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, 2007.
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 of (I.R.S.Employer
incorporation or organization) Identification No.)
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 if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. (Check one):
Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [X]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-25 of the Exchange Act): [ ] Yes [X] No
The aggregate market value of the voting stock held by non-affiliates of the
Registrant, based upon the closing sale price of the common stock on March 31,
2007, as quoted on the American Stock Exchange, was approximately $60,900,000.
As of November 30, 2007, the Registrant had 115,729,129 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 lead product, Multikine(R), is being developed for the treatment
of cancer. It is the first of a new class of cancer immunotherapy drugs called
Immune SIMULATORs. It simulates the activities of a healthy person's immune
system, which battles cancer every day. Multikine is multi-targeted; it is the
only cancer immunotherapy that both kills cancer cells in a targeted fashion and
activates the general immune system to destroy the cancer. We believe 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 comprehensive
immunotherapy, incorporating both active and passive immune activity. A
comprehensive immunotherapy most closely resembles the workings of the natural
immune system in the sense that it works on multiple fronts in the battle
against cancer. A comprehensive immunotherapy causes a direct and targeted
killing of the tumor cells and activates the immune system to produce a more
robust and sustainable anti-tumor response. Multikine is designed to target the
tumor micro-metastases that are mostly responsible for treatment failure. The
basic concept is to add Multikine to the current cancer treatments with the goal
of making the overall cancer treatment more successful. Phase II data indicated
that Multikine treatment resulted in a substantial increase in the survival of
patients. The lead indication is advanced primary (previously untreated) head &
neck cancer (about 600,000 new cases per annum). Since Multikine is not tumor
specific, it may also be applicable in many other solid tumors.
Multikine is the first immunotherapeutic agent being developed as a
first-line treatment for cancer. It is administered prior to any other cancer
therapy because that is the period when the anti-tumor immune response can still
be fully activated. Once the patient has had surgery or has received radiation
and/or chemotherapy, the immune system is severely weakened and is less able to
mount an effective anti-tumor immune response. To date, other immunotherapies
have been administered later in cancer therapy (i.e., after radiation,
chemotherapy, surgery).
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.
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.
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(vi) A histopathology study showed that the tumor load in Multikine treated
patients was reduced by nearly 50% as compared to tumors from control
patients in the same pathology study.
(vii) The tumors of all of the patients in this Phase II trial who
responded to Multikine treatment were devoid of the cell surface
marker for HLA Class II. This finding, if confirmed in this global
Phase III clinical trial, may lead to the establishment of a marker
for selecting the patient population best suited for treatment with
Multikine.
(viii) In a Phase II study, using the same drug regimen as will be used in
the Phase III study, the addition of Multikine as first-line treatment
prior to the standard of care treatment resulted in a 33% improvement
in the median overall survival at 3 1/2 years post-surgery, when
compared to the results of 55 OSCC clinical trials published in the
scientific literature between 1987 and 2007.
CEL-SCI also owns a pre-clinical technology called L.E.A.P.S.TM (Ligand
Epitope Antigen Presentation System). The lead product derived from this
technology is the CEL-1000 peptide which has shown protection in animals against
herpes, malaria, viral encephalitis and cancer.
MULTIKINE
Multikine is the first of a new class of cancer immunotherapy drugs called
Immune SIMULATORs. It simulates the activities of a healthy person's immune
system, which battles cancer every day. Multikine is multi-targeted; it is the
only cancer immunotherapy that both kills cancer cells in a targeted fashion and
activates the general immune system to destroy the cancer.
Multikine is a new type of immunotherapy in that it is a comprehensive
immunotherapy, incorporating both active and passive immune activity. A
comprehensive immunotherapy most closely resembles the workings of the natural
immune system in the sense that it works on multiple fronts in the battle
against cancer. A comprehensive immunotherapy causes a direct and targeted
killing of the tumor cells and activates the immune system to produce a more
robust and sustainable anti-tumor response.
Multikine 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
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 first-line therapy for advanced
primary head and neck cancer. This is a deadly cancer in which there is 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 the cancer will recur and from which metastases will develop.
Multikine unleashes and then harnesses and enhances the immune system's ability
to target and kill those tumor cells before they can cause recurrence or
metastasize. It is expected that multiple indications will be pursued over time
since it is the same principle for different cancers.
Summary of Key Multikine
Responses: The following efficacy was seen in the last Phase II study
conducted with Multikine. This study used the same treatment protocol as will be
used in the Phase III study:
- 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%) over 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.
4
- Average of 50% reduction in tumor cells: The 3 week Multikine
treatment regimen used in the last Phase II study killed, on average,
about half of the cancer cells before the start of standard therapy
like surgery, radiation and chemotherapy (as determined by
histopathology).
- 12% complete response: In 12 % of patients the tumor was completely
eliminated after only a 3 week treatment with Multikine (as determined
by histopathology).
- 8% increase in the Local Regional Control (LRC): At 24 months
follow-up after surgical resection of the tumor, patients treated with
Multikine had an 8% better LRC rate than the 2 year median LRC rate
reported in the scientific literature for the same cancer patient
population in 55 clinical trials conducted between 1987 and 2007.
Local Regional control means the avoidance of tumor recurrence above
the clavicle.
History of Multikine
Multikine has been tested in over 200 patients in clinical trials conducted
in the U.S., Canada, Europe and Israel. Most of these patients were head and
neck cancer patients, but some studies were also conducted in prostate cancer
patients, HIV-infected patients and HIV-infected women with Human Papilloma
Virus ("HPV")-induced cervical dysplasia, the precursor stage before the
development of cervical cancer. The safety profile was found to be very good and
CEL-SCI believes that the clinical data suggests that further studies are
warranted.
The objective of CEL-SCI scientists is to use Multikine as an adjunct
(additive) therapy to the existing treatment of previously untreated head & neck
cancer patients with the goal of killing cancer cells and activating the general
immune system to destroy the cancer. However, pursuant to FDA regulations,
CEL-SCI was required to test the drug first for safety in locally recurrent,
locally metastatic head and neck cancer patients who had failed other cancer
therapies. This dose escalation study was started in 1995 at several centers in
Canada and the US where 16 patients were enrolled at 4 different dosage levels.
The study ended in 1998 and showed Multikine to be safe and well tolerated at
all dose levels.
Because CEL-SCI scientists have determined that patients with previously
untreated disease would most likely benefit more from Multikine treatment,
CEL-SCI started a safety trial in Canada in 1997 in advanced primary head & neck
cancer patients who had just recently been diagnosed with head & neck cancer.
This study ultimately enrolled 28 patients, also at 4 different dosage levels,
and ended in late 1999. Halfway through this study, CEL-SCI launched a number of
Phase II studies in advanced primary head & neck cancer to determine the best
dosage, best route of administration and best frequency of administration of
Multikine. Those studies involved 19 patients in Israel (1997 - 2000), 30
patients in Poland and the Czech Republic (1999 - 2000), and 94 patients (half
treated with Multikine and the other half disease-matched cancer patients served
as control) in Hungary (1999 - 2003). The Hungarian trial compared the control
group (receiving only conventional cancer therapy) to the Multikine treated
5
patients (receiving Multikine prior to conventional therapy) by histopathology
and immunohistochemistry. The results of these studies were published in
peer-reviewed scientific journals and/or presented at scientific meetings. The
studies that have not yet been published were conducted in support of
Multikine's safety and clinical utility.
The above studies, which are all completed, indicate that Multikine was
safe and well tolerated at all dose levels investigated. The studies also showed
partial and complete tumor responses following Multikine treatment at the best
treatment regimen combinations as well as tumor necrosis (destruction) and
fibrosis (as determined by histopathology).
The initial results of the Hungarian study were published in December 2003.
Data from a Phase I/II clinical trial in fifty-four (54) advanced primary head
and neck cancer patients (half treated, half control), the first part of the
Hungarian study, were published in The Laryngoscope, December 2003, Vol.113
(12). The title of the article is "The Effect of Leukocyte Interleukin Injection
(MULTIKINE) on the Peritumoral and Intratumoral Subpopulation of Mononuclear
Cells and on Tumor Epithelia: A Possible New Approach to Augmenting Sensitivity
to Radiation Therapy and Chemotherapy in Oral Cancer - A Multi Center Phase I/II
Clinical Trial".
The data demonstrate that treatment with Multikine rendered a high
proportion of the tumor cell population highly susceptible to radiation therapy.
This finding represents a major advance in the treatment of cancer since, under
current standard therapy, only about 5%-10% of the cancer cells are thought to
be susceptible to radiation therapy at any one point in time.
The increased sensitivity of the Multikine-treated tumors to radiation was
derived from a dramatic increase in the number of proliferating (those that are
in cell cycle) cancer cells. Following Multikine treatment, the great majority
of the tumor cells were in a proliferative state, as measured by the
well-established cell proliferation marker Ki67. The control patients (not
treated with Multikine) had only low expression (near background) of the same
proliferation marker (Ki67) in this study. These findings were statistically
significant (p<0.05, ANOVA).
This is an important finding because the ability of radiation therapy (and
chemotherapy) to kill tumor cells is dependent, in large part, on the
proliferative state of the tumor cells at the time of radiation (and
chemotherapy) treatment. As seen in the control group in this study, and also in
many other tumor types, the great majority of tumor cells (about 90% or more)
are in a "resting" state (non-proliferating). It is generally accepted that
tumor cells in the "resting" state are by-and-large resistant to radiation and
chemotherapy. However, Multikine treatment induced a reversal of this
non-proliferative state of the tumor cells and caused the great majority of the
tumor cells to enter into the proliferative state, thereby rendering the tumor
highly susceptible to radiation therapy (and chemotherapy).
The results of the Israeli trial have been published in Archives of
Otolaryngology - Head & Neck Surgery, August 2003, Vol.129. This paper on 12
patients treated by Dr. Feinmesser shows positive safety, tumor response and
clinical outcome data.
Results from the Multikine Phase II clinical trials were published in June
2004 at the 40th ASCO Annual Meeting. The study involved 39 head & neck cancer
patients, 19 of whom were treated with CEL-SCI's immunotherapy drug Multikine
6
prior to surgery and radiation. The other 20 patients served as matched
controls, meaning that they did not receive Multikine prior to surgery and
radiation. In a comparison pathology study of the tumors, Multikine treatment
caused a significant shift in the ratio of key immune cells that infiltrate the
tumor. The cancer patients treated with Multikine were shown to have much higher
rate of tumor cell killing, resulting in a 42% overall response rate, including
12% complete responses.
The tumors of the 39 head & neck cancer patients were analyzed by three
independent pathologists, blinded to the study. Of the 19 Multikine treated
patients in this study, 2 patients (12%) had no remaining cancer cells, another
2 patients (12%) had a reduction in the cancer cell mass greater than 50% and an
additional 4 patients (21%) had a reduction in the cancer cell mass of more than
30%. The objective response rate in this trial was 21%, with an overall response
rate of 42%, as determined by pathology.
This study, which used a three-week, non-toxic treatment with Multikine,
caused a shift from a low CD4/CD8 cell ratio (less than one CD4 cell for each
CD8 cell) to a high (over 2.5 - 3) CD4/CD8 cell ratio (2.5 - 3 CD4 cells for
each CD8 cell) in the tumor. This indicates that Multikine treatment shifts the
immune response from a mainly CD8 cell anti-tumor response to a predominately
CD4 anti-tumor response. Both CD4 and CD8 are key cells of the immune system.
We believe the change in the immune response from CD8 to CD4 cells is very
important for the cancer patient because the cancer cells seem to have learned
to shut down the CD8 anti-tumor immune response. This "shut-down" of the CD8
cells was evident in the tumors of the control (non-Multikine treated) group.
The control group had predominately CD8 cell infiltrate which was inactive
against the tumor. The Multikine treated group, on the other hand, had a
predominately CD4 cell infiltrate. The tumor was unable, or less able, to shut
down the Multikine induced CD4 cell immune response and, as a result thereof,
the cancer patients treated with Multikine were shown to have a much higher rate
of tumor cell killing.
In May 2006, CEL-SCI presented long-term survival data from its last Phase
II clinical trial in patients with head and neck cancer (oral squamous cell
carcinoma -- OSCC) treated with its anti-cancer drug Multikine. 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. The data were presented at
the "Vaccine Discovery and Commercialization" conference in Philadelphia, PA.
The long-term survival data were collected by the treating physicians in a
follow-up study of 22 patients with advanced untreated primary tumors, who were
enrolled in the Multikine Phase II clinical trial. The Multikine treatment
regimen was administered to these patients prior to the standard of care
treatment (i.e., surgery + radiation or surgery + chemo-radiation). Informed
consent was obtained from all patients in the clinical trial and from 19
patients for the long-term follow-up study. Investigational Review Board /
Ethics Committee approval was provided before the initiation of the clinical
trial and again for the data collection in the follow-up study. The follow-up
study questionnaire assessed the overall survival and the local regional control
of the Multikine treated patients in this Phase II trial.
7
Documented data were available for 19 of the 22 patients in the follow-up
portion of this clinical trial. Of the three patients who could not be evaluated
in the follow-up study, one patient was known to be alive, but failed to give
informed consent, and the other two were lost to follow-up. One patient died the
day after definitive surgery, unrelated to Multikine therapy.
The median overall survival (calculated by including death from any cause
of patients in the trial, even deaths not related to the disease) of the 19
evaluable patients in the follow-up portion of this clinical trial was 63% at a
median follow-up of 40 months post-surgery. The results of the published
scientific literature (55 OSCC clinical trials published between 1987 and 2007)
document that survival at 3 1/2 years is approximately 47% following standard of
care treatment. The addition of Multikine to the standard of care treatment
resulted in a 33% increase in overall survival over the results published in the
literature.
Multikine first-line treatment also resulted in a 2-year local regional
control (LRC) rate of 79%, as compared to the median 2-year LRC of 73% reported
in the same 39 scientific publications. Multikine treatment resulted in an
improvement over the published local regional control rate. It is clinically
recognized that recurrence of disease in head & neck cancer is associated with a
very poor prognosis.
Multikine treatment did not result in any severe adverse events (SAE) in
this Phase II clinical trial. No SAEs related to Multikine have been reported in
other trials conducted with Multikine either.
The data from CEL-SCI's Multikine Phase II clinical trial are thought to be
directly applicable to CEL-SCI's planned global Phase III clinical trial, as the
Multikine treatment regimen planned in the Phase III trial is identical to that
of the Multikine treatment in the Phase II Clinical trial.
In January 2007, CEL-SCI received a no objection letter from the FDA
indicating that it could proceed with the Phase III protocol with Multikine in
head & neck cancer patients. The protocol for the Phase III clinical trial was
designed to develop conclusive evidence of the safety and efficacy of Multikine
in the treatment of advanced primary squamous cell carcinoma of the oral cavity.
CEL-SCI had previously received a "no objection" letter from the Canadian
Biologics and Genetic Therapies Directorate which enabled CEL-SCI to begin its
Phase III clinical trial in Canada.
The Phase III trial will test the hypothesis that Multikine administered
prior to the current standard therapy for head and neck cancer patients
(surgical resection of the tumor and involved lymph nodes followed by
radiotherapy or radiotherapy and concurrent chemotherapy) will 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. 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.
8
In May 2005, CEL-SCI was issued a new U.S. patent covering Multikine. The
patent, No. 6,896,879, relates to a new method for pre-sensitizing cancer with
Multikine prior to therapeutic treatment such as chemotherapy, radiation therapy
or immunotherapy.
Multikine has also been tested in 15 HIV-infected patients (1998 - 1999) in
California. This small study found Multikine to be safe in the HIV-infected
population and showed preliminary evidence of improved delayed type
hypersensitivity response to recall antigens. The results of this study were
reported in Antiviral Therapy 5 (Supplement), 2000.
Another study at the Thomas Jefferson Medical Center (1998) used very small
amounts of Multikine to determine the feasibility of injecting Multikine into
the prostate of 5 hormonal therapy refractive prostate cancer patients scheduled
for prostatectomy. Although deemed safe by the investigators, Multikine
administration in this trial directly into the prostate (under ultrasound
guidance) resulted in occasional mild dysuria and mild increase in urinary
frequency. Two out of the five treated cases had an inflammatory response in the
prostate and a third case had fibrosis. CEL-SCI believes that more Multikine
injections will need to be given to achieve a potential outcome as seen in head
& neck cancer. None of the prostate cancer patients received more than half of
the amounts given to the head & neck cancer patients. Also, no testing was done
at the time to determine if Multikine would enhance susceptibility to radiation
therapy in the prostate. The results of this trial were published in Seminars in
Oncology Vol. 26 (4) (August) 1999.
In May 2001, CEL-SCI also started a Phase I clinical trial at the
University of Maryland Biotechnology Institute (UMBI). The focus of this study
was HIV-infected women with Human Papilloma Virus (HPV)-induced cervical
dysplasia, the precursor stage before the development of cervical cancer. The
goal of the study was to obtain safety and preliminary efficacy data on
Multikine as a treatment for pre-cancerous lesions of the cervix (dysplasia).
Most cervical dysplasia and cancer is due to infection with HPV. The rationale
for using Multikine in the treatment of cervical dysplasia/cancer is that
Multikine may safely boost the patients' immune systems to the point where their
immune systems can eliminate the virally-induced cancer. Cervical cancer is the
second leading cause of cancer death in women worldwide.
The HIV-infected women with HPV-induced cervical dysplasia were chosen as a
study group because of the high morbidity and low success rate of current
surgical therapies. Since HIV infection results in immune suppression,
HPV-induced cervical dysplasia follows a more malignant and aggressive course of
disease in such women. Co-infection with HPV is common in HIV-positive women
(about 83%) and cervical cancer is considered an AIDS-defining illness.
HPV infection is also a leading health problem in non HIV-infected American
college-age women. A large concern among women who have HPV-induced cervical
dysplasia is that the repeated surgical procedures will lead to a hysterectomy
and the inability to bear children.
At the March 2002 33rd Annual Meeting of the Society of Gynecological
Oncologists in Miami, Florida, scientists from UMBI and CEL-SCI presented data
from this trial in HIV-infected women with HPV induced cervical dysplasia. The
results were as follows: 8 patients had been treated with no major toxicity. The
9
lower dosage group had 3 out of 5 patients resolved/improved with 2 out of 5
patients with no change in their cervical dysplasia status as compared to the
patient's own baseline disease. The higher dosage group had 2 out of 3 patients
who improved and 1 out of 3 patients with no change. The changes in disease
status were determined by both Colposcopy and Histology.
Subsequent HPV testing during 2001 and 2002 of the first three patients
revealed the elimination of HPV virus types (using in situ PCR) following
treatment with Multikine and ranged from 54% to 84% (Avg = 68%) reduction in HPV
virus in the cervical tissue of Multikine treated HIV/HPV co-infected patients.
The study was closed due to the inability to enroll further patients.
CEL-SCI's future studies in the HPV-induced cervical dysplasia area will
only be conducted with grant or government funds as CEL-SCI plans to devote its
resources to head and neck cancer, the area where it has the most data.
In November 2000, CEL-SCI entered into a development, supply and
distribution agreement with Orient Europharma of Taiwan. The agreement gives
Orient Europharma the exclusive marketing rights to Multikine for all cancer
indications in Taiwan, Singapore, Hong Kong and Malaysia. The agreement provides
for Orient Europharma to fund the clinical trials needed to obtain marketing
approvals in the four countries for head and neck cancer, naso-pharyngeal cancer
and potentially cervical cancer, which are very prevalent in Far East Asia.
CEL-SCI may use the clinical data generated in these trials to support
applications for marketing approvals for Multikine in other parts of the world.
Under the agreement, CEL-SCI will manufacture Multikine and Orient
Europharma will purchase the product from CEL-SCI for distribution in the
territory. Both parties will share in the revenue from the sale of Multikine. As
of September 30, 2007, Orient Europharma had not started any clinical trials and
CEL-SCI agreed in December 2007 with Orient Europharma, that Orient EuroPharma
will participate in the global Phase III clinical trial by enrolling and paying
for a substantial number of patients in its territory. Orient EuroPharma will
also purchase Multikine from CEL-SCI for these patients at a rate established in
the November 2000 agreement.
Pursuant to an agreement dated May 2003, Eastern Biotech will receive a
royalty equal to 2% of CEL-SCI's net sales of Multikine and CEL-1000 prior to
May 30, 2033.
Since 1985, Multikine has been well tolerated in clinical studies involving
over 200 patients. Forty-eight patients were treated in the United States in
accordance with clinical trials authorized by the FDA. The remaining patients
were treated outside of the United States in accordance with protocols
authorized by comparable health regulatory authorities in the countries where
the patients were treated. All the clinical trials were conducted in accordance
with the Declaration of Helsinki (1985), and informed consent was obtained from
each patient volunteer. This process is the standard procedure for the conduct
of human clinical trials.
Proof of efficacy for anti-cancer drugs is a lengthy and complex process.
At this 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
10
would be necessary before required government approvals are obtained. It should
be noted that other companies and research teams are actively involved in
developing treatments and/or cures for cancer, and accordingly, there can be no
assurance that CEL-SCI's research efforts, even if successful from a medical
standpoint, can be completed before those of its competitors.
