inventory used in
R&D and manufacturing (1,076,760) (4,304) (9,520)
Increase/(decrease) in
accounts payable 693,799 343,208 (36,622)
Increase/(decrease) in
accrued expenses 125,031 (14,514) 14,576
Decrease in accrued interest on
convertible debt - (2,674) (23,237)
Increase in deferred revenue 125,000 - -
(Decrease)/increase in due to
employees (3,719) 13,450 9,342
(Decrease)/increase in
deposits held (10,000) 10,000 (3,000)
------------ ------------ -----------
Net cash used in operating
activities (12,804,207) (6,513,309) (7,941,790)
------------ ------------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additional investment in
manufacturing facility (32,059) (505,225) (2,359,473)
Decrease in restricted cash 47,195 919,100 1,180,977
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 (493,736) (191,868) (1,023,011)
Expenditures for patent costs (25,340) (53,290) (121,616)
------------ ------------ -----------
Net cash (used in) provided by
investing activities (503,940) 368,717 (2,523,123)
------------ ------------ -----------
(continued)
See notes to consolidated financial statements.
F-7
CEL-SCI CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (cont'd)
YEARS ENDED SEPTEMBER 30, 2010, 2009 AND 2008
2010 2009 2008
---------- ---------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common
stock $ - $ 32,242,716 $ 1,037,542
Proceeds from exercise of warrants
and stock options 6,308,874 8,681,254 14,403
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)
Costs for equity related transactions - (2,072,927) (23,795)
------------ ------------ -----------
Net cash provided by financing
activities 6,308,874 39,000,850 183,150
------------ ------------ -----------
NET (DECREASE) INCREASE
IN CASH AND CASH EQUIVALENTS (6,999,273) 32,856,258 (10,281,763)
CASH AND CASH EQUIVALENTS, BEGINNING
OF YEAR 33,567,516 711,258 10,993,021
------------ ------------ -----------
CASH AND CASH EQUIVALENTS,
END OF YEAR $ 26,568,243 $ 33,567,516 $ 711,258
============ ============ ==========
CONVERSION OF CONVERTIBLE DEBT
INTO COMMON STOCK:
Decrease in convertible debt $ - $ 1,206,341 $ -
Increase in common stock - (30,159) -
Increase in additional paid-in
capital - (1,176,182) -
------------ ------------ -----------
$ - $ - $ -
============ ============ ===========
CONVERSION OF INTEREST ON
CONVERTIBLE DEBT INTO COMMON STOCK:
Decrease in accrued liabilities $ - $ 42,885 $ -
Increase in common stock - (1,774) -
Increase in additional paid-in
capital - (41,111) -
------------ ------------ -----------
$ - $ - $ -
============ ============ ===========
PAYMENT OF CONVERTIBLE DEBT PRINCIPAL
WITH
COMMON STOCK:
Decrease in convertible debt $ - $ 285,000 $ -
Increase in common stock - (9,728) -
Increase in additional paid-in
capital - (275,272) -
------------ ------------ -----------
$ - $ - $ -
============ ============ ===========
ISSUANCE OF WARRANTS:
Increase in derivative
liabilities $ - $ (8,877,217) $ (891,336)
Increase in discount on notes
payable - 245,000 -
Decrease in additional paid-in
capital - 8,632,217 891,336
------------ ------------ -----------
$ - $ - $ -
============ ============ ===========
EXERCISE OF DERIVATIVE LIABILITIES:
Decrease in derivative liabilities $ 5,510,490 $ - $ -
Increase in additional paid-in
capital (5,510,490) - -
------------ ------------ -----------
$ - $ - $ -
============ ============ ===========
MODIFICATION OF WARRANTS:
Increase in additional paid-in
capital $ (1,532,456) $ (24,061) $ (173,187)
Decrease in additional paid-in
capital 1,532,456 24,061 173,187
------------ ------------ -----------
$ - $ - $ -
============ ============ ===========
See notes to consolidated financial statements.
(continued)
F-8
CEL-SCI CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (cont'd)
YEARS ENDED SEPTEMBER 30, 2010, 2009 AND 2008
2010 2009 2008
---------- ---------- -----------
ACCOUNTS PAYABLE:
Increase in patent costs $ - $ 7,285 $ 14,013
Increase in accounts payable - (7,285) (14,013)
------------ ------------ -----------
$ - $ - $ -
============ ============ ===========
EQUIPMENT COSTS INCLUDED IN
ACCOUNTS PAYABLE:
Increase in research and office
equipment $ 10,436 $ 15,147 $ 201,998
Increase in accounts payable (10,436) (15,147) (201,998)
------------ ------------ -----------
$ - $ - $ -
============ ============ ===========
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
------------ ------------ -----------
$ - $ - $ -
============ ============ ===========
ADOPTION OF ASC 815-40
Increase in derivative
liabilities $ (6,186,343) $ - $ -
Increase in accumulated deficit 6,186,343 - -
------------ ------------ -----------
$ - $ - $ -
============ ============ ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOWS
INFORMATION:
Cash expenditure for interest
expense $ 162,326 $ 115,559 $ 224,662
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.
The Company'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. Certain amounts from 2009 consolidated
financial statements have been reclassified to conform to 2010 consolidated
financial statement presentation. One such reclassification is the
reclassification of derivative instruments of $35,113,970 from current
liabilities to long-term liabilities on the September 30, 2009 consolidated
balance sheet.
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 on September 30, 2009 was for the manufacturing
facility ($1,575,000) required by the lease agreement, but was refunded in
February 2010, after the Company met the cash requirements of the lease.
F-10
f. Research and Office Equipment and Leasehold Improvements--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, 2010, 2009 and 2008 totaled
$437,629, $330,820, and $133,604, respectively. During the years ended
September 30, 2010, 2009 and 2008, equipment with a net book value of $2,323,
$270 and $595 was retired.
