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), has been cleared for a global Phase III clinical trial in advanced primary (previously untreated) head and neck cancer patients. Multikine is being developed for the treatment of cancer. It is the first of a new class of cancer immunotherapy drugs called Immune SIMULATORs. It simulates the activities of a healthy person's immune system, which battles cancer every day. Multikine is multi-targeted; it is the only cancer immunotherapy that both kills cancer cells in a targeted fashion and activates the general immune system to destroy the cancer. We believe Multikine is the first immunotherapeutic agent being developed as a first-line standard of care treatment for cancer.
CEL-SCI took delivery of its new manufacturing facility for its lead drug Multikine on October 8, 2008. This dedicated facility will be used to produce the Multikine that will be used for CEL-SCI's pivotal Phase III clinical trial and subsequently for sale following approval of the drug. CEL-SCI needs to raise additional funds in order to launch the global Phase III clinical trial. CEL-SCI is currently working on partnerships and joint ventures to finance the part of the Phase III clinical trial that will not be funded by its existing partners. If CEL-SCI cannot raise the funds in a timely manner the Phase III clinical trial will be delayed.
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.
(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). One of the lead products derived from this technology is the CEL-1000 peptide which has shown protection in animals against herpes, malaria, viral encephalitis and cancer. Another product is CEL-2000 which is being tested for the treatment of rheumatoid arthritis. Recent data indicate that CEL-SCI's rheumatoid arthritis vaccine CEL-2000 prevents or retards the permanent tissue damage caused by rheumatoid arthritis in an animal model of the disease, The data were derived from a histopathological analysis of tissues samples collected in comparative studies of CEL-2000 and Enbrel(R) that were conducted in a well established animal model of rheumatoid arthritis. Enbrel is a leading treatment for people with rheumatoid arthritis.
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. 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.
- 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).
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 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 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.
CEL SCI believes 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.
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.
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 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 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.
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 would be necessary before required government approvals are obtained. It should be noted that other companies and research teams are actively involved in developing treatments and/or cures for cancer, and accordingly, there can be no assurance that CEL-SCI's research efforts, even if successful from a medical standpoint, can be completed before those of its competitors.
Development, Supply and Distribution Agreements
CEL-SCI has a development, supply and distribution agreement with Orient Europharma of Taiwan. The agreement gave Orient Europharma the exclusive marketing rights to Multikine for all cancer indications in Taiwan, Singapore, Hong Kong and Malaysia. On November 3, 2008 CEL-SCI expanded its exclusive
licensing agreement for Multikine with Orient Europharma. The new agreement extends the Multikine collaboration to also cover South Korea, the Philippines, Australia and New Zealand. As part of this new agreement, Orient Europharma invested an additional $500,000 in CEL-SCI. The agreement provides for Orient Europharma to fund the clinical trials needed to obtain marketing approvals in these countries for head and neck cancer, naso-pharyngeal cancer and potentially cervical cancer, which are very prevalent in Far East Asia. CEL-SCI may use the clinical data generated in these trials to support applications for marketing approvals for Multikine in other parts of the world. Orient Europharma will participate and pay for part of CEL-SCI's head and neck Phase III clinical trial.
Under the agreement, CEL-SCI will manufacture Multikine and Orient Europharma will purchase the product from CEL-SCI for distribution in the territory. Both parties will share in the revenue from the sale of Multikine. As of September 30, 2008, Orient Europharma had not started any clinical trials and CEL-SCI agreed in December 2007 with Orient Europharma, that Orient EuroPharma will participate in the global Phase III clinical trial by enrolling and paying for a substantial number of patients in its territory. Orient Europharma will also purchase Multikine from CEL-SCI for these patients at a rate established in the November 2000 agreement.
Pursuant to an agreement dated May 2003, Eastern Biotech will receive a royalty equal to 2% of CEL-SCI's net sales of Multikine and CEL-1000 prior to May 30, 2033.
On August 19, 2008 CEL-SCI entered into an agreement with Teva Pharmaceutical Industries Ltd. (Teva), a leading global pharmaceutical company, under which CEL-SCI granted Teva an exclusive license to market and distribute CEL-SCI's cancer drug Multikine in Israel and Turkey (the "Territory"). Although the licensing agreement is initially restricted to the areas of head and neck cancer, Teva has the right, subject to certain conditions, to include other cancers during the term of the agreement. Multikine is currently thought to be potentially useful in treating many tumor types.
Pursuant to the agreement, Teva will participate in CEL-SCI's upcoming global Phase III clinical trial. Teva will fund a portion of the Phase III clinical study and Teva's clinical group will conduct part of the clinical study in Israel under the auspices of CEL-SCI and its Clinical Research Organization. Teva will also be responsible for registering Multikine in the Territory. If Multikine is approved, CEL-SCI will be responsible for manufacturing the product, while Teva will be responsible for sales in the Territory. Revenues will be divided equally between CEL-SCI and Teva.
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. In addition, CEL-SCI announced the discovery of a novel peptide for the treatment of rheumatoid arthritis. This peptide, called CEL-2000, was tested in a well established animal model of rheumatoid arthritis and was compared to Enbrel(R), a leading treatment for people with rheumatoid arthritis. The tests showed that CEL-2000 is equivalent or possibly superior to Enbrel in slowing disease progression and lessening symptoms in mice. In addition, the vaccine has the potential to require fewer and smaller doses, be less toxic, more disease specific and much less invasive. Further data indicates that, in mice vaccinated with CEL-2000 after appearance of visible disease, statistically significant less inflammation and permanent damage with regard to 1) bone erosion, 2) cartilage destruction, and 3) pannus formation were observed. These are some of the same parameters that can be seen in rheumatoid arthritis damage in humans. CEL-2000 was as good as, and possibly superior to, Enbrel in slowing further disease progression as evaluated by these histological parameters and by footpad swelling as well as externally visible joint damage.
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 LEAPS 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.
CEL-SCI has also 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, 2008, 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, CEL-2000 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, 2008, approximately $59,319,600 has been spent on CEL-SCI-sponsored research and development, including approximately $4,101,600, $2,529,000, and $1,897,000 respectively during the years ended September 30, 2008, 2007 and 2006.
The costs associated with the clinical trials relating to CEL-SCI's technologies, research expenditures and CEL-SCI's administrative expenses have been funded with the public and private sales of CEL-SCI's securities and borrowings from third parties, including affiliates of CEL-SCI. The extent of CEL-SCI's clinical trials and research programs is primarily based upon the amount of capital available to CEL-SCI and the extent to which CEL-SCI has received regulatory approvals for clinical trials.
GOVERNMENT REGULATION - ---------------------
New drug development and approval process
Regulation by governmental authorities in the United States and other countries is a significant factor in the manufacture and marketing of biological and other drug products and in ongoing research and product development activities. CEL-SCI's products will require regulatory approval by governmental agencies prior to commercialization. In particular, these products are subject to rigorous preclinical and clinical testing and other premarket approval requirements by the FDA and regulatory authorities in other countries. In the United States, various statutes and regulations also govern or influence the manufacturing, safety, labeling, storage, record keeping and marketing of pharmaceutical and biological drug products. The lengthy process of seeking these approvals, and the subsequent compliance with applicable statutes and regulations, require the expenditure of substantial resources. CEL-SCI believes that it is currently in compliance with applicable statutes and regulations that are relevant to its operations. CEL-SCI has no control, however, over 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.
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 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.
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.
Some of the clinical trials funded to date by CEL-SCI have not been approved by the FDA, but rather have been conducted pursuant to approvals obtained from certain states and foreign countries. Conducting clinical studies in foreign countries is normal industry practice since these studies can often be completed in less time and are less expensive than studies conducted in the U.S. Conducting clinical studies in foreign countries is also beneficial since CEL-SCI will need the approval from a foreign country prior to the time CEL-SCI can market any of its drugs in the foreign country. However, since the results of these clinical trials may not be accepted by the FDA, competitors conducting clinical trials approved by the FDA may have an advantage in that the products of such competitors are further advanced in the regulatory process than those of CEL-SCI. CEL-SCI is conducting its trials in compliance with internationally recognized standards. By following these standards, CEL-SCI anticipates obtaining acceptance from world regulatory bodies, including the FDA.
Once CEL-SCI has acquired the necessary funding to begin the Phase III clinical trial, we will retain a Clinical Research Organization to establish an accurate budget for the Phase III clinical trial.
EMPLOYEES - ---------
As of December 31, 2008, CEL-SCI had 30 employees. Nine employees are involved in administration and 21 employees are involved in manufacturing.
ITEM 1A.
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, 2008 CEL-SCI incurred net losses of approximately $124,696,000. CEL-SCI has relied principally upon the proceeds of public and private sales of its securities to finance its activities to date. All of CEL-SCI's potential products, with the exception of Multikine,
are in the early stages of development, and any commercial sale of these products will be many years away. Even potential product sales from Multikine are many years away as cancer trials can be lengthy. Accordingly, CEL-SCI expects to incur substantial losses for the foreseeable future.
Since CEL-SCI does not intend to pay dividends on its common stock, any return to investors will come only from potential increases in the price of CEL-SCI's common stock.
At the present time, CEL-SCI intends to use available funds to finance CEL-SCI's operations. Accordingly, while payment of dividends rests within the discretion of the Board of Directors, no common stock dividends have been declared or paid by CEL-SCI and CEL-SCI has no intention of paying any common stock dividends.
If CEL-SCI cannot obtain additional capital, CEL-SCI may have to postpone development and research expenditures and may be in default on its manufacturing facility lease, 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.
In accordance with the terms of the manufacturing facility's lease, CEL-SCI must maintain a certain amount of cash. Should CEL-SCI's cash position fall below the amount stipulated in the lease CEL-SCI would be required to deposit with the landlord the equivalent of one year's base rent.
The inability of CEL-SCI to conduct clinical trials or research, whether due to a lack of capital or regulatory approval, will prevent CEL-SCI from completing the studies and research required to obtain regulatory approval for any products which CEL-SCI is developing.
No definite plan for marketing of Multikine has been established.
CEL-SCI has not established a definitive plan for marketing nor has it established a price structure for CEL-SCI's saleable products. However, CEL-SCI intends, if CEL-SCI is in a position to begin commercialization of its products, to sell Multikine itself in certain markets and to enter into written marketing
agreements with various major pharmaceutical firms with established sales forces. The sales forces in turn would probably target CEL-SCI's products to cancer centers, physicians and clinics involved in head and neck cancer.
CEL-SCI may encounter problems, delays and additional expenses in developing marketing plans with outside firms. In addition, even though Multikine should be very cost effective to use if proven to increase overall survival, CEL-SCI may experience other limitations involving the proposed sale of its products, such as uncertainty of third-party reimbursement. There is no assurance that CEL-SCI can successfully market any products which they may develop or market them at competitive prices.
Potential Future Dilution
To raise additional capital CEL-SCI may have to sell shares of its common stock or securities convertible into common stock at prices that may be below the prevailing market price of CEL-SCI's common stock at the time of sale. The issuance of additional shares will have a dilutive impact on other stockholders and could have a negative effect on the market price of CEL-SCI's common stock.
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.
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.
Our Independent Registered Public Accountants have issued a "Going Concern" opinion raising doubt about our financial viability.
As a result of our continuing losses, negative cash flows, and negative working capital, our independent registered public accounting firm, BDO Seidman, LLP, issued a "going concern" opinion in connection with their audit of our consolidated financial statements for the year ended September 30, 2008. This opinion expressed substantial doubts as to our ability to continue as a going concern. The going concern opinion could have an adverse impact on our ability to execute our business plan, result in the reluctance on the part of certain suppliers to do business with us, or adversely affect our ability to raise additional debt or equity capital.
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.
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 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.
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, 2008, CEL-SCI's stock price has ranged from a low of $0.37 per share to a high of $0.78 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, 2008 could potentially allow the holders to acquire up to approximately 174,100,000 additional shares of its common stock. Until the options and warrants expire, or the convertible notes are paid, or the options 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 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.
ITEM 1B. UNRESOLVED SEC COMMENTS - --------------------------------
None
ITEM 2.
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, has been remodeled in accordance with CEL-SCI's specifications so that it can be used by CEL-SCI to manufacture Multikine for CEL-SCI's Phase III clinical trial and sales of the drug if approved by the FDA. The lease expires on October 31, 2028 and requires annual base rent payments of $1,575,000 during the year ending 2009. The annual base rent escalates each year thereafter at 3%. CEL-SCI is also required to pay all real and personal property taxes, insurance premiums, maintenance expenses, repair costs and utilities. The lease allows CEL-SCI, at its election, to extend the lease for two ten-year periods or to purchase the building at the end of the 20-year lease. The lease requires CEL-SCI to pay $3,150,000 towards the remodeling costs, which will be recouped by reductions in the annual base rent of $303,228 beginning in 2014. In July 2008, CEL-SCI was required to deposit the equivalent of one year's base rent in accordance with the contract. The $1,575,000 was required to be deposited when the amount of cash CEL-SCI had fell below the amount stipulated in the lease. In December 2008, CEL-SCI was not in compliance with certain lease requirements (i.e., failure to pay an installment of Base Annual Rent). However, the landlord has not declared CEL-SCI formally in default under the terms of the lease. The landlord currently has the right to declare CEL-SCI in default if CEL-SCI fails to pay any installment of the Base Annual Rent when such failure continues for a period of 5 business days after CEL-SCI's receipt of written notice thereof from the Landlord, provided that if CEL-SCI fails to pay any of the foregoing within 5 business days more than two (2) times in any twelve (12) month period during the lease term, the Landlord shall not be required to provide CEL-SCI with any further notice and CEL-SCI shall be deemed to be in default. CEL-SCI is currently in negotiation with the Landlord for rent deferral on the lease in order to conserve its cash. If CEL-SCI does not renegotiate the lease, CEL-SCI plans to either obtain an additional loan from Mr. de Clara or use the equity line of credit to make the rent payments.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS - ---------------------------
None.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - -------------------------------------------------------------
Not applicable.