T-CELL MODULATION PROCESS
CEL-SCI's patented T-cell Modulation Process uses "heteroconjugates" to
direct the body to choose a specific immune response. The heteroconjugate
technology, referred to as L.E.A.P.S. (Ligand Epitope Antigen Presentation
System), is intended to selectively stimulate the human immune system to more
effectively fight bacterial, viral and parasitic infections as well as
autoimmune, allergies, transplantation rejection and cancer, when it cannot do
so on its own. Administered like vaccines, L.E.A.P.S. combines T-cell binding
ligands with small, disease associated, peptide antigens and may provide a new
method to treat and prevent certain diseases.
The ability to generate a specific immune response is important because
many diseases are often not combated effectively due to the body's selection of
the "inappropriate" immune response. The capability to specifically reprogram an
immune response may offer a more effective approach than existing vaccines and
drugs in attacking an underlying disease.
Using the LEAPS technology, CEL-SCI discovered a peptide, named CEL-1000,
which is currently being tested in animals for the prevention/treatment of avian
flu, herpes simplex, malaria, viral encephalitis, smallpox, vaccinia and a
number of other indications.
CEL-SCI received two grants in April 2003, one grant in May 2003, and one
grant in September 2003, all from the National Institutes of Health (NIH). The
first grant totaling $1,100,000 was awarded to Northeastern Ohio Universities
College of Medicine (NEOUCOM) with CEL-SCI as a subcontractor. The grant is for
a period of three years and is intended to support the development of CEL-SCI's
new compound, CEL-1000, as a possible treatment for viral encephalitis, a
potentially lethal inflammation of the brain. The grant was awarded following a
peer review process and will fund pre-clinical studies leading up to toxicology
studies. The second grant, totaling $134,000 and awarded to CEL-SCI with Johns
Hopkins Medical Institutions as a subcontractor, is a Phase I Small Business
Innovation Research (SBIR) grant for the further development of a potential
treatment for autoimmune myocarditis, a heart disease. The third grant,
announced on May 7, 2003 for $162,000 was awarded to CEL-SCI with NEOUCOM as a
sub-contractor, and is a Phase I SBIR grant for the further development of
CEL-1000 against Herpes Simplex. The fourth grant, totaling $104,000 was awarded
to CEL-SCI with the University of Nebraska as a sub-contractor, and is a Phase I
SBIR grant from the National Institute of Allergy and Infectious Diseases
(NIAID), NIH, for the development of CEL-1000 as a potential therapeutic and
prophylactic agent against vaccinia and smallpox infections as a single agent
and as an adjuvant for vaccinia vaccines. Vaccinia is the virus used in the
smallpox vaccine. The grant funds are disbursed for the necessary expenses
incurred by CEL-SCI for each specific grant. CEL-SCI submits its expenses by
accessing the Division of Payment Management, a Health and Human Services
program support center, when CEL-SCI is the primary contractor, or, when CEL-SCI
is a sub-contractor, by invoicing the primary contractor of the grant, on a
monthly basis, for expenses incurred for the grant.
11
The viral encephalitis grant ended on March 31, 2007 leaving no funds
remaining as of September 30, 2007. The other three grants were closed out
during fiscal year 2005. As of September 30, 2007, CEL-SCI had received
approximately $719,800 from these grants.
In May 2005, CEL-SCI scientists, in collaboration with scientists from the
laboratory of Dr. Noel Rose at The Johns Hopkins University Department of
Pathology, presented animal data showing that pretreatment and early therapy of
Experimental Autoimmune Myocarditis with a compound developed by CEL-SCI
resulted in significant reduction in heart enlargement and disease associated
histopathological changes. The compound used to achieve these results was
derived from CEL-SCI's patented L.E.AP.S. technology.
The protection observed was statistically significant for both pretreatment
and early therapy. This protective effect was shown to be antigen-specific and
was associated with an increase in IL-13 in both the sera and heart tissue and
of IL-1a in the sera of the protected mice. Other studies from Dr. Rose's
laboratory with IL-13 knockout mice (mice missing the IL-13 gene) demonstrate
the importance of IL-13 in this model of Experimental Autoimmune Myocarditis and
corroborated these findings.
During the last year CEL-SCI evaluated the use of CEL-1000 as a vaccine
adjuvant with both hepatitis B Virus antigen and an antigen from Bird Influenza.
These findings were reported at two scientific conferences in April and May
2007.
As of November 30, 2007 CEL-SCI was involved in a number of pre-clinical
studies with respect to its L.E.A.P.S. technology. CEL-SCI intends to continue
to prepare and submit scientific papers to disclose future results for CEL-1000
and the L.E.A.P.S. technology and to continue to apply for government grants to
help fund future studies. However CEL-SCI does not know what obstacles it will
encounter in future pre-clinical and clinical studies involving its L.E.A.P.S.
technology.
RESEARCH AND DEVELOPMENT
Since 1983, and through September 30, 2007, approximately $55,218,000 has
been expended on CEL-SCI-sponsored research and development, including
approximately $2,529,000, $1,897,000, and $2,230,000 respectively during the
years ended September 30, 2007, 2006 and 2005.
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.
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GOVERNMENT REGULATION
New drug development and approval process
Regulation by governmental authorities in the United States and other
countries is a significant factor in the manufacture and marketing of biological
and other drug products and in ongoing research and product development
activities. CEL-SCI's products will require regulatory approval by governmental
agencies prior to commercialization. In particular, these products are subject
to rigorous preclinical and clinical testing and other premarket approval
requirements by the FDA and regulatory authorities in other countries. In the
United States, various statutes and regulations also govern or influence the
manufacturing, safety, labeling, storage, record keeping and marketing of
pharmaceutical and biological drug products. The lengthy process of seeking
these approvals, and the subsequent compliance with applicable statutes and
regulations, require the expenditure of substantial resources. CEL-SCI believes
that it is currently in compliance with applicable statutes and regulations that
are relevant to its operations. CEL-SCI has no control, however, over compliance
by its manufacturing and other partners.
The FDA's statutes, regulations, or policies may change and additional
statutes or government regulations may be enacted which could prevent or delay
regulatory approvals of biological or other drug products. CEL-SCI cannot
predict the likelihood, nature or extent of adverse governmental regulation that
might arise from future legislative or administrative action, either in the U.S.
or abroad.
Regulatory approval, when and if obtained, may be limited in scope. In
particular, regulatory approvals will restrict the marketing of a product to
specific uses. Further, approved biological and other drugs, as well as their
manufacturers, are subject to ongoing review. Discovery of previously unknown
problems with these products may result in restrictions on their manufacture,
sale or use or in their withdrawal from the market. Failure to comply with
regulatory requirements may result in criminal prosecution, civil penalties,
recall or seizure of products, total or partial suspension of production or
injunction, as well as other actions affecting CEL-SCI. Any failure by CEL-SCI
or its manufacturing and other partners to obtain and maintain, or any delay in
obtaining, regulatory approvals could materially adversely affect CEL-SCI's
business.
The process for new drug approval has many steps, including:
Preclinical testing
Once a biological or other drug candidate is identified for development,
the drug candidate enters the preclinical testing stage. During preclinical
studies, laboratory and animal studies are conducted to show biological activity
of the drug candidate in animals, both healthy and with the targeted disease.
Also, preclinical tests evaluate the safety of drug candidates. These tests
typically take approximately two years to complete. Preclinical tests must be
conducted in compliance with good laboratory practice regulations. In some
cases, long-term preclinical studies are conducted while clinical studies are
ongoing.
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Investigational new drug application.
When the preclinical testing is considered adequate by the sponsor to
demonstrate the safety and the scientific rationale for initial human studies,
an investigational new drug application (IND) is filed with the FDA to seek
authorization to begin human testing of the biological or other drug candidate.
The IND becomes effective if not rejected by the FDA within 30 days after
filing. The IND must provide data on previous experiments, how, where and by
whom the new studies will be conducted, the chemical structure of the compound,
the method by which it is believed to work in the human body, any toxic effects
of the compound found in the animal studies and how the compound is
manufactured. All clinical trials must be conducted under the supervision of a
qualified investigator in accordance with good clinical practice regulations.
These regulations include the requirement that all subjects provide informed
consent. In addition, an institutional review board (IRB), comprised primarily
of physicians and other qualified experts at the hospital or clinic where the
proposed studies will be conducted, must review and approve each human study.
The IRB also continues to monitor the study and must be kept aware of the
study's progress, particularly as to adverse events and changes in the research.
Progress reports detailing the results of the clinical trials must be submitted
at least annually to the FDA and more frequently if adverse events occur. In
addition, the FDA may, at any time during the 30-day period after filing an IND
or at any future time, impose a clinical hold on proposed or ongoing clinical
trials. If the FDA imposes a clinical hold, clinical trials cannot commence or
recommence without FDA authorization, and then only under terms authorized by
the FDA. In some instances, the IND process can result in substantial delay and
expense.
Some limited human clinical testing may also be done under a physician's
IND that allows a single individual to receive the drug, particularly where the
individual has not responded to other available therapies. A physician's IND
does not replace the more formal IND process, but can provide a preliminary
indication as to whether further clinical trials are warranted, and can, on
occasion, facilitate the more formal IND process.
Clinical trials are typically conducted in three sequential phases, but the
phases may overlap.
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
14
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.
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.
15
Among the conditions for NDA or BLA approval is the requirement that each
prospective manufacturer's quality control and manufacturing procedures conform
to current good manufacturing practice standards and requirements (cGMPs).
Manufacturing establishments are subject to periodic inspections by the FDA and
by other federal, state or local agencies.
COMPETITION AND MARKETING
Many companies, nonprofit organizations and governmental institutions are
conducting research on cytokines. Competition in the development of therapeutic
agents incorporating cytokines is intense. Large, well-established
pharmaceutical companies are engaged in cytokine research and development and
have considerably greater resources than CEL-SCI has to develop products.
Licensing and other collaborative arrangements between governmental and other
nonprofit institutions and commercial enterprises, as well as the seeking of
patent protection of inventions by nonprofit institutions and researchers, could
result in strong competition for CEL-SCI. Any new developments made by such
organizations may render CEL-SCI's licensed technology and know-how obsolete.
Several biotechnology companies are producing compounds that utilize
cytokines. However, CEL-SCI believes that its main advantage lies in two areas
and that those two areas will allow it to be successful. 1) Multikine is given
prior to surgery, radiation and/or chemotherapy, a time when the immune system
can still be activated effectively. Other companies give their immunotherapy
drugs after these cancer treatments. At that time the immune system is already
so weakened that it can no longer mount a good 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 close to impossible for someone to
copy Multikine.
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.
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
16
in foreign countries is normal industry practice since these studies can often
be completed in less time and are less expensive than studies conducted in the
U.S. Conducting clinical studies in foreign countries is also beneficial since
CEL-SCI will need the approval from a foreign country prior to the time CEL-SCI
can market any of its drugs in the foreign country. However, since the results
of these clinical trials may not be accepted by the FDA, competitors conducting
clinical trials approved by the FDA may have an advantage in that the products
of such competitors are further advanced in the regulatory process than those of
CEL-SCI. CEL-SCI is conducting its trials in compliance with internationally
recognized standards. By following these standards, CEL-SCI anticipates
obtaining acceptance from world regulatory bodies, including the FDA.
EMPLOYEES
As of November 30, 2007, CEL-SCI had 26 employees. Five employees are
involved in administration, 19 employees are involved in manufacturing and 2
employees are involved in general research and development with respect to
CEL-SCI's products.
ITEM 1A. RISK FACTORS
Investors should be aware that the risks described below could adversely
affect the price of CEL-SCI's common stock.
Risks Related to CEL-SCI
Since CEL-SCI Has Earned Only Limited Revenues and Has a History of Losses,
CEL-SCI Will Require Additional Capital to Remain in Operation.
CEL-SCI has had only limited revenues since it was formed in 1983. Since
the date of its formation and through September 30, 2007 CEL-SCI incurred net
losses of approximately $116,600,000. 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.
17
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.
The extent of CEL-SCI's clinical trials and research programs are primarily
based upon the amount of capital available to CEL-SCI and the extent to which
CEL-SCI has received regulatory approvals for clinical trials. CEL-SCI is
currently in the process of establishing estimates of the future costs of the
Phase III clinical trial.
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.
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.
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.
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.
18
Although CEL-SCI has product liability insurance for Multikine, the successful
prosecution of a product liability case against CEL-SCI could have a materially
adverse effect upon its business if the amount of any judgment exceeds CEL-SCI's
insurance coverage.
Although no claims have been brought to date, participants in CEL-SCI's
clinical trials could bring civil actions against CEL-SCI for any unanticipated
harmful effects arising from the use of Multikine or any drug or product that
CEL-SCI may try to develop. Although CEL-SCI believes its insurance coverage of
$1,000,000 per claim is adequate, the defense or settlement of any product
liability claim could adversely affect CEL-SCI even if the defense and
settlement costs did not exceed CEL-SCI's insurance coverage.
CEL-SCI's directors are allowed to issue shares of preferred stock with
provisions that could be detrimental to the interests of the holders of
CEL-SCI's
common stock.
The provisions in CEL-SCI's Articles of Incorporation relating to CEL-SCI's
preferred stock would allow CEL-SCI's directors to issue preferred stock with
rights to multiple votes per share and dividend rights which would have priority
over any dividends paid with respect to CEL-SCI's common stock. The issuance of
preferred stock with such rights may make more difficult the removal of
management even if such removal would be considered beneficial to shareholders
generally, and will have the effect of limiting shareholder participation in
certain transactions such as mergers or tender offers if such transactions are
not favored by incumbent management.
Risks Related to Government Approvals
CEL-SCI's product candidates must undergo rigorous preclinical and clinical
testing and regulatory approvals, which could be costly and time-consuming and
subject CEL-SCI to unanticipated delays or prevent CEL-SCI from marketing any
products.
Therapeutic agents, drugs and diagnostic products are subject to approval,
prior to general marketing, by the FDA in the United States and by comparable
agencies in most foreign countries. Before obtaining marketing approval,
CEL-SCI's product candidates must undergo rigorous preclinical and clinical
testing which is costly and time consuming and subject to unanticipated delays.
There can be no assurance that such approvals will be granted.
CEL-SCI cannot be certain when or under what conditions it will undertake
further clinical trials, including 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.
19
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.
In addition to conducting further clinical studies of Multikine and
CEL-SCI's other product candidates, CEL-SCI also must undertake the development
of its manufacturing process and optimize its product formulations.
CEL-SCI has only limited experience in filing and pursuing applications
necessary to gain regulatory approvals, which may impede its ability to obtain
timely approvals from the FDA or foreign regulatory agencies, if at all. CEL-SCI
will not be able to commercialize Multikine and other product candidates until
it has obtained regulatory approval, and any delay in obtaining, or inability to
obtain, regulatory approval could harm its business. In addition, regulatory
authorities may also limit the types of patients to which CEL-SCI or others may
market Multikine or CEL-SCI's other products.
Even if CEL-SCI obtains regulatory approval for its product candidates, CEL-SCI
will be subject to stringent, ongoing government regulation.
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.
CEL-SCI and any third-party manufacturers or suppliers must continually
adhere to federal regulations setting forth requirements, known as current Good
Manufacturing Practices, or cGMPs, and their foreign equivalents, which are
20
enforced by the FDA and other national regulatory bodies through their
facilities inspection programs. If CEL-SCI's facilities, or the facilities of
its contract manufacturers or suppliers, cannot pass a pre-approval plant
inspection, the FDA will not approve the marketing applications of CEL-SCI's
product candidates. In complying with cGMP and foreign regulatory requirements,
CEL-SCI and any of its potential third-party manufacturers or suppliers will be
obligated to expend time, money and effort in production, record-keeping and
quality control to ensure that its products meet applicable specifications and
other requirements. State regulatory agencies and the regulatory agencies of
other countries have similar requirements.
If CEL-SCI does not comply with regulatory requirements at any stage,
whether before or after marketing approval is obtained, it may be subject to
license suspension or revocation, criminal prosecution, seizure, injunction,
fines, or be forced to remove a product from the market or experience other
adverse consequences, including restrictions or delays in obtaining regulatory
marketing approval, which could materially harm CEL-SCI's financial results,
reputation and stock price. Additionally, CEL-SCI may not be able to obtain the
labeling claims necessary or desirable for product promotion. CEL-SCI may also
be required to undertake post-marketing trials. In addition, if CEL-SCI or other
parties identify adverse effects after any of CEL-SCI's products are on the
market, or if manufacturing problems occur, regulatory approval may be
withdrawn. CEL-SCI may be required to reformulate its products, conduct
additional clinical trials, make changes in its product's labeling or
indications of use, or submit additional marketing applications to support these
changes. If CEL-SCI encounters any of the foregoing problems, its business and
results of operations will be harmed and the market price of our common stock
may decline.
Also, the extent of adverse government regulations which might arise from
future legislative or administrative action cannot be predicted. Without
government approval, CEL-SCI will be unable to sell any of its products.
Risks Related to Intellectual Property
CEL-SCI may not be able to achieve or maintain a competitive position and other
technological developments may result in CEL-SCI's proprietary technologies
becoming uneconomical or obsolete.
The biomedical field in which CEL-SCI is involved is undergoing rapid and
significant technological change. The successful development of therapeutic
agents from CEL-SCI's compounds, compositions and processes through
CEL-SCI-financed research, or as a result of possible licensing arrangements
with pharmaceutical or other companies, will depend on its ability to be in the
technological forefront of this field.
Many companies are working on drugs designed to cure or treat cancer and
have substantial financial, research and development, and marketing resources
and are capable of providing significant long-term competition either by
establishing in-house research groups or by forming collaborative ventures with
other entities. In addition, smaller companies and non-profit institutions are
active in research relating to cancer and infectious diseases.
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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 year ended September 30, 2007, CEL-SCI's stock
price has ranged from a low of $0.55 per share to a high of $1.08 per share.
Factors such as fluctuations in CEL-SCI's operating results, announcements of
technological innovations or new therapeutic products by CEL-SCI or its
competitors, governmental regulation, developments in patent or other
proprietary rights, public concern as to the safety of products developed by
CEL-SCI or other biotechnology and pharmaceutical companies, and general market
conditions may have a significant effect on the future market price of CEL-SCI's
common stock.
Shares issuable upon the conversion of the Series K notes, the payment of
interest or principal on the Series K notes, the exercise of the Series K
warrants, or the exercise of other outstanding options and warrants, 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, 2007 could potentially allow the holders to acquire up to
approximately 45,540,000 additional shares of its common stock. Until the
options and warrants expire, or the convertible notes are paid, or the options
22
or warrants expire, the holders will have an opportunity to profit from any
increase in the market price of CEL-SCI's common stock without assuming the
risks of ownership. Holders of convertible notes, options and warrants may
convert or exercise these securities at a time when CEL-SCI could obtain
additional capital on terms more favorable than those provided by the options.
The conversion of the notes or the exercise of the options and warrants will
dilute the voting interest of the owners of presently outstanding shares by
adding a substantial number of additional shares of CEL-SCI's common stock.
CEL-SCI has filed, or plans to file, registration statements with the
Securities and Exchange Commission so that substantially all of the shares of
common stock which are issuable upon the exercise of outstanding options and
warrants may be sold in the public market. The sale of common stock issued or
issuable upon the exercise of the warrants described above, or the perception
that such sales could occur, may adversely affect the market price of CEL-SCI's
common stock.
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 $7,590. 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 $10,556 per month. The laboratory lease expires in 2009, with an
extension available until 2014.
In August 2007, CEL-SCI leased a building near Baltimore, Maryland. The
building, which consists of approximately 73,000 square feet, will be remodeled
in accordance with CEL-SCI's specifications so that it can be used by CEL-SCI to
manufacture Multikine for CEL-SCI's Phase III clinical trial and sales of the
drug if approved by the FDA. The lease is for a term of twenty years and
requires annual base rent payments of $1,575,000 during the first year of the
lease. The annual base rent escalates each year at 3%. CEL-SCI is also required
to pay all real and personal property taxes, insurance premiums, maintenance
expenses, repair costs and utilities. The lease allows CEL-SCI, at its election,
to extend the lease for two ten-year periods or to purchase the building at the
end of the 20-year lease. The lease required CEL-SCI to pay $3,150,000 towards
the remodeling costs, which will be recouped by reductions in the annual base
rent of $303,228 in years six through twenty of the lease.
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The annual meeting of CEL-SCI's shareholders was held on September 14,
2007.
23
At the meeting the following persons were elected as directors for the
upcoming year:
Name Votes For Votes Withheld
---- --------- --------------
Maximilian de Clara 73,036,507 5,882,070
Geert Kersten 75,106,412 3,812,165
Alexander Esterhazy 75,719,342 3,199,364
C. Richard Kinsolving 75,756,342 3,162,235
Peter R. Young 75,824,113 3,094,464
At the meeting the following proposals were ratified by the shareholders.
1. The adoption of CEL-SCI's 2007 Incentive Stock Option Plan which
provides that up to 1,000,000 shares of common stock may be issued
upon the exercise of options granted pursuant to the Incentive Stock
Option Plan.