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, 2010, 2009 and 2008, the Company
recorded patent impairment charges of $13,877, $138,525, and $8,114,
respectively, for the net book value of patents abandoned during the year.
These amounts are included in general and administrative expenses.
Amortization expense for the years ended September 30, 2010, 2009 and 2008
totaled $78,488, $86,385, and $81,456, respectively. The Company estimates
that amortization expense will be approximately $71,200 for each of the next
five years, totalling $356,000.
h. Deferred Rent-- Interest on the deferred rent is calculated at 3% on the
funds deposited on the manufacturing facility and for September 30, 2010, is
included in the deferred rent. This interest income will be used to offset
future rent. On September 30, 2010, 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 ($1,481,040); 3) additional
investment ($2,889,409); 4) deposit on the cost of the leasehold improvements
for the manufacturing facility ($1,786,591), 5) amortization of deferred rent
($(1,682,053)); and 6) accrued interest on deposit ($194,535).
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).
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 entered into financing arrangements that
consisted of freestanding derivative instruments or were hybrid instruments
that contained embedded derivative features. The Company accounted for these
F-11
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". 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, 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 determined the
fair value of derivative instruments and hybrid instruments based on
available market data using appropriate valuation models, giving
consideration to all of the rights and obligations of each instrument and
precluding the use of "blockage" discounts or premiums in determining the
fair value of a large block of financial instruments. Fair value under these
conditions does not necessarily represent fair value determined using
valuation standards that give consideration to blockage discounts and other
factors that may be considered by market participants in establishing fair
value. 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 shown in the balance sheet
in long term liabilities. Warrants exercised during the year ended September
30, 2010 totaled $534,088 in funds received by the Company. In addition, the
Company recognized a gain of $280,223 on the exercise of the Series K
warrants. Outstanding warrants associated with Series K are valued at
$1,002,502 at September 30, 2010. The Company recorded a gain of $2,856,355
on the remaining Series K for the year ending September 30, 2010.
The Company 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 long term liabilities. At September 30,
2010, the fair value of these derivative instruments totaled $4,037,067.
There were 8,813,088 Series A warrants exercised during the year ended
September 30, 2010, that brought in $4,406,544 in funds to the Company. In
addition, the Company recognized a gain of $8,433,451 on the exercise of the
Series A warrants. 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. The Company recorded a
gain of $12,993,883 on the remaining Series A through E warrants for the year
ending September 30, 2010.
Also included in derivative liabilities are warrants issued to investors in
August 2008. These warrants were valued at $1,906,482 on September 30, 2010,
which resulted in a gain of $4,279,860 for the year ended September 30, 2010.
F-12
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 Company is currently
not receiving funds from any grants.
l. Research and Development Costs--Research and development expenditures are
expensed as incurred. Total research and development costs, excluding
depreciation, were $11,911,626, $6,011,750, and $4,101,563 for the years
ended September 30, 2010, 2009 and 2008.
m. Net Income (Loss) Per Common Share--Net income (loss) per common share is
computed by dividing the net income (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, are included in the calculation unless
the result is antidilutive.
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 has net operating loss carryforwards at
September 30, 2010 of approximately $115 million. 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.
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.
F-13
q. Recent Accounting Pronouncements--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 has adopted this topic with no impact on
its consolidated financial statements.
In June 2008, the FASB issued EITF 07-5, "Determining Whether an Instrument
(or Embedded Feature) Is Indexed to a Company's Own Stock". EITF 07-5 is now
known as Codification 815-40-15-7 and it supersedes EITF 01-6 and provides
revised guidance for, "...the determination of whether an instrument (or an
embedded feature) is indexed to an entity's own stock, which is the first
part of the scope exception in paragraph 11(a) of Statement 133, now known as
Codification 815-10-50. If an instrument (or an embedded feature) that has
the characteristics of a derivative instrument under Codification 815-10-50
is indexed to an entity's own stock, it is still necessary to evaluate
whether it is classified in stockholders' equity (or would be classified in
stockholders' equity if it were a freestanding instrument)." Specifically,
Codification 815-40-15-7 provides a two-step process:
Step 1: Evaluate the instrument's contingent exercise provisions, if any.
Step 2: Evaluate the instrument's settlement provisions.
Codification 815-40-15-7 was effective for the Company as of January 1, 2009
and was applied to outstanding instruments as of October 1, 2009.
Based on this analysis, the Company has determined that some of its warrants
are subject to Codification 815-10-50 and must be revalued at the end of
every reporting period, with changes to the fair value of the warrants to be
accounted for as derivative gains or losses in the income statement. For
further discussion, see Note 10.
In September 2008, the FASB 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 codification applies to
credit derivatives within the scope of ASC 815 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 impact of the
adoption of this codification did not have a material effect on the Company's
consolidated financial statements.
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
F-14
adopted this codification for the period ended June 30, 2009. There was no
significant impact from this adoption on the Company's consolidated financial
statement.
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. 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. The impact of the adoption was
not significant.
In January 2010, the FASB amended Codification 820-10, "Improving
Disclosures about Fair Value Measurement", effective for interim periods
beginning after December 15, 2009. This amendment changes disclosures
required for interim and annual periods with respect to fair value
measurements. The Company has adopted the change in the disclosure
requirements and the effect was immaterial.
r. Stock-Based Compensation-- The Company recognized expense of $1,316,399 for
options issued or vested during the fiscal year ended September 30, 2010,
expense of $1,699,448 for options issued or vested during the fiscal year
ended September 30, 2009 and expense of $561,387 for options issued or vested
during the fiscal year ending September 30, 2008. This expense was recorded
as general and administrative expense. The Company received a total of
$36,330 and $282,841 from the exercise of options during the year ended
September 30, 2010 and 2009, respectively. The following table summarizes
stock option activity for the year ended September 30, 2010.