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
As of November 30, 2008, there were approximately 2,500 record holders of CEL-SCI's common stock. CEL-SCI's common stock is traded on the NYSE Alternext US (formerly the American Stock Exchange) under the symbol "CVM". Set forth
below are the range of high and low quotations for CEL-SCI's common stock for the periods indicated as reported on the NYSE Alternext US. The market quotations reflect inter-dealer prices, without retail mark-up, mark-down or commissions and may not necessarily represent actual transactions.
Quarter Ended High Low ------------- ---- ---
12/31/06 $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
12/31/07 $0.64 $0.48 3/31/08 $0.74 $0.37 6/30/08 $0.71 $0.60 9/30/08 $0.78 $0.40
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.
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, 2003 to September 30, 2008.
9/03 9/04 9/05 9/06 9/07 9/08 - ------------------------------------------------------------------------
CEL-SCI Corporation 100.00 61.29 50.54 66.67 67.23 43.01 AMEX Composite 100.00 127.97 188.44 212.08 270.41 208.31 Peer Group 100.00 80.89 36.12 19.51 10.29 16.10
The stock price performance included in this graph is not necessarily indicative of future stock price performance.
ITEM 6.
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
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.
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).
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 2008 - -----------
Grant revenue and other decreased by $51,978 during the year ended September 30, 2008, compared to fiscal 2007, due to the completion of the work funded by the grants. The final grant ended on March 31, 2007. A training grant in the amount of $3,535 was received from the State of Maryland during the year ended September 30, 2008. In addition, CEL-SCI received rent on an office sublet during a portion of the fiscal year 2008.
During the year ended September 30, 2008, research and development expenses increased by $1,573,035 compared to fiscal 2007. This increase was due to expenses relating to the preparation for the Phase III clinical trial on Multikine.
During the year ended September 30, 2008, general and administrative expenses decreased by $1,503,803 compared to fiscal 2007. This change was primarily due to stock issued to consultants in 2007 (approximately $1,825,000) and a reduction in the public relations and presentations (approximately $43,400) from fiscal 2007. This reduction on stock and public relation costs was partially offset by an increase in filing fees (approximately $41,600), insurance ($35,000) and the implementation costs of Sarbanes-Oxley requirements (approximately $16,700).
Interest income during the year ended September 30, 2008 decreased by $79,721 compared to fiscal 2007. The decrease was due to fewer funds available for investment. This decrease was partially offset by interest income accrued on the deferred rent on the manufacturing facility (approximately $190,550).
The gain on derivative instruments of $1,799,393 for the year ended September 30, 2008 was the result of the change in fair value of the Series K Notes and Series K Warrants during the year. These gains were caused by fluctuations in the share price of CL-SCI's common stock.
The interest expense of $473,767 for the year ended September 30, 2008 was composed of three elements: 1) amortization of the Series K discount ($249,106), 2) interest paid and accrued on the Series K debt ($217,140) and 3) loan interest ($7,521). This is a decline of approximately $1,234,836 from the year ended September 30, 2007 due to the lower principal balance of Series K notes.
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.
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).
Research and Development Expenses - ---------------------------------
During the five years ended September 30, 2008 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.
2008 2007 2006 2005 2004 ---- ---- ---- ---- ----
MULTIKINE $3,765,258 $2,217,108 $1,656,362 $1,911,615 $1,539,454 L.E.A.P.S. 336,305 311,420 240,614 318,114 402,176 ------------------------------------ -----------------------
TOTAL $4,101,563 $2,528,528 $1,896,976 $2,229,729 $1,941,630 ========== ========== ========== ========== ==========
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, 2008, 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.
CEL-SCI's lead product, Multikine, has been cleared for a global Phase III clinical trial in advanced primary (previously untreated) head and neck cancer patients. CEL-SCI is currently working on partnerships and joint ventures to finance the part of the Phase III clinical trial that is not currently funded by its partners. Once CEL-SCI raises the necessary funding to begin the Phase III clinical trial, we will retain a Clinical Research Organization to establish an accurate budget for the Phase III clinical trial.
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.
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.
CEL-SCI's working capital at September 30, 2008 was $(2,492,555) compared to $10,257,568 at September 30, 2007. The convertible debt of $2,240,715 and the short-term loan of $200,000 (repaid in November 2008) are the only debt that CEL-SCI has outstanding.
During fiscal year 2008, cash and cash equivalents decreased by approximately $10,281,800 over fiscal year 2007. Net cash provided by financing activities totaled approximately $183,150 and resulted primarily from the issuance of stock and was used for the new manufacturing facility and equipment purchases and patent costs.
Cash used in investing activities totaled $2,523,123. The additional cost of the manufacturing facility totaled $2,359,473 and equipment purchases, most for the manufacturing facility, totaled $1,023,011. In addition, expenditures for patent costs during the fiscal year were $121,616.
Components of the cash used in operating activities ($7,941,790), were the net loss of $7,703,415 and the cost of stock and options issued, options and warrants extended and repriced, to both employees and nonemployees of $2,841,201. The gain on derivative instruments of $1,799,393 and an additional deposit on the manufacturing facility ($1,575,000) required by the contract were other major components of the cash used in operating activities.
In August 2007, CEL-SCI leased a building near Baltimore, Maryland. The building, which consists of approximately 73,000 square feet, has been remodeled in accordance with CEL-SCI's specifications so that it can be used by CEL-SCI to manufacture Multikine for CEL-SCI's Phase III clinical trials and sales of the
drug if approved by the FDA. The lease expires on October 31, 2028 and requires annual base rent payments of $1,575,000 during the year ending October 31, 2009. The annual base rent escalates each year thereafter at 3%. CEL-SCI is also required to pay all real and personal property taxes, insurance premiums, maintenance expenses, repair costs and utilities. The lease allows CEL-SCI, at its election, to extend the lease for two ten-year periods or to purchase the building at the end of the 20-year lease. The lease required CEL-SCI to pay $3,150,000 towards the remodeling costs, which will be recouped by reductions in the annual base rent of $303,228 beginning in 2014.
In December 2008, CEL-SCI was not in compliance with certain lease requirements (i.e., failure to pay an installment of Base Annual Rent). However, the landlord has not declared CEL-SCI formally in default under the terms of the lease. The landlord currently has the right to declare CEL-SCI in default if CEL-SCI fails to pay any installment of the Base Annual Rent when such failure continues for a period of 5 business days after CEL-SCI's receipt of written notice thereof from the Landlord, provided that if CEL-SCI fails to pay any of the foregoing within 5 business days more than two (2) times in any twelve (12) month period during the lease term, the Landlord shall not be required to provide CEL-SCI with any further notice and CEL-SCI shall be deemed to be in default. CEL-SCI is currently in negotiation with the Landlord for rent deferral on the lease in order to conserve its cash. If we do not renegotiate the lease we plan to either get an additional loan from Mr. deClara or use the equity line of credit to make the rent payments.
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. Since March 2007 CEL-SCI has been 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.
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.
As of September 30, 2008, Series K notes in the principal amount of $4,399,284 had been converted into 5,744,765 shares of CEL-SCI's common stock. In addition, principal payments of $1,452,500 in cash and $207,500 in shares of common stock were made to the holders of the Series K notes. As of September 30, 2008 the outstanding principal balance on the Series K notes was $2,240,715.
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.
On August 18, 2008, CEL-SCI sold 1,383,389 shares of common stock and 2,075,084 warrants in a private financing for $1,037,500. The shares were sold at $0.75, a significant premium over the closing price of CEL-SCI's common stock on the date of sale. Each warrant entitles the holder to purchase one share of
CEL-SCI's common stock at a price of $0.75 per share at any time prior to August 18, 2014. The shares have no registration rights.
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.
Future Capital Requirements - ---------------------------
CEL-SCI has two partners who have agreed to participate in and pay for part of the Phase III clinical trial for Multikine. However in light of the current capital market environment, CEL-SCI believes it is prudent not to start the Phase III clinical trial until it has firm commitments in the form of partnerships and/or money raised for a substantial amount of cash to support the Phase III clinical trial. In the meantime, CEL-SCI will operate at significantly reduced cash expenditure levels and additional cash may be raised by offering contract manufacturing services to the pharmaceutical industry in its new manufacturing facility. CEL-SCI expects that it will need to raise additional capital in fiscal year 2009 in the form of corporate partnerships and/or equity financings to support its operations at its current rate. CEL-SCI is currently working towards a transaction which it expects to complete in fiscal 2009 which will finance its Phase III clinical trial of Multikine. CEL-SCI believes that it will be able to obtain additional financing since Multikine is a Phase III product designed to treat cancer, an area that pharmaceutical companies are increasingly targeting. CEL-SCI is working on a sale-leaseback program for the equipment it owns which would provide CEL-SCI approximately $1.5 million in additional cash. It is important to note that CEL-SCI's expenditures for fiscal year 2008 included several very large non-recurring expenses that amounted to several million dollars, mostly related to the build out of the manufacturing facility. These expenses will not recur in fiscal year 2009, thereby reducing CEL-SCI's expenditures significantly. Beyond those savings CEL-SCI has also made other very significant cuts in its expenditures and certain vendors have agreed to take common stock in lieu of cash payments. In addition, CEL-SCI has put in place a $5 million Equity Line of Credit (see Note 15). With this Equity Line of Credit in place CEL-SCI believes it will have the required capital to continue operations into January 2010. However, if necessary CEL-SCI can make further reductions in expenditures by a reduction in force or by implementation of a salary reduction program.
The Company has determined that the convertible debt holders of the Series K Notes may require repayment of the entire remaining principal balance at any time after August 4, 2009. This debt can be paid in stock and may not require a cash payment. In addition, in December 2008, CEL-SCI was not in compliance with certain lease requirements (i.e., failure to pay an installment of Base Annual Rent). However, the landlord has not declared CEL-SCI formally in default under the terms of the lease. The landlord currently has the right to declare CEL-SCI in default if CEL-SCI fails to pay any installment of the Base Annual Rent when such failure continues for a period of 5 business days after CEL-SCI's receipt of written notice thereof from the Landlord, provided that if CEL-SCI fails to pay any of the foregoing within 5 business days more than two (2) times in any twelve (12) month period during the lease term, the Landlord shall not be required to provide CEL-SCI with any further notice and CEL-SCI shall be deemed to be in default. CEL-SCI is currently in negotiation with the Landlord for rent deferral on the lease in order to conserve its cash. If we do not renegotiate the lease we plan to either get an additional loan from Mr. deClara or use the equity line of credit to make the rent payments.
In general, with the reduction in expenses and the $5 million Equity Line in place, the Company expects to have enough cash to continue operations through January 2010 if the debt holders do not exercise their put options and the landlord of their manufacturing facility does not issue a default notice. The Company's independent audit firm has issued an audit opinion that expresses doubt about the Company's ability to continue as a going concern mainly due to continued losses from operations, the debt holders ability to exercise their put options, and the potential for the landlord to issue a default notice.
While there can be no assurance that the debt holders will not exercise their put option, and the landlord of the manufacturing facility will not issue a default notice, the Company continues to work on solutions for additional financing and ways to reduce expenses. The Company has shown in the past that they are able to secure financing to continue operations. However, there is no assurance to do so in the future.
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, 2008 are as follows:
Contractual Obligations:
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. 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.
Subsequent Events
On November 3, 2008, the Company extended its licensing agreement for Multikine with Orient Europharma. The new agreement extends the Multikine collaboration to also cover South Korea, the Philippines, Australia and New Zealand. The licensing agreement initially focuses on the areas of head and neck cancer, nasopharyngeal cancer and potentially cervical cancer. As part of this new agreement, Orient Europharma invested $500,000 in the Company.
Effective December 3, 2008, Dr. Daniel Zimmerman, the Company's Senior Vice President of Research, Cellular Immunology, and John Cipriano, the Company's Senior Vice President of Regulatory Affairs, have agreed to become consultants to the Company on an as needed basis thereby ending their full time employment with the Company. The stock and options owned by these two individuals will fully vest on January 1, 2009
On December 30, 2008, CEL-SCI entered into an equity line of credit agreement as a source of funding for CEL-SCI. For a two-year period, the agreement allows CEL-SCI, at its discretion, to sell up to $5 million of CEL-SCI's common stock at the volume weighted average price on the day of the drawdown, less 9%. CEL-SCI may request a drawdown once every ten trading days, although CEL-SCI is under no obligation to request any drawdowns under the equity line of credit. The equity line of credit expires on January 6, 2011.