2. The adoption of CEL-SCI's 2007 Non-Qualified Stock Option Plan which
provides that up to 1,000,000 shares of common stock may be issued
upon the exercise of options granted pursuant to the Non-Qualified
Stock Option Plan.
3. The adoption of CEL-SCI's 2007 Stock Bonus Plan which provides that up
to 1,000,000 shares of common stock may be issued to persons granted
stock bonuses pursuant to the Stock Bonus Plan.
4. An amendment to CEL-SCI's Stock Compensation Plan to provide for the
issuance of up to 1,000,000 additional restricted shares of common
stock to CEL-SCI's directors, officers, employees and consultants for
services provided to
CEL-SCI.
5. An amendment to CEL-SC's Articles of Incorporation such that CEL-SCI
would be authorized to issue 300,000,000 shares of common stock.
6. Ratification of the appointment of BDO Seidman, LLP as CEL-SCI's
independent registered public accounting firm for the fiscal year
ending September 30, 2007.
The following is a tabulation of votes cast with respect to these
proposals:
Votes
----------------------------------- Broker
Proposal For Against Abstain Non-Votes
-------- ---------- --------- -------- -----------
1. 22,413,477 5,421,125 280,807 50,803,168
2. 22,079,482 5,687,060 348,867 50,803,168
3. 22,175,301 5,655,394 284,714 50,803,168
4. 21,568,630 6,216,988 329,791 50,803,168
5. 64,812,272 13,577,363 528,942 0
6. 75,737,653 2,029,530 1,151,394 0
24
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
As of November 30, 2007, there were approximately 2,500 record holders of
CEL-SCI's common stock. CEL-SCI's common stock is traded on the American Stock
Exchange under the symbol "CVM". Set forth below are the range of high and low
quotations for CEL-SCI's common stock for the periods indicated as reported on
the American Stock Exchange. The market quotations reflect inter-dealer prices,
without retail mark-up, mark-down or commissions and may not necessarily
represent actual transactions.
Quarter Ended High Low
12/31/05 $0.69 $0.45
3/31/06 $1.06 $0.49
6/30/06 $1.78 $0.71
9/30/06 $0.92 $0.53
12/31/06 $0.81 $0.55
3/31/07 $0.90 $0.56
6/30/07 $1.08 $0.71
9/30/07 $0.76 $0.57
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.
25
The graph below compares the cumulative 5-year total return of holders of
CEL-SCI Corporation's common stock with the cumulative total returns of the AMEX
Composite index, and a customized peer group of three companies that includes:
IDM Pharma Inc, Neoprobe Corp. and Orchestra Therapeutics Inc. The graph tracks
the performance of a $100 investment in our common stock, in the peer group, and
the index (with the reinvestment of all dividends) from September 30, 2002 to
September 30, 2007.
--------------------------------------------------------------------------------
9/02 9/03 9/04 9/05 9/06 9/07
--------------------------------------------------------------------------------
CEL-SCI Corporation 100.00 516.67 316.67 261.11 344.44 347.33
AMEX Composite 100.00 125.41 155.23 212.56 231.11 292.95
Peer Group 100.00 160.07 129.48 57.82 31.23 16.47
The stock price performance included in this graph is not necessarily
indicative of future stock price performance.
PEER GROUP 1
--------------
IDM Pharma Inc
Neoprobe Corp.
Orchestra Therapeutics Inc
26
ITEM 6. SELECTED FINANCIAL DATA
The following selected historical consolidated financial data are qualified
by reference to, and should be read in conjunction with the consolidated
financial statements and the related notes thereto, appearing elsewhere in this
report, as well as Item 7 of this report.
For the years ended September 30,
------------------------------------------------------------------------
Statements of Operations 2007 2006 2005 2004 2003
------------------------------------------------------------------------
Grant revenue and other $ 57,043 $ 125,457 $ 269,925 $ 325,479 $ 318,304
Other expenses:
Research and development 2,528,528 1,896,976 2,229,729 1,941,630 1,915,501
Depreciation and
amortization 176,186 170,902 190,420 198,269 199,117
General and administrative 6,704,538 3,406,775 1,930,543 2,310,279 2,287,019
Gain (loss) on
derivative instruments 868,182 2,325,784 363,028 1,174,660 (2,319,005)
Other income - - 625,472 - -
Other costs of financing - (4,791,548) - - (270,664)
Interest income 562,973 92,487 52,660 51,817 52,502
Interest expense (1,708,603) (216,737) - (53,855) (1,365,675)
------------- ------------- ------------- ------------- -------------
Net loss $ (9,629,657) $ (7,939,210) $ (3,039,607) $ (2,952,077) $ (7,986,175)
------------- ------------- ------------- ------------- -------------
Statements of Operations
Net loss per common share
Basic $ (0.10) $ (0.10) $ (0.04) $ (0.04) $ (0.16)
Diluted $ (0.10) $ (0.11) $ (0.05) $ (0.06) $ (0.19)
Weighted average common
shares outstanding
Basic 97,310,488 78,971,290 72,703,395 67,273,133 50,961,457
Diluted (1) 97,310,488 93,834,078 73,581,925 68,924,099 51,127,439
Balance Sheets: September 30,
------------------------------------------------------------------------
2007 2006 2005 2004 2003
------------------------------------------------------------------------
Working capital $10,257,568 $ 7,109,879 $ 2,235,297 $ 4,592,332 $ 205,815
Total assets 20,730,802 9,653,277 3,092,352 5,513,810 2,915,206
Convertible debt (2) - - - 194,109
Note payable - Covance (2) - - - 184,330
Note payable - Cambrex (2) - - - 664,910
Series E preferred stock (2) - - - -
Derivative instruments -
current (2) 782,732 1,670,234 1,280 - 319,295
Derivative instruments -
noncurrent (2) 4,831,252 8,645,796 811,180 1,175,488 2,517,131
Total liabilities 6,060,703 10,583,878 987,313 1,391,468 4,694,385
Stockholders' equity
(deficit) 14,670,099 (930,601) 2,105,039 4,122,342 (1,779,179)
27
(1) The calculation of diluted earnings per share for the year ended September
30, 2007 equals the basic earnings per share because the calculation would
have been anti-dilutive.
(2) Included in total liabilities.
No dividends have been declared on CEL-SCI's common stock.
CEL-SCI's net losses for each fiscal quarter during the two years ended
September 30, 2007 were:
Net income Net income (loss) per share
Quarter (loss) Basic Diluted
------- ---------- ----- -------
12/31/2005 $ (997,127) $ (0.01) $ (0.01)
3/31/2006 $ (1,331,071) $ (0.02) $ (0.02)
6/30/2006 $ (1,294,041) $ (0.02) $ (0.02)
9/30/2006 $ (4,391,444) $ (0.05) $ (0.06)
12/31/2006 $ (1,112,359) $ (0.01) $ (0.01)
3/31/2007 $ (2,723,885) $ (0.03) $ (0.03)
6/30/2007 $ (5,554,976) $ (0.05) $ (0.05)
9/30/2007 $ (238,437) $ (0.00) $ (0.00)
The Company has experienced large swings in its quarterly losses in 2007 and
2006. 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, as discussed in the results of operations in the
10K, has affected the quarterly losses recorded by the Company.
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.
OVERVIEW
--------
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. It is the first of a new class of cancer immunotherapy
drugs called Immune SIMULATORs. It simulates the activities of a healthy
person's immune system, which battles cancer every day. Multikine is
multi-targeted; it is the only cancer immunotherapy that both kills cancer cells
in a targeted fashion and activates the general immune system to destroy the
cancer. We believe 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.
28
Multikine is a new type of immunotherapy in that it is a comprehensive
immunotherapy, incorporating both active and passive immune activity. A
comprehensive immunotherapy most closely resembles the workings of the natural
immune system in the sense that it works on multiple fronts in the battle
against cancer. A comprehensive immunotherapy causes a direct and targeted
killing of the tumor cells and activates the immune system to produce a more
robust and sustainable anti-tumor response.
Multikine is designed to target the tumor micro-metastases that are mostly
responsible for treatment failure. The basic concept is to add Multikine to the
current cancer treatments with the goal of making the overall cancer treatment
more successful. Phase II data indicated that Multikine treatment resulted in a
substantial increase in the survival of patients. The lead indication is
advanced primary (previously untreated) head & neck cancer (about 600,000 new
cases per annum). Since Multikine is not tumor specific, it may also be
applicable in many other solid tumors.
We believe 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).
CEL-SCI also owns a pre-clinical technology called L.E.A.P.S. (Ligand
Epitope Antigen Presentation System). The lead product derived from this
technology is the CEL-1000 peptide which has shown protection in animals against
herpes, viral encephalitis, malaria and cancer.
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 2007
-----------
Grant revenues and other decreased by approximately $68,400 during the year
ended September 30, 2007 compared to the previous year due to the completion of
the grant in March 2007.
During the year ended September 30, 2007, research and development expenses
increased by approximately $631,600 compared to the year ended September 30,
2006. This increase was due to work on two new CEL-1000 projects and the use of
lab supplies in the preparation for the beginning of the Phase III trials on
Multikine.
29
During the year ended September 30, 2007, general and administrative
expenses increased by approximately $3,297,800 compared to the year ended
September 30, 2006. This change was primarily due to: (1) increased public
relations, presentations and strategic consulting agreements (approximately
$3,231,000); (2) additional accounting expenses relating to the valuation of the
Series K notes and warrants (approximately $76,100), and, (3) increased travel
by CEL-SCI's employees (approximately $37,500).
During the year ended September 30, 2007, interest income increased by
approximately $470,500 compared to the year ended September 30, 2006 due to
interest earned on the funds received from the sale of the Series K notes and
the shares of common stock sold in April 2007.
The gain on derivative instruments of approximately $868,200 for the year
ended September 30, 2007, was the result of the change in fair value of the
Series K notes and warrants during the period.
The interest expense of approximately $1,708,600 for the year ended
September 30, 2007 was composed of two elements: (1) amortization of the
discounted Series K notes (approximately $1,180,400) and (2) interest paid and
accrued on the Series K warrants (approximately $528,200).
Fiscal 2006
-----------
Grant revenues and other decreased by approximately $144,500 during the
year ended September 30, 2006, compared to fiscal 2005, due to the winding down
of the work funded by the grants in 2006 related to grants received in 2003.
CEL-SCI is continuing to apply for grants to support its work.
During the year ended September 30, 2006, general and administrative
expenses increased by approximately $1,476,000. This change was largely due to:
1) costs related to the restatement of the financial statements (approximately
$420,110); 2) an increase in public relations and corporate presentation
expenses (approximately $587,200); 3) an increase in filing and registration
fees (approximately $71,800) and 4) the employee stock option expense required
by SFAS 123R (approximately $180,300).
Interest income during the year ended September 2006 increased by
approximately $39,800. The increase was due to an increase of the cash balances
in the interest bearing accounts from the sale of the Series K convertible debt.
The issuance of the Series K convertible debt in the summer of 2006
resulted in an additional charge of approximately $4,791,500. This charge
included $568,710 paid as fees to the agent, legal fees and $223,907 in
placement warrants issued to the agent. The remaining $3,998,800 (approximate)
represent the immediate charge upon issuance of the convertible debt for the
fair value accounting for the debt and the warrants. This charge is a non-cash
charge. The interest expense of $216,737 is a result of the amortization of the
discount on the convertible debt ($104,351) and actual interest paid in stock
and cash ($112,386) for the interest expense on the Series K convertible debt.
30
The gain on derivative instruments of approximately $2,325,800 for the year
ended September 30, 2006 was the result of several factors: 1) a decrease in the
value of the stock between the date of the issuance (August 2006) of the Series
K convertible debt and September 30, 2006 resulted in the biggest part of the
gain ($2,311,159), 2) reclassification to equity of all previous derivative
instruments ($13,337), and 3) expiration of the Series E warrants ($1,495).
CEL-SCI's future financial statements are expected to show significant gains and
losses on derivative instruments due to the requirement to mark the value of the
convertible debt to market, as measured by the stock price of CEL-SCI's common
stock.
Research and Development Expenses
---------------------------------
During the five years ended September 30, 2007 CEL-SCI's research and
development efforts involved Multikine and L.E.A.P.S. The table below shows the
research and development expenses associated with each project during this
five-year period.
2007 2006 2005 2004 2003
---- ---- ---- ---- ----
MULTIKINE $2,217,108 $1,656,362 $1,911,615 $1,539,454 $1,653,904
L.E.A.P.S. 311,420 240,614 318,114 402,176 261,597
---------- ---------- ---------- ---------- ----------
TOTAL $2,528,528 $1,896,976 $2,229,729 $1,941,630 $1,915,501
========== ========== ========== ========== ==========
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, 2007, CEL-SCI
was involved in a number of pre-clinical studies with respect to its L.E.A.P.S.
technology. As with Multikine, CEL-SCI does not know what obstacles it will
encounter in future pre-clinical and clinical studies involving its L.E.A.P.S.
technology. Consequently, CEL-SCI cannot predict with any certainty the funds
required for future research and clinical trials and the timing of future
research and development projects.
Clinical and other studies necessary to obtain regulatory approval of a new
drug involve significant costs and require several years to complete. The extent
of CEL-SCI's clinical trials and research programs are primarily based upon the
amount of capital available to CEL-SCI and the extent to which CEL-SCI has
received regulatory approvals for clinical trials. The inability of CEL-SCI to
conduct clinical trials or research, whether due to a lack of capital or
regulatory approval, will prevent CEL-SCI from completing the studies and
research required to obtain regulatory approval for any products which CEL-SCI
is developing. Without regulatory approval, CEL-SCI will be unable to sell any
of its products.
Since all of CEL-SCI's projects are under development, CEL-SCI cannot
predict when it will be able to generate any revenue from the sale of any of its
products.
31
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.
During fiscal year 2007, cash and cash equivalents increased by
approximately $2,900,000 million over fiscal year 2006, from approximately
$8,080,000 to $10,993,000. Net cash provided by financing activities totaled
approximately $15,227,300. The cash was primarily from the sale of common stock
($15,000,000) and the exercise of stock options (approximately $612,500) offset
by principal payments on convertible debt ($407,500). The cash used for
investing activities totaled approximately $7,424,600. The cash was used for
purchases of equipment (approximately $181,500), expenditures for patent costs
(approximately $137,900), cash restricted (in escrow) for use in equipping the
manufacturing facility (approximately $2,168,600) and costs for building the
manufacturing facility (approximately $4,936,600). Net cash used for operating
activities was approximately $4,890,100. The major uses of cash for operating
activities was the gain on derivative instruments (approximately $868,200) and
the net loss of approximately $9,629,700. This was partially offset by stock and
options issued to employees (approximately $721,700), stock and options issued
to outsiders (approximately $2,897,200) and amortization of the discount on the
convertible debt (approximately $1,180,400).
The Company's working capital at September 30, 2007 was $10,257,568
compared to $7,109,879 at September 30, 2006. The convertible debt is the only
debt that the Company has outstanding. The Company believes that this will be
sufficient to satisfy anticipated cash requirements for the next 12 months.
In August 2007, CEL-SCI leased a building near Baltimore, Maryland. The
building, which consists of approximately 73,000 square feet, will be remodeled
in accordance with CEL-SCI's specifications so that it can be used by CEL-SCI to
manufacture Multikine for CEL-SCI's Phase III clinical trials and sales of the
drug if approved by the FDA. The lease is for a term of twenty years and
requires annual base rent payments of $1,575,000 during the first year of the
lease. The annual base rent escalates each year at 3%. CEL-SCI is also required
to pay all real and personal property taxes, insurance premiums, maintenance
expenses, repair costs and utilities. The lease allows CEL-SCI, at its election,
to extend the lease for two ten-year periods or to purchase the building at the
end of the 20-year lease. The lease required CEL-SCI to pay $3,150,000 towards
the remodeling costs, which will be recouped by reductions in the annual base
rent of $303,228 in years six through twenty of the lease.
32
Regulatory authorities prefer to see biologics, such as Multikine,
manufactured for commercial sale in the same facility used to produce dosages
used in Phase III clinical trials since this arrangement helps to ensure that
the drug lots used to conduct the clinical trials will be consistent with those
that nay be subsequently sold commercially. Although some biotech companies
outsource their manufacturing, this can prevent problems since biologics require
intense manufacturing and process control. With biologic products a minor change
in manufacturing and process control can result in a major change in the final
product. Good and consistent manufacturing and process control is critical and
is best assured if the product is manufactured and controlled in the
manufacturer's own facility by its own specially trained personnel.
On August 4, 2006, CEL-SCI sold Series K convertible notes, plus Series K
warrants, to independent private investors for $8,300,000. The Notes bear
interest annually at the greater of 8% or 6 month LIBOR plus 3% per year. The
Notes are due and payable on August 4, 2011 and are secured and collateralized
by substantially all of CEL-SCI's assets.
Interest is payable quarterly with the first interest payment calculation
due on September 30, 2006. This interest payment was paid on October 2, 2006.
Beginning March 4, 2007 CEL-SCI is required to make monthly payments of $207,500
toward the principal amount of the Notes. If CEL-SCI fails to make any interest
or principal payment when due, the Notes will become immediately due and
payable.
At CEL-SCI's election, and under certain conditions, CEL-SCI may use shares
of its common stock to make interest and principal payments.
At the holder's option the Series K notes are convertible into shares of
the Company's common stock at a conversion price of $0.75.
If CEL-SCI sells any additional shares of common stock, or any securities
convertible into common stock at a price below the then applicable Conversion
Price, the Conversion Price will be lowered to the price at which the shares
were sold or the lowest price at which the securities are convertible, as the
case may be. If CEL-SCI sells any additional shares of common stock, or any
securities convertible into common stock at a price above the Conversion Price,
but below the average closing price of CEL-SCI's common stock over the five
trading days prior to the sale of the shares, the Conversion Price will be
lowered to a price determined by a formula contained in the Notes. The
Conversion Price will also be proportionately adjusted in the event of any stock
splits.
CEL-SCI has filed a registration statement with the Securities and Exchange
Commission so that the shares of common stock issuable upon the conversion of
the Series K notes or the exercise of the Series K warrants may be resold in the
public market. CEL-SCI is required to keep the registration statement
continuously effective until the shares covered by the registration statement
have been sold or can be sold pursuant to Rule 144(k). If CEL-SCI fails to
comply with this provision, CEL-SCI will be required to pay damages to the
holders of the Notes.
33
At any time after August 4, 2009 any Note holder will have the right to
require CEL-SCI to redeem all or any portion of the outstanding principal amount
of the Notes, plus all accrued but unpaid interest.
The Series K warrants allow the holders to purchase up to 4,825,581 shares
of CEL-SCI's common stock at a price of $0.75 per share at any time prior to
February 4, 2012.
The exercise price of the Series K warrants, as well as the shares issuable
upon the exercise of the warrants, will be proportionately adjusted in the event
of any stock splits.
If CEL-SCI sells any additional shares of common stock, or any securities
convertible into common stock at a price below the then applicable exercise
price of the Series K warrants, the warrant exercise price will be lowered to
the price at which the shares were sold or the lowest price at which the
securities are convertible, as the case may be.
If CEL-SCI sells any additional shares of common stock or any securities
convertible into common stock at a price above the exercise price but below the
market price of CEL-SCI's common stock, the exercise price of the Series K
warrants will be lowered to a price determined by a formula contained in the
warrants.
During the year ended September 30, 2007, $4,399,284 in Series K notes were
converted into 5,744,765 shares of common stock. In addition, principal payments
of $407,500 in cash and $207,500 in shares of common stock were made to the
holders of the Series K notes. As of September 30, 2007, the outstanding
principal on the Series K notes was $3,285,715. As of
In April 2007 CEL-SCI raised $15,000,000 from the sale of 19,999,998 shares
of its common stock at a price of $0.75 per share. The investors who purchased
the shares also received warrants which entitle the holders to purchase
10,000,000 shares of CEL-SCI's common stock at a price of $0.75 per share and
warrants to purchase an additional 10,000,000 shares of common stock at a price
of $2.00 per share. The warrants expire on March 31, 2012.
As a result of the April 2007 financing, and in accordance with the terms
of the Series K notes and warrants, the conversion price of the Series K notes
was reduced to $0.75 and the exercise price of the Series K warrants was reduced
to $0.75.
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.
34
Future Capital Requirements
---------------------------
CEL-SCI plans to use its existing financial resources, and any proceeds
received from the exercise of CEL-SCI's outstanding warrants or options to fund
its capital requirements during the year ending September 30, 2008.
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, 2007 are as
follows:
Contractual Obligations:
Years Ending September 30,
Total 2008 2009 2010 2011 2012 2013 & thereafter
----- ---- ---- ---- ---- ---- -----------------
Operating Leases $38,356,153 $ 302,256 $1,706,693 $1,727,368 $1,779,188 $1,805,169 $31,035,479
Employment Contracts $ 2,740,225 $1,163,825 $ 963,825 $ 612,575 -- -- --
It should be noted that substantial funds will be needed for the clinical
trial which will be necessary before CEL-SCI will be able to apply to the FDA
for approval to sell any products which may be developed on a commercial basis
throughout the United States. In the absence of revenues, CEL-SCI will be
required to raise additional funds through the sale of securities, debt
financing or other arrangements in order to continue with its research efforts.