Non-Qualified Stock Option Plan
-------------------------------
Outstanding Exercisable
---------------------------------------------- -----------------------------------------------
Weighted
Weighted Average
Weighted Average Weighted Remaining
Number Average Remaining Aggregate Number Average Contractual Aggregate
of Exercise Contractual Intrinsic of Exercise Term Intrinsic
Shares Price Term (Years) Value Shares Price (Years) Value
--------- ---------- ----------- --------- -------- ----------- ----------- -----------
Outstanding at 19,578,091 $ 0.48 7.70 23,979,937 7,400,431 $ 0.61 4.18 7,676,815
October 1, 2009
Vested 812,669 $ 0.53
Granted 1,453,450 $ 0.57 9.74 106,592 9.74 106,592
Exercised (18,625) $ 0.31 8.31 6,224 (18,625) $ 0.31 8.31 6,224
Forfeited (4,500) $ 0.77
Expired (30,502) $ 1.05 (30,502) $ 1.05
Outstanding at
September 30, 2010 20,977,914 $ 0.49 7.18 4,209,476 8,163,973 $ 0.62 4.47 1,135,673
F-15
Incentive Stock Option Plan
---------------------------
Outstanding Exercisable
---------------------------------------------- -----------------------------------------------
Weighted
Weighted Average
Weighted Average Weighted Remaining
Number Average Remaining Aggregate Number Average Contractual Aggregate
of Exercise Contractual Intrinsic of Exercise Term Intrinsic
Shares Price Term (Years) Value Shares Price (Years) Value
--------- ---------- ----------- --------- -------- ----------- ----------- -----------
Outstanding at 9,598,874 $ 0.39 7.03 12,859,317 8,548,876 $ 0.38 6.99 11,525,319
October 1, 2009
Vested 449,999 $ 0.49
Granted 1,100,000 $ 0.61 9.76 31,000 $ 0.61 9.76 31,000
Exercised (71,333) $ 0.43 1.74 22,400 (71,333) $ 0.43 1.74 22,400
Expired (34,500) $ 2.25 (34,500) $ 2.25
Outstanding at
September 30, 2010 10,593,041 $ 0.40 6.65 3,101,582 8,893,042 $ 0.38 6.02 2,794,276
The total intrinsic value of options exercised during the fiscal years
2010, 2009 and 2008 was $32,999, $242,634 and $5,784, respectively.
The weighted average fair value at the date of grant for options granted
during fiscal years 2010, 2009 and 2008 was $0.52, $0.28 and $0.51,
respectively.
A summary of the status of the Company's non-vested options as of
September 30, 2010 is presented below:
Non-qualified Stock Option Plan:
Weighted
Number of Average
Shares Price
---------- ---------
Nonvested at October 1, 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)
-----------
F-16
Nonvested at September 30, 2009 12,177,660 $0.40
Vested (812,669)
Granted 1,453,450 $0.50
Forfeited (4,500)
-----------
Nonvested at September 30, 2010 12,813,941 $0.40
==========
Incentive Stock Option Plan:
Weighted
Number of Average
Shares Price
---------- ---------
Nonvested at October 1, 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
Vested (449,999)
Granted 1,100,000 $0.55
Forfeited -
-----------
Nonvested at September 30, 2010 1,699,999 $0.54
=========
In fiscal year 2010, the Company issued 2,553,450 stock options to employees
and directors at a fair value of $1,333,831, ($0.52 fair value per option),
at a weighted average exercise price of $0.59 per share. In fiscal year 2009,
the Company 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 exercise price of $0.343 per share. In fiscal year 2008, the Company
issued 1,339,000 stock options to employees and directors at a fair value of
$677,661, at a weighted average exercise price of $0.51 per share. On
September 30, 2010, the Company had 14,513,940 options that were unvested at
a fair value of $5,333,797, which is a weighted average fair value of $0.37
per share with a weighted average remaining vesting life of 1.87 years. 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:
2010 2009 2008
---- ---- ----
Expected stock price volatility 98.6-104.5% 79.5-80.2% 79-81%
Risk-free interest rate 2.54-4.01% 2.82-3.72% 3.68-4.53%
Expected life of options 9.63-10 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 daily closing prices of the Company's stock. The risk-free rate of return
used for fiscal years 2010, 2009 and 2008 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 million 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. The Series K convertible debt has all either been
repaid or converted into shares of the Company's common stock as of
September 2009.
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
allowed to require the 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.
F-18
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 the
Company 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.
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
F-19
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 fiscal
year ended September 30, 2010, 1,335,221 Series K warrants were exercised,
on which the Company recognized a gain on conversion of $280,223. When the
warrants were exercised, $1,233,518 of the Series K warrants was converted
from derivative liabilities to equity. At September 30, 2010, the fair
value of the remaining investor and broker warrants was $1,002,502.
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.
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 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.
The Company has two partners who have agreed to participate in and pay for
part of the Phase III clinical trial for Multikine. Since the Company 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 currently being negotiated, but is assumed to be about $25 - $26
million. The Company believes that its capital will allow it to enroll the
patients in the Phase III clinical trial. The Company will need to raise
additional funds, either through its existing warrants/options, through a
debt or equity financing or a partnering arrangement, to complete the Phase
III trial and bring Multikine to market. There can be no assurances the
Company will be successful in raising additional funds.
F-20
4. RESEARCH AND OFFICE EQUIPMENT
Research and office equipment at September 30, 2010 and 2009, consists of the
following:
2010 2009
---- ----
Research equipment $3,647,684 $3,292,472
Furniture and equipment 116,996 122,957
Leasehold improvements 126,910 44,419
------------ -------
3,891,590 3,459,848
Less: Accumulated depreciation
and amortization (2,626,759) (2,259,237)
----------- ----------
Net research and office equipment $1,264,831 $1,200,611
========== ==========
5. INCOME TAXES
At September 30, 2010, the Company had a federal net operating loss
carryforward of approximately $115 million expiring from 2011 through 2030.