In December 2008 and January 2009 CEL-SCI Maximilian de Clara, CEL-SCI's president and a director, loaned CEL-SCI a total of $230,000. The loan bears interest at 15% per year and is payable on March 27, 2009.
Critical Accounting Policies - ----------------------------
CEL-SCI's significant accounting policies are more fully described in Note 1 to the consolidated financial statements. However, certain accounting policies are particularly important to the portrayal of financial position and results of operations and require the application of significant judgments by management. As a result, the consolidated financial statements are subject to an inherent degree of uncertainty. In applying those policies, management uses its judgment to determine the appropriate assumptions to be used in the determination of certain estimates. These estimates are based on CEL-SCI's historical experience, terms of existing contracts, observance of trends in the industry and information available from outside sources, as appropriate. CEL-SCI's significant accounting policies include:
Patents - Patent expenditures are capitalized and amortized using the straight-line method over 17 years. In the event changes in technology or other circumstances impair the value or life of the patent, appropriate adjustment in the asset value and period of amortization is made. An impairment loss is recognized when estimated future undiscounted cash flows expected to result from the use of the asset, and from disposition, is less than the carrying value of the asset. The amount of the impairment loss is the difference between the estimated fair value of the asset and its carrying value.
Stock Options and Warrants - 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 is recognized for awards that were granted, modified, repurchased or cancelled on or after October 1, 2005.
Options to non-employees are accounted for in accordance with 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, intangibles and deferred rent every fiscal quarter. This review requires that CEL-SCI make assumptions regarding the value of these assets and the changes in circumstances that would affect the carrying value of these assets. If such analysis indicates that a possible impairment may exist, CEL-SCI is then required to estimate the fair value of the asset and, as deemed appropriate, expense all or a portion of the asset. The determination of fair value includes numerous uncertainties, such as the impact of competition on future value. CEL-SCI believes that it has made reasonable estimates and
judgments in determining whether its long-lived assets have been impaired; however, if there is a material change in the assumptions used in its determination of fair values or if there is a material change in economic conditions or circumstances influencing fair value, CEL-SCI could be required to recognize certain impairment charges in the future. As a result of the reviews, no changes in asset values were required.
Prepaid Expenses and Laboratory Supplies--The majority of prepaid expenses consist of bulk purchases of laboratory supplies used on a daily basis in the lab and items that will be used for future production. The items in prepaid expenses are expensed when used in production or daily activity as Research and Development expenses. These items are disposables and consumables and can be used for both the manufacturing of Multikine for clinical studies and in the laboratory for quality control and bioassay use. They can be used in training, testing and daily laboratory activities. Other prepaid expenses are payments for services over a long period and are expensed over the time period for which the service is rendered.
Derivative Instruments--CEL-SCI enters into financing arrangements that consist of freestanding derivative instruments or are hybrid instruments that contain embedded derivative features. CEL-SCI accounts for these arrangement in accordance with 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 cannot be reliably measured, CEL-SCI measures and reports the entire hybrid instrument at fair value with changes in fair value recognized as either a gain or loss in earnings. CEL-SCI determines the fair value of derivative instruments and hybrid instruments based on available market data using appropriate valuation models, giving consideration to all of the rights and obligations of each instrument and precluding the use of "blockage" discounts or premiums in determining the fair value of a large block of financial instruments. Fair value under these conditions does not necessarily represent fair value determined using valuation standards that give consideration to blockage discounts and other factors that may be considered by market participants in establishing fair value.
Recent Accounting Pronouncements - --------------------------------
In September 2006, the 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. In February 2008, the FASB issued FASB Staff Position ("FSP") No. 157-2, Effective Data of FASB Statement No. 157. FSP 157-2 delays the effective date of SFAS 157 to fiscal years beginning after November 15, 2008, for
nonfinancial assets and nonfinancial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). The Company is evaluating whether this statement will affect its current practice in valuing fair value of its derivatives each quarter. The effect of the adoption is expected to be immaterial.
In February 2007, the 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 effect will be immaterial.
In December 2007, the FASB issued SFAS No. 141 (revised 2007), "Business Combinations", which replaces SFAS No. 141. The statement retains the purchase method of accounting for acquisitions, but requires a number of changes, including changes in the way assets and liabilities are recognized in the purchase accounting. It also changes the recognition of assets acquired and liabilities assumed arising from contingencies, requires the capitalization of in-process research and development at fair value, and requires the expensing of acquisition-related costs as incurred. SFAS No. 141R is effective beginning October 1, 2009 and will apply prospectively to business combinations completed on or after that date.
In December 2007, the FASB issued SFAS No. 160, "Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB 51", which changes the accounting and reporting for minority interests. Minority interests will be recharacterized as noncontrolling interests and will be reported as a component of equity separate from the parent's equity, and purchases or sales of equity interests that do not result in a change in control will be accounted for as equity transactions. In addition, net income attributable to the noncontrolling interest will be included in consolidated net income on the face of the income statement and, upon loss of control, the interest sold, as well as any interest retained, will be recorded at fair value with any gain or loss recognized in earnings. SFAS No. 160 is effective beginning October 1, 2009 and will apply prospectively, except for the presentation and disclosure requirements, which will apply retrospectively.
In March 2008, the FASB issued SFAS No. 161, "Disclosures about Derivative Instruments and Hedging Activities - an amendment of FASB Statement No. 133", which changes disclosure requirements for derivative instruments and hedging activities. The statement is effective for periods ending on or after November 15, 2008, with early application encouraged. The Company is currently assessing the additional requirements of this statement.
In April 2008, the FASB staff issued PSP FAS 142-3, "Determination of the Useful Life of Intangible Assets", which amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under FASB Statement No. 142, "Goodwill and Other Intangible Assets". The staff position is intended to improve the consistency between the useful life of a recognized intangible asset under Statement 142 and the period of expected cash flows used to measure the fair value of the asset under FASB Statement No. 141, "Business Combinations",
and other U.S. generally accepted accounting principles (GAAP). The Company is currently assessing the potential impact of this staff position on its consolidated financial statements.
In June 2008, the FASB finalized EITF 07-5, "Determining Whether an Instrument (or Embedded Feature) is Indexed to an Entity's Own Stock". The EITF lays out a procedure to determine if the debt instrument is indexed to its own common stock. The EITF is effective for fiscal years beginning after December 15, 2008. The Company believes it will have an impact on the convertible debt and certain warrants and it could be material.
In September 2008, the FASB staff issued PSP FAS 133-1 and FIN 45-4, "Disclosures about Credit Derivatives and Certain Guarantees: An Amendment of FASB Statement No. 133 and FASB Interpretation No. 45; and Clarification of the Effective Date of FASB Statement No. 161". The FSP applies to credit derivatives within the scope of Statement 133 and hybrid instruments that have embedded credit derivatives. It deals with disclosures related to these derivatives and is effective for reporting periods ending after November 15, 2008. It also clarifies the effective date of SFAS No. 161 as any reporting period beginning after November 15, 2008. The Company is currently assessing the potential impact of this staff position on its consolidated financial statements.
ITEM 7A.
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, 2008, 2007 and 2006, CEL-SCI recognized a gain of $1,799,393, $868,182, and $2,325,784, 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, 2008, 2007 and 2006.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See the consolidated financial statements included with this Report.
ITEM 9.
ITEM 9.CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable
ITEM 9A.
ITEM 9A. and 9A(T). CONTROLS AND PROCEDURES
Under the direction and with the participation of CEL-SCI's management, including CEL-SCI's Chief Executive Officer and Chief Financial Officer, CEL-SCI carried out an evaluation of the effectiveness of the design and operation of its disclosure controls and procedures as of September 30, 2008. CEL-SCI maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in its periodic reports with the Securities and Exchange Commission is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and regulations, and that such information is accumulated and communicated to CEL-SCI's management, including its principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure. CEL-SCI's disclosure controls and procedures are designed to provide a reasonable level of assurance of reaching its desired disclosure control objectives. Based on the evaluation, the Chief Executive Officer and Cheif Financial Officer have concluded that these disclosure controls and procedures are effective as of September 30, 2008.
Management's Report on Internal Control Over Financial Reporting
CEL-SCI's management is responsible for establishing and maintaining adequate internal control over financial reporting and for the assessment of the effectiveness of internal control over financial reporting. As defined by the Securities and Exchange Commission, internal control over financial reporting is a process designed by, or under the supervision of CEL-SCI's principal executive officer and principal financial officer and implemented by CEL-SCI's Board of Directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of CEL-SCI's financial statements in accordance with U.S. generally accepted accounting principles.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Geert Kersten, CEL-SCI's Chief Executive and Principal Financial Officer, evaluated the effectiveness of CEL-SCI's internal control over financial reporting as of September 30, 2008 based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission, or the COSO Framework. Management's assessment included an evaluation of the design of CEL-SCI's internal control over financial reporting and testing of the operational effectiveness of those controls.
Based on this evaluation, Mr. Kersten concluded that CEL-SCI's internal control over financial reporting was effective as of September 30, 2008.
There was no change in CEL-SCI's internal control over financial reporting that occurred during the quarter ended September 30, 2008 that has materially affected, or is reasonably likely to materially affect, CEL-SCI's internal control over financial reporting.
This report does not include an attestation report of CEL-SCI's independent registered public accounting firm regarding internal control over financial reporting. Management's report was not subject to attestation by CEL-SCI's independent registered public accounting firm pursuant to temporary rules of the SEC that permit CEL-SCI to provide only management's report on internal control in this report.
ITEM 9B.
ITEM 9B. OTHER INFORMATION - ---------------------------
Not applicable.
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Officers and Directors
Name Age Position - ---- --- --------
Maximilian de Clara 78 Director and President Geert R. Kersten, Esq. 49 Director, Chief Executive Officer and Treasurer Patricia B. Prichep 57 Senior Vice President of Operations and Secretary Dr. Eyal Talor 52 Senior Vice President of Research and Manufacturing Dr. Daniel H. Zimmerman 67 Senior Vice President of Research, Cellular Immunology John Cipriano 66 Senior Vice President of Regulatory Affairs Alexander G. Esterhazy 66 Director Dr.C. Richard Kinsolving 72 Director Dr. Peter R. Young 63 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 has been a Director of CEL-SCI since its inception in March l983, and has been President of CEL-SCI since July l983. Prior to his affiliation with CEL-SCI, and since at least l978, Mr. de Clara was involved in the management of his personal investments and personally funding research in the fields of biotechnology and biomedicine. Mr. de Clara attended the medical school of the University of Munich from l949 to l955, but left before he received a medical degree. During the summers of l954 and l955, he worked as a research assistant at the University of Istanbul in the field of cancer research. For his efforts and dedication to research and development in the fight against cancer and AIDS, Mr. de Clara was awarded the "Pour le Merit"
honorary medal of the Austrian Military Order "Merito Navale" as well as the honor cross of the Austrian Albert Schweitzer Society.
Geert Kersten has served in his current leadership role at CEL-SCI since 1995. Mr. Kersten has been with CEL-SCI from the early days of its inception since 1987. He has been involved in the pioneering field of cancer immunotherapy for almost two decades and has successfully steered CEL-SCI through many challenging cycles in the biotechnology industry. Mr. Kersten also provides CEL-SCI with significant expertise in the fields of finance and law and has a unique vision of how the company's Multikine product will change the way cancer is treated. Prior to CEL-SCI, Mr. Kersten worked at the law firm of Finley & Kumble and worked at Source Capital, an investment banking firm located in McLean, VA. He is a native of Germany, graduated from Millfield School in England, and completed his studies in the US. Mr. Kersten completed his Undergraduate Degree in Accounting, received an M.B.A. from George Washington University, and a law degree (J.D.) from American University in Washington, DC.
Patricia B. Prichep joined CEL-SCI in 1992 and has been CEL-SCI's Senior Vice President of Operations since March 1994. Between December 1992 and March 1994, Ms. Prichep was CEL-SCI's Director of Operations. Ms. Prichep became CEL-SCI's Corporate Secretary in May 2000. She is responsible for all day-to-day operations of the Company, including human resources and is the liaison with the auditing firm for financial reporting. June 1990 to December 1992, Ms. Prichep was the Manager of Quality and Productivity for the NASD's Management, Systems and Support Department. She was responsible for the internal auditing and work flow analysis of operations. Between 1982 and 1990, Ms. Prichep was Vice President and Operations Manager for Source Capital, Ltd. She handled all operations and compliance for the company and was licensed as a securities broker. Ms. Prichep received her B.A. from the University of Bridgeport in Connecticut.
Eyal Talor, Ph.D. joined CEL-SCI in October 1993 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 and DOD. From 1969-1973, Dr. Zimmerman was a Senior Staff Fellow at NIH. For the following 25 years, he continued on at NIH as a guest worker. Dr Zimmerman received a Ph.D. in Biochemistry in 1969, a Masters in Zoology in 1966 from the University of Florida and a B.S. in Biology from Emory and Henry College in 1963. Dr. Zimmerman ended his full time employment with the Company on December 3, 2008.