However, there can be no assurance that such financing will be available or be
available on favorable terms. It is the opinion of management that sufficient
funds are available to meet CEL-SCI's liabilities and commitments as they come
due during fiscal 2008. Ultimately, CEL-SCI must complete the development of its
products, obtain appropriate regulatory approvals and obtain sufficient revenues
to support its cost structure.
Since all of CEL-SCI's projects are under development CEL-SCI cannot
predict with any certainty the funds required for future research and clinical
trials, the timing of future research and development projects, or when it will
be able to generate any revenue from the sale of any of its products.
CEL-SCI's cash flow and earnings are subject to fluctuations due to changes
in interest rates on its certificates of deposit, and, to an immaterial extent,
foreign currency exchange rates.
Critical Accounting Policies
----------------------------
CEL-SCI's significant accounting policies are more fully described in Note
1 to the consolidated financial statements. However, certain accounting policies
are particularly important to the portrayal of financial position and results of
operations and require the application of significant judgments by management.
As a result, the consolidated financial statements are subject to an inherent
degree of uncertainty. In applying those policies, management uses its judgment
to determine the appropriate assumptions to be used in the determination of
certain estimates. These estimates are based on CEL-SCI's historical experience,
terms of existing contracts, observance of trends in the industry and
information available from outside sources, as appropriate. CEL-SCI's
significant accounting policies include:
35
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 - SFAS No. 123R requires companies to recognize
expense associated with share based compensation arrangements, including
employee stock options, using a fair value-based option pricing model. SFAS No.
123R applies to all transactions involving issuance of equity by a company in
exchange for goods and services, including employees. Using the modified
prospective transition method of adoption, CEL-SCI reflects compensation expense
in the financial statements beginning October 1, 2005. The modified prospective
transition method does not require restatement of prior periods to reflect the
impact of SFAS No. 123R. As such, compensation expense will be 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 FASB's
Emerging Issues Task Force (EITF) Issue 96-18 Accounting for Equity Instruments
That Are Issued to Other Than Employees for Acquiring, or in Conjunction with
Selling, Goods or Services. Accordingly, compensation is recognized when goods
or services are received and is measured using the Black-Scholes valuation
model. The Black-Scholes model requires 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 every fiscal quarter. This review requires that CEL-SCI make
assumptions regarding the value of these assets and the changes in circumstances
that would affect the carrying value of these assets. If such analysis indicates
that a possible impairment may exist, CEL-SCI is then required to estimate the
fair value of the asset and, as deemed appropriate, expense all or a portion of
the asset. The determination of fair value includes numerous uncertainties, such
as the impact of competition on future value. CEL-SCI believes that it has made
reasonable estimates and judgments in determining whether its long-lived assets
have been impaired; however, if there is a material change in the assumptions
used in its determination of fair values or if there is a material change in
economic conditions or circumstances influencing fair value, CEL-SCI could be
required to recognize certain impairment charges in the future. As a result of
the reviews, no changes in asset values were required.
Prepaid Expenses and Laboratory Supplies--The majority of prepaid expenses
consist of bulk purchases of laboratory supplies used on a daily basis in the
lab and items that will be used for future production. The items in prepaid
expenses are expensed when used in production or daily activity as Research and
Development expenses. These items are disposables and consumables and can be
used for both the manufacturing of Multikine for clinical studies and in the
laboratory for quality control and bioassay use. They can be used in training,
testing and daily laboratory activities. Other prepaid expenses are payments for
services over a long period and are expensed over the time period for which the
service is rendered.
36
Derivative Instruments--CEL-SCI enters into financing arrangements that
consist of freestanding derivative instruments or are hybrid instruments that
contain embedded derivative features. CEL-SCI accounts for these arrangement in
accordance with Statement of Financial Accounting Standards No. 133, "Accounting
for Derivative Instruments and Hedging Activities", ("SFAS No. 133") and
Emerging Issues Task Force Issue No. 00-19, "Accounting for Derivative Financial
Instruments Indexed to, and Potentially Settled in, a Company's Own Stock",
("EITF 00-19"), as well as related interpretations of these standards. In
accordance with accounting principles generally accepted in the United States
("GAAP"), derivative instruments and hybrid instruments are recognized as either
assets or liabilities in the statement of financial position and are measured at
fair value with gains or losses recognized in earnings or other comprehensive
income depending on the nature of the derivative or hybrid instruments. Embedded
derivatives that are not clearly and closely related to the host contract are
bifurcated and recognized at fair value with changes in fair value recognized as
either a gain or loss in earnings if they can be reliably measured. When the
fair value of embedded derivative features can not be reliably measured, 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.
Recent Accounting Pronouncements
--------------------------------
In July 2006, the Financial Accounting Standards Board issued
Interpretation No. 48, "Accounting for Uncertainty in Income Taxes" ("FIN 48")
which clarifies the accounting for income taxes by prescribing the minimum
recognition threshold a tax position is required to meet before being recognized
in the financial statements. FIN 48 also provides guidance on derecognition,
measurement, classification, interest and penalties, accounting in interim
periods, disclosure and transition. FIN 48 is effective for fiscal years
beginning after December 15, 2006. FIN 48 is not expected to have an effect on
the financial statements.
In September 2006, FASB issued SFAS No. 157, "Fair Value Measurements". The
statement defines fair value, establishes a framework for measuring fair value
in GAAP and expands disclosures about fair value measurements. The statement is
effective for financial statements issued for fiscal years beginning after
November 15, 2007 and interim periods within those fiscal years. The Company is
evaluating whether this statement will affect its current practice in valuing
fair value of its derivatives each quarter.
In February 2007, FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities - Including an amendment of FASB
Statement No. 15". The Statement permits companies to choose to measure many
financial instruments and certain other items at fair value. The statement is
effective for fiscal years that begin after November 15, 2007, but early
adoption is permitted. The Company is evaluating the effect of the adoption of
this statement.
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 the years ended September 30, 2007, 2006 and 2005, CEL-SCI recognized
a gain of $868,183, a gain of $2,329,091, and a gain of $363,028, respectively,
resulting from changes in fair value of derivative instruments. CEL-SCI has no
exposure to risks associated with foreign exchange rate changes because none of
the operations of CEL-SCI are transacted in a foreign currency. The interest
rate risk on investments is considered immaterial due to the dollar value of
investments as of September 30, 2007, 2006 and 2005.
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
Geert Kersten, CEL-SCI's Chief Executive and Financial Officer, has
evaluated the effectiveness of CEL-SCI's disclosure controls and procedures as
of September 30, 2007 and in his opinion CEL-SCI's disclosure controls and
procedures ensure that material information relating to CEL-SCI, including
CEL-SCI's consolidated subsidiary, is made known to him by others within those
entities, particularly during the period in which this report is being prepared,
so as to allow timely decisions regarding required disclosure. The Company has
determined that these controls and procedures are effective as of September 30,
2007. To the knowledge of Mr. Kersten there have been no significant changes in
CEL-SCI's internal controls or in other factors that could significantly affect
CEL-SCI's internal controls in the fourth quarter, and as a result, no
corrective actions with regard to significant deficiencies or material weakness
in CEL-SCI's internal controls were required.
ITEM 9B. OTHER INFORMATION
Not applicable.
38
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Officers and Directors
----------------------
Name Age Position
---- --- --------
Maximilian de Clara 77 Director and President
Geert R. Kersten, Esq. 48 Director, Chief Executive Officer and Treasurer
Patricia B. Prichep 56 Senior Vice President of Operations and
Secretary
Dr. Eyal Talor 51 Senior Vice President of Research and
Manufacturing
Dr. Daniel H. Zimmerman 66 Senior Vice President of Research, Cellular
Immunology
John Cipriano 65 Senior Vice President of Regulatory Affairs
Alexander G. Esterhazy 63 Director
Dr. C. Richard Kinsolving 70 Director
Dr. Peter R. Young 62 Director
The directors of CEL-SCI serve in such capacity until the next annual
meeting of CEL-SCI's shareholders and until their successors have been duly
elected and qualified. The officers of CEL-SCI serve at the discretion of
CEL-SCI's directors.
Mr. Maximilian de Clara, by virtue of his position as an officer and
director of CEL-SCI, may be deemed to be the "parent" and "founder" of CEL-SCI
as those terms are defined under applicable rules and regulations of the SEC.
The principal occupations of CEL-SCI's officers and directors, during the
past several years, are as follows:
Maximilian de Clara. Mr. de Clara has been a Director of CEL-SCI since its
inception in March l983, and has been President of CEL-SCI since July l983.
Prior to his affiliation with CEL-SCI, and since at least l978, Mr. de Clara was
involved in the management of his personal investments and personally funding
research in the fields of biotechnology and biomedicine. Mr. de Clara attended
the medical school of the University of Munich from l949 to l955, but left
before he received a medical degree. During the summers of l954 and l955, he
worked as a research assistant at the University of Istanbul in the field of
cancer research. For his efforts and dedication to research and development in
the fight against cancer and AIDS, Mr. de Clara was awarded the "Pour le Merit"
honorary medal of the Austrian Military Order "Merito Navale" as well as the
honor cross of the Austrian Albert Schweitzer Society.
Geert Kersten has served in his current leadership role at CEL-SCI since
1995. Mr. Kersten has been with CEL-SCI from the early days of its inception
since 1987. He has been involved in the pioneering field of cancer immunotherapy
for almost two decades and has successfully steered CEL-SCI through many
challenging cycles in the biotechnology industry. Mr. Kersten also provides
CEL-SCI with significant expertise in the fields of finance and law and has a
unique vision of how the company's Multikine product will change the way cancer
is treated. Prior to CEL-SCI, Mr. Kersten worked at the law firm of Finley &
Kumble and worked at Source Capital, an investment banking firm located in
McLean, VA. He is a native of Germany, graduated from Millfield School in
39
England, and completed his studies in the US. Mr. Kersten completed his
Undergraduate Degree in Accounting, received an M.B.A. from George Washington
University, and a law degree (J.D.) from American University in Washington, DC.
Patricia B. Prichep 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. From June 1990 to December 1992, Ms. Prichep was the
Manager of Quality and Productivity for the NASD's Management, Systems and
Support Department. Between 1982 and 1990, Ms. Prichep was Vice President and
Operations Manager for Source Capital, Ltd.
Eyal Talor, Ph.D. joined CEL-SCI in October 1993 and has been Senior Vice
president of Research and Manufacturing since March of 1994. He is a clinical
immunologist with over 19 years of hands-on management of clinical research and
drug development for immunotherapy application; pre-clinical to Phase III, in
the biopharmaceutical industry. His expertise includes; biopharmaceutical R&D
and Biologics product development, GMP (Good Manufacturing Practices)
manufacture, Quality Control testing, and the design and building of GMP
manufacturing and testing facilities. He served as Director of Clinical
Laboratories (certified by the State of Maryland) and has experience in the
design of clinical trials (Phase I - III) and GCP (Good Clinical Practices)
requirements. He also has broad experience in the different aspects of
biological assay development, analytical methods validation, raw material
specifications, and QC (Quality Control) tests development under FDA/GMP, USP,
and ICH guidelines. He has extensive experience in the preparation of
documentation for IND and other regulatory submissions. His scientific area of
expertise encompasses immune response assessment. He is the author of over 25
publications and has published a number of reviews on immune regulations in
relation to clinical immunology. Before coming to CEL-SCI, he was Director of
R&D and Clinical Development at CBL, Inc., Principal Scientist - Project
Director, and Clinical Laboratory Director at SRA Technologies, Inc. Prior to
that he was a full time faculty member at The Johns Hopkins University, Medical
Intuitions; School of Public Health. He holds two US patents; one on Multikine's
composition of matter and method of use in cancer, and one on a platform Peptide
technology (`Adapt') for the treatment of autoimmune diseases, asthma, allergy,
and transplantation rejection. He also has numerous product and process
inventions as well as a number of pending US and PCT patent applications. He
received his Ph.D. in Microbiology and Immunology from the University of Ottawa,
Ottawa, Ontario, Canada, and had post-doctoral training in clinical and cellular
immunology at The John Hopkins University, Baltimore, Maryland, USA. He holds an
Adjunct Associate teaching position at the Johns Hopkins University Medical
Institutions.
Daniel H. Zimmerman, Ph.D., has been CEL-SCI's Senior Vice President of
Cellular Immunology since 1996. 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
40
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, has been CEL-SCI's Senior Vice President of Regulatory
Affairs since March 2004. Mr. Cipriano brings to CEL-SCI over 30 years of
experience in both biotech and pharmaceutical companies. In addition, he held
positions at the United States Food and Drug Administration (FDA) as Deputy
Director, Division of Biologics Investigational New Drugs, Office of Biologics
Research and Review and was the Deputy Director, IND Branch, Division of
Biologics Evaluation, Office of Biologics. Mr. Cipriano completed his B.S. in
Pharmacy from the Massachusetts College of Pharmacy in Boston, Massachusetts and
his M.S. in Pharmaceutical Chemistry from Purdue University in West Lafayette,
Indiana.
Alexander G. Esterhazy has been an independent financial advisor since
November 1997. Between July 1991 and October 1997 Mr. Esterhazy was a senior
partner of Corpofina S.A. Geneva, a firm engaged in mergers, acquisitions and
portfolio management. Between January 1988 and July 1991 Mr. Esterhazy was a
managing director of DG Bank in Switzerland. During this period Mr. Esterhazy
was in charge of the Geneva, Switzerland branch of the DG Bank, founded and
served as vice president of DG Finance (Paris) and was the President and Chief
Executive officer of DG-Bourse, a securities brokerage firm.
C. Richard Kinsolving, Ph.D. has been a Director of CEL-SCI since April
2001. Since February 1999 Dr. Kinsolving has been the Chief Executive Officer of
BioPharmacon, a pharmaceutical development company. Between December 1992 and
February 1999 Dr. Kinsolving was the President of Immuno-Rx, Inc., a company
engaged in immuno-pharmaceutical development. Between December 1991 and
September 1995 Dr. Kinsolving was President of Bestechnology, Inc. a nonmedical
research and development company producing bacterial preparations for industrial
use. Dr. Kinsolving received his Ph.D. in Pharmacology from Emory University
(1970), his Masters degree in Physiology/Chemistry from Vanderbilt University
(1962), and his Bachelor's degree in Chemistry from Tennessee Tech. University
(1957).
Peter R. Young, Ph.D. has been a Director of CEL-SCI since August 2002. Dr.
Young has been a senior executive within the pharmaceutical industry in the
United States and Canada for most of his career. Over the last 20 years he has
primarily held positions of Chief Executive Officer or Chief Financial Officer
and has extensive experience with acquisitions and equity financings. Since
November 2001 Dr. Young has been the President of Agnus Dei, LLC, which acts as
a partner in an organization managing immune system clinics which treat patients
with diseases such as cancer, multiple sclerosis and hepatitis. Since January
2003 Dr. Young has been the President and Chief Executive Officer of SRL
Technology, Inc., a company involved in the development of pharmaceutical (drug)
delivery systems. Between 1998 and 2001 Dr. Young was the Chief Financial
Officer of Adams Laboratories, Inc. Dr. Young received his Ph.D. in Organic
Chemistry from the University of Bristol, England (1969), and his Bachelor's
degree in Honors Chemistry, Mathematics and Economics also from the University
of Bristol, England (1966).
All of CEL-SCI's officers devote substantially all of their time to
CEL-SCI's business.
41
CEL-SCI has an audit committee and compensation committee. The members of
the audit committee are Alexander G. Esterhazy, C. Richard Kinsolving and Dr.
Peter Young. Dr. Peter Young serves as the audit committee's financial expert.
In this capacity, Dr. Young is independent, as that term is defined in the
listing standards of the American Stock Exchange. The members of the
compensation committee are Maximilian de Clara, Alexander Esterhazy and C.
Richard Kinsolving.
CEL-SCI has adopted a Code of Ethics which is applicable to CEL-SCI'S
principal executive, financial, and accounting officers and persons performing
similar functions. The Code of Ethics is available on CEL-SCI's website, located
at www.cel-sci.com.
If a violation of this code of ethics act is discovered or suspected, the
Senior Officer must (anonymously, if desired) send a detailed note, with
relevant documents, to CEL-SCI's Audit Committee, c/o Dr. Peter Young, 1247
Dodgeton Drive, Frisco, TX 75034-1432.
ITEM 11. EXECUTIVE COMPENSATION
Compensation Discussion and Analysis
The Company's Compensation Committee is empowered to review and approve the
annual compensation and compensation procedures for our executive officers and
annually determines the total compensation level for our President and Chief
Executive Officer. The total proposed compensation of our named executive
officers is formulated and evaluated by our Chief Executive Officer and
submitted to the Compensation Committee for consideration.
The key components of CEL-SCI's executive compensation program include
annual base salaries and long-term incentive compensation consisting of stock
options. It is CEL-SCI's policy to target compensation (i.e., base salary, stock
option grants and other benefits) at approximately the median of comparable
companies in the biotechnology field. Accordingly, data on compensation
practices followed by other companies in the biotechnology industry is
considered.
Objectives and Components of the Compensation Program
The primary objective of our compensation program is to attract, motivate
and retain talented executives who are enthusiastic about our mission. The
components of our compensation practices are:
o CEL-SCI's base salary levels are commensurate with those of comparable
positions at other biotechnology companies given the level of
seniority and skills possessed by the executive officer and which
reflect the individual's performance with us over time. The base
salary of the President, CEO and our other named executive officers is
reviewed annually. Current employment agreements with Maximilian de
Clara and Geert Kersten set minimums for their base salary rates.
o CEL-SCI's long-term stock option incentive program consists
exclusively of periodic grants of stock options with an exercise price
equal to the fair market value of CEL-SCI's common stock on the date
42
of grant. To encourage retention, the ability to exercise options
granted under the program is subject to vesting restrictions.
Decisions made regarding the timing and size of option grants take
into account the performance of both CEL-SCI and the employee,
"competitive market" practices, and the size of the option grants made
in prior years. The weighting of these factors varies and is
subjective. Current option holdings are not considered when granting
options.
o CEL-SCI's stock-based incentive awards are intended to strengthen the
mutuality of interests between the executive officers and our
stockholders.
o CEL-SCI has a defined contribution retirement plan, qualifying under
Section 401(k) of the Internal Revenue Code and covering substantially
all CEL-SCI's employees. CEL-SCI's contribution to the plan is made in
shares of CEL-SCI's common stock. Each participant's contribution is
matched by CEL-SCI with shares of common stock which have a value
equal to 100% of the participant's contribution, not to exceed 6% of
the participant's total compensation.
The following table sets forth in summary form the compensation received by
(i) the Chief Executive Officer of CEL-SCI and (ii) by each other executive
officer of CEL-SCI who received in excess of $100,000 during the fiscal year
ended September 30, 2007.
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, 2007 $363,000 - $418,327 $105,460 $64,693 $951,480
President
Geert R. Kersten, 2007 389,637 - 31,752 105,460 16,114 542,963
Chief Executive
Officer and
Treasurer
Patricia B. Prichep 2007 179,574 - 19,520 52,730 4,225 256,049
Senior Vice President
of Operations and
Secretary
Eyal Talor, Ph.D. 2007 218,587 - 18,764 52,730 4,225 294,306
Senior Vice President
of Research and
Manufacturing
43
Daniel Zimmerman, Ph.D. 2007 169,127 - 14,469 39,548 4,225 227,369
Senior Vice President
of Cellular Immunology
John Cipriano 2007 165,400 - 14,196 39,548 25 219,169
Senior Vice President
of Regulatory Affairs
(1) The dollar value of base salary (cash and non-cash) earned. During the year
ended September 30, 2007, $28,429 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
09/20/2006 49,016 $0.58
On each date the amount of compensation satisfied through the issuance of
shares was determined by multiplying the number of shares issued by the price
per share. The price per share was equal to the closing price of CEL-SCI's
common stock on the date prior to the date the shares were issued.
(2) The dollar value of bonus (cash and non-cash) earned.
(3) During the periods covered by the table, the value of the shares of
restricted stock issued as compensation for services to the persons listed
in the table. In the case of Mr. de Clara, $400,000 was paid in restricted
shares of CEL-SCI's common stock which cannot be sold in the public market
for a period of three years after the date of issuance. In the case of all
other persons listed in the table, the shares were issued as CEL-SCI's
contribution on behalf of the named officer to CEL-SCI's 401(k) retirement
plan and restricted shares issued from the Stock Compensation Plan.
(4) The value of all stock options granted during the periods covered by the
table are calculated according to SFAS 123R requirements..
(5) All other compensation received that CEL-SCI could not properly report in
any other column of the table including annual contributions or other
allocations to vested and unvested defined contribution plans, and the
dollar value of any insurance premiums paid by, or on behalf of, CEL-SCI
with respect to term life insurance for the benefit of the named executive
officer, and the full dollar value of the remainder of the premiums paid
by, or on behalf of, CEL-SCI.
Long Term Incentive Plans - Awards in Last Fiscal Year
------------------------------------------------------
None.