In addition, the Company has a general business credit as a result of the
credit for increasing research activities of approximately $2,341,000 at
September 30, 2010 and 2009. 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, 2010 and 2009 are comprised of the following:
2010 2009
---- ----
Net operating loss $45,940,445 $39,491,048
R&D credit 2,340,614 2,340,614
Amortization of debt discount -- 658,406
Codification 718-10-30-3 1,243,647 683,245
Derivative loss -- 8,919,951
Vacation and other 83,593 9,127
Deferred rent 970,224 -
----------- ----------
Total deferred tax assets 50,578,523 52,102,392
Derivative gain (2,133,259) -
Depreciation (80,026) -
----------- ----------
Total deferred tax liability (2,213,285) -
Valuation allowance (48,365,238) (52,102,392)
----------- ----------
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 is dependent upon the generation of future taxable
F-21
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:
2010 2009 2008
---- ---- ----
Federal Rate 34.0% 34.0% 34.0%
State tax rate, net of federal benefit 5.91% 3.96% 3.96%
R&D credit 0% 2.01% 5.06%
RT&D credit true-up 0% (0.40%) 0%
Nondeductible expenses 0.02% (0%) (0.04%)
Valuation allowance (39.93%) (39.57%) (42.98%)
------- ------- -------
Effective tax rate 0.0% 0.0% 0.0%
======= ======= =======
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 ASC 740-10 had no impact on its financial positions. No interest
or penalties have been accrued as a result of adoption of this requirement.
In the United States, the Company is still open to examination from 2006
forward.
6. STOCK OPTIONS, BONUS PLAN AND WARRANTS
Non-Qualified Stock Option Plans --At September 30, 2010, the Company has
collectively authorized the issuance of 33,760,000 shares of common stock
under its Non-Qualified Stock Option Plans. 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 the plans. The Company's employees, directors,
officers, and consultants or advisors are eligible to be granted options
under the Non-Qualified Stock Option Plans.
Information regarding the Company's Non-Qualified Stock Option Plans is
summarized as follows:
F-22
Outstanding Exercisable
------------------ ----------------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
------ -------- ------ --------
Options outstanding,
October 1, 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
---------
Options granted 1,453,450 $0.56
Options exercised (18,625) $0.31
Options forfeited (35,002) $0.97
---------
Options outstanding,
September 30,2010 21,720,414 $0.50 8,906,473 $0.65
=========
In December 2007, the Company extended the expiration date on 1,680,533
options from the Nonqualified Stock Option Plans with exercise prices ranging
from $1.05 to $1.94. The options originally would have expired between
February 2008 and 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, 2010, all of these options remain outstanding.
In April 2009, the Company extended the expiration date on 147,000 options
from the Nonqualified Stock Option Plans with the exercise prices ranging
from $1.05 to $1.87. The options originally would have expired between May
2009 and 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, 2010, all of these options remain outstanding.
In January 2010, the Company extended the expiration date on 181,666 options
from the Nonqualified Stock Option Plans with the exercise prices ranging
from $1.05 to $1.76. The options originally would have expired between
February 2010 and November 2010 and were extended for three years to
expiration dates ranging from February 2013 to November 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 $72,632.
As of September 30, 2010, all of these options remain outstanding.
F-23
Incentive Stock Option Plan--At September 30, 2010, the Company has
collectively authorized the issuance of 17,100,000 shares of common stock
under its Incentive Stock Option Plans. 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 the plans. Only the Company's employees and
directors are eligible to be granted options under the Incentive Stock Option
Plans.
Information regarding the Company's Incentive Stock Option Plans is
summarized as follows:
Outstanding Exercisable
------------------ ----------------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
------ -------- ------ --------
Options outstanding,
October 1, 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
=========
Options granted 1,100,000 $0.61
Options exercised (71,333) $0.43
Options forfeited (34,500) $2.25
-------
Options outstanding,
September 30,2010 10,593,041 $0.50 8,893,042 $0.65
=========
In December 2007, the Company extended the expiration date on 225,100 options
from the Incentive Stock Option Plans with exercise prices ranging from $1.05
to $1.94. The options originally would have expired between February 2008 and
December 2008 and were extended for five years to expiration dates ranging
from February 2013 to December 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 $54,537. As of September
30, 2010, all of these options remain outstanding.
In April 2009, the Company extended the expiration date on 153,000 options
from the Incentive Stock Option Plans with the exercise price of $1.05. The
options originally would have expired between April 2009 and December 2009
and were extended for three years to expiration dates ranging from April 2012
F-24
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, 2010, all of these
options remain outstanding.
In January 2010, the Company extended the expiration date on 337,166 options
from the Incentive Stock Option Plans with the exercise prices ranging from
$1.05 to $1.18. The options originally would have expired between February
2010 and December 2010 and were extended for three years to expiration dates
ranging from February 2013 to December 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 $139,812. As of
September 30, 2010, 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 consolidated statement of
operations. Warrants issued in connection with some financings are
classified as derivative liabilities due to their terms. See Note 10 for
further discussion of the derivative liabilities. Details of the other
transactions follow.
In November and December 2007, the Company extended the expiration date of
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 was 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.
Expected stock risk volatility 72%
Risk-free interest rate 3.67%
Expected life of warrant 5.17-5.5 Years
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 were repriced at $0.75 per share and expire on January 26, 2014. The
cost of this repricing and extension of the warrants was $70,515 and was
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,
exercisable at a price of $0.75 per share, and will expire on January 26,
2014. The cost of these warrants was $45,207 and was 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-25
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 are exercisable at any time prior to March 6, 2016. The fair value
of the warrants was calculated to be $1,015,771 using the Black Scholes
method with 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 exercisable at $0.40 per share 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 exercisable at $0.50 per
share 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.