John Cipriano, has been CEL-SCI's Senior Vice President of Regulatory Affairs 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. Mr. Cipriano ended his full time employment with the Company on December 3, 2008.
Alexander G. Esterhazy has been a Director of CEL-SCI since December 1999 and has been an independent financial advisor since November 1997. Between July 1991 and October 1997, Mr. Esterhazy was a senior partner of Corpofina S.A. Geneva, a firm engaged in mergers, acquisitions and portfolio management. Between January 1988 and July 1991, Mr. Esterhazy was a managing director of DG Bank in Switzerland. During this period Mr. Esterhazy was in charge of the Geneva, Switzerland branch of the DG Bank, founded and served as vice president of DG Finance (Paris) and was the President and Chief Executive officer of DG-Bourse, a securities brokerage firm.
C. Richard Kinsolving, Ph.D. has been a Director of CEL-SCI since April 2001. Since February 1999, Dr. Kinsolving has been the Chief Executive Officer of BioPharmacon, a pharmaceutical development company. Between December 1992 and February 1999, Dr. Kinsolving was the President of Immuno-Rx, Inc., a company engaged in immuno-pharmaceutical development. Between December 1991 and
September 1995, Dr. Kinsolving was President of Bestechnology, Inc. a nonmedical research and development company producing bacterial preparations for industrial use. Dr. Kinsolving received his Ph.D. in Pharmacology from Emory University (1970), his Masters degree in Physiology/Chemistry from Vanderbilt University (1962), and his Bachelor's degree in Chemistry from Tennessee Tech. University (1957).
Peter R. Young, Ph.D. has been a Director of CEL-SCI since August 2002. Dr. Young has been a senior executive within the pharmaceutical industry in the United States and Canada for most of his career. Over the last 20 years he has primarily held positions of Chief Executive Officer or Chief Financial Officer and has extensive experience with acquisitions and equity financings. Since November 2001, Dr. Young has been the President of Agnus Dei, LLC, which acts as a partner in an organization managing immune system clinics which treat patients with diseases such as cancer, multiple sclerosis and hepatitis. Since January 2003, Dr. Young has been the President and Chief Executive Officer of SRL Technology, Inc., a company involved in the development of pharmaceutical (drug) delivery systems. Between 1998 and 2001, Dr. Young was the Chief Financial Officer of Adams Laboratories, Inc. Dr. Young received his Ph.D. in Organic Chemistry from the University of Bristol, England (1969), and his Bachelor's degree in Honors Chemistry, Mathematics and Economics also from the University of Bristol, England (1966).
All of CEL-SCI's officers devote substantially all of their time to CEL-SCI's business.
CEL-SCI has an audit committee and compensation committee. The members of the audit committee are Alexander G. Esterhazy, C. Richard Kinsolving and Dr. Peter Young. Dr. Peter Young serves as the audit committee's financial expert. In this capacity, Dr. Young is independent, as that term is defined in the listing standards of the NYSE Alternext US. 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.
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 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 two fiscal years ended September 30, 2008.
(1) The dollar value of base salary (cash and non-cash) earned. During the years ended September 30, 2008 and 2007, $18,730 and $28,429, respectively, of the total salaries paid to the persons shown in the table were paid in restricted shares of CEL-SCI's common stock.
Information concerning the issuance of these restricted shares is shown in the following table:
Date Shares Number of Price Issued Shares Issued Per Share
09/20/2006 49,016 $0.52 01/15/2008 36,020 $0.52
On each date the amount of compensation satisfied through the issuance of shares was determined by multiplying the number of shares issued by the price per share. The price per share was equal to the closing price of CEL-SCI's common stock on the date prior to the date the shares were issued.
(2) The dollar value of bonus (cash and non-cash) earned.
(3) During the periods covered by the table, the value of the shares of restricted stock issued as compensation for services to the persons listed in the table. In the case of Mr. de Clara, during the years ended September 30, 2008 and 2007 $400,000 and $400,000, respectively, were paid in restricted shares of CEL-SCI's common stock which cannot be sold in the public market for a period of three years after the date of issuance. In the case of all other persons listed in the table, the shares were issued as CEL-SCI's contribution on behalf of the named officer to CEL-SCI's 401(k) retirement plan and restricted shares issued from the Stock Compensation Plan.
(4) The value of all stock options granted during the periods covered by the table are calculated according to SFAS 123R requirements.
(5) All other compensation received that CEL-SCI could not properly report in any other column of the table including annual contributions or other allocations to vested and unvested defined contribution plans, and the dollar value of any insurance premiums paid by, or on behalf of, CEL-SCI with respect to term life insurance for the benefit of the named executive officer, and the full dollar value of the remainder of the premiums paid by, or on behalf of, CEL-SCI. Includes board of directors fees for M. de Clara and G. Kersten.
Long Term Incentive Plans - Awards in Last Fiscal Year
See Footnote 6 to the financial statements.
Employee Pension, Profit Sharing or Other Retirement Plans
CEL-SCI has a defined contribution retirement plan, qualifying under Section 401(k) of the Internal Revenue Code and covering substantially all CEL-SCI's employees. CEL-SCI's contribution to the plan is made in shares of CEL-SCI's common stock. Each participant's contribution is matched by CEL-SCI with shares of common stock which have a value equal to 100% of the participant's contribution, not to exceed the lesser of $1,000 or 6% of the participant's total compensation. CEL-SCI's contribution of common stock is valued each quarter based upon the closing price of its common stock. The fiscal 2008 expenses for this plan were $110,024. Other than the 401(k) Plan, CEL-SCI does not have a defined benefit, pension plan, profit sharing or other retirement plan.
Compensation of Directors During Year Ended September 30, 2008
Stock Option Name Paid in Cash Awards (1) Awards (2) Total - ---- ------------ ---------- ---------- --------
Maximilian de Clara $20,000 $124,000 $103,320 $247,320 Geert Kersten $20,000 $124,000 $103,320 $247,320 Alexander Esterhazy $20,000 $ 62,000 $ 51,660 $133,660 C. Richard Kinsolving $20,000 $ 62,000 $ 51,660 $133,660 Peter R. Young $20,000 $ 62,000 $ 51,660 $133,660
(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. The employment agreement provided that CEL-SCI will pay Mr. de Clara an annual salary of $363,000 during the term of the agreement. On September 8, 2006 Mr. de Clara's Employment Agreement was amended and extended to April 30, 2010. The terms of the amendment to Mr. de Clara's employment 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 $200,000) and the unvested portion of any stock options would vest immediately ($227,333). For purposes of the employment agreement, a change in the control of CEL-SCI means the sale of more than 50% of the outstanding shares of CEL-SCI's Common Stock, or a change in a majority of CEL-SCI's directors.
The Employment Agreement will also terminate upon the death of Mr. de Clara, Mr. de Clara's physical or mental disability, the conviction of Mr. de Clara for any crime involving fraud, moral turpitude, or CEL-SCI's property, or a breach of the Employment Agreement by Mr. de Clara. If the Employment Agreement is terminated for any of these reasons, Mr. de Clara, or his legal representatives, as the case may be, will be paid the salary provided by the Employment Agreement through the date of termination.
Effective September 1, 2003, CEL-SCI entered into a three-year employment agreement with Mr. Kersten. The employment agreement provides that during the term of the employment agreement CEL-SCI will pay Mr. Kersten an annual salary of $370,585 plus any increases approved by the Board of Directors during the period of the employment agreement. In the event there is a change in the
control of CEL-SCI, the agreement allows Mr. Kersten to resign from his position at CEL-SCI and receive a lump-sum payment from CEL-SCI equal to 24 months salary ($809,800) and the unvested portion of any stock options would vest immediately ($246,666). For purposes of the employment agreement a change in the control of CEL-SCI means: (1) the merger of CEL-SCI with another entity if after such merger the shareholders of CEL-SCI do not own at least 50% of voting capital stock of the surviving corporation; (2) the sale of substantially all of the assets of CEL-SCI; (3) the acquisition by any person of more than 50% of CEL-SCI's common stock; or (4) a change in a majority of CEL-SCI's directors which has not been approved by the incumbent directors. Effective September 1, 2006 Mr. Kersten's employment agreement was extended to September 1, 2011.
The Employment Agreement will also terminate upon the death of Mr. Kersten, Mr. Kersten's physical or mental disability, willful misconduct, an act of fraud against CEL-SCI, or a breach of the Employment Agreement by Mr. Kersten. If the Employment Agreement is terminated for any of these reasons Mr. Kersten, or his legal representatives, as the case may be, will be paid the salary provided by the Employment Agreement through the date of termination.
Compensation Committee Interlocks and Insider Participation
CEL-SCI has a compensation committee comprised of all of CEL-SCI's directors, with the exception of Mr. Kersten. During the year ended September 30, 2008, 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, 2008, 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, 2008, to the persons named below.
Options Granted Exercise Grant Options Price Per Expiration Name Date Granted (#) Share Date ------ ---- ----------- ---------- ---- Maximilian de Clara 03/05/2008 200,000 $0.62 03/04/2018 Geert Kersten 03/05/2008 200,000 $0.62 03/04/2018 Patricia B. Prichep 03/05/2008 100,000 $0.62 03/04/2018 Eyal Talor, Ph.D. 03/05/2008 100,000 $0.62 03/04/2018 Daniel Zimmerman, Ph.D. 03/05/2008 75,000 $0.62 03/04/2018 John Cipriano 03/05/2008 75,000 $0.62 03/04/2018
Options Exercised
Shares Date of Acquired On Value Exercise Exercise Realized -------- ------------ --------
None
Shares underlying unexercised Option which are: Exercise Expiration Name Exercisable Unexercisable Price Date ---- ----------- ------------- --------- -----------
Maximilian de Clara 23,333 2.87 07/31/13 95,000 (1) 1.94 08/31/13 70,000 1.05 09/25/09 56,666 1.05 05/01/10 50,000 1.05 05/01/13 50,000 1.05 04/12/09 60,000 1.05 04/19/10 60,000 1.38 03/22/11 75,000 0.54 03/14/12 50,000 0.61 09/02/14 50,000 0.48 09/21/15 66,667 0.58 09/12/16 66,667 0.63 09/13/17 ------ 773,333 33,333 0.58 09/12/16 133,333 0.63 09/13/17 200,000 0.62 03/04/18 ------- 366,666
Geert R. Kersten 50,000 1.05 11/01/13 14,000 1.05 10/31/13 50,000 1.05 07/31/13 224,000 (1) 1.05 06/10/13 50,000 1.05 09/25/09 150,000 1.05 05/01/10 50,000 1.05 05/01/13 50,000 1.05 04/12/09 95,000 (1) 1.94 08/31/13 60,000 1.05 04/19/10 60,000 1.38 03/22/11 560,000 (1) 1.05 10/16/13 105,000 0.54 03/14/12 1,890,000 0.22 04/01/13 50,000 0.61 09/02/14 50,000 0.48 09/21/15 133,334 0.58 09/12/16 66,667 0.63 09/13/17 ------ 3,708,001
Shares underlying unexercised Option which are: Exercise Expiration Name Exercisable Unexercisable Price Date ---- ----------- ------------- --------- -----------
Geert R. Kersten (cont'd) 66,666 0.58 09/12/16 133,333 0.63 09/13/17 200,000 0.62 03/04/18 ------- 399,999
- ------------------------------------------------------------------------------
Patricia B. Prichep 6,000 1.05 12/01/13 10,000 1.05 11/30/13 9,500 1.05 07/31/13 3,000 1.05 12/31/09 35,000 1.05 03/01/10 17,000 1.05 12/01/13 15,000 1.05 04/12/09 47,500 (1) 1.94 08/31/13 23,000 1.05 02/02/10 25,000 1.18 12/08/10 30,000 1.00 12/03/11 200,000 (1) 1.05 10/16/13 10,500 0.54 03/14/12 50,000 0.33 04/26/12 243,000 0.22 04/01/13 337,000 0.22 04/01/13 50,000 0.61 09/02/14 30,000 0.48 09/21/15 60,000 0.58 09/12/16 33,334 0.63 09/13/17 ------ 1,234,834 30,000 0.58 09/12/16 66,666 0.63 09/13/17 100,000 0.62 03/04/18 ------- 196,666
- -------------------------------------------------------------------------------
Eyal Talor, Ph.D. 15,500 1.05 07/31/13 16,666 1.05 03/16/10 15,000 1.05 08/03/13 10,000 (1) 1.94 08/31/13 20,000 1.05 08/02/09 25,000 1.76 11/10/10 35,000 1.00 12/03/11 160,000 (1) 1.05 10/16/13 50,000 0.33 04/26/12 374,166 0.22 04/01/13 50,000 0.61 09/02/14 30,000 0.48 09/21/15 53,334 0.58 09/12/16 33,334 0.63 09/13/17 ------ 888,000
Shares underlying unexercised Option which are: Exercise Expiration Name Exercisable Unexercisable Price Date ---- ----------- ------------- --------- -----------
Eyal Talor, Ph.D (cont'd) 26,666 0.58 09/12/16 66,666 0.63 09/13/17 100,000 0.62 03/04/18 ------- 193,332
- -------------------------------------------------------------------------------
Daniel Zimmerman, Ph.D.12,000 1.05 12/31/13 3,000 1.05 12/31/09 7,000 1.05 06/19/10 15,000 1.05 02/19/13 30,000 (1) 1.94 08/31/13 15,000 1.05 04/12/09 20,000 1.05 02/02/10 20,000 1.85 01/26/11 120,000 (1) 1.05 10/16/13 41,000 0.54 03/14/12 50,000 0.33 04/16/12 392,000 0.22 04/01/13 50,000 0.61 09/02/14 30,000 0.48 09/21/15 40,000 0.58 09/12/16 25,000 0.63 09/13/17 ------ 870,000
20,000 0.58 09/12/16 50,000 0.63 09/13/17 75,000 0.62 03/04/18 ------ 145,000
- -------------------------------------------------------------------------------
John Cipriano 100,000 1.13 03/01/14 20,000 0.61 09/02/14 30,000 0.48 09/21/15 40,000 0.58 09/12/16 25,000 0.63 09/13/17 ------ 215,000 20,000 0.58 09/12/16 50,000 0.63 09/13/17 75,000 0.62 03/04/18 ------ 145,000
(1) Options purchased by Employee through the Salary Reduction Plan.