44
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
2007 expenses for this plan were $92,035. 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
-------------------------
Paid Stock Option
Name in Cash Awards (1) Awards (2) Total
---- ------- ---------- ---------- -------
Maximilian de Clara $12,500 $ 126,000 $105,460 $243,960
Geert Kersten $12,500 $ 126,000 $105,460 $243,960
Alexander Esterhazy $12,500 $ 63,000 $ 52,730 $128,230
C. Richard Kinsolving $12,500 $ 63,000 $ 52,730 $128,230
Peter R. Young $12,500 $ 63,000 $ 52,730 $128,230
(1) The fair value of stock issued for services.
(2) The fair value of options granted computed in accordance with FAS 123R on
the date of grant.
Directors' fees paid to Maximilian de Clara and Geert Kersten are included
in the Executive Compensation table.
Employment Contracts.
---------------------
In April 2005 CEL-SCI entered into a three-year employment agreement with
Mr. de Clara which expires April 30, 2008. The employment agreement provides
that CEL-SCI will pay Mr. de Clara an annual salary of $363,000 during the term
of the agreement. 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. In the event that
there is a material reduction in Mr. de Clara's authority, duties or activities,
or in the event there is a change in the control of CEL-SCI, then the agreement
allows Mr. de Clara to resign from his position at CEL-SCI and receive a
lump-sum payment from CEL-SCI equal to 18 months salary ($544,500), the
remaining stock payments per the amendment to Mr. de Clara's employment
agreement (valued at $600,000) and the unvested portion of any stock options
would vest immediately ($142,626). 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.
45
The Employment Agreement will also terminate upon the death of Mr. de
Clara, Mr. de Clara's physical or mental disability, the conviction of Mr. de
Clara for any crime involving fraud, moral turpitude, or CEL-SCI's property, or
a breach of the Employment Agreement by Mr. de Clara. If the Employment
Agreement is terminated for any of these reasons, Mr. de Clara, or his legal
representatives, as the case may be, will be paid the salary provided by the
Employment Agreement through the date of termination.
Effective September 1, 2003, CEL-SCI entered into a three-year employment
agreement with Mr. Kersten. The employment agreement provides that during the
term of the employment agreement CEL-SCI will pay Mr. Kersten an annual salary
of $370,585. In the event there is a change in the control of CEL-SCI, the
agreement allows Mr. Kersten to resign from his position at CEL-SCI and receive
a lump-sum payment from CEL-SCI equal to 24 months salary ($801,650) and the
unvested portion of any stock options would vest immediately ($174,626). For
purposes of the employment agreement a change in the control of CEL-SCI means:
(1) the merger of CEL-SCI with another entity if after such merger the
shareholders of CEL-SCI do not own at least 50% of voting capital stock of the
surviving corporation; (2) the sale of substantially all of the assets of
CEL-SCI; (3) the acquisition by any person of more than 50% of CEL-SCI's common
stock; or (4) a change in a majority of CEL-SCI's directors which has not been
approved by the incumbent directors. Effective September 1, 2006 Mr. Kersten's
employment agreement was extended to September 1, 2011.
The Employment Agreement will also terminate upon the death of Mr. Kersten,
Mr. Kersten's physical or mental disability, willful misconduct, an act of fraud
against CEL-SCI, or a breach of the Employment Agreement by Mr. Kersten. If the
Employment Agreement is terminated for any of these reasons Mr. Kersten, or his
legal representatives, as the case may be, will be paid the salary provided by
the Employment Agreement through the date of termination.
Compensation Committee Interlocks and Insider Participation
------------------------------------------------------------
CEL-SCI has a compensation committee comprised of all of CEL-SCI's
directors, with the exception of Mr. Kersten. During the year ended September
30, 2006, Mr. de Clara was the only officer participating in deliberations of
CEL-SCI's compensation committee concerning executive officer compensation.
During the year ended September 30, 2007, 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, 2007, to the persons named below.
46
Options Granted
Exercise
Grant Options Price Per Expiration
Name Date Granted (#) Share Date
---- ----- ----------- ---------- ----------
Maximilian de Clara 9/14/2007 200,000 $0.63 9/13/2017
Geert Kersten 9/14/2007 200,000 $0.63 9/13/2017
Patricia B. Prichep 9/14/2007 100,000 $0.63 9/13/2017
Eyal Talor, Ph.D. 9/14/2007 100,000 $0.63 9/13/2017
Daniel Zimmerman, Ph.D. 9/14/2007 75,000 $0.63 9/13/2017
John Cipriano 9/14/2007 75,000 $0.63 9/13/2017
Options Exercised
Shares
Date of Acquired On Value
Exercise Exercise (1) Realized (2)
-------- ------------ -------------
Maximilian de Clara 11/08/2006 50,000 $21,600
Maximilian de Clara 11/09/2006 18,900 $ 7,938
Maximilian de Clara 11/13/2006 31,100 $13,373
Maximilian de Clara 11/15/2006 100,000 $43,500
Maximilian de Clara 12/18/2006 100,000 $34,500
Maximilian de Clara 01/11/2007 52,500 $20,108
Maximilian de Clara 01/16/2007 21,500 $10,965
Maximilian de Clara 03/02/2007 50,000 $24,000
Maximilian de Clara 03/19/2007 50,000 $24,000
Maximilian de Clara 04/13/2007 50,000 $25,500
Maximilian de Clara 05/22/2007 50,999 $34,679
(1) The number of shares received upon exercise of options during the fiscal
year ended September 30, 2007.
(2) With respect to options exercised during the fiscal year ended September
30, 2007, the dollar value of the difference between the option exercise
price and the market value of the option shares purchased on the date of
the exercise of the options.
Shares underlying unexercised
Option which are: Exercise Expiration
Name Exercisable Unexercisable Price Date
------ ----------- ------------- -------- ----------
Maximilian de Clara 23,333 2.87 07/31/08
95,000 (1) 1.94 08/31/08
70,000 1.05 09/25/09
56,666 1.05 05/01/10
50,000 1.05 05/01/08
50,000 1.05 04/12/09
47
Shares underlying unexercised
Option which are: Exercise Expiration
Name Exercisable Unexercisable Price Date
------ ----------- ------------- -------- ----------
Maximilian de Clara 60,000 1.05 04/19/10
60,000 1.38 03/22/11
75,000 0.54 03/14/12
50,000 0.61 09/02/14
33,334 0.48 09/21/15
33,334 0.58 09/12/16
--------
656,667
16,666 0.48 09/21/15
66,666 0.58 09/12/16
200,000 0.63 09/13/17
-------
283,332
--------------------------------------------------------------------------------
Geert R. Kersten 50,000 1.05 11/01/08
14,000 1.05 10/31/08
50,000 1.05 07/31/08
224,000 (1) 1.05 06/10/08
50,000 1.05 09/25/09
150,000 1.05 05/01/10
50,000 1.05 05/01/08
50,000 1.05 04/12/09
95,000 (1) 1.94 08/31/08
60,000 1.05 04/19/10
60,000 1.38 03/22/11
560,000 (1) 1.05 10/16/08
105,000 0.54 03/14/12
1,890,000 0.22 04/01/13
50,000 0.61 09/02/14
33,334 0.48 09/21/15
66,667 0.58 09/12/16
---------
3,558,001
16,666 0.48 09/21/15
133,333 0.58 09/12/16
200,000 0.63 09/13/17
-------
349,999
--------------------------------------------------------------------------------
Patricia B. Prichep 6,000 1.05 12/01/08
10,000 1.05 11/30/08
9,500 1.05 07/31/08
3,000 1.05 12/31/09
35,000 1.05 03/01/10
17,000 1.05 12/01/08
15,000 1.05 04/12/09
47,500 (1) 1.94 08/31/08
23,000 1.05 02/02/10
48
Shares underlying unexercised
Option which are: Exercise Expiration
Name Exercisable Unexercisable Price Date
------ ----------- ------------- -------- ----------
Patricia B. Prichep 25,000 1.18 12/08/10
30,000 1.00 12/03/11
200,000 (1) 1.05 10/16/08
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
20,000 0.48 09/21/15
30,000 0.58 09/12/16
----------
1,161,500
10,000 0.48 09/21/15
60,000 0.58 09/12/16
100,000 0.63 09/13/17
-------
170,000
--------------------------------------------------------------------------------
Eyal Talor, Ph.D. 15,500 1.05 07/31/08
16,666 1.05 03/16/10
15,000 1.05 08/03/08
10,000 (1) 1.94 08/31/08
20,000 1.05 08/02/09
25,000 1.76 11/10/10
35,000 1.00 12/03/11
160,000 (1) 1.05 10/16/08
50,000 0.33 04/26/12
374,166 0.22 04/01/13
50,000 0.61 09/02/14
20,000 0.48 09/21/15
26,667 0.58 09/12/16
-------
817,999
10,000 0.48 09/21/15
53,333 0.58 09/12/16
100,000 0.63 09/13/17
-------
163,333
--------------------------------------------------------------------------------
Daniel Zimmerman,
Ph.D. 12,000 1.05 12/31/08
3,000 1.05 12/31/09
7,000 1.05 06/19/10
15,000 1.05 02/19/08
30,000 (1) 1.94 08/31/08
15,000 1.05 04/12/09
20,000 1.05 02/02/10
20,000 1.85 01/26/11
120,000 (1) 1.05 10/16/08
49
Shares underlying unexercised
Option which are: Exercise Expiration
Name Exercisable Unexercisable Price Date
------ ----------- ------------- -------- ----------
Daniel Zimmerman,
Ph.D. 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
20,000 0.48 09/21/15
20,000 0.58 09/12/16
-------
815,000
10,000 0.48 09/21/15
40,000 0.58 09/12/16
75,000 0.63 09/13/17
-------
125,000
--------------------------------------------------------------------------------
John Cipriano 100,000 1.13 03/01/14
20,000 0.61 09/02/14
20,000 0.48 09/21/15
20,000 0.58 09/12/16
-------
160,000
10,000 0.48 09/21/15
40,000 0.58 09/12/16
75,000 0.63 09/13/17
-------
125,000
(1) Options purchased by Employee through the Salary Reduction Plan.
Stock Option and Bonus Plans
----------------------------
CEL-SCI has Incentive Stock Option Plans, Non-Qualified Stock Option Plans
and Stock Bonus Plans. All Stock Option and Bonus Plans have been approved by
the stockholders. A summary description of these Plans follows. In some cases
these Plans are collectively referred to as the "Plans".
Incentive Stock Option Plan. The Incentive Stock Option Plans authorize the
issuance of shares of CEL-SCI's common stock to persons who exercise options
granted pursuant to the Plan. Only CEL-SCI's employees may be granted options
pursuant to the Incentive Stock Option Plan.
To be classified as incentive stock options under the Internal Revenue
Code, options granted pursuant to the Plans must be exercised prior to the
following dates:
(a) The expiration of three months after the date on which an option
holder's employment by CEL-SCI is terminated (except if such
termination is due to death or permanent and total disability);
50
(b) The expiration of 12 months after the date on which an option holder's
employment by CEL-SCI is terminated, if such termination is due to the
Employee's permanent and total disability;
(c) In the event of an option holder's death while in the employ of
CEL-SCI, his executors or administrators may exercise, within three
months following the date of his death, the option as to any of the
shares not previously exercised;
The total fair market value of the shares of Common Stock (determined at
the time of the grant of the option) for which any employee may be granted
options which are first exercisable in any calendar year may not exceed
$100,000.
Options may not be exercised until one year following the date of grant.
Options granted to an employee then owning more than 10% of the Common Stock of
CEL-SCI may not be exercisable by its terms after five years from the date of
grant. Any other option granted pursuant to the Plan may not be exercisable by
its terms after ten years from the date of grant.
The purchase price per share of Common Stock purchasable under an option is
determined by the Committee but cannot be less than the fair market value of the
Common Stock on the date of the grant of the option (or 110% of the fair market
value in the case of a person owning more than 10% of CEL-SCI's outstanding
shares).
Non-Qualified Stock Option Plans. The Non-Qualified Stock Option Plans
authorize the issuance of shares of CEL-SCI's common stock to persons that
exercise options granted pursuant to the Plans. CEL-SCI's employees, directors,
officers, consultants and advisors are eligible to be granted options pursuant
to the Plans, provided however that bona fide services must be rendered by such
consultants or advisors and such services must not be in connection with the
offer or sale of securities in a capital-raising transaction. The option
exercise price is determined by the Committee.
Stock Bonus Plan. Under the Stock Bonus Plans shares of CEL-SCI's common
stock may be issued to CEL-SCI's employees, directors, officers, consultants and
advisors, provided however that bona fide services must be rendered by
consultants or advisors and such services must not be in connection with the
offer or sale of securities in a capital-raising transaction.
Other Information Regarding the Plans. The Plans are administered by
CEL-SCI's Compensation Committee ("the Committee"), each member of which is a
director of 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.
51
In the discretion of the Committee, any option granted pursuant to the
Plans may include installment exercise terms such that the option becomes fully
exercisable in a series of cumulating portions. The Committee may also
accelerate the date upon which any option (or any part of any options) is first
exercisable. Any shares issued pursuant to the Stock Bonus Plan and any options
granted pursuant to the Incentive Stock Option Plan or the Non-Qualified Stock
Option Plan will be forfeited if the "vesting" schedule established by the
Committee administering the Plan at the time of the grant is not met. For this
purpose, vesting means the period during which the employee must remain an
employee of CEL-SCI or the period of time a non-employee must provide services
to CEL-SCI. At the time an employee ceases working for CEL-SCI (or at the time a
non-employee ceases to perform services for CEL-SCI), any shares or options not
fully vested will be forfeited and cancelled. At the discretion of the Committee
payment for the shares of Common Stock underlying options may be paid through
the delivery of shares of CEL-SCI's Common Stock having an aggregate fair market
value equal to the option price, provided such shares have been owned by the
option holder for at least one year prior to such exercise. A combination of
cash and shares of Common Stock may also be permitted at the discretion of the
Committee.
Options are generally non-transferable except upon death of the option
holder. Shares issued pursuant to the Stock Bonus Plan will generally not be
transferable until the person receiving the shares satisfies the vesting
requirements imposed by the Committee when the shares were issued.
The Board of Directors of CEL-SCI may at any time, and from time to time,
amend, terminate, or suspend one or more of the Plans in any manner they deem
appropriate, provided that such amendment, termination or suspension will not
adversely affect rights or obligations with respect to shares or options
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, 2007
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 9,100,000 4,556,933 N/A 4,306,833
Non-Qualified Stock Option
Plans 12,760,000 7,420,231 N/A 2,032,667
Stock Bonus Plans 6,940,000 N/A 2,112,535 4,827,381
Of the shares issued pursuant to CEL-SCI's Stock Bonus Plans 975,419 shares
were issued as part of CEL-SCI's contribution to its 401(k) plan.
52
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, 2007, CEL-SCI's most recent fiscal year
end. CEL-SCI's Incentive and Non-Qualified Stock Option Plans have been approved
by CEL-SCI's shareholders.
Number of Securities
Number Remaining Available
of Securities For Future Issuance
to be Issued Weighted-Average Under Equity
Upon Exercise Exercise Price of Compensation Plans,
of Outstanding of Outstanding Excluding Securities
Plan category Options (a) Options Reflected in Column (a)
------------------------------------------------------------------------------------
Incentive Stock Option Plans 4,601,933 $0.64 4,306,833
Non-Qualified Stock Option Plans 7,462,698 $0.69 2,040,667
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The following table shows, as of November 30, 2007, information with
respect to the only persons owning beneficially 5% or more of the outstanding
common stock and the number and percentage of outstanding shares owned by each
director and officer and by the officers and directors as a group. Unless
otherwise indicated, each owner has sole voting and investment powers over his
shares of common stock.
Name and Address Number of Shares (1) Percent of Class (3)
---------------- -------------------- --------------------
Maximilian de Clara 894,674 0.8%
Bergstrasse 79
6078 Lungern,
Obwalden, Switzerland
Geert R. Kersten 6,633,981 (2) 5.6%
8229 Boone Blvd., Suite 802
Vienna, VA 22182
Patricia B. Prichep 1,837,242 1.6%
8229 Boone Blvd., Suite 802
Vienna, VA 22182
Eyal Talor, Ph.D. 1,214,107 1.0%
8229 Boone Blvd., Suite 802
Vienna, VA 22182
53
Name and Address Number of Shares (1) Percent of Class (3)
---------------- -------------------- --------------------
Daniel H. Zimmerman, Ph.D. 1,269,433 1.1%
8229 Boone Blvd., Suite 802
Vienna, VA 22182
John Cipriano 278,824 0.2%
8229 Boone Blvd., Suite 802
Vienna, VA 22182
Alexander G. Esterhazy 354,999 0.3%
20 Chemin du Pre-Poiset
CH- 1253 Vandoeuvres
Geneve, Switzerland
C. Richard Kinsolving, Ph.D. 584,090 0.5%
P.O. Box 20193
Bradenton, FL 34204-0193
Peter R. Young, Ph.D. 356,267 0.3%
1247 Dodgeton Drive
Frisco, TX 75034-1432
All Officers and Directors 13,423,617 10.9%
as a Group (9 persons)
(1) Includes shares issuable prior to January 31, 2008 upon the exercise of
options or warrants granted to the following persons:
Options or Warrants Exercisable
Name Prior to January 31, 2008
---- -------------------------------
Maximilian de Clara 656,667
Geert R. Kersten 3,558,001
Patricia B. Prichep 1,161,500
Eyal Talor, Ph.D. 817,999
Daniel H. Zimmerman, Ph.D. 815,000
John Cipriano 160,000
Alexander G. Esterhazy 234,999
C. Richard Kinsolving, Ph.D. 395,000
Peter R. Young, Ph.D. 221,666
(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.
54
(3) Amount includes shares referred to in (1) above but excludes shares which
may be issued upon the exercise or conversion of other options, warrants
and other convertible securities previously issued by CEL-SCI.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
BDO Seidman, LLP served as CEL-SCI's auditors for the two years ended
September 30, 2007. The following table shows the aggregate fees billed to
CEL-SCI for these years by BDO Seidman, LLP:
Year Ended September 30,
2007 2006
---- ----
Audit Fees $ 142,704 $204,860
Audit-Related Fees -- --
Tax Fees -- --
All Other Fees -- --
Audit fees represent amounts billed for professional services rendered for
the audit of CEL-SCI's annual financial statements and the reviews of the
financials statements included in CEL-SCI's 10-Q reports for the fiscal year and
all regulatory filings. Before BDO Seidman, LLP was engaged by CEL-SCI to render
audit or non-audit services, the engagement was approved by CEL-SCI's audit
committee. CEL-SCI's Board of Directors is of the opinion that the Audit Fees
charged by BDO Seidman, LLP are consistent with BDO Seidman, LLP maintaining its
independence from CEL-SCI.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a) See the Financial Statements attached to this Report.
Exhibits Page Number
-------- -----------
3(a) Articles of Incorporation Incorporated by reference to Exhibit
3(a) of CEL-SCI's combined Registration
Statement on Form S-1 and Post-Effective
Amendment ("Registration Statement"),
Registration Nos. 2-85547-D and 33-7531.
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.
55
Exhibits Page Number
-------- -----------
3(c) Amended Articles (Name Filed as Exhibit 3(c) to CEL-SCI's
change only) Registration Statement on Form S-1
Registration Statement (No. 33-34878).
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.
10(d) Employment Agreement with Incorporated by reference to Exhibit
Maximilian de Clara 10(d) of CEL-SCI's report on Form 8-K
(dated April 21, 2005) and Exhibit
10(d) to CEL-SCI's report on
Form 8-K dated September 8, 2006.
10(e) Employment Agreement with Incorporated by reference to Exhibit
Geert Kersten 10(e) of CEL-SCI's Registration
Statement on Form S-3 (Commission File
#106879) and Exhibit 10(c) to CEL-SCI's
report on Form 8-K dated September 8,
2006.
10(f) Distribution and Royalty Incorporated by reference to Exhibit
Agreement with Eastern Biotech 10(x) to Amendment No. 2 to CEL-SCI's
Registration statement on Form S-3
(Commission File No. 333-106879).
10(g) Securities Purchase Agreement Incorporated by reference to Exhibit 10
(together with schedule required to CEL-SCI's report on Form 8-K dated
by Instruction 2 to Item 601 of August 4, 2006.
Regulation S-K) pertaining to
Series K notes and warrants,
together with the exhibits to
the Securities Purchase
Agreement.
10(h) Subscription Agreement Incorporated by reference to Exhibit 10
(together with Schedule required of CEL-SCI's report on Form 8-K dated
by Instruction 2 to Item 601 of April 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.
23 Consent of BDO Seidman, LLP __________________________________
31 Rule 13a-14(a) Certifications __________________________________
32 Section 1350 Certifications __________________________________
56
CEL-SCI CORPORATION
Consolidated Financial Statements for the Years
Ended September 30, 2007, 2006, and 2005, and
Report of Independent Registered Public Accounting Firm
CEL-SCI CORPORATION
TABLE OF CONTENTS
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM F- 2
CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED
SEPTEMBER 30, 2007, 2006, AND 2005:
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
F-1
Report of Independent Registered Public Accounting Firm
Board of Directors and Stockholders
CEL-SCI Corporation
Vienna, Virginia
We have audited the accompanying consolidated balance sheets of CEL-SCI
Corporation as of September 30, 2007 and 2006 and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
three years in the period ended September 30, 2007. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our 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, 2007 and 2006, and the results of its operations and its cash
flows for each of the three years in the period ended September 30, 2007, in
conformity with accounting principles generally accepted in the United States of
America.