F-26
Expected stock risk volatility 62.59%
Risk-free interest rate 2.13-2.71%
Expected life of warrant 5 Years
In connection with the reset of the conversion price of the Series K notes
and the exercise price of the 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, 2010. See Note 2.
In June 2009, the Company issued 1,648,244 warrants exercisable at $0.40 per
share to the holder of a note from the Company. These warrants were valued at
$65,796 using the Black Scholes method. In July 2009, the Company issued
1,849,295 warrants exercisable at $0.50 per share 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. 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 was
amortized as a reduction to interest expense as of September 30, 2009. The
balance of the premium of $3,282 was amortized as a reduction to interest
expense in October 2009. The following assumptions were used to value these
warrants:
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 debit 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 0.08 Year 2.08 Years
In July 2009, 192,500 options were issued with exercise prices between $0.40
and $0.60 per share 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
F-27
in capital. Also in July 2009, the Company issued 200,000 options to a
consultant with an exercise price of $0.38 per share. 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
In July 2009, the Company issued warrants to a private investor. The 167,500
warrants were issued with an exercise price of $0.50 per share 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 exercisable at $0.55 per
share. 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 2009, the Company completed an offering to the original Series
K investors. Issued with an exercise price of $0.55 per share, 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
F-28
In September 2009, the Company received a $2,000,000 loan. In connection with
the loan, the Company issued 500,000 warrants with an exercise price of $0.68
per share. 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.
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 with an exercise
price of $1.50 per share 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 with an exercise price of $1.75 per share to the placement agent on
the transaction. The cost of $664,286 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. As of September 30, 2009, the fair value
of these new derivative liabilities totaled $29,741,372. As of September 30,
2010, the value of the remaining derivative liabilities totaled $5,943,549.
In August 2010, 70,000 options owned by an investor were extended for two
years at a cost of $15,477. This cost was calculated using the Black Scholes
method and was accounted for as a credit to additional paid in capital and a
debit to general and administrative expense. The calculation used the
following assumptions.
Prior to After
Extension Extension
Expected stock risk volatility 102% 102%
Risk-free interest rate 0.15% 0.49%
Expected life of warrant 0 Years 2 Years
F-29
Stock Bonus Plans -- At September 30, 2010, the Company had been authorized
to issue up to 11,940,000 shares of common stock under its Stock Bonus Plans.
All employees, directors, officers, consultants, and advisors are eligible to
be granted shares. 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. During the year ended September 30, 2010,
182,233 shares were issued to the Company's 401(k) plan for a cost of
$112,325.
Stock Compensation Plan-- At September 30, 2010, 9,500,000 shares were
authorized for use in the Company's stock compensation plan. 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. During the year ended September
30, 2010, no shares were issued from the Stock Compensation Plan.
7. EMPLOYEE BENEFIT PLAN
The Company maintains a defined contribution retirement plan, qualifying
under Section 401(k) of the Internal Revenue Code, subject to the Employee
Retirement Income Security Act of 1974, as amended, and covering
substantially all Company employees. Each participant's contribution is
matched by the Company with shares of common stock that have a value equal to
100% of the participant's contribution, not to exceed the lesser of $10,000
or 6% of the participant's total compensation. The Company's contribution of
common stock is valued each quarter based upon the closing bid price of the
Company's common stock. The expense for the years ended September 30, 2010,
2009, and 2008, in connection with this Plan was $123,500, $61,517, and
$110,670, 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,
2011 1,903,471
2012 1,896,205
2013 1,855,889
2014 1,579,931
2015 1,572,839
2016 and thereafter 26,441,949
-----------
Total minimum lease payments: $35,250,284
============
Rent expense for the years ended September 30, 2010, 2009, and 2008, was
$3,308,102, $2,759,332, and $253,526, respectively. Rent increased
substantially during the fiscal year ended September 30, 2009 because the
F-30
Company took delivery of the new building in October of 2008; see discussion
below. These leases expire between June 2012 and August 2028.
In August 2007 the Company leased a building near Baltimore, Maryland. The
building was be remodeled in accordance with the Company's specifications so
that it can be used by the Company to manufacture Multikine for the Company'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%. The Company is also required to pay all real
and personal property taxes, insurance premiums, maintenance expenses, repair
costs and utilities. The lease allows the Company, 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 the Company 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 the
Company maintaining compliance with the lease covenants. Included on the
consolidated balance sheet is an asset of $7,819,522 shown as deferred rent.
$7,068,184 of this asset is long term and the balance of $751,338 is in
current assets. Included in deferred rent are the following: 1) deposit on
the manufacturing facility ($3,150,000); 2) warrants issued to lessor
($1,481,040); 3) additional investment ($2,889,409); 4) deposit on the cost
of the leasehold improvements for the manufacturing facility ($1,786,591); 5)
amortization of deferred rent ($(1,682,053)); and 6) accrued interest on
deposit ($194,535). Also included on the consolidated balance sheet is
restricted cash of $21,357. 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 on September 30, 2009 was required to
be deposited when the amount of cash the Company had dropped below the amount
stipulated in the lease. The Company received a refund of the deposit in
February 2010, when the Company was again in compliance with the contract.
Employment Contracts--In April 2005, the Company entered into a three-year
employment agreement with Maximilian de Clara, the Company's President. The
employment agreement provided that the Company would 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. On August 30, 2010, Mr. de Clara's employment agreement, as amended
on September 8, 2006, was extended to August 30, 2013.
F-31
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", the Company 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 the Company's common stock
for the twenty trading days preceding the Payment Date. A total of 2,610,649
shares were issued to Mr. de Clara under this agreement.