Stock Option, Bonus and Compensation Plans
CEL-SCI has Incentive Stock Option Plans, Non-Qualified Stock Option, Stock Bonus and Stock Compensation Plans. All Stock Option, Bonus and Compensation Plans have been approved by the stockholders. A summary description of these Plans follows. In some cases these Plans are collectively referred to as the "Plans".
Incentive Stock Option Plan. The Incentive Stock Option Plans authorize the issuance of shares of CEL-SCI's common stock to persons who exercise options granted pursuant to the Plan. Only CEL-SCI's employees may be granted options pursuant to the Incentive Stock Option Plan.
To be classified as incentive stock options under the Internal Revenue Code, options granted pursuant to the Plans must be exercised prior to the following dates:
(a) The expiration of three months after the date on which an option holder's employment by CEL-SCI is terminated (except if such termination is due to death or permanent and total disability);
(b) The expiration of 12 months after the date on which an option holder's employment by CEL-SCI is terminated, if such termination is due to the Employee's permanent and total disability;
(c) In the event of an option holder's death while in the employ of CEL-SCI, his executors or administrators may exercise, within three months following the date of his death, the option as to any of the shares not previously exercised;
The total fair market value of the shares of Common Stock (determined at the time of the grant of the option) for which any employee may be granted options which are first exercisable in any calendar year may not exceed $100,000.
Options may not be exercised until one year following the date of grant. Options granted to an employee then owning more than 10% of the Common Stock of CEL-SCI may not be exercisable by its terms after five years from the date of grant. Any other option granted pursuant to the Plan may not be exercisable by its terms after ten years from the date of grant.
The purchase price per share of Common Stock purchasable under an option is determined by the Committee but cannot be less than the fair market value of the Common Stock on the date of the grant of the option (or 110% of the fair market value in the case of a person owning more than 10% of CEL-SCI's outstanding shares).
Non-Qualified Stock Option Plans. The Non-Qualified Stock Option Plans authorize the issuance of shares of CEL-SCI's common stock to persons that exercise options granted pursuant to the Plans. CEL-SCI's employees, directors, officers, consultants and advisors are eligible to be granted options pursuant to the Plans, provided however that bona fide services must be rendered by such consultants or advisors and such services must not be in connection with the offer or sale of securities in a capital-raising transaction. The option exercise price is determined by CEL-SCI's Board of Directors.
Stock Bonus Plan. Under the Stock Bonus Plans shares of CEL-SCI's common stock may be issued to CEL-SCI's employees, directors, officers, consultants and advisors, provided however that bona fide services must be rendered by consultants or advisors and such services must not be in connection with the offer or sale of securities in a capital-raising transaction.
Stock Compensation Plan. Under the Stock Compensation Plan, shares of CEL-SCI's common stock may be issued to CEL-SCI's employees, directors, officers, consultants and advisors in payment of salaries, fees and other compensation owed to these persons. However, bona fide services must be rendered by consultants or advisors and such services must not be in connection with the offer or sale of securities in a capital-raising transaction.
Other Information Regarding the Plans. The Plans are administered by CEL-SCI's Compensation Committee ("the Committee"), each member of which is a director of CEL-SCI. The members of the Committee were selected by CEL-SCI's Board of Directors and serve for a one-year tenure and until their successors are elected. A member of the Committee may be removed at any time by action of the Board of Directors. Any vacancies which may occur on the Committee will be filled by the Board of Directors. The Committee is vested with the authority to interpret the provisions of the Plans and supervise the administration of the Plans. In addition, the Committee is empowered to select those persons to whom shares or options are to be granted, to determine the number of shares subject to each grant of a stock bonus or an option and to determine when, and upon what conditions, shares or options granted under the Plans will vest or otherwise be subject to forfeiture and cancellation.
In the discretion of the Committee, any option granted pursuant to the Plans may include installment exercise terms such that the option becomes fully exercisable in a series of cumulating portions. The Committee may also accelerate the date upon which any option (or any part of any options) is first exercisable. Any shares issued pursuant to the Stock Bonus Plan and any options granted pursuant to the Incentive Stock Option Plan or the Non-Qualified Stock Option Plan will be forfeited if the "vesting" schedule established by the Committee administering the Plan at the time of the grant is not met. For this purpose, vesting means the period during which the employee must remain an employee of CEL-SCI or the period of time a non-employee must provide services to CEL-SCI. At the time an employee ceases working for CEL-SCI (or at the time a non-employee ceases to perform services for CEL-SCI), any shares or options not fully vested will be forfeited and cancelled. At the discretion of the Committee payment for the shares of Common Stock underlying options may be paid through the delivery of shares of CEL-SCI's Common Stock having an aggregate fair market value equal to the option price, provided such shares have been owned by the option holder for at least one year prior to such exercise. A combination of cash and shares of Common Stock may also be permitted at the discretion of the Committee.
Options are generally non-transferable except upon death of the option holder. Shares issued pursuant to the Stock Bonus Plan will generally not be transferable until the person receiving the shares satisfies the vesting requirements imposed by the Committee when the shares were issued.
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, 2008 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 10,100,000 4,745,266 n/a 5,003,000 Non-Qualified Stock Option Plans 13,760,000 8,404,565 n/a 2,028,000 Stock Bonus Plans 7,940,000 n/a 4,805,019 3,134,897 Stock Compensation Plan 5,500,000 n/a 4,062,146 1,437,854
Of the shares issued pursuant to CEL-SCI's Stock Bonus Plans 1,180,544 shares were issued as part of CEL-SCI's contribution to its 401(k) plan.
The following table shows the weighted average exercise price of the outstanding options granted pursuant to CEL-SCI's Incentive and Non-Qualified Stock Option Plans as of September 30, 2008, 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.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The following table shows, as of November 30, 2008, 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 1,211,410 1.0% Bergstrasse 79 6078 Lungern, Obwalden, Switzerland
Geert R. Kersten 7,034,583 5.6% 8229 Boone Blvd., Suite 802 Vienna, VA 22182
Patricia B. Prichep 2,029,987 1.6% 8229 Boone Blvd., Suite 802 Vienna, VA 22182
Eyal Talor, Ph.D. 1,403,209 1.1% 8229 Boone Blvd., Suite 802 Vienna, VA 22182
Daniel H. Zimmerman, Ph.D. 1,392,820 1.1% 8229 Boone Blvd., Suite 802 Vienna, VA 22182
John Cipriano 401,693 0.3% 8229 Boone Blvd., Suite 802 Vienna, VA 22182
Alexander G. Esterhazy 516,666 0.4% 20 Chemin du Pre-Poiset CH- 1253 Vandoeuvres Geneve, Switzerland
C. Richard Kinsolving, Ph.D. 745,757 0.6% P.O. Box 20193 Bradenton, FL 34204-0193
Peter R. Young, Ph.D. 517,934 0.4% 1247 Dodgeton Drive Frisco, TX 75034-1432
Name and Address Number of Shares (1) Percent of Class (3) - ---------------- ---------------- ----------------
All Officers and Directors 15,254,059 11.6% as a Group (9 persons)
(1) Includes shares issuable prior to January 31, 2009 upon the exercise of options or warrants granted to the following persons:
Options or Warrants Exercisable
Name Prior to January 31, 2009 ---- --------------------------
Maximilian de Clara 773,333 Geert R. Kersten 3,708,001 Patricia B. Prichep 1,234,834 Eyal Talor, Ph.D. 888,000 Daniel H. Zimmerman, Ph.D. 870,000 John Cipriano 215,000 Alexander G. Esterhazy 296,666 C. Richard Kinsolving, Ph.D. 456,667 Peter R. Young, Ph.D. 283,333
(2) Amount includes shares held in trust for the benefit of Mr. Kersten's minor children. Geert R. Kersten is the stepson of Maximilian de Clara.
(3) Amount includes shares referred to in (1) above but excludes shares which may be issued upon the exercise or conversion of other options, warrants and other convertible securities previously issued by CEL-SCI.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
ITEM 14.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
BDO Seidman, LLP served as CEL-SCI's independent registered public accountant for the two years ended September 30, 2008. The following table shows the aggregate fees billed to CEL-SCI for these years by BDO Seidman, LLP:
Year Ended September 30, 2008 2007 ---- ----
Audit Fees $173,052 $ 142,704 Audit-Related Fees -- -- Tax Fees -- -- All Other Fees -- --
Audit fees represent amounts billed for professional services rendered for the audit of the CEL-SCI's annual financial statements and the reviews of the 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 Related Fees charged by BDO Seidman, LLP are consistent with BDO Seidman, LLP maintaining its independence from CEL-SCI.
ITEM 15.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a) See the Financial Statements attached to this Report.
Exhibits
3(a)Articles of Incorporation Incorporated by reference to Exhibit 3(a) of CEL-SCI's combined Registration Statement on Form S-1 and Post-Effective Amendment ("Registration Statement"), Registration Nos. 2-85547-D and 33-7531.
3(b) Amended Articles Incorporated by reference to Exhibit 3(a) of CEL-SCI's Registration Statement on Form S-1, Registration Nos. 2-85547-D and 33-7531.
3(c)Amended Articles (Name change only) Filed as Exhibit 3(c) to CEL-SCI's 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 Agreement Incorporated by reference to Exhibit with Eastern Biotech 10(x) to Amendment No. 2 to CEL-SCI's Registration statement on Form S-3 (Commission File No. 333-106879).
10(g) Securities Purchase Agreement Incorporated by reference to Exhibit 10 (together with schedule required to CEL-SCI's report on Form 8-K dated by Instruction 2 to Item 601 of August 4, 2006. Regulation S-K) pertaining to Series K notes and warrants, together with the exhibits to the Securities Purchase Agreement.