/s/ BDO SEIDMAN LLP
Bethesda, Maryland
January 11, 2008
F-2
CEL-SCI CORPORATION
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2007 AND 2006
ASSETS 2007 2006
------------------- --------------------
CURRENT ASSETS:
Cash and cash equivalents $ 10,993,021 $ 8,080,365
Interest and other receivables 57,476 35,626
Prepaid expenses 34,578 526,498
Inventory used for R&D and
manufacturing 385,650 390,644
Deposits 14,828 14,828
------------------- --------------------
Total current assets 11,485,553 9,047,961
RESEARCH AND OFFICE EQUIPMENT AND
LEASEHOLD IMPROVMENTS-- less accumulated
depreciation of $1,859,644 and $1,773,102 233,876 92,117
PATENT COSTS--less accumulated
amortization of $896,407 and
$816,169 541,380 513,199
RESTRICTED CASH 2,168,629 -
DEFERRED RENT 6,301,364 -
------------------- --------------------
TOTAL ASSETS $ 20,730,802 $ 9,653,277
=================== ====================
(continued)
F-3
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
2007 2006
------------------- --------------------
CURRENT LIABILITIES:
Accounts payable 248,120 98,056
Accrued expenses 98,603 74,894
Due to employees 26,735 17,425
Accrued interest on convertible debt 68,795 74,473
Deposits held 3,000 3,000
Derivative instruments - current
portion 782,732 1,670,234
------------------- --------------------
Total current liabilities 1,227,985 1,938,082
Deferred rent 1,466 -
Derivative instruments -
noncurrent portion 4,831,252 8,645,796
------------------- --------------------
Total liabilities 6,060,703 10,583,878
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY (DEFICIT):
Preferred stock, $.01 par value--authorized
100,000 shares, issued and outstanding, -0-
Common stock, $.01 par value--authorized
300,000,000 shares; issued and outstanding,
115,678,662 and 82,697,428 shares at
September 30, 2007 and 2006, respectively 1,156,787 826,974
Additional paid-in capital 130,081,378 105,180,834
Accumulated deficit (116,568,066) (106,938,409)
------------------- --------------------
Total stockholders' equity (deficit) 14,670,099 (930,601)
------------------- --------------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY (DEFICIT) $ 20,730,802 $ 9,653,277
=================== ====================
See notes to consolidated financial statements
F-4
CEL-SCI CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED SEPTEMBER 30, 2007, 2006 AND 2005
2007 2006 2005
-------------- ------------- -------------
GRANT REVENUE AND OTHER $ 57,043 $ 125,457 $ 269,925
OPERATING EXPENSES:
Research and development (excluding
R&D depreciation of $91,292,
$74,043 and $96,442 respectively,
included below) 2,528,528 1,896,976 2,229,729
Depreciation and amortization 176,186 170,903 190,420
General & administrative 6,704,538 3,406,774 1,930,543
-------------- ------------- -------------
Total operating expenses 9,409,252 5,474,653 4,350,692
-------------- ------------- -------------
NET OPERATING LOSS (9,352,209) (5,349,196) (4,080,767)
GAIN ON DERIVATIVE INSTRUMENTS 868,182 2,325,784 363,028
COSTS ASSOCIATED WITH CONVERTIBLE DEBT - (4,791,548) -
OTHER INCOME - - 625,472
INTEREST INCOME 562,973 92,487 52,660
INTEREST EXPENSE (1,708,603) (216,737) -
-------------- ------------- -------------
NET LOSS $ (9,629,657) $ (7,939,210) $ (3,039,607)
============== ============= =============
NET LOSS PER COMMON SHARE
BASIC $ (0.10) $ (0.10) $ (0.04)
DILUTED $ (0.10) $ (0.11) $ (0.05)
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING
BASIC 97,310,488 78,971,290 72,703,395
DILUTED 97,310,488 93,834,078 73,581,925
See notes to consolidated financial statements.
F-5
CEL-SCI CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED SEPTEMBER 30, 2007, 2006 AND 2005
Additional
Common Stock Paid-In Unearned Accumulated
Shares Amount Capital Compensation Deficit Total
------------------------------------------------------------------------------------------
BALANCE, OCTOBER 1, 2004 72,147,367 $ 721,474 $ 99,374,697 $ (14,237) $ (95,959,592) $ 4,122,342
Stock issued to nonemployees
for service 8,687 86 4,084 4,170
Exercise of stock options 200,669 2,007 47,778 49,785
Issuance of stock options
to nonemployees 7,972 7,972
401(k) contributions paid
in common stock 144,469 1,445 77,423 78,868
Issuance of common stock
for equity line of credit 743,014 7,430 359,842 367,272
Expense unearned compensation 14,237 14,237
Private placement 1,250,000 12,500 487,500 500,000
Net loss (3,039,607) (3,039,607)
---------- ---------- ----------- -------- ----------- ----------
BALANCE SEPTEMBER 30, 2005 74,494,206 744,942 100,359,296 -- (98,999,199) 2,105,039
Stock issued to nonemployees
for service 980,000 9,800 611,250 621,050
Exercise of stock options 150,000 1,500 37,217 38,717
Issuance of stock options --
to nonemployees 271,893 271,893
Extension of options 86,864 86,864
401(k) contributions paid --
in common stock 132,989 1,330 84,150 85,480
Issuance of common stock to
employees 583,815 5,838 317,468 323,306
Issuance of common stock
for equity line of credit 1,419,446 14,194 663,533 677,727
F-6
CEL-SCI CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED SEPTEMBER 30, 2007, 2006 AND 2005
Additional
Common Stock Paid-In Unearned Accumulated
Shares Amount Capital Compensation Deficit Total
------------------------------------------------------------------------------------------
Payment of interest on
convertible debt in
common stock 68,500 685 37,228 37,913
Penalty shares issued 186,250 1,863 130,624 132,487
Exercise of warrants 1,300,000 13,000 652,000 665,000
Cashless exercise of warrants 882,222 8,822 (8,822) --
Private placement 2,500,000 25,000 975,000 1,000,000
Reclassification of derivatives 797,835 797,835
SFAS 123R cost of employee
options 180,298 180,298
Financing costs (15,000) (15,000)
Net loss (7,939,210) (7,939,210)
----------- ----------- ---------- ------------- ---------- -----------
BALANCE, SEPTEMBER 30, 2006 82,697,428 826,974 105,180,834 -- (106,938,409) (930,601)
Private placement 20,043,331 200,433 14,832,067 15,032,500
401(k) contributions paid
in common stock 137,546 1,376 88,347 89,723
Issuance of common stock to
employees 1,663,830 16,638 308,140 324,788
Exercise of stock options 1,337,364 13,374 599,092 612,466
Penalty shares issued 245,000 2,450 153,900 156,350
Stock issued to nonemployees
for service 3,466,300 34,663 2,512,736 2,547,399
Issuance of stock options
to nonemployees 1,556,228 1,556,228
Payment of principal on
convertible debt in common
stock 343,099 3,431 229,724 233,155
Conversion of convertible debt
into common stock 5,744,764 57,448 4,323,279 4,380,727
SFAS 123R cost of employee
options 307,201 307,201
Financing costs (10,170) (10,170)
Net loss (9,629,657) (9,629,657)
----------- ----------- ---------- ------------- ---------- -----------
BALANCE, SEPTEMBER 30, 2007 115,678,662 $ 1,156,787 $130,081,378 $ -- $(116,568,066) $14,670,099
=========== =========== ============= ============ ============ ===========
See notes to consolidated financial statements
F-7
CEL-SCI CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED SEPTEMBER 30, 2007, 2006 AND
2005
2007 2006 2005
-------------- ------------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(9,629,657) $ (7,939,210) %(3,039,607)
Adjustments to reconcile net loss to
net cash used for operating activities:
Depreciation and amortization 176,186 170,902 190,420
Issuance of stock options to
nonemployees for services 191,455 271,893 7,972
Issuance of common stock for services 2,547,399 621,050 4,170
Penalty shares issued to nonemployees 156,350 132,487 --
Modification of stock options -- 86,864 --
Issuance of stock to employees 324,778 323,306 --
Employee option cost 307,201 180,298 --
Common stock contributed to 401(k)
plan 89,723 85,480 78,868
Decrease in unearned compensation -- -- 14,237
Impairment loss on abandonment of
patents 34,122 -- 3,716
Loss on retired equipment -- 645 1,806
Deferred rent 1,466 -- --
Amortization of discount on
convertible note 1,180,421 104,351 --
Gain on derivative instruments (868,182) (2,325,784) (363,028)
Change in assets and liabilities:
Decrease (increase) in interest and
other receivables (14,753) (14,462) 92
Decrease (increase) in prepaid
expenses 491,920 (454,651) 57,795
(Increase) decrease in inventory
used in R&D and manufacturing 4,994 (29,839) 18,150
Increase (decrease) in accounts
payable 89,159 3,637 (71,782)
Increase in accrued expenses 23,709 275 10,259
Increase (decrease) in accrued
interest on convertible debt (5,678) 112,386 --
Increase (decrease) in due to
employees 9,310 (5,455) 17,560
---------- --------- --------
Net cash used for operating activities (4,890,077) (8,675,827) (3,069,372)
---------- --------- --------
CASH FLOWS USED FOR INVESTING ACTIVITIES:
Deferred rent on manufacturing
facility (4,936,591) -- --
Increase in restricted cash (2,168,629) -- --
Purchases of equipment (181,459) (1,885) (65,736)
Expenditures for patent costs (137,884) (88,819) (87,966)
---------- --------- --------
Net cash used for investing activities (7,424,563) (90,704) (153,702)
---------- --------- --------
(continued)
See notes to consolidated financial statements.
F-8
CEL-SCI CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED SEPTEMBER 30, 2007, 2006 AND 2005
2007 2006 2005
-------------- ------------- -----------
CASH FLOWS PROVIDED BY FINANCING ACTIVITIES:
Proceeds from issuance of common stock $15,032,500 $ 1,000,000 $ 500,000
Proceeds from exercise of warrants -- 665,000 --
Draw-downs on equity line of credit -- 677,727 367,272
Proceeds from exercise of stock options 612,466 38,717 49,785
Proceeds from convertible debt -- 8,300,000 --
Fair value adjustment for convertible debt -- 3,163,265 --
Fair value adjustment for warrants issued
in relation to convertible debt -- 835,666 --
Principal payments on convertible debt (407,500) -- --
Warrants issued to placement agent -- 223,907 --
Costs for equity related transactions not
completed (10,170) (15,000) --
----------- ---------- ----------
Net cash provided by financing activities 15,227,296 14,889,282 917,057
----------- ---------- ----------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 2,912,656 6,122,751 (2,306,017)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 8,080,365 1,957,614 4,263,631
----------- ---------- ----------
CASH AND CASH EQUIVALENTS, END OF YEAR 10,993,021 8,080,365 1,957,614
=========== ========== ==========
(continued)
See notes to consolidated financial statements.
F-9
CEL-SCI CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED SEPTEMBER 30, 2007, 2006 AND 2005
2007 2006 2005
-------------- ------------- -----------
CONVERSION OF CONVERTIBLE DEBT
INTO COMMON STOCK:
Decrease in convertible debt $ 4,373,631 $ -- $ --
Increase in receivables 7,096 -- --
Increase in common stock (57,448) -- --
Increase in additional paid-in capital (4,323,279) -- --
----------- ----------- ----------
$ -- $ -- $ --
=========== =========== ==========
CONVERSION OF INTEREST ON
CONVERTIBLE DEBT INTO COMMON STOCK:
Decrease in accrued liabilities $ -- $ 37,913 $ --
Increase in common stock -- (685) --
Increase in additional paid-in capital -- (37,228) --
----------- ----------- ----------
$ -- $ -- $ --
=========== =========== ==========
PAYMENT OF CONVERTIBLE DEBT PRINCIPAL WITH
COMMON STOCK:
Decrease in convertible debt $ 233,155 $ -- $ --
Increase in common stock (3,431) -- --
Increase in additional paid-in capital (229,724) -- --
----------- ----------- ----------
$ -- $ -- $ --
=========== =========== ==========
ISSUANCE OF SERIES L AND M WARRANTS:
Increase in additional paid-in capital $(5,598,655) $ -- $ --
Decrease in additional paid-in capital 5,598,655 -- $ --
----------- ----------- ----------
$ -- $ -- $ --
=========== =========== ==========
WARRANTS ISSUED TO LESSOR:
Increase in deferred rent $ 1,364,773 $ -- $ --
Increase in additional paid-in capital (1,364,773) -- --
----------- ----------- ----------
$ -- $ -- $ --
=========== =========== ==========
EQUIPMENT COSTS INCLUDED IN
ACCOUNTS PAYABLE:
Increase in research and office
equipment $ 52,476 $ -- $ 268
Increase in accounts payable (52,476) -- (268)
----------- ----------- ----------
$ -- $ -- $ --
=========== =========== ==========
(continued)
See notes to consolidated financial statements.
F-10
CEL-SCI CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED SEPTEMBER 30, 2007, 2006 AND 2005
2007 2006 2005
-------------- ------------- -----------
PATENT COSTS INCLUDED IN
ACCOUNTS PAYABLE:
Increase in patent costs $ 8,429 $ 20,065 $ 2,568
Increase in accounts payable (8,429) (20,065) (2,568)
---------- ----------- ---------
$ -- $ -- $ --
========== =========== =========
CASHLESS EXERCISE OF WARRANTS:
Increase in common stock -- (8,822) --
Increase in additional paid-in capital -- 8,822 --
---------- ----------- ---------
$ -- $ -- $ --
========== =========== =========
RECLASSIFICATION OF DERIVATIVE
INSTRUMENTS:
Decrease in derivative instruments -- $ 797,835 $ --
Increase in additional paid-in capital -- (797,835) --
---------- ----------- ---------
$ -- $ -- $ --
========== =========== =========
FAIR VALUE ADJUSTMENT FOR CONVERTIBLE
DEBT AND RELATED WARRANTS:
Increase in convertible debt -- $ 3,998,931 $ --
Increase in costs associated with
convertible debt -- (3,998,931) --
---------- ----------- ---------
$ -- $ -- $ --
========== =========== =========
COST OF NEW WARRANTS AND REPRICING OF
OLD WARRANTS ON PRIVATE PLACEMENT:
Increase in additional paid-in capital -- $ 1,192,949 $ --
Decrease in additional paid-in capital -- (1,192,949) --
---------- ----------- ---------
$ -- $ -- $ --
========== =========== =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash expenditure for interest expense $ 528,182 $ -- $ --
See notes to consolidated financial statements.
F-11
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CEL-SCI Corporation (the "Company") was incorporated on March 22, 1983, in
the state of Colorado, to finance research and development in biomedical
science and ultimately to engage in marketing and selling products.
CEL-SCI's lead product, Multikine(R), is being developed for the treatment of
cancer. Multikine is a patented immunotherapeutic agent consisting of a
mixture of naturally occurring cytokines, including interleukins,
interferons, chemokines and colony-stimulating factors, currently being
developed for the treatment of cancer. Multikine is designed to target the
tumor micro-metastases that are mostly responsible for treatment failure. The
basic concept is to add Multikine to the current cancer treatments with the
goal of making the overall cancer treatment more successful. Phase II data
indicated that Multikine treatment resulted in a substantial increase in the
survival of patients. The lead indication is advanced primary head & neck
cancer. Since Multikine is not tumor specific, it may also be applicable in
many other solid tumors.
Significant accounting policies are as follows:
a. Principles of Consolidation--The consolidated financial statements include
the accounts of the Company and its wholly owned subsidiary, Viral
Technologies, Inc. (VTI). All significant intercompany transactions have been
eliminated upon consolidation.
b. Cash and Cash Equivalents--For purposes of the statements of cash flows, cash
and cash equivalents consists principally of unrestricted cash on deposit and
short-term money market funds. The Company considers all highly liquid
investments with a maturity when purchased of less than three months, as cash
and cash equivalents.
c. Restricted Cash--The restricted cash is money held in escrow pursuant to the
lease agreement for the manufacturing facility.
d. Prepaid Expenses and Inventory-- Prepaid expenses consist of expenses which
benefit a substantial period of time. Inventory consists of manufacturing
production advances and bulk purchases of laboratory supplies to be consumed
in the manufacturing of the Company's product for clinical studies.
e. Research and Office Equipment--Research and office equipment is recorded at
cost and depreciated using the straight-line method over estimated useful
lives of five to seven years. Leasehold improvements are depreciated over the
shorter of the estimated useful life of the asset or the terms of the lease.
Repairs and maintenance which do not extend the life of the asset are
expensed when incurred. The fixed assets are reviewed on a quarterly basis to
determine if any of the assets are impaired. Depreciation expense for the
years ended September 30, 2007, 2006 and 2005 totaled $92,176, $90,664 and
$116,268, respectively.
F-12
f. 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, 2007, 2006 and 2005,
the Company recorded patent impairment charges of $34,122, $-0- and $3,716,
respectively, for the net book value of patents abandoned during the year.
These abandonments included the write off in the year ended September 30,
2007 of the unamortized patent costs in Viral Technologies, Inc., the
Company's wholly owned subsidiary, totaling $34,122. These amounts are
included in general and administrative expenses. Amortization expense for
the years ended September 30, 2007, 2006 and 2005 totaled $84,010, $80,238
and $74,152, respectively. The Company estimates that amortization expense
will be $77,846 for each of the next five years, totaling $389,230.
g. Deferred Rent--The Company has included in deferred rent the following: 1)
deposit on the manufacturing facility ($3,150,000); 2) warrants issued to
lessor ($1,364,773); and 3) deposit on the cost of the leasehold
improvements for the manufacturing facility ($1,786,591).
h. Derivative Instruments--The Company enters into financing arrangements that
consist of freestanding derivative instruments or are hybrid instruments
that contain embedded derivative features. The Company accounts for these
arrangement in accordance with Statement of Financial Accounting Standards
No. 133, "Accounting for Derivative Instruments and Hedging Activities",
("SFAS No. 133") and Emerging Issues Task Force Issue No. 00-19, "Accounting
for Derivative Financial Instruments Indexed to, and Potentially Settled in,
a Company's Own Stock", ("EITF 00-19"), as well as related interpretations
of these standards. In accordance with accounting principles generally
accepted in the United States ("GAAP"), derivative instruments and hybrid
instruments are recognized as either assets or liabilities in the statement
of financial position and are measured at fair value with gains or losses
recognized in earnings or other comprehensive income depending on the nature
of the derivative or hybrid instruments. Embedded derivatives that are not
clearly and closely related to the host contract are bifurcated and
recognized at fair value with changes in fair value recognized as either a
gain or loss in earnings if they can be reliably measured. When the fair
value of embedded derivative features can not be reliably measured, the
Company measures and reports the entire hybrid instrument at fair value with
changes in fair value recognized as either a gain or loss in earnings. The
Company determines the fair value of derivative instruments and hybrid
instruments based on available market data using appropriate valuation
models, giving consideration to all of the rights and obligations of each
instrument and precluding the use of "blockage" discounts or premiums in
determining the fair value of a large block of financial instruments. Fair
value under these conditions does not necessarily represent fair value
determined using valuation standards that give consideration to blockage
discounts and other factors that may be considered by market participants in
establishing fair value.
i. Research and Development Grant Revenues--The Company's grant arrangements
are handled on a reimbursement basis. Grant revenues under the arrangements
are recognized as grant revenue when costs are incurred. The grants which
the Company had been receiving have been exhausted in fiscal year 2007 and
the Company is currently not receiving funds from any grants.
F-13
j. Research and Development Costs--Research and development expenditures are
expensed as incurred. Total research and development costs, excluding
depreciation, were $2,528,528, $1,896,977 and $2,326,171 for the years ended
September 30, 2007, 2006 and 2005.
k. Net Loss Per Common Share--Net loss per common share is computed by dividing
the net loss by the weighted average number of common shares outstanding
during the period. Potentially dilutive common stock equivalents, including
convertible preferred stock, convertible debt and options to purchase common
stock, were included in the calculation unless it was antidilutive.
l. 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.
m. Income Taxes--The Company has net operating losses of approximately
$93,519,300. 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.
n. Use of Estimates--The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates. Accounting for derivatives is
based upon valuations of derivative instrument determined using various
valuation techniques including the Black-Scholes and binomial pricing
methodologies. The Company considers such valuations to be significant
estimates.
o. Recent Accounting Pronouncements--In September 2006, FASB issued SFAS No.
157, "Fair Value Measurements". The statement defines fair value, establishes
a framework for measuring fair value in GAAP and expands disclosures about
fair value measurements. The statement is effective for financial statements
issued for fiscal years beginning after November 15, 2007 and interim periods
within those fiscal years. The Company is evaluating whether this statement
will affect its current practice in valuing fair value of its derivatives
each quarter.