The employment agreement provides that the Company will pay Mr. de Clara an
annual salary of $363,000 during the term of the agreement. In the event
that there is a material reduction in 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 the Company equal to 18 months salary. For purposes
of the employment agreement, a change in the control of the Company means
the sale of more than 50% of the outstanding shares of the Company's Common
Stock, or a change in a majority of the Company's directors.
In September 2006, the Company agreed to extend its employment agreement with
Geert R. Kersten, the Company'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
the Company 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.
On August 30, 2010, the Company entered into a three-year employment
agreement with Patricia B. Prichep, the Company's Senior Vice President of
Operations. The employment agreement with Ms. Prichep provides that during
the term of the agreement the Company will pay Ms. Prichep an annual salary
of $194,298 plus any increases approved by the Board of Directors during the
period of the employment agreement.
On August 30, 2010, the Company also entered into a three-year employment
agreement with Eyal Talor, Ph.D., the Company's Chief Scientific Officer. The
employment agreement with Dr. Talor provides that during the term of the
agreement the Company will pay Dr. Talor an annual salary of $239,868 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 employment
agreements with Ms. Prichep and Dr. Talor allow Ms. Prichep and/or Dr. Talor
(as the case may be) to resign from her or his position at the Company and
receive a lump-sum payment from the Company equal to 18 months salary. For
purposes of the employment agreements, 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.
The employment agreements with Ms. Prichep and Dr. Talor will also terminate
upon the death of the employee, the employee's physical or mental disability,
willful misconduct, an act of fraud against the Company, or a breach of the
employment agreement by the employee. If the employment agreement is
terminated for any of these reasons the employee, or her or his legal
representatives, as the case may be, will be paid the salary provided by the
employment agreement through the date of termination.
F-32
The Company has an additional contract with a consultant for a nine month
period ending in fiscal year 2011. This contract totals approximately
$45,000. Further, the Company has contingent obligations with other vendors
for work that will be completed in relation to the Phase III trial. The
timing of these obligations cannot be determined at this time. The amount of
these obligations for the Phase III trial are approximately $27 million with
the net cost to the Company being between $25 - $26 million.
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 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 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. LOANS FROM OFFICER AND INVESTOR
Between December 2008 and June 2009, Maximilian de Clara, the Company's
President and a director, loaned the Company $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, the Company issued Mr. de Clara warrants which entitle Mr. de
Clara to purchase 1,648,244 shares of the Company'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 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 the Company's then
recent financing, the Company'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 the Company'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 the Company's common
stock at a price of $0.50 per share at any time prior to January 6, 2015.
F-33
The loan from Mr. de Clara bears interest at 15% per year and is secured by
a second lien on substantially all of the Company's assets. The Company 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. This resulted in a premium of
$341,454, which was amortized over the period from July 6, 2009, the date of
the second amendment, to October 1, 2009. The loan holder may request
repayment in full or in part at any time after October 1, 2009 on ten days
notice. In October 2009, the balance of the remaining premium of $3,282, was
amortized to interest expense. Amortization of the premium was $338,172 for
the year ended September 30, 2009.
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 2009, 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. On
September 30, 2010, the fair value of the warrants was $220,000, and all of
the warrants remain outstanding.
10. 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.
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 notes was repriced to $0.75
from the original $0.86 and the exercise price of the warrants were adjusted
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.
F-34
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 the Company'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 was 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 value of the
stock was 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 was 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 3,316,438 shares
of common stock in payment of invoices totaling $1,561,343. 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 the territory. In
connection with 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.
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 years ended September 30, 2010 or
2009.
F-35
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. This payment was received in March 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 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 are
exercisable at any time 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 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 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,
exercisable at $0.50 per share 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. During
the year ended September 30, 2010, 8,813,088 warrants were exercised. As of
September 30, 2010, the fair value of the 1,470,972 remaining warrants was
$676,647.
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 the Company were below the conversion
price of the notes and the exercise price of the warrants. Also in
conjunction with the June 2009 financing, the exercise price of warrants
issued in 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 for the year ended
September 30, 2009.
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. During the year ended September 30, 2009, $16,770 of the cost was
expensed. There was no additional vesting for these shares for the year ended
September 30, 2010. 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
F-36
is shown on the balance sheet as a derivative liability on September 30,
2009. As of September 30, 2009, the fair value of these warrants was
$8,088,328. On September 30, 2010, these warrants are shown as a derivative
liability of $2,480,420. No warrants were exercised during the year ended
September 30, 2010.
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,
exercisable at $1.50 per share to the investors at a fair value of
$3,488,570. The Company also issued 714,286 warrants, exercisable at $1.75
per share 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. As of
September 30, 2010, the fair value of these warrants is shown as a derivative
liability of $660,000. No warrants were exercised during the year ended
September 30, 2010.
During the year ended September 30, 2010, there were an additional 2,011,174
warrants and options exercised for 2,011,174 shares of common stock at prices
ranging from $0.56 to $0.75. The Company received a total of $1,413,307 from
the exercise of warrants and options during the year ended September 30,
2010.
During the year ended September 30, 2009, 3,316,438 shares of common stock
were issued in payment of invoices totaling $1,561,343. During the year ended
September 30, 2010, 465,158 shares of common stock were issued in payment of
invoices totaling $1,241,026.
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. Series A through E warrants that do not
qualify for equity accounting must be accounted for as a derivative liability
since the warrant agreements provide the holders with the right, at their
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 agreements. 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. As of September 30, 2009, the fair value
of these derivative liabilities was $29,741,372. As of September 30, 2010,
and after the exercise of warrants discussed above, the fair value of these
derivative liabilities was $4,037,067.