10(h) Subscription Agreement (together Incorporated by reference to Exhibit with Schedule required by 10 of CEL-SCI's report on Form 8-K Instruction 2 to Item 601 of dated 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 13
CEL-SCI CORPORATION
Consolidated Financial Statements for the Years Ended September 30, 2008, 2007, and 2006, and Report of Independent Registered Public Accounting Firm
CEL-SCI CORPORATION
Page
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM F- 2
CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED SEPTEMBER 30, 2008, 2007, AND 2006:
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- 13
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, 2008 and 2007 and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended September 30, 2008. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of CEL-SCI Corporation at September 30, 2008 and 2007, and the results of its operations and its cash flows for each of the three years in the period ended September 30, 2008, in conformity with accounting principles generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 3 to the consolidated financial statements, the Company has suffered recurring net losses, negative cash flows, and negative working capital. The Company has convertible debt that allows the debt holders to exercise a put option in August 2009. In December 2008, the Company was not in compliance with certain lease requirements related with its facility lease. These factors raise substantial doubt about the Company's ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 3. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
/s/ BDO SEIDMAN LLP
Bethesda, Maryland January __, 2009
CEL-SCI CORPORATION CONSOLIDATED BALANCE SHEETS SEPTEMBER 30, 2008 AND 2007
ASSETS 2008 2007 ----------------- -------------- CURRENT ASSETS: Cash and cash equivalents $ 711,258 $ 10,993,021 Short-term investments 200,000 - Interest and other receivables - 57,476 Prepaid expenses 27,209 34,578 Inventory used for R&D and manufacturing 395,170 385,650 Deposits 14,828 14,828 ---------- ------------ Total current assets 1,348,465 11,485,553
RESEARCH AND OFFICE EQUIPMENT AND LEASEHOLD IMPROVMENTS - less accumulated depreciation of $1,964,597 and $1,859,644 1,324,686 233,876
PATENT COSTS--less accumulated amortization of $1,091,597 and $896,407 587,439 541,380
RESTRICTED CASH 987,652 2,168,629
INTEREST RECEIVABLE - LONG TERM 199,593 -
DEPOSITS 1,575,000 -
DEFERRED RENT 8,660,837 6,301,364 ---------- ------------ TOTAL ASSETS $14,683,672 $ 20,730,802 =========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY 2008 2007 -------- ------- CURRENT LIABILITIES: Accounts payable $ 427,509 $ 248,120 Accrued expenses 113,179 98,603 Due to employees 36,077 26,735 Accrued interest on convertible debt 45,558 68,795 Short-term loan 200,000 - Deposits held - 3,000 Derivative instruments - current portion 3,018,697 782,732 ---------- ------------ Total current liabilities 3,841,020 1,227,985 Deferred rent 6,617 1,466 Derivative instruments - noncurrent portion - 4,831,252 ---------- ------------ Total liabilities 3,847,637 6,060,703 ---------- ------------
CEL-SCI CORPORATION CONSOLIDATED BALANCE SHEETS SEPTEMBER 30, 2008 AND 2007 (continued)
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY: 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, 120,796,094 and 115,678,662 shares at September 30, 2008 and 2007, respectively 1,207,961 1,156,787
Additional paid-in capital 134,324,370 130,081,378
Accumulated deficit (124,696,296) (116,568,066) ------------ ------------
Total stockholders' equity 10,836,035 14,670,099 ------------ ------------ TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 14,683,672 $ 20,730,802 ============ ============
See notes to consolidated financial statements
CEL-SCI CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS YEARS ENDED SEPTEMBER 30, 2008, 2007 AND 2006
2008 2007 2006 ----- ----- ----
GRANT REVENUE AND OTHER $ 5,065 $ 57,043 $ 125,457
OPERATING EXPENSES: Research and development (excluding R&D depreciation of $124,705, $91,292 and $74,043 respectively, included below) 4,101,563 2,528,528 1,896,976
Depreciation and amortization 215,060 176,186 170,903
General & administrative 5,200,735 6,704,538 3,406,774 ---------- ---------- ---------- Total operating expenses 9,517,358 9,409,252 5,474,653 ---------- ---------- ----------
NET OPERATING LOSS (9,512,293) (9,352,209) (5,349,196)
GAIN ON DERIVATIVE INSTRUMENTS 1,799,393 868,182 2,325,784
COSTS ASSOCIATED WITH CONVERTIBLE DEBT - - (4,791,548)
INTEREST INCOME 483,252 562,973 92,487
INTEREST EXPENSE (473,767) (1,708,603) (216,737) ---------- ---------- ----------
NET LOSS (7,703,415) (9,629,657) (7,939,210)
DIVIDENDS (424,815) - - ---------- ---------- ----------
NET LOSS AVAILABLE TO COMMON SHAREHOLDERS $(8,128,230) $(9,629,657) $(7,939,210) ============ =========== =========== NET LOSS PER COMMON SHARE
BASIC $ (0.07) $ (0.10) $ (0.10)
DILUTED $ (0.07) $ (0.10) $ (0.11)
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING BASIC 117,060,866 97,310,488 78,971,290
DILUTED 117,060,866 97,310,488 93,834,078
See notes to consolidated financial statements.
CEL-SCI CORPORATION CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY YEARS ENDED SEPTEMBER 30, 2008, 2007 AND 2006
CEL-SCI CORPORATION CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY YEARS ENDED SEPTEMBER 30, 2008, 2007 AND 2006 (continued)
CEL-SCI CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED SEPTEMBER 30, 2008, 2007 AND 2006
See notes to consolidated financial statements.
CEL-SCI CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED SEPTEMBER 30, 2008, 2007 AND 2006 (continued)
(continued)
See notes to consolidated financial statements.
CEL-SCI CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED SEPTEMBER 30, 2008, 2007 AND 2006 (continued)
(continued)
See notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED SEPTEMBER 30, 2008, 2007 AND 2006 (continued)
(continued)
See notes to consolidated financial statements.
CEL-SCI CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED SEPTEMBER 30, 2008, 2007 AND 2006 (continued)
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. Interest and other receivables--Interest and other receivables consists of interest accrued on any investments and on the deferred rent. Interest on the deferred rent is calculated at 3% on the funds deposited on the manufacturing facility. This interest income will be used to offset future rent.
e. 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.
f. Deposits--The deposits are both deposits on the office ($14,828) and the deposit on the manufacturing facility ($1,575,000) required by the lease agreement.
g. 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, 2008, 2007 and 2006 totaled $133,604, $92,176 and $90,664, respectively.
h. 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, 2008, 2007 and 2006, the Company recorded patent impairment charges of $8,114, $34,122 and $-0-, 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, 2008, 2007 and 2006 totaled $81,456, $84,010 and $80,238, respectively. The Company estimates that amortization expense will be $82,000 for each of the next five years, totaling $410,000.
i. Deferred Rent--On September 30, 2008, the Company has included in deferred rent the following: 1) deposit on the manufacturing facility ($3,150,000); 2) the fair value of the warrants issued to lessor ($1,364,773); 3) additional investment ($2,359,473); and 4) deposit on the cost of the leasehold improvements for the manufacturing facility ($1,786,591). On September 30, 2007, the Company has included in deferred rent the following: 1) deposit on the manufacturing facility ($3,150,000); 2) the fair value of the warrants issued to lessor ($1,364,773); and 3) deposit on the cost of the leasehold improvements for the manufacturing facility ($1,786,591).
j. Deferred Rent (liability)-The deferred rent (liability) is amortized on a straight-line basis over the term of the lease with the offset going against rent expense.
k. Derivative Instruments--The Company has entered into financing arrangements that consist of freestanding derivative instruments or are hybrid instruments that contain embedded derivative features. The Company accounts for these arrangement in accordance with 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 cannot be reliably measured, the Company measures and reports the entire hybrid instrument at fair value with changes in fair value recognized as either a gain or loss in earnings. The Company determines the fair value of derivative instruments and hybrid instruments based on available market data using appropriate valuation models, giving consideration to all of the rights and obligations of each instrument and 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.
l. 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.
m. Research and Development Costs--Research and development expenditures are expensed as incurred. Total research and development costs, excluding depreciation, were $4,101,563, $2,528,528 and $1,896,976 for the years ended September 30, 2008, 2007 and 2006.
n. 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.
o. 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.
p. Income Taxes--The Company adopted the provisions of FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes, on October 1, 2007. The Company has net operating loss carryforwards approximately $98,093,100. The Company uses the asset and liability method of accounting for income taxes. Under the asset and liability method, deferred tax assets and liabilities are recognized for future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating and tax loss carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. The Company records a valuation allowance to reduce the deferred tax assets to the amount that is
more likely than not to be recognized. There has been no change in the Company's financial position and results of operations due to the adoption of FIN 48.
q. 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.
r. Recent Accounting Pronouncements--In September 2006, the 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. In February 2008, the FASB issued FASB Staff Position ("FSP") No. 157-2, Effective Data of FASB Statement No. 157. FSP 157-2 delays the effective date of SFAS 157 to fiscal years beginning after November 15, 2008, for nonfinancial assets and nonfinancial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). The Company is evaluating whether this statement will affect its current practice in valuing fair value of its derivatives each quarter. The effect of the adoption is expected to be immaterial.
In February 2007, the 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 effect will be immaterial.
In December 2007, the FASB issued SFAS No. 141 (revised 2007), "Business Combinations", which replaces SFAS No. 141. The statement retains the purchase method of accounting for acquisitions, but requires a number of changes, including changes in the way assets and liabilities are recognized in the purchase accounting. It also changes the recognition of assets acquired and liabilities assumed arising from contingencies, requires the capitalization of in-process research and development at fair value, and requires the expensing of acquisition-related costs as incurred. SFAS No. 141R is effective beginning October 1, 2009 and will apply prospectively to business combinations completed on or after that date.
In December 2007, the FASB issued SFAS No. 160, "Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB 51", which changes the accounting and reporting for minority interests. Minority interests will be recharacterized as noncontrolling interests and will be reported as a component of equity separate from the parent's equity, and purchases or sales of equity interests that do not result in a change in control will be accounted for as equity transactions. In addition, net income attributable to
the noncontrolling interest will be included in consolidated net income on the face of the income statement and, upon loss of control, the interest sold, as well as any interest retained, will be recorded at fair value with any gain or loss recognized in earnings. SFAS No. 160 is effective beginning October 1, 2009 and will apply prospectively, except for the presentation and disclosure requirements, which will apply retrospectively.
In March 2008, the FASB issued SFAS No. 161, "Disclosures about Derivative Instruments and Hedging Activities - an amendment of FASB Statement No. 133", which changes disclosure requirements for derivative instruments and hedging activities. The statement is effective for periods ending on or after November 15, 2008, with early application encouraged. The Company is currently assessing the additional requirements of this statement.
In April 2008, the FASB staff issued PSP FAS 142-3, "Determination of the Useful Life of Intangible Assets", which amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under FASB Statement No. 142, "Goodwill and Other Intangible Assets". The staff position is intended to improve the consistency between the useful life of a recognized intangible asset under Statement 142 and the period of expected cash flows used to measure the fair value of the asset under FASB Statement No. 141, "Business Combinations", and other U.S. generally accepted accounting principles (GAAP). The Company is currently assessing the potential impact of this staff position on its consolidated financial statements.
In June 2008, the FASB finalized EITF 07-5, "Determining Whether an Instrument (or Embedded Feature) is Indexed to an Entity's Own Stock". The EITF lays out a procedure to determine if the debt instrument is indexed to its own common stock. The EITF is effective for fiscal years beginning after December 15, 2008. The Company believes it will have an impact on the convertible debt and certain warrants and it could be material.
In September 2008, the FASB staff issued PSP FAS 133-1 and FIN 45-4, "Disclosures about Credit Derivatives and Certain Guarantees: An Amendment of FASB Statement No. 133 and FASB Interpretation No. 45; and Clarification of the Effective Date of FASB Statement No. 161". The FSP applies to credit derivatives within the scope of Statement 133 and hybrid instruments that have embedded credit derivatives. It deals with disclosures related to these derivatives and is effective for reporting periods ending after November 15, 2008. It also clarifies the effective date of SFAS No. 161 as any reporting period beginning after November 15, 2008. The Company is currently assessing the potential impact of this staff position on its consolidated financial statements.
s. 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 recognized expense of $ 561,387 for options issued or vested during the fiscal year ended September 30, 2008, 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 ending 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, 2008.
Non-Qualified Stock Option Plan
Incentive Stock Option Plan - ---------------------------
The total intrinsic value of options exercised during the fiscal years 2008, 2007 and 2006 was $5,784, $257,463 and $67,432, respectively.
A summary of the status of the Company's non-vested options as of September 30, 2008 is presented below:
Non-qualified Stock Option Plan: Weighted Number of Average Shares Price ---------- ---------
Nonvested at October 1, 2005 1,572,470 $0.25 Vested (1,538,821) Granted 1,091,000 Forfeited - Expired - ----------
Nonvested at September 30, 2006 1,124,649 $0.23 Vested (554,663) Granted 870,000 Forfeited - Expired - ----------
Nonvested at September 30, 2007 1,439,986 $0.51 Vested (616,328) Granted 1,038,000 Forfeited (9,332) Expired - -----------
Nonvested at September 30, 2008 1,852,326 $0.61
Incentive Stock Option Plan: Weighted Number of Average Shares Price --------- -------
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 Vested (280,001) Granted 300,000 Forfeited - Expired - -----------
Nonvested at September 30, 2008 623,331 $0.62
The weighted average fair value at the date of grant for options granted during fiscal years 2008, 2007 and 2006 was $0.51, $0.53 and $0.58, respectively.
In fiscal year 2008, CEL-SCI issued 1,338,000 stock options to employees and directors at a fair value of $677,661, or weighted average $0.51 per share. In September 2007, CEL-SCI issued 1,170,000 stock options to employees and directors at a fair value of $616,977, or $0.53 per share. 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:
2008 2007 2006 ---- ---- ----
Expected stock risk volatility 79-81% 80% 78% Risk-free interest rate 3.68-4.53% 4.67% 4.88% Expected life options 10 Years 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 2008, 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.
At the annual shareholders' meeting on March 3, 2008, the following plans were adopted:
o CEL-SCI's 2008 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 2008 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 2008 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 were convertible into 9,651,163 shares of the Company's common stock at the option of the holder at any time prior to maturity at a conversion price of $0.86 per share, subject to adjustment for certain events described below. The Series K Warrants were exercisable over a five-year period from February 4, 2007 through February 4, 2012 at $0.95 per share.
The Series K Notes 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 $95,000 beginning on March 4, 2007 and continuing through September 4, 2010. The remaining principal balance of $950,000 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, 2009, accordingly, the debt has been classified as current as of September 30, 2008. Interest has been 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 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 determined the initial carrying value of the Series K Notes to be $6,565,528. The Series K Notes were immediately marked to fair value resulting in a derivative liability in the amount of $9,728,793 and recognized a charge of $3,163,265, which was recorded as costs associated with convertible debt. As of September 30, 2008, the fair value of the Series K Notes is $1,943,240, and the Company recognized a total gain of $1,799,393 on the convertible debt and associated warrants during the year ended September 30, 2008. A debt discount in the amount of $1,734,472 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, 2008, the Company recorded interest expense of $249,106 in related amortization of the debt discount over the term of the Series K Notes.