In February 2007, FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities - Including an amendment of FASB
Statement No. 15". The Statement permits companies to choose to measure many
financial instruments and certain other items at fair value. The statement is
effective for fiscal years that begin after November 15, 2007, but early
adoption is permitted. The Company is evaluating the effect of the adoption
of this statement.
F-14
In July 2006, the Financial Accounting Standards Board issued Interpretation
No. 48, "Accounting for Uncertainty in Income Taxes" ("FIN 48") which
clarifies the accounting for income taxes by prescribing the minimum
recognition threshold a tax position is required to meet before being
recognized in the financial statements. FIN 48 also provides guidance on
derecognition, measurement, classification, interest and penalties,
accounting in interim periods, disclosure and transition. FIN 48 is effective
for fiscal years beginning after December 15, 2006. FIN 48 is not expected to
have an effect on the consolidated financial statements.
p. Stock-Based Compensation-- In December 2004, the FASB issued SFAS No. 123R,
"Share-Based Payment". SFAS No. 123R requires companies to recognize
compensation expense in an amount equal to the fair value of the share-based
payment (stock options and restricted stock) issued to employees. 123R
applies to all transactions involving issuance of equity by a Company in
exchange for goods and services, including transactions with employees. SFAS
No. 123R was effective for the first fiscal period in the fiscal year
beginning after June 15, 2005. The Company adopted SFAS 123R beginning
October 1, 2005. The Company recognized expense of $307,201 for options
issued or vested during the fiscal year ended September 30, 2007 and expense
of $180,298 for options issued or vested during the fiscal year ended
September 30, 2006. This expense was recorded as general and administrative
expense. The following table summarizes stock option activity for the year
ended September 30, 2007.
Non-Qualified Stock Option Plan
-------------------------------
Outstanding Exercisable
--------------------------------------------- -----------------------------------------------------
Weighted Ave Weighted
Weighted Remaining Weighted Average
Number Average Contractual Aggregate Number Average Contractual Aggregate
of Exercise Term Intrinsic of Exercise Term Intrinsic
Shares Price (Years) Value Shares Price (Years) Value
------- -------- ------------ ----------- --------- -------- ----------- -----------
Outstanding at
October 1, 2006 6,731,362 $ 0.65 5.66 $1,384,353 5,606,713 $ 0.68 5.05 $1,300,020
Vested 554,663 0.58
Granted 870,000 0.66 10.00 870,000 0.66 10.00
Exercised (653,664) 0.47 5.62 257,463 (653,664) 0.47 5.62 257,463
Forfeited
Expired (40,000) 2.15 (40,000) 2.15
Outstanding at
September 30, 2007 6,907,698 $ 0.70 5.17 $1,162,496 5,467,712 $ 0.64 4.02 $1,085,252
Incentive Stock Option Plan
---------------------------
Outstanding Exercisable
--------------------------------------------- -----------------------------------------------------
Weighted Ave Weighted
Weighted Remaining Weighted Average
Number Average Contractual Aggregate Number Average Contractual Aggregate
of Exercise Term Intrinsic of Exercise Term Intrinsic
Shares Price (Years) Value Shares Price (Years) Value
------- -------- ------------ ----------- --------- -------- ----------- -----------
Outstanding at
October 1, 2006 4,326,933 $ 0.65 6.03 $1,047,933 3,810,26 $ 0.66 5.59 $1,021,933
Vested 213,334 0.64
Granted 300,000 0.63 10.00 300,000 0.63 10.00
Exercised
Forfeited (25,000) 3.12 (25,000) 3.12
Expired
Outstanding at
September 30, 2007 4,601,933 $ 0.64 5.38 $1,078,567 3,998,601 0.63 4.52 $1,050,067
F-15
The total intrinsic value of options exercised during the year ended
September 30, 2007 was $257,463.
A summary of the status of the Company's non-vested options as of
September 30, 2007 is presented below:
Non-qualified Stock Option Plan:
Nonvested at October 1, 2005 1,572,470 $0.25
Vested (1,538,821)
Granted 1,466,000
Forfeited --
Expired --
----------
Nonvested at September 30, 2006 1,499,649 $0.23
Vested (554,663)
Granted 870,000
Forfeited --
Expired --
----------
Nonvested at September 30, 2007 1,814,986 $0.51
Incentive Stock Option Plan:
Nonvested at October 1, 2005 1,086,665 $0.21
Vested (939,999
Granted 370,000
Forfeited --
Expired --
----------
Nonvested at September 30, 2006 516,666 $0.46
Vested (213,334)
Granted 300,000
Forfeited --
Expired --
----------
Nonvested at September 30, 2007 603,332 $0.49
The weighted average fair value at the date of grant for options granted
during fiscal years 2007, 2006 and 2005 was $0.53, $0.58 and $0.48,
respectively.
F-16
For the year ended September 30, 2005, if the Company had elected to
recognize compensation expense based on the fair value of the awards granted
consistent with the provisions of SFAS No. 123, the Company's net loss and
net loss per common share would have been increased to the pro forma amounts
indicated below:
September 30, 2005
------------------
Net loss:
As reported $(3,039,607)
subtract: Total stock-based
employee compensation
expense determined under
fair-value based method for
all awards (575,716)
------------
Pro forma net loss $(3,615,323)
===========
Net loss per common share:
As reported $ (0.04)
===========
Pro forma $ (0.05)
===========
In September 2007, CEL-SCI issued 1,170,000 stock options to employees and
directors at a fair value of $616,977, or $0.53 per share. In September 2006,
CEL-SCI issued 1,086,000 stock options to employees and directors at a fair
value of $543,699, or $0.50 per share. The fair value of each option grant
was estimated on the date of grant using the Black-Scholes option-pricing
model with the following assumptions:
2007 2006
---- ----
Expected stock risk volatility 80% 78%
Risk-free interest rate 4.67% 4.88%
Expected life options 10 Years 10 Years
Expected dividend yield -- --
The Company's stock options are not transferable, and the actual value of the
stock options that an employee may realize, if any, will depend on the excess
of the market price on the date of exercise over the exercise price. The
Company has based its assumption for stock price volatility on the variance
of monthly closing prices of the Company's stock. The risk-free rate of
return used for fiscal years 2007 and 2006 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.
F-17
At the annual shareholders' meeting on September 14, 2007, the following
plans were adopted:
o CEL-SCI's 2007 Incentive Stock Option Plan which provides that up to
1,000,000 shares of common stock may be issued upon the exercise of
options granted pursuant to the Incentive Stock Option Plan.
o CEL-SCI's 2007 Non-Qualified Stock Option Plan which provides that up to
1,000,000 shares of common stock may be issued upon the exercise of
options granted pursuant to the Non-Qualified Stock Option Plan.
o CEL-SCI's 2007 Stock Bonus Plan which provides that up to 1,000,000 shares
of common stock may be issued to persons granted stock bonuses pursuant to
the Stock Bonus Plan.
o CEL-SCI's Stock Compensation Plan was amended to provide for the issuance
of up to 1,000,000 additional restricted shares of common stock to
CEL-SCI's directors, officers, employees and consultants for services
provided to CEL-SCI.
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.
Features of the Convertible Debt Instrument and Warrants
The Series K Notes are 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 are exercisable over a
five-year period from February 4, 2007 through February 4, 2012 at $0.95
per share.
The Series K Notes bear interest at the greater of 8% or LIBOR plus 300
basis points, and are required to be repaid in thirty equal monthly
installments of $207,500 beginning on March 4, 2007 and continuing through
September 4, 2010. The remaining principal balance of $2,075,000 is
required to be repaid on August 4, 2011; however, holders of the Series K
Notes may require repayment of the entire remaining principal balance at
any time after August 4, 2010. Interest is payable quarterly beginning in
September 30, 2006. Each payment of principal and accrued interest may 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 is
determined based on the lower of (a) $0.86 per share, as adjusted pursuant
to the terms of the Series K Notes or (b) 90% applied to the arithmetic
average of the volume-weighted-average trading prices for the twenty day
period immediately preceding each share settlement.
In the event of default, as defined in the Series K Notes, all amounts due
and outstanding thereunder shall become, at the option of the holders,
immediately due and payable in cash, in an amount that equals the sum of
(i) the greater of (a) 115% of the outstanding balance plus all accrued and
F-18
unpaid interest or (b) 115% of the arithmetic average of the
volume-weighted-average trading prices for the five day period immediately
preceding notice requiring repayment, and (ii) all other amounts due in
connection with the Series K Notes and associated agreements. Additionally,
if a certain breach occurs under a related registration rights agreement,
the Company will be required to pay, as liquidated damages, 1.5% per month
of the outstanding balance of the Series K Notes, until such default is
cured (or 2% per month if such breach occurs after 180 days following
closing of the transaction). Events of default include circumstances in
which the Company either fails to have a registration statement for shares
into which the Series K Notes can be converted be declared effective by the
SEC within 180 days of the issuance date of the Series K Notes or that the
registration statement's effectiveness lapses for any reason.
The Company may not make payments in shares if such payments would result
in the cumulative issuance of shares of its common stock exceeding 19.999%
of the shares outstanding on the day immediately preceding the issuance
date of the Series K Notes, unless prior approval is given by vote of at
least a majority of the shares outstanding. The Company received such
approval on November 17, 2006. The Company cannot determine at this time if
it will be required to issue shares in excess of the Issuable Maximum
because the number of shares issuable as payments of principal and interest
under the Series K Notes will depend on future share prices. The conversion
price of the Series K Notes and exercise price of the Series K Warrants are
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 is accounting for the Series K Warrants as derivative
liabilities in accordance with SFAS No. 133. The Company has determined
that the Series K Notes constitute a hybrid instrument that has 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 FAS 133. The
Company has determined that certain of these features can not be reliably
measured and, in accordance with the requirements of SFAS No. 133, has
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
F-19
determined the initial carrying value of the Series K Notes to be
$6,565,528. The Series K Notes were immediately marked to fair value
resulting in a derivative liability in the amount of $9,728,793 and
recognized a charge of $3,163,265, which was recorded as costs associated
with convertible debt. As of September 30, 2007, the fair value of the
Series K Notes is $3,010,836, and the Company recognized a gain of $760,810
during the year ended September 30, 2007. A debt discount in the amount of
$1,734,472 is being amortized to interest expense using the effective
interest method over the expected term of the Series K Notes. During the
year ended September 30, 2007, the Company recorded interest expense of
$1,183,728 in related amortization of the debt discount, because of
conversions of the debt into stock and the amortization 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 EITF Issue No.
00-19, "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 must be
accounted for as freestanding derivative instruments pursuant to the
provisions of FAS 133. 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, 2007, the fair value of the Series K
Warrants is $2,410,322. This resulted in a gain on derivative instruments
of $868,182 for the year ended September 30, 2007. The Company paid
$568,710 in cash transaction costs and incurred another $223,907 in costs
based upon the fair value of the Placement Agent Warrants, which was
recorded as costs associated with convertible debt. Such costs were
expensed immediately as part of fair value adjustments required in
connection with the convertible debt instrument and the Company's
irrevocable election to initially and subsequently measure the Series K
Notes at fair value. As of September 30, 2007, the fair value of the
Placement Agent Warrants was $192,826.
During the year ended September 30, 2007, $4,399,285 in convertible debt
and related derivative instruments was converted into 5,744,764 shares of
common stock.
The following summary comprises the total of the fair value of the
convertible debt and related derivative instruments at September 30, 2007
and 2006:
2007 2006
---- ----
Face value of debt $3,285,715 $8,300,000
Discount on debt (443,086) (1,623,507)
Investor warrants 1,734,472 1,734,472
Placement agent warrants 192,826 177,582
Fair value adjustment-convertible debt 168,207 1,418,423
Fair value adjustment-investor warrants 675,850 309,060
----------- ---------
Total fair value $5,613,984 $10,316,030
========== ===========
3. OPERATIONS AND FINANCING
The Company has incurred significant costs since its inception in connection
with the acquisition of certain patented and unpatented proprietary
technology and know-how relating to the human immunological defense system,
patent applications, research and development, administrative costs,
construction of laboratory facilities, and clinical trials. The Company has
funded such costs with proceeds realized from the public and private sale of
its common and preferred stock. The Company will be required to raise
additional capital or find additional long-term financing in order to
continue with its research efforts. To date, the Company has not generated
any revenue from product sales. The ability of the Company to complete the
necessary clinical trials and obtain Federal Drug Administration (FDA)
approval for the sale of products to be developed on a commercial basis is
uncertain. Ultimately, the Company must complete the development of its
products, obtain the appropriate regulatory approvals and obtain sufficient
revenues to support its cost structure.
F-20
Currently, the Company believes it has sufficient cash to support its
operations at the current expenditure rate until 2009. The Company received
the go-ahead from FDA in January 2007 to commence its Phase III clinical
trial with Multikine.
4. RESEARCH AND OFFICE EQUIPMENT
Research and office equipment at September 30, 2007 and 2006, consists of the
following:
2007 2006
---- ----
Research equipment $ 1,931,459 $ 1,712,137
Furniture and equipment 119,020 110,041
Leasehold improvements 43,041 43,041
------------ ----------
2,093,520 1,865,219
Less: Accumulated depreciation and
amortization (1,859,644) (1,773,102)
------------ ----------
Net research and office equipment $ 233,876 $ 92,117
============ ==========
5. INCOME TAXES
At September 30, 2007 the Company had a federal net operating loss
carryforward of approximately $93.5 million expiring from 2008 through 2027.
The Company has deferred tax assets of approximately $35.6 million and $32.7
million at September 30, 2007 and 2006, respectively. The deferred tax assets
are principally a result of the net operating loss carryforwards and research
and development credits.
At both September 30, 2007 and 2006, the Company has recognized a valuation
allowance to the full extent of its deferred tax assets. The valuation
allowances at September 30, 2007 and 2006 were approximately $35,596,300 and
$32,690,200, respectively. In assessing the realization of the deferred tax
assets, management considered whether it was more likely than not that some
portion or all of the deferred tax asset will be realized. The ultimate
realization of the deferred tax assets are dependent upon the generation of
future taxable income. Management has considered the history of the Company's
operating losses and believes that the realization of the benefit of the
deferred tax assets cannot be determined. In addition, under the Internal
Revenue Code Section 382, the Company's ability to utilize these net
operating loss carryforwards may be limited or eliminated in the event of a
change in ownership. Internal Revenue Code Section 382 generally defines a
change in ownership as the situation where there has been a more than 50
percent change in ownership of the value of the Company within the last three
years.
In addition, the Company has a general business credit as a result of the
credit for increasing research activities of $1,950,700 and $1,713,900 at
September 30, 2007 and 2006, respectively. These tax credits begin expiring
after twenty years from the year in which the credit was generated. As
discussed above, the Company believes that the realization of the benefit of
these tax credits cannot be determined because the use of the credits is
dependent upon the generation of future taxable income.
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:
F-21
2007 2006 2005
--------- -------- --------
Expected statutory rate (35.0%) (35.0%) (35.0%)
State tax rate, net of federal benefit (3.9%) (3.9%) (3.9%)
Nondeductible interest 1.4% 0.9% 0.0%
Nondeductible (nontaxable) derivative
losses (gains) (1.0%) (2.9%) (4.6%)
Other nondeductible expenses 0.1% 6.1% 15.2%
Increase in valuation allowance 38.4% 34.8% 28.3%
--------- -------- --------
Effective tax rate 0.0% 0.0% 0.0%
========= ======== ========
6. STOCK OPTIONS, BONUS PLAN AND WARRANTS
Non-Qualified Stock Option Plan--At September 30, 2007, the Company has
collectively authorized the issuance of 12,760,000 shares of common stock
under the Non-Qualified Stock Option Plan. Options typically vest over a
three-year period and expire no later than ten years after the grant date.
Terms of the options are to be determined by the Company's Compensation
Committee, which administers all of the plans. The Company's employees,
directors, officers, and consultants or advisors are eligible to be granted
options under the Non-Qualified Stock Option Plan.
Information regarding the Company's Non-Qualified Stock Option Plan is
summarized as follows:
Outstanding Exercisable
--------------------- --------------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
-------- --------- -------- ---------
Options outstanding,
October 1, 2004 6,899,138 $0.74 4,288,847 $0.98
-----------
Options granted 278,000 0.48
Options exercised (174,001) 0.24
Options forfeited (787,774) 1.35
-----------
Options outstanding,
September 30, 2005 6,215,363 $0.66 4,642,893 $0.76
-----------
Options granted 1,466,000 0.63
Options exercised (150,001) 0.26
Options forfeited (20,000) 1.05
-----------
Options outstanding,
September 30, 2006 7,511,362 $0.66 6,011,713 $0.69
-----------
Options granted 1,395,000 0.66
Options exercised (1,403,664) 0.47
Options forfeited (40,000) 2.15
-----------
Options outstanding,
September 30, 2007 7,462,698 $0.69 5,972,712 $0.67
F-22
In April 2005, the Company extended the expiration date on 1,625,333 options
from the Nonqualified Stock Option Plan with exercise prices ranging from
$1.05 to $1.94. The options originally would have expired from June 2005 to
October 2005 and were extended for three years to expiration dates ranging
from June 2008 to October 2008. This extension was considered a new
measurement date with respect to the modified options. At the date of
modification, the exercise price of the options exceeded the fair market
value of the Company's common stock and no compensation expense was recorded.
As of September 30, 2007, all of these options remain outstanding.
In September 2006, the Company extended the expiration date on 126,666
options from the Nonqualified Stock Option Plan with an exercise price of
$1.05. The options originally would have expired from September 2006 to May
2007 and were extended for three years to expiration dates ranging from
September 2009 to May 2010. This extension was considered a new measurement
date with respect to the modified options. At the date of modification,
compensation expense of $30,468 was recorded. As of September 30, 2007, all
of these options remain outstanding.
Incentive Stock Option Plan--At September 30, 2007, the Company has
collectively authorized the issuance of 9,100,000 shares of common stock
under the Incentive Stock Option Plan. Options vest over a one-year to
three-year period and expire no later than ten years after the grant date.
Terms of the options are to be determined by the Company's Compensation
Committee, which administers all of the plans. Only the Company's employees
and directors are eligible to be granted options under the Incentive Plan.
Information regarding the Company's Incentive Stock Option Plan is summarized
as follows:
Outstanding Exercisable
--------------------- --------------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
-------- --------- -------- ---------
Options outstanding,
October 1, 2004 3,833,100 $0.68 2,006,435 $1.05
Options granted 170,000 0.48
Options exercised (26,667) 0.22
Options forfeited (3,800) 2.16
------------
Options outstanding,
September 30, 2005 3,972,633 $0.68 2,885,968 $0.81
Options granted 370,000 0.58
Options exercised -
Options forfeited (15,700) 5.36
------------
Options outstanding,
September 30, 2006 4,326,933 $0.65 3,810,267 $0.66
------------
Options granted 300,000 0.63
Options exercised -
Options forfeited (25,000) 3.12
------------
F-23
Options outstanding,
September 30, 2007 4,601,933 $0.64 3,998,601 $0.63
In April 2005, the Company extended the expiration date on 128,100 options
from the Incentive Stock Option Plan with exercise prices ranging from $1.05
to $1.94. The options originally would have expired from July 2005 to
December 2005 and were extended for three years to expiration dates ranging
from July 2008 to December 2008. This was considered a new measurement date
with respect to all of the modified options. At each of the dates of
modification, the exercise price of the options exceeded the fair market
value of the Company's common stock and no compensation expense was recorded.
As of September 30, 2007, all options remain outstanding.
In September 2006, the Company extended the expiration date on 268,166
options from the Incentive Stock Option Plan with an exercise price of $1.05.
The options originally would have expired from September 2006 to August 2007
and were extended for three years to expiration dates ranging from September
2009 to August 2010. This extension was considered a new measurement date
with respect to the modified options. At the date of modification,
compensation expense of $56,396 was recorded. As of September 30, 2007, all
of these options remain outstanding.
Other Options and Warrants -- In February 2005, the Company granted a
consultant, for services previously performed, options to purchase 15,000
shares of the Company's common stock at a price of $0.73 per share. The
options vest over a three year period and expire in February 2015. The
expense for these options was determined using the Black Scholes pricing
methodology with the following assumptions:
Expected stock risk volatility 93%
Risk-free interest rate 3.89%
Expected life of warrant 5 Years
Expected dividend yield -0-
The fair value of the options was recorded as general and administrative
expense. The expense of $7,972 was recorded for the year ended
September 30, 2005.
On July 18, 2005, CEL-SCI sold 1,250,000 shares of its common stock and
375,000 warrants to one investor for $500,000. The warrants vested
immediately. Each warrant entitles the holder to purchase one share of
CEL-SCI's common stock at a price of $0.65 per share at any time prior to
July 18, 2009. The shares of common stock and warrants are "restricted"
securities as defined in Rule 144 of the Securities and Exchange Commission.