During the fiscal year ended September 30, 2010, 8,813,088 of Series A
warrants were exercised, resulting on a gain on derivative instruments of
$8,433,451. When the warrants were exercised, the value of these warrants was
converted from derivative liabilities to equity, and the Series A warrants
transferred to equity totaled $4,276,972.
On October 1, 2009, the Company reviewed all outstanding warrants in
accordance with the requirements of Codification 815-40, "Determining Whether
an Instrument (or Embedded Feature) is Indexed to an Entity's Own Stock".
This topic provides that an entity should use a two-step approach to evaluate
F-37
whether an equity-linked financial instrument (or embedded feature) is
indexed to its own stock, including evaluating the instrument's contingent
exercise and settlement provisions. Two warrant agreements provide for
adjustments to the purchase price for certain dilutive events, which includes
an adjustment to the warrant exercise price in the event that the Company
makes certain equity offerings in the future at a price lower than the
exercise price of the warrants. Under the provisions of Codification 815-40,
the warrants are not considered indexed to the Company's stock because future
equity offerings or sales of the Company's stock are not an input to the fair
value of a "fixed-for-fixed" option on equity shares, and equity
classification is therefore precluded. Accordingly, effective October 1,
2009, 3,890,782 warrants issued in August 2008 were determined to be subject
to the requirements of this topic and were valued using the Black-Scholes
formula as of October 1, 2009 at $6,186,343. Effective October 1, 2009, the
warrants are recognized as a liability in the Company's condensed
consolidated balance sheet at fair value with a corresponding adjustment to
accumulated deficit and will be marked-to-market each reporting period during
which they are exercisable. The warrants were revalued on September 30, 2010,
at $1,906,482. The assumptions used in the fair value calculation for the
warrants as of October 1, 2009 and September 30, 2010 are as follows:
October 1, 2009 September 30, 2010
---------------- ------------------
Expected stock price volatility 95% 100%
Risk-free interest rate 2.151% 0.919%
Expected life of warrant 4.88 years 3.88 years
On March 12, 2010, the Company temporarily reduced the exercise price of
the Series M warrants, originally issued on April 18, 2007. The exercise
price was reduced from $2.00 to $0.75. At any time prior to June 16, 2010,
investors could have exercised the Series M warrants at a price of $0.75
per share. For every two Series M warrants exercised prior to June 16,
2010, the investor would have received one Series F warrant. Each Series F
warrant would have allowed the holder to purchase one share of the
Company's common stock at a price of $2.50 per share at any time on or
before June 15, 2014. After June 15, 2010 the exercise price of the Series
M warrants reverted back to the $2.00 per share. Any person exercising a
Series M warrant after June 15, 2010 would not receive any Series F
warrants. The Series M warrants expire on April 17, 2012. An analysis of
the modification to the warrants determined that the modification increased
the value of the warrants by $1,432,456. The adjustment was recorded as a
debit and a credit to additional paid-in capital. There were no exercises
of the Series M warrants at the reduced price and the exercise price of the
Series M warrants reverted back to $2.00 on June 16, 2010.
On August 3, 2010, the Company's Board of Directors approved an amendment to
the terms of the Series M warrants held by an investor. The investor is the
owner of 8,800,000 warrants priced at $2.00 per share. The investor may now
purchase 6,000,000 shares of the Company's common stock (reduced from
8,800,000) at a price of $0.60 per share. In approving the amendment, the
Company's Directors determined that reducing the number of outstanding
warrants would be beneficial. An analysis of the modification to the warrants
determined that the modification increased the value of the warrants by
$100,000. The adjustment was recorded as a debit and a credit to additional
paid-in capital. As of September 30, 2010, all of these warrants remained
outstanding.
F-38
11. 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 the Company's 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
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). The
Company classifies 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. The Company's
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, 2010:
F-39
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 $ - $ - $ 6,946,051 $6,946,051
=========== =========== =========== ==========
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 following sets forth the reconciliation of beginning and ending
balances related to fair value measurements using significant unobservable
inputs (Level 3), as of September 30, 2010 and 2009:
2010 2009
---- ----
Beginning balance $35,113,970 $3,018,697
Transfers in 6,186,343 8,877,217
Transfers out (5,510,490) (5,273,594)
Realized and unrealized gains/losses
recorded in Earnings (28,843,772) 28,491,650
Ending balance $ 6,946,051 $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.
12. NET INCOME (LOSS) PER COMMON SHARE
Basic earnings per share (EPS) excludes dilution and is computed by dividing
net income by the weighted average of common shares outstanding for the
period. Diluted EPS reflects the potential dilution that could occur if
securities or other common stock equivalents (convertible preferred stock,
convertible debt, warrants to purchase common stock and common stock options)
were exercised or converted into common stock. The following table provides a
reconciliation of the numerators and denominators of the basic and diluted
per-share computations:
F-40
2010 2009 2008
---- ---- ----
Net income (loss) - available to
common shareholders-basic $ 8,950,973 $(41,400,758) $(8,128,230)
Add: Conversion of note payable 162,326 - -
Less: Conversion of derivative
instruments (20,130,098) - -
----------- ------------ -----------
Net income (loss) - diluted $(11,016,799) $(31,830,304) $(8,128,230)
Weighted average number of
shares - basic 202,102,859 133,535,050 117,060,866
Incremental shares from:
Potentially dilutive shares 21,414,912 - -
Conversion of note payable 2,760,142 - -
----------- ------------ -----------
Weighted average number of
shares - diluted 226,277,913 133,535,050 117,060,866
============ ============ ===========
Earnings per share - basic $ 0.04 $ (0.31) $ (0.07)
============ ============ ===========
Earnings per share - diluted $ (0.05) $ (0.31) $ (0.07)
============ ============ ===========
Included in the above computations of weighted-average shares for diluted net
loss per share were options and warrants to purchase 21,414,912 shares of
common stock as of September 30, 2010. Excluded from the above computations
of weighted-average shares for diluted net loss per share were options and
warrants to purchase 23,384,797, and 14,488,124 shares of common stock as of
September 30, 2009 and 2008, respectively. These securities were excluded
because their inclusion would have an anti-dilutive effect on net loss per
share.