Upon issuance, the Series K Warrants and Placement Agent Warrants did not meet the requirements for equity classification set forth in 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, 2008, the fair value of the Series K Warrants is $995,793. The Company paid $568,710 in cash transaction costs and incurred another $223,907 in costs based upon the fair value of the Placement Agent Warrants, which was recorded as costs associated with convertible debt. Such costs were expensed immediately as part of fair value adjustments required in connection with the convertible debt instrument and the Company's irrevocable election to initially and subsequently measure the Series K Notes at fair value. As of September 30, 2008, the fair value of the Placement Agent Warrants was $79,664.
During the year ended September 30, 2007, $4,399,285 in convertible debt was converted into 5,744,764 shares of common stock. No debt was converted into common stock during the year ended September 30, 2008.
The following summary comprises the total of the fair value of the convertible debt at September 30, 2008 and 2007:
2008 2007 ---- ----
Face value of debt $2,240,715 $3,285,715 Discount on debt (193,980) (443,086) Investor warrants 1,734,472 1,734,472 Placement agent warrants 79,664 192,826 Fair value adjustment-convertible debt (103,495) 168,207 Fair value adjustment-investor warrants (738,679) 675,850 ----------- ------------ Total fair value $3,018,697 $5,613,984 ========== ==========
3. OPERATIONS AND FINANCING
The Company has incurred significant costs since its inception in connection with the acquisition of certain patented and unpatented proprietary technology and know-how relating to the human immunological defense system, patent applications, research and development, administrative costs, construction of laboratory facilities, and clinical trials. The Company has funded such costs with proceeds realized from the public and private sale of its common and preferred stock. The Company will be required to raise additional capital or find additional long-term financing in order to continue with its research efforts. To date, the Company has not generated any revenue from product sales. The ability of the Company to complete the necessary clinical trials and obtain Federal Drug Administration (FDA) approval for the sale of products to be developed on a commercial basis is
uncertain. Ultimately, the Company must complete the development of its products, obtain the appropriate regulatory approvals and obtain sufficient revenues to support its cost structure.
CEL-SCI has two partners who have agreed to participate in and pay for part of the Phase III clinical trial for Multikine. However in light of the current capital market environment, CEL-SCI believes it is prudent not to start the Phase III clinical trial until it has firm commitments in the form of partnerships and/or money raised for a substantial amount of cash to support the Phase III clinical trial. In the meantime, CEL-SCI will operate at significantly reduced cash expenditure levels and additional cash may be raised by offering contract manufacturing services to the pharmaceutical industry in its new manufacturing facility. CEL-SCI expects that it will need to raise additional capital in fiscal year 2009 in the form of corporate partnerships and/or equity financings to support its operations at its current rate. CEL-SCI is currently working towards a transaction which it expects to complete in fiscal 2009 which will finance its Phase III clinical trial of Multikine. CEL-SCI believes that it will be able to obtain additional financing since Multikine is a Phase III product designed to treat cancer, an area that pharmaceutical companies are increasingly targeting. CEL-SCI is working on a sale-leaseback program for the equipment it owns which would provide CEL-SCI approximately $1.5 million in additional cash. It is important to note that CEL-SCI's expenditures for fiscal year 2008 included several very large non-recurring expenses that amounted to several million dollars, mostly related to the build out of the manufacturing facility. These expenses will not recur in fiscal year 2009, thereby reducing CEL-SCI's expenditures significantly. Beyond those savings CEL-SCI has also made other very significant cuts in its expenditures and certain vendors have agreed to take common stock in lieu of cash payments. In addition, CEL-SCI has put in place a $5 million Equity Line of Credit (see Note 15). With this Equity Line of Credit in place CEL-SCI believes it will have the required capital to continue operations into January 2010. However, if necessary CEL-SCI can make further reductions in expenditures by a reduction in force or by implementation of a salary reduction program. The Company has determined that the convertible debt holders of the Series K Notes may require repayment of the entire remaining principal balance at any time after August 4, 2009. This debt can be paid in stock and would not require a cash payment. In addition, CEL-SCI is currently in negotiation with the Landlord of the manufacturing facility for rent deferral on the lease in order to conserve its cash. If we do not renegotiate the lease, we plan to either get an additional loan from Mr. de Clara or use the equity line of credit to make the rent payments.
The Company has determined that the convertible debt holders of the Series K Notes may require repayment of the entire remaining principal balance at any time after August 4, 2009. This debt can be paid in stock and may not require a cash payment. In addition, in December 2008, CEL-SCI was not in compliance with certain lease requirements (i.e., failure to pay an installment of Base Annual Rent). However, the landlord has not declared CEL-SCI formally in default under the terms of the lease. The landlord currently has the right to declare CEL-SCI in default if CEL-SCI fails to pay any installment of the Base Annual Rent when such failure continues for a period of 5 business days after CEL-SCI's receipt of written notice thereof from the Landlord, provided that if CEL-SCI fails to pay any of the foregoing within 5 business days more than two (2) times in any twelve (12) month period during the lease term, the Landlord shall not be required to provide CEL-SCI with any further notice and CEL-SCI shall be deemed to be in default. CEL-SCI is currently in negotiation with the Landlord for rent deferral on the lease in order to conserve its cash. If we do not renegotiate the lease we plan to either get an additional loan from Mr. deClara or use the equity line of credit to make the rent payments.
In general, with the reduction in expenses and the $5 million Equity Line in place, the Company expects to have enough cash to continue operations through January 2010 if the debt holders do not exercise their put options and the landlord of their manufacturing facility does not issue a default notice.
While there can be no assurance that the debt holders will not exercise their put option, and the landlord of the manufacturing facility will not issue a default notice, the Company continues to work on solutions for additional financing and ways to reduce expenses. The Company has shown in the past that they are able to secure financing to continue operations. There is no assurance the Company can do so in the future. These financial statements do not reflect any adjustments that might result from this uncertainty.
4. RESEARCH AND OFFICE EQUIPMENT
Research and office equipment at September 30, 2008 and 2007, consists of the following: 2008 2007 ---- ----
Research equipment $3,125,982 $1,931,459 Furniture and equipment 118,881 119,020 Leasehold improvements 44,419 43,041 ------------ ---------- 3,289,283 2,093,520
Less: Accumulated depreciation and amortization (1,964,597) (1,859,644) ------------ ----------- Net research and office equipment $ 1,324,686 $ 233,876 ============ ===========
5. INCOME TAXES
At September 30, 2008 the Company had a federal net operating loss carryforward of approximately $98.1 million expiring from 2009 through 2028.
In addition, the Company has a general business credit as a result of the credit for increasing research activities of $2,342,000 and $1,950,700 at September 30, 2008 and 2007, respectively. These tax credits begin expiring after twenty years from the year in which the credit was generated. The components of the deferred taxes at September 30, 2008 and 2007 are comprised of the following:
2008 2007 ---- ----
Net operating loss $37,235,972 $35,596,301
R&D credit 2,341,994 1,950,699 Amortization of debt discount 584,771 502,349 FAS 123R 207,635 - Vacation 5,533 - ----------- ----------- Total deferred tax assets 40,375,905 38,049,349
Derivative gain (1,895,479) (1,242,453) ----------- ----------- Total deferred tax liability (1,895,479) -
Valuation allowance (38,480,426) (36,806,896) ----------- ----------- Net Deferred Tax Asset $ - $ - ============ ============
In assessing the realization of the deferred tax assets, management considered whether it was more likely than not that some portion or all of the deferred tax asset will be realized. The ultimate realization of the deferred tax assets are dependent upon the generation of future taxable income. Management has considered the history of the Company's operating losses and believes that the realization of the benefit of the deferred tax assets cannot be determined. In addition, under the Internal Revenue Code Section 382, the Company's ability to utilize these net operating loss carryforwards may be limited or eliminated in the event of a change in ownership in the future. Internal Revenue Code Section 382 generally defines a change in ownership as the situation where there has been a more than 50 percent change in ownership of the value of the Company within the last three years.
The Company's effective tax rate is different from the applicable federal statutory tax rate. The reconciliation of these rates for the years ended September 30 is as follows:
2008 2007 2006 ---- ---- ----
Federal Rate 34.0% 35.0% 35.0% State tax rate, net of federal benefit 3.96% 3.96% 3.9% R&D credit 5.06% 0% 0% Nondeductible expenses (0.04%) (0.10%) (6.4%) Valuation allowance (42.98%) (38.86%) (32.50%)
Effective tax rate 0.0% 0.0% 0.0%
The Company adopted the provisions of FIN No. 48, "Accounting for Uncertainty in Income Taxes" on October 1, 2007 which requires financial statement benefits be recognized for positions taken for tax return purposes, when it is more likely than not that the position will be sustained. The Company has concluded that it has properly filed its tax returns and does not believe that any of the positions it has taken would result in a disallowance of any of these tax positions. Therefore, the Company has concluded that adoption of FIN No. 48 had no impact on its financial positions. It is the Company's policy to record interest and penalties, if any, related to unrecognized tax benefits as part income tax expense for financial reporting purposes. No interest or penalties were accrued as of October 1, 2007 as a result of adoption of FIN No. 48. In the United States, the Company is still open to examination from 2004 forward.
6. STOCK OPTIONS, BONUS PLAN AND WARRANTS
Non-Qualified Stock Option Plan--At September 30, 2008, the Company has collectively authorized the issuance of 13,760,000 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, 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 Options granted 1,038,000 $0.60 Options exercised (50,467) $0.29 Options forfeited (43,966) $0.96 ----------
Options outstanding, September 30, 2008 8,406,265 $0.68 6,553,939 $ 0.64
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, 2008, 1,622,833 options remain outstanding.
In September 2006, the Company extended the expiration date on 126,666 options from the Nonqualified Stock Option Plan with an exercise price of $1.05. The options originally would have expired from September 2006 to May 2007 and were extended for three years to expiration dates ranging from September 2009 to May 2010. This extension was considered a new measurement date with respect to the modified options. At the date of modification, compensation expense of $30,468 was recorded. As of September 30, 2008, all of these options remain outstanding.
In December 2007, the Company extended the expiration date on 1,680,533 options from the Nonqualified Stock Option Plan with exercise prices ranging from $1.05 to $1.94. The options originally would have expired between February 2008 to October 2008 and were extended for five years to expiration dates ranging from February 2013 to October 2013. This extension was considered a new measurement date with respect to the modified options. At the date of modification, the additional cost of the options was $410,471. As of September 30, 2008, all of these options remain outstanding.
Incentive Stock Option Plan--At September 30, 2008, the Company has collectively authorized the issuance of 10,100,000 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, 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 ---------
Options outstanding, September 30, 2007 4,601,933 $0.64 3,998,601 $0.63 Options granted 300,000 $0.62 Options exercised Options forfeited (156,667) $3.83 ---------
Options outstanding, September 30, 2008 4,745,266 $0.53 4,121,935 $0.52
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, 2008, 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, 2008, all of these options remain outstanding.
In December 2007, the Company extended the expiration date on 225,100 options from the Incentive Stock Option Plan with exercise prices ranging from $1.05 to $1.94. The options originally would have expired between February 2008 to December 2008 and were extended for five years to expiration dates ranging from February 2013 to December 2013. This extension was considered a new measurement date with respect to the modified options. At the date of modification, the additional cost of the options was $54,537. As of September 30, 2008, all of these options remain outstanding.
Other Options and Warrants
In February 2005, the Company granted a consultant options to purchase 15,000 shares of the Company's common stock at a price of $0.73 per share. The options vest over a three year period and expire in February 2015. The 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. 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 expense for these options of $66,718, recorded as general and administrative expense 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 sharey. 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 valuye 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-
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 general and administrative expense of $79,976 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 expired in June 2008. These warrants were extended for 5 years and will expire in June 2013. The expense 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:
Original Extended Warrants Warrants
Expected stock risk volatility 77% 72% Risk-free interest rate 4.91% 5.50% Expected life of warrant 2.17 Years 5.50 Years Expected dividend yield -0- -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 expense 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.
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 general and administrative expense of $74,992 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 1.5 and two years. The options were valued at $30,375 using the Black Scholes pricing methodology, using the following assumptions, and the cost was recorded as a debit to general and administrative expense. In August 2008, 50,000 of these options were extended for one year. The revaluing of the options was valued at less than the original value, so no additional cost needed to be recognized.