The warrants were valued at $155,671 and recorded as a debit and a credit to
additional paid-in capital. The value was determined using the Black Scholes
pricing methodology with the following assumptions:
Expected stock risk volatility 75%
Risk-free interest rate 3.92%
Expected life of warrant 5 Years
Expected dividend yield -0-
On October 14, 2005, CEL-SCI granted a consultant options to purchase 80,000
shares of the Company's common stock at a price of $1.00 per share and 80,000
shares of the Company's common stock at a price of $2.00 per share. The
options vested immediately. The options expire in October 2010. The fair
F-24
value of $66,718 was recorded as general and administrative expense over the
service period of October 14, 2005 to April 14, 2006. The fair value was
determined using the Black Scholes pricing methodology with the following
assumptions:
Expected stock risk volatility 75%
Risk-free interest rate 4.33%
Expected life of warrant 5 Years
Expected dividend yield -0-
On October 31, 2005 in connection with the 2005 Equity Line of Credit,
CEL-SCI granted options to purchase 271,370 shares of the Company's common
stock at a price of $0.55 per share. The options vested immediately. The
options expire in October 2010. The options were recorded as a derivative
instrument at the time of issuance but reverted back to equity on December
27, 2005. The expense for these options at the time of issuance of $104,721,
recorded as general and administrative expense, was determined using the
Black Scholes pricing methodology with the following assumptions:
Expected stock risk volatility 87%
Risk-free interest rate 4.33%
Expected life of warrant 5 Years
Expected dividend yield -0-
On February 9, 2006, CEL-SCI sold 2,500,000 shares of its common stock and
750,000 warrants to one investor for $1,000,000. The warrants vested
immediately. Each warrant entitles the holder to purchase one share of
CEL-SCI's common stock at a price of $0.56 per share at any time prior to
February 9, 2011. The warrants were valued at $238,986 and recorded as a
debit and credit to additional paid-in capital. In addition, 441,176 warrants
previously issued to the investor were repriced and extended for one year.
The revaluing of the warrants was valued at $76,122 and recorded as a debit
and a credit to additional paid-in capital. The Black Scholes pricing
methodology was used with the following assumptions:
New Warrants Extended Warrants
Expected stock risk volatility 78% 78%
Risk-free interest rate 4.57% 4.67%
Expected life of warrant 5 Years 1.83 years
Expected dividend yield -0- -0-
On April 1, 2006, CEL-SCI granted a consultant options to purchase 375,000
shares of the Company's common stock at a price of $0.73 per share. The
options vested over a three-month period. In March 2007, 66,300 options were
exercised. The expiration date on the remaining 308,700 options was extended
to May 1, 2007. All options were exercised. As of September 30, 2007, there
were no remaining options. The fair value of $87,007 was recorded as general
and administrative expense over the service period of April 1, 2006 to
March 31, 2007. The fair value for these options was determined using the
Black Scholes pricing methodology with the following assumptions:
Expected stock risk volatility 77%
Risk-free interest rate 4.86%
Expected life of warrant 1 Year
Expected dividend yield -0-
F-25
On April 12, 2006, CEL-SCI granted a consultant options to purchase 100,000
shares of the Company's common stock at a price of $1.50 per share and vested
immediately. The options expire in April 2009. The fair value of $79,976 was
recorded as general and administrative expense over the service period of
April 15, 2006 to July 14, 2006. The fair value for these options was
determined using the Black Scholes pricing methodology with the following
assumptions:
Expected stock risk volatility 77%
Risk-free interest rate 4.90%
Expected life of warrant 3 Years
Expected dividend yield -0-
On April 17, 2006, 800,000 warrants were issued to an investor. These
warrants granted the investor the right to purchase shares of the Company's
common stock at a price of $1.25 and vested immediately. The warrants were
given to the investor to induce the investor to exercise 700,000 warrants at
$0.47 for unregistered common stock. The warrants expire in June 2008. The
amount of $460,920 recorded as a debit and a credit to additional paid-in
capital and was determined using the Black Scholes pricing methodology with
the following assumptions:
Expected stock risk volatility 77%
Risk-free interest rate 4.91%
Expected life of warrant 2.17 Years
Expected dividend yield -0-
On May 18, 2006, the Company issued 800,000 warrants to an investor to
purchase shares of the Company's common stock at a price of $0.82 per share
and vested immediately. The warrants were given to the investor to induce the
investor to exercise 600,000 warrants at $0.56 for unregistered common stock
and will expire on May 17, 2011. The amount of $416,921 was recorded as a
debit and a credit to additional paid-in capital and was determined using the
Black Scholes pricing methodology with the following assumptions:
Expected stock risk volatility 73%
Risk-free interest rate 4.96%
Expected life of warrant 5 Years
Expected dividend yield -0-
Series K Warrants were issued in connection with the issuance of convertible
debt in August 2006. The Series K Warrants allow the holders to purchase up
to 4,825,581 shares of the Company's common stock at a price equal to $0.95
per share between February 4, 2007 and February 4, 2012. The exercise price
of the Series K warrants, as well as the shares issuable upon the exercise
of the warrants, will be proportionately adjusted in the event of any stock
splits. If CEL-SCI sells any additional shares of common stock, or any
securities convertible into common stock at a price below the then
applicable exercise price of the Series K warrants, the warrant exercise
price will be lowered to the price at which the shares were sold or the
lowest price at which the securities are convertible, as the case may be. If
CEL-SCI sells any additional shares of common stock, or any securities
convertible into common stock at a price above the exercise price but below
the market price of CEL-SCI's common stock, the exercise price of the Series
K warrants will be lowered to a price determined by a formula contained in
the warrants.
F-26
On September 29, 2006, CEL-SCI granted a consultant options to purchase
375,000 shares of the Company's common stock at a price of $0.62 per share.
The options vested over a three month period and would have expired in
September 2007. All options were exercised. The fair value of $74,992 was
recorded as general and administrative expense over the service period of
October 1, 2006 to March 31, 2007. The fair value for these options was
determined using the Black Scholes pricing methodology with the following
assumptions:
Expected stock risk volatility 78%
Risk-free interest rate 5.08%
Expected life of warrant 1 Year
Expected dividend yield -0-
In February 2007, 50,000 options were issued to each of two consultants to
purchase shares of common stock at $0.70 and $0.81. The options vested in 3
months and 3 1/2 months respectively and expire in two years. The fair value
of $30,375 was recorded as general and adminstrative expense over the service
period ranging from 3 1/2 months to 6 months. The fair value for these
options was determined using the Black Scholes pricing methodology with the
following assumptions:
Expected stock risk volatility 74.0%
Risk-free interest rate 4.85%
Expected life of warrant 1.5 and 2 Years
On April 5, 2007, 375,000 options were issued to a consultant to purchase
shares of common stock at $0.72 per share and vested immediately. The options
expire on April 4, 2008. The fair value of $76,617 was recorded as general
and administrative expense upon the issuance since the terms were not stated.
The fair value for these options was determined using the Black Scholes
pricing methodology with the following assumptions:
Expected stock risk volatility 68.02%
Risk-free interest rate 4.73%
Expected life of warrant 1 Year
On May 29, 2007, 100,000 options were issued to a consultant to purchase
shares of common stock at $0.84 and vested immediately. The options expire
on May 28, 2011. The fair value of $45,583 was recorded as general and
administrative expense upon issuance. These options were issued as
consideration for their acceptance of the Company as a client. The fair
value for these options was determined using the Black Scholes pricing
methodology with the following assumptions:
Expected stock risk volatility 66.93%
Risk-free interest rate 4.60%
Expected life of warrant 4 Years
In July 2007, the Company issued 3,000,000 warrants to VIF II CEL-SCI
Partners LLC in connection with the manufacturing facility lease agreement.
The warrants vested immediately and expire on July 11, 2013. The value of the
warrants, $1,403,654 was recorded as an increase in deferred rent and will be
expensed over the life of the lease.
In September 2007, 50,000 options were issued to a consultant. The options
vest in March 2008 and expire in September 2009.
F-27
Stock Bonus Plan -- At September 30, 2007, the Company had been authorized to
issue up to 6,940,000 shares of common stock under the Stock Bonus Plan. All
employees, directors, officers, consultants, and advisors are eligible to be
granted shares. During the year ended September 30, 2005, 144,469 shares were
issued to the Company's 401(k) plan for a cost of $78,868. During the year
ended September 30, 2006, 132,989 shares were issued to the Company's 401(k)
plan for a cost of $85,480. During the year ended September 30, 2007, 137,546
shares were issued to the Company's 401(k) plan for a cost of $89,722.
Stock Compensation Plan-- At September 30, 2007, 4,500,000 shares were
authorized for use in the Company's stock compensation plan. During the year
ended September 30, 2006, 266,355 shares were issued in lieu of salary
increases extending through August 31, 2007. These shares were issued at
$0.58 per share for a total cost of $154,486. During the year ended September
30, 2007, 1,075,000 shares were issued at $0.63 per share for a total cost of
$677,250.
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, 2007,
2006, and 2005, in connection with this Plan was $92,035, $88,054, and
$79,406, 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,
------------------------
2008 $ 302,256
2009 1,706,693
2010 1,727,368
2011 1,779,188
2012 1,805,169
2013 and thereafter 31,035,479
-----------
Total minimum lease payments $38,356,153
===========
Rent expense for the years ended September 30, 2007, 2006, and 2005, was
$240,914, $250,994 and $253,180, respectively. Minimum payments have not been
reduced by minimum sublease rental receivable under future cancelable
subleases. These leases expire between September 2008 and August 2028.
In August 2007 CEL-SCI leased a building near Baltimore, Maryland. The
building will be remodeled in accordance with CEL-SCI's specifications so
that it can be used by CEL-SCI to manufacture Multikine for CEL-SCI's Phase
III clinical trial and sales of the drug if approved by the FDA.
F-28
The lease is for a term of twenty years and requires annual base rent
payments of $1,575,000 during the first year of the lease. The annual base
rent escalates each year at 3%. CEL-SCI is also required to pay all real and
personal property taxes, insurance premiums, maintenance expenses, repair
costs and utilities. The lease allows CEL-SCI, at its election, to extend the
lease for two ten-year periods or to purchase the building at the end of the
20-year lease. The lease required CEL-SCI to pay $3,150,000 towards the
remodeling costs, which will be recouped by reductions in the annual base
rent of $303,228 in years six through twenty of the lease, subject to CEL-SCI
maintaining compliance with the lease covenants. Included on the consolidated
balance sheet is an asset of $6,301,364 shown as deferred rent. Included in
deferred rent are the following: 1) deposit on the manufacturing facility
($3,150,000); 2) warrants issued to lessor ($1,364,773); and 3) deposit on
the cost of the leasehold improvements for the manufacturing facility
($1,786,591). Also included on the consolidated balance sheet is restricted
cash of $2,168,629. The restricted cash amount includes funds for the
following: 1) contingency escrow of $803,401; 2) moveable equipment escrow of
$1,364,868; and 3) accrued interest on the escrowed funds of $360.
Employment Contracts--In April 2005 the Company entered into a three year
employment agreement with its President and Chairman of the Board which
expires April 30, 2008. On September 8, 2006 CEL-SCI agreed to extend its
employment agreement with Maximilian de Clara, CEL-SCI's President, to April
30, 2010. During the term of the employment agreement, CEL-SCI will pay Mr.
de Clara an annual salary of $363,000.
The employment agreement, as amended, also provided that on September 8,
2006, March 8, 2007, September 8, 2007, March 8, 2008, September 8, 2008 and
March 8, 2009, each date being a "Payment Date", CEL-SCI will issue Mr. de
Clara shares of its common stock equal in number to the amount determined by
dividing $200,000 by the average closing price of CEL-SCI's common stock for
the twenty trading days preceding the Payment Date.
The employment agreement provides that CEL-SCI will pay him an annual salary
of $363,000 during the term of the agreement. In the event that there is a
material reduction in his authority, duties or activities, or in the event
there is a change in the control of the Company, then the agreement allows
him to resign from his position at the Company and receive a lump-sum payment
from CEL-SCI equal to 18 months salary. For purposes of the employment
agreement, a change in the control of CEL-SCI means the sale of more than 50%
of the outstanding shares of CEL-SCI's Common Stock, or a change in a
majority of CEL-SCI's directors.
In September 2006, CEL-SCI agreed to extend its employment agreement with
Geert R. Kersten, CEL-SCI's Chief Executive Officer, to September 2011. The
employment agreement, which is essentially the same as Mr. Kersten's prior
employment agreement, provides that during the term of the agreement CEL-SCI
will pay Mr. Kersten an annual salary of $370,585. In the event there is a
change in the control of the Company, the agreement allows him to resign from
his position at the Company and receive a lump-sum payment from the Company
equal to 24 months of salary. For purposes of the employment agreement a
change in the control of the Company means: (1) the merger of the Company
with another entity if after such merger the shareholders of the Company do
not own at least 50% of voting capital stock of the surviving corporation;
(2) the sale of substantially all of the assets of the Company; (3) the
acquisition by any person of more than 50% of the Company's common stock; or
(4) a change in a majority of the Company's directors which has not been
approved by the incumbent directors.
F-29
9. CONVERTIBLE DEBT
As of September 30, 2007, the Company has outstanding convertible debt with a
fair value of $3,010,836. As of September 30, 2006, the Company had
outstanding convertible debt totaling $8,300,000. In July, 2006, the Company
sold Series K Notes and Series K warrants to a group of private investors for
proceeds of $8,300,000, less transaction costs of $568,710. For a further
discussion of this transaction, see Note 2.
10. EQUITY LINES OF CREDIT
On October 31, 2005, the Company entered into the 2005 Equity Line of Credit.
The agreement allows the Company at its discretion to sell up to $5 million
of common stock in increments of a minimum of $100,000 and a maximum to be
determined at the time of the drawdown request using a formula contained in
the agreement. The Company may request a drawdown once every 22 trading days,
although the Company is under no obligation to request any drawdown. The term
of the Equity Line of Credit will be for a period of 24 months from the date
the registration statement of the Company covering the shares being
subscribed are declared effective by the SEC. As of September 30, 2007 no
shares have been subscribed and no registration statement has been filed. As
consideration for extending the equity line of credit, the Company granted
warrants to purchase 271,370 shares of common stock at a price of $0.55 per
share at any time prior to October 24, 2010. The warrants are discussed in
Note 6. The Company had no drawdowns on the new line of credit during the
fiscal years ended September 30, 2007 and 2006.
11.STOCKHOLDERS' EQUITY
In May 2003, the Company sold 1,100,000 shares of common stock and an
additional 1,100,000 warrants to purchase common stock in conjunction with a
marketing agreement. The Company received proceeds of $500,000 for the stock
and warrants. The warrants are exercisable at a price of $0.47 per share. The
warrants initially expired May 30, 2006. In accordance with the terms of the
agreement, the expiration was extended to May 30, 2008. The warrants are
discussed in Note 6.
On July 18, 2005, CEL-SCI sold 1,250,000 shares of its common stock and
375,000 warrants to one investor for $500,000. Each warrant entitles the
holder to purchase one share of CEL-SCI's common stock at a price of $0.65
per share at any time prior to July 18, 2009. The shares of common stock and
warrants are "restricted" securities as defined in Rule 144 of the Securities
and Exchange Commission.
On February 9, 2006, CEL-SCI sold 2,500,000 shares of its common stock and
750,000 warrants to one investor for $1,000,000. Each warrant entitles the
holder to purchase one share of CEL-SCI's common stock at a price of $0.56
per share at any time prior to February 9, 2011. The warrants were valued at
$238,986. In addition, 441,176 warrants previously issued to the investor
were repriced and extended for one year. The revaluing of the warrants was
valued at $76,122, as discussed in Note 6.
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 funds will allow
the Company to move forward as planned to start the Phase III clinical trial
in first line advanced primary head and neck cancer.
F-30
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.
As a result of the financing, and in accordance with the original Series K
agreement, the Series K conversion price of the shares were repriced to $0.75
from the original $0.86 and the warrants were repriced to $0.75 from the
original $0.95. The Series K convertible debt and warrants were revalued with
the new conversion price and were adjusted to their new fair value.
12.NET LOSS PER COMMON SHARE
Basic earnings per share (EPS) excludes dilution and is computed by dividing
net income by the weighted average of common shares outstanding for the
period. Diluted EPS reflects the potential dilution that could occur if
securities or other common stock equivalents (convertible preferred stock,
convertible debt, warrants to purchase common stock and common stock options)
were exercised or converted into common stock. The following table provides a
reconciliation of the numerators and denominators of the basic and diluted
per-share computations:
2007 2006 2005
--------------- -------------- -------------
Net loss - basic $ (9,629,657) $ (7,939,210) $ (3,039,607
Add: Interest on
convertible debt - 216,737 -
Gain on derivative
instruments - (2,276,358) (363,028)
--------------- -------------- --------------
Net loss - diluted $ (9,629,657) $ (9,998,831) $ (3,402,635)
=============== ============== ==============
Weighted average number of
shares - basic 97,310,488 78,971,290 72,703,395
Incremental shares from:
Warrants - 5,211,628 878,530
Convertible debt - 9,651,160 -
--------------- -------------- --------------
Weighted average number
of shares - diluted 97,310,488 93,834,078 73,581,925
=============== ============== ==============
Earnings per share - basic $ (0.10) $ (0.10) $ (0.04)
Earnings per share - diluted $ (0.10) $ (0.11) $ (0.05)
Excluded from the above computations of weighted-average shares for diluted
net loss per share were options and warrants to purchase 11,054,492,
4,075,446 and 10,787,480 shares of common stock as of September 30, 2007,
2006 and 2005, respectively. These securities were excluded because their
inclusion would have an anti-dilutive effect on net loss per share. The
calculation of diluted earnings per share for the year ended September 30,
2007 equals the basic earnings per share because the calculation would have
been anti-dilutive.
13.SEGMENT REPORTING
SFAS No. 131, "Disclosure about Segments of an Enterprise and Related
Information" establishes standards for reporting information regarding
operating segments in annual financial statements and requires selected
information for those segments to be presented in interim financial reports
issued to stockholders. SFAS No. 131 also establishes standards for related
disclosures about products and services and geographic areas. Operating
segments are identified as components of an enterprise about which separate
F-31
discrete financial information is available for evaluation by the chief
operating decision maker, or decision-making group, in making decisions how
to allocate resources and assess performance. The Company's chief decision
maker, as defined under SFAS No. 131, is the Chief Executive Officer. To
date, the Company has viewed its operations as principally one segment, the
research and development of certain drugs and vaccines. As a result, the
financial information disclosed herein, materially represents all of the
financial information related to the Company's principal operating segment.
14.QUARTERLY INFORMATION (UNAUDITED)
The following quarterly data are derived from the Company's consolidated
statements of operations.
Financial Data
Fiscal 2007
-----------
Three Three Three Three
months months months months
ended ended ended ended Year ended
December 31, March 31, June 30, September 30, September 30,
2006 2007 2007 2007 2007
-----------------------------------------------------------------------
Revenue $ 20,793 $ 24,722 $ 6,449 $ 5,079 $ 57,043
Operating expenses 1,600,704 2,037,327 3,782,712 1,988,509 9,409,252
Nonoperating (expense) income (251,695) (263,924) (688,242) 58,231 (1,145,630)
Gain (loss) on derivative
instruments 719,247 (447,356) (1,090,471) 1,686,762 868,182
Net loss (1,112,359) (2,723,885) (5,554,976) (238,437) (9,629,657)
Loss per common share - basic $ (0.01) $ (0.03) $ (0.05) $ (0.00) $ (0.10)
Loss per common share -
diluted $ (0.01) $ (0.03) $ (0.05) $ (0.00) $ (0.10)
Fiscal 2006
-----------
Three Three Three Three
months months months months
ended ended ended ended Year ended
December 31, March 31, June 30, September 30, September 30,
2005 2006 2006 2006 2006
-----------------------------------------------------------------------------
Revenue $ 29,847 $ 36,815 $ 39,708 $ 19,087 $ 125,457
Operating expenses 1,051,715 1,378,062 1,345,165 1,699,711 5,474,653
Nonoperating (expense) income 11,404 11,998 9,801 (157,453) (124,250)
Gain (loss) on derivative
instruments 13,337 (1,822) 1,615 2,312,654 2,325,784
Net loss (997,127) (1,331,071) (1,294,041) (4,316,971) (7,939,210)
Loss per common share - basic (0.01) (0.02) (0.02) (0.05) (0.10)
Loss per common share -
diluted (0.01) (0.02) (0.02) (0.06) (0.11)
The Company has experienced large swings in its quarterly losses in 2007 and
2006. 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.
F-32
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 11th day of January 2008.
CEL-SCI CORPORATION
By: /s/ Maximilian de Clara
-------------------------------
Maximilian de Clara, President
By: /s/ Geert R. Kersten
-------------------------------
Geert R. Kersten, Chief Executive,
Principal Accounting and Principal
Financial Officer
Pursuant to the requirements of the Securities Act of l934, this Report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
Signature Title Date
/s/ Maximilian de Clara Director January 11, 2008
----------------------
Maximilian de Clara
/s/ Geert R. Kersten Director January 11, 2008
----------------------
Geert R. Kersten
Director
----------------------
Alexander G. Esterhazy
/s/ Dr. C. Richard Kinsolving Director January 11, 2008
----------------------
Dr. C. Richard Kinsolving
/s/ Dr. Peter R. Young Director January 11, 2008
----------------------
Dr. Peter R. Young
CEL-SCI CORPORATION
FORM 10-K
EXHIBITS