13. SEGMENT REPORTING
Codification 280-10, "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. This topic also establishes standards for related
disclosures about products and services and geographic areas. Operating
segments are identified as components of an enterprise about which separate
discrete financial information is available for evaluation by the chief
operating decision maker, or decision-making group, in making decisions how
to allocate resources and assess performance. The Company's chief decision
maker, as defined under this topic, 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.
F-41
14. QUARTERLY INFORMATION (UNAUDITED)
The following quarterly data are derived from the Company's consolidated
statements of operations.
Financial Data
Fiscal 2010
Three Three Three Three
months months months months
ended ended ended ended Year Ended
December 31, March 31, June 30, September 30, September 30
2009 2010 2010 2010 2010
----------- --------- ----------- ------------- --------------
Revenue $ 30,000 $ 30,600 $ 30,900 $ 61,800 $ 153,300
Operating expenses 4,282,849 5,350,958 3,424,959 5,654,787 18,713,553
Non operating expenses
(income) (72,099) (56,167) (38,423) (33,221) (199,910)
Gain/loss on derivative
instruments 23,340,267 4,519,672 2,754,512 (1,770,679) 28,843,772
Modification of warrants - (1,432,456) - (100,000) (1,532,456)
---------- ---------- ------------ ----------- -----------
Net loss available to
common shareholders $19,159,517 $(2,176,975) $ (601,124) $(7,430,445) $ 8,950,973
=========== =========== ============ =========== ===========
Net loss per
share-basic $ 0.10 $ (0.01) $ 0.00 $ (0.04) $ 0.04
=========== =========== ============ =========== ===========
Weighted average
shares-basic 194,959,814 204,173,750 204,592,051 204,757,898 202,102,859
Net loss per
share-diluted $ 0.02 $ (0.03) $ (0.01) $ (0.04) $ (0.05)
=========== =========== ============ =========== ===========
Weighted average
shares-diluted 256,198,162 258,251,010 231,827,525 228,932,952 226,277,913
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
Non operating 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)
Modification of
warrants - - (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 $ (0.02) $ (0.02) $ (0.05) $ (0.19) $ (0.31)
=========== =========== ============ =========== ===========
Net loss per
share-diluted $ (0.02) $ (0.02) $ (0.05) $ (0.19) $ (0.31)
=========== =========== ============ =========== ===========
Weighted average
shares-basic and
diluted 122,215,334 124,701,667 130,076,656 156,916,920 133,535,050
F-42
The Company has experienced large swings in its quarterly gains and losses
in 2010 and 2009. These swings are caused by the changes in the fair value
of the 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 date of the filing. The Company
received a $733,437 grant under The Patient Protection and Affordable Care
Act of 2010 (PPACA). The grant was related to three of the Company's
projects, including the Phase III trial of Multikine. The PPACA provides
small and mid-sized biotech, pharmaceutical and medical device companies with
up to a 50% tax credit for investments in qualified therapeutic discoveries
for tax years 2009 and 2010, or a grant for the same amount tax-free. The tax
credit/grant program covers research and development costs from 2009 and 2010
for all qualified "therapeutic discovery projects."
On December 10, 2010, the Company entered into a sales agreement with
McNicoll Lewis & Vlak LLC (MLV) relating to shares of common stock which have
been registered by means of a shelf registration statement filed in July
2009. The Company may offer and sell shares of its common stock, having an
aggregate offering price of up to $30 million, from time to time through MLV
acting as agent and/or principal.
Sales of the Company's common stock, if any, may be made in sales deemed to
be "at-the-market" equity offerings as defined in Rule 415 promulgated under
the Securities Act of 1933, as amended, including sales made directly on or
through the NYSE Amex, the existing trading market for the Company's common
stock, sales made to or through a market maker other than on an exchange or
otherwise, in negotiated transactions at market prices prevailing at the time
of sale or at prices related to such prevailing market prices, and/or any
other method permitted by law. MLV will act as sales agent on a best efforts
basis. The Company is not required to sell any shares to McNicoll Lewis &
Vlak and McNicoll Lewis & Vlak is not required to sell any shares on the
Company's behalf or purchase any of its shares for its own account.
McNicoll Lewis & Vlak will be entitled to a commission in an amount equal to
the greater of 3% of the gross proceeds from each sale of the shares, or
$0.025 for each share sold, provided, that, in no event will McNicoll Lewis &
Vlak receive a commission greater than 8.0% of the gross proceeds from the
sale of the shares. In connection with the sale of the common stock on behalf
of the Company, McNicoll Lewis & Vlak may be deemed to be an "underwriter"
within the meaning of the Securities Act of 1933, as amended, and the
compensation of McNicoll Lewis & Vlak may be deemed to be underwriting
commissions or discounts.
F-43
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 10th day of December 2010.
CEL-SCI CORPORATION
By: /s/ Maximilian de Clara
------------------------------
Maximilian de Clara, President
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 December 10, 2010
----------------------
Maximilian de Clara
/s/ Geert R. Kersten Chief Executive, Principal
---------------------- Accounting, Principal Financial
Geert R. Kersten Officer and a Director December 10, 2010
/s/ Alexander G. Esterhazy Director December 10, 2010
-------------------------
Alexander G. Esterhazy
/s/ C, Richard Kinsolving Director December 10, 2010
-------------------------
Dr. C. Richard Kinsolving
/s/ Peter R. Young Director December 10, 2010
-------------------------
Dr. Peter R. Young
CEL-SCI CORPORATION
FORM 10-K
EXHIBITS