Original Extended Warrants Warrants
Expected stock risk volatility 74.0% 74.0% Risk-free interest rate 4.85% 4.85% Expected life of warrant 1.5 and 2 Years 1 Year
On April 5, 2007, 375,000 options were issued to a consultant to purchase shares of common stock at $0.72 per share and vested immediately. The options were valued at $76,617 using the Black Scholes pricing methodology, using the following assumptions, and the cost was recorded as a debit to general and administrative expense. In December 2007, these warrants were extended for five years. The revaluing of the warrants was valued at an additional $99,181 and recorded as general and administrative expense. The Black Scholes pricing methodology was used with the following assumptions:
Original Extended Warrants Warrants
Expected stock risk volatility 68.02% 68.02% Risk-free interest rate 4.73% 4.73% Expected life of warrant 1 Year 5.33 Years
On May 29, 2007, 100,000 options were issued to a consultant to purchase shares of common stock at $0.84 and vested immediately. The options were valued at $45,583 using the Black Scholes pricing methodology, using the following assumptions, and the cost was recorded as a debit to general and administrative expense:
Expected stock risk volatility 66.93% Risk-free interest rate 4.60% Expected life of warrant 4 Years
In July 2007, the Company issued 3,000,000 warrants to VIF II CEL-SCI Partners LLC in connection with the manufacturing facility lease agreement. The warrants vested immediately. The cost of the warrants, $1,403,654 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 and valued at $12,342. The options vested and were recorded as a general and administrative expense in January 2008.
In November and December 2007, the Company extended 2,016,176 investor and consultant warrants. The options and warrants were due to expire from December 1, 2007 through December 31, 2008. All options and warrants were extended for an additional five years from the original expiration date. The cost of the extension of investor warrants of $424,815 was recorded as a debit to accumulated deficit (dividend) and a credit to additional paid-in capital. The cost of the extension of the consultant warrants of $99,181 is recorded as a debit to general and administrative expense and a credit to additional paid-in capital. The additional cost of the extension of investor and consultant warrants was determined using the Black Scholes method.
Stock Bonus Plan -- At September 30, 2008, the Company had been authorized to issue up to 7,940,000 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, 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. During the year ended September 30, 2008, 205,125 shares were issued to the Company's 401(k) plan for a cost of $108,590.
Stock Compensation Plan-- At September 30, 2008, 5,500,000 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. During the year ended September 30, 2008, 1,789,451 shares were issued at the weighted average $0.62 per share for a total cost of $1,324,474.
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, 2008, 2007, and 2006, in connection with this Plan was $110,670, $92,035, and $88,054, 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,
2009 $ 1,711,320 2010 1,727,368 2011 1,779,188 2012 1,805,169 2013 1,751,83 2014 and thereafter 29,437,792 ----------- Total minimum lease payments: $ 38,212,676 ============
Rent expense for the years ended September 30, 2008, 2007, and 2006, was $253,526, $240,914 and $250,994, 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 was be remodeled in accordance with CEL-SCI's specifications so that it can be used by CEL-SCI to manufacture Multikine for CEL-SCI's Phase III clinical trial and sales of the drug if approved by the FDA. The Company took possession of the building in October 2008.
The lease is for a term of twenty years and 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 $8,660,837 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); 3) deposit on the cost of the leasehold improvements for the manufacturing facility ($1,786,591); and 4) additional investment in the manufacturing facility during the year ended September 30, 2008 ($2,359,473). Also included on the consolidated balance sheet is restricted cash of $987,652. The restricted cash amount includes funds for the following: 1) contingency escrow of $551,155; and 2) movable equipment escrow of $436,497. In July 2008, the Company was required to deposit the equivalent of one year of base rent in accordance with the contract. The $1,575,000 included in noncurrent assets was required to be deposited when the amount of cash the Company had dipped below the amount stipulated in the contract. In December 2008, CEL-SCI was not in compliance with certain lease requirements (i.e., failure to pay an installment of Base Annual Rent). However, the landlord has not declared CEL-SCI formally in default under the terms of the lease. The landlord currently has the right to declare CEL-SCI in default if CEL-SCI fails to pay any installment of the Base Annual Rent when such failure continues for a period of 5 business days after CEL-SCI's receipt of written notice thereof from the Landlord, provided that if CEL-SCI fails to pay any of the foregoing within 5 business days more than two (2) times in any twelve (12) month period during the lease term, the Landlord shall not be required to provide CEL-SCI with any further notice and CEL-SCI shall be deemed to be in default. CEL-SCI is currently in negotiation with the Landlord for rent deferral on the lease. In order to conserve its cash, if CEL-SCI does not renegotiate the lease it plans to either get an additional loan from Mr. de Clara or use the equity line of credit to make the rent payments.
Employment Contracts--In April 2005 the Company entered into a three year employment agreement with its President and Chairman of the Board which expired April 30, 2008. However, on September 8, 2006 CEL-SCI agreed to extend its employment agreement with Maximilian de Clara, CEL-SCI's President, to April 30, 2010. During the term of the employment agreement, CEL-SCI will pay Mr. de Clara an annual salary of $363,000.
The employment agreement, as amended, also provided that on September 8, 2006, March 8, 2007, September 8, 2007, March 8, 2008, September 8, 2008 and March 8, 2009, each date being a "Payment Date", CEL-SCI 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. A total of 673,431 shares were issued to Mr. de Clara during the fiscal year ended September 30, 2008.
The employment agreement provides that CEL-SCI will pay him an annual salary of $363,000 during the term of the agreement. In the event that there is a material reduction in his authority, duties or activities, or in the event there is a change in the control of the Company, then the agreement allows him to resign from his position at the Company and receive a lump-sum payment from CEL-SCI equal to 18 months salary. For purposes of the employment agreement, a change in the control of CEL-SCI means the sale of more than 50% of the outstanding shares of CEL-SCI's Common Stock, or a change in a majority of CEL-SCI's directors.
In September 2006, CEL-SCI agreed to extend its employment agreement with Geert R. Kersten, CEL-SCI's Chief Executive Officer, to September 2011. The employment agreement, which is essentially the same as Mr. Kersten's prior employment agreement, provides that during the term of the agreement CEL-SCI will pay Mr. Kersten an annual salary of $370,585 plus any increases approved by the Board of Directors during the period of the employment agreement. In the event there is a change in the control of the Company, the agreement allows him to resign from his position at the Company and receive a lump-sum payment from the Company equal to 24 months of salary. For purposes of the employment agreement a change in the control of the Company means: (1) the merger of the Company with another entity if after such merger the shareholders of the Company do not own at least 50% of voting capital stock of the surviving corporation; (2) the sale of substantially all of the assets of the Company; (3) the acquisition by any person of more than 50% of the Company's common stock; or (4) a change in a majority of the Company's directors which has not been approved by the incumbent directors.
9. CONVERTIBLE DEBT
As of September 30, 2008, the Company has outstanding convertible debt with a fair value of $3,018,697. As of September 30, 2007, the Company had outstanding convertible debt with a fair value totaling $5,613,984. In August 2006, the Company sold Series K Notes and Series K warrants to a group of private investors for proceeds of $8,300,000, less transaction costs of $568,710. For a further discussion of this transaction, see Note 2.
10. SHORT-TERM INVESTMENTS/EQUITY LINES OF CREDIT
At September 30, 2008, the Company had $200,000 of a short-term investment in Auction Rate Cumulative Preferred Shares (ARPs), liquidation preference of $25,000 per share, of an income mutual fund. On May 6, 2008, the fund company announced the redemption of $300 million or, 85.7% of the ARPs on various dates between May 19, 2008 and May 23, 2008 subject to the investment fund lottery system. All of the Company's ARPs, except for the currently held $200,000, were redeemed.
In conjunction with the ARPs, the Company has a line of credit to borrow up to 100% of the ARPs at an interest rate of prime minus 1% (prime equals 5% on September 30, 2008). During the fiscal year, the Company borrowed $1,956,803 against the ARPs and paid back $1,756,803 in May 2008. On September 30, 2008, the Company had a $200,000 outstanding loan balance
secured by the investment balance of ARPs. On November 4, 2008, the $200,000 loan was repaid when the ARPs were redeemed at face value. During the fiscal year, the Company paid $7,522 in interest expense on the loan.
11. STOCKHOLDERS' EQUITY
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 financing resulted in the issuance of 19,999,998 shares of common stock to the investors. The warrants issued with the financing qualified for equity treatment. The Series L warrants were recorded as a debit and a credit to additional paid-in capital at a value of $5,164,355 and the Series M warrants were recorded as a debit and a credit to additional paid-in capital at a fair value of $434,300.
In September 2008, 2,250,000 of the original Series L warrants were repriced at $0.56 and extended for one year to April 17, 2013. The increase in the value of the warrants of $173,187 was recorded as a debit and a credit to additional paid-in capital in accordance with the original accounting for the Series L warrants.
As a result of the financing, and in accordance with the original Series K agreement, the Series K conversion price of the shares were repriced to $0.75 from the original $0.86 and the warrants were repriced to $0.75 from the original $0.95. The Series K convertible debt and warrants were revalued with the new conversion price and were adjusted to their new fair value.
On August 18, 2008, the Company sold 1,383,389 shares of common stock and 2,075,084 warrants in a private financing for $1,037,542. The shares were sold at $0.75, a significant premium over the closing price of the Company's common stock. The warrants were valued at $891,336 and recorded as a debit and a credit to additional paid-in capital. Each warrant entitles the holder to purchase one share of CEL-SCI's common stock at a price of $0.75 per share at any time prior to August 18, 2014. The shares have no registration rights.
On February 26, 2008, the Company issued a total of 258,000 shares of restricted common stock to two consultants at $0.53 per share for a total cost of $136,740 of which $70,312 had been expensed at September 30, 2008. This stock will be expensed over the period of the contracts with the consultants. In April 2008, an additional 258,000 shares of restricted common stock to two consultants were issued at $0.69 for a total cost of $178,020, of which $86,984 had been expensed at September 30, 2008. The stock will be expensed over the remaining period of the contracts with the consultants.
During the fourth quarter, an additional 1,173,000 shares were issued to consultants at prices ranging from $0.55 to $0.578. The total cost of $649,994 will be expensed to general and administrative expense. At September 30, 2008, $111,452 had been expensed to general and administrative expense.
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:
2008 2007 2006 ---- ---- ----
Net loss - basic $ (8,128,230) $ (9,629,657) $ (7,939,210) Add: Interest on convertible debt - - 216,737 Gain on derivative instruments - - (2,276,358)
Net loss - diluted $ (8,128,230) $ (9,629,657) $ (9,998,831)
Weighted average number of shares - basic 117,060,866 97,310,488 78,971,290 Incremental shares from: Warrants - - 5,211,628 Convertible debt - - 9,651,160
Weighted average number of shares - diluted 117,060,866 97,310,488 93,834,078
Earnings per share - basic $ (0.07) $ (0.10) $ (0.10) Earnings per share - diluted $ (0.07) $ (0.10) $ (0.11)
Excluded from the above computations of weighted-average shares for diluted net loss per share were options and warrants to purchase 14,488,124, 11,054,492 and 4,075,446 shares of common stock as of September 30, 2008, 2007 and 2006, 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, 2008 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 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 2008
Fiscal 2007
The Company has experienced large swings in its quarterly losses in 2008 and 2007. These swings are caused by the changes in the fair value of the convertible debt each quarter. These changes in the fair value of the debt are recorded on the consolidated statements of operations. In addition, the cost of options granted to consultants has affected the quarterly losses recorded by the Company.
15. SUBSEQUENT EVENTS
On November 3, 2008, the Company extended its licensing agreement for Multikine with Orient Europharma. The new agreement extends the Multikine collaboration to also cover South Korea, the Philippines, Australia and New Zealand. The licensing agreement initially focuses on the areas of head and neck cancer, nasopharyngeal cancer and potentially cervical cancer. As part of this new agreement, Orient Europharma invested $500,000 in the Company.
Effective December 3, 2008, Dr. Daniel Zimmerman, the Company's Senior Vice President of Research, Cellular Immunology, and John Cipriano, the Company's Senior Vice President of Regulatory Affairs, have agreed to become consultants to the Company on an as needed basis thereby ending their full time employment with the Company. The stock and options owned by these two employees will fully vest on January 1, 2009.
On December 30, 2008, the Company entered into an Equity Line of Credit agreement as a source of funding for the Company. For a two-year period, the agreement allows the Company, at its discretion, to sell up to $5 million of the Company's common stock at the volume weighted average price of the day minus 9%. The Company may request a drawdown once every ten trading days, although the company is under no obligation to request any drawdowns under the equity line of credit. The equity line of credit expires on January 6, 2011.
In December 2008 and January 2009 CEL-SCI Maximilian de Clara, CEL-SCI's president and a director, loaned CEL-SCI a total of $230,000. The loan bears interest at 15% per year and is payable on March 27, 2009.
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 12th day of January 2009.
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 12, 2009 - ---------------------- Maximilian de Clara
/s/ Geert R. Kersten Director January 12, 2009 - ---------------------- Geert R. Kersten
/s/ Alexander G. Esterhazy Director January 12, 2009 - ---------------------- Alexander G. Esterhazy
/s/ Dr. C. Richard Kinsolving Director January 12, 2009 - ---------------------- Dr. C. Richard Kinsolving
/s/ Dr. Peter R. Young Director January 12, 2009 - ---------------------- Dr. Peter R. Young
CEL-SCI CORPORATION
FORM 10-K
EXHIBITS