As filed with the Securities and Exchange Commission on August __, 2006.
Registration No. 333-______
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM S-1
Registration Statement
Under
THE SECURITIES ACT OF 1933
CEL-SCI Corporation
---------------- ---------------------
(Exact name of registrant as specified in charter)
Colorado
----------------------
(State or other jurisdiction of incorporation)
8229 Boone Blvd. #802
Vienna, Virginia 22182
84-09l6344 (703) 506-9460
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(IRS Employer I.D. number) (Address, including zip code, and telephone
Number) including area of principal
executive offices)
Geert Kersten
8229 Boone Blvd. #802
Vienna, Virginia 22182
(703) 506-9460
-----------------------------------------
(Name and address, including zip code, and telephone number,
including area code, of agent for service)
Copies of all communications, including all communications sent
to the agent for service, should be sent to:
William T. Hart, Esq.
Hart & Trinen
1624 Washington Street
Denver, Colorado 80203
(303) 839-0061
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the effective date
of this Registration Statement
If the only securities being registered on this Form are being offered pursuant
to dividend or interest reinvestment plans, please check the following box. [ ]
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. [X]
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
Title of each Proposed Proposed
Class of Maximum Maximum
Securities Securities Offering Aggregate Amount of
to be to be Price Per Offering Registration
Registered Registered Share (3) Price Fee
---------- ---------- --------- ---------- ------------
Common stock (1) 14,862,790 $0.61 $9,066,302 $ 970.09
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Common stock (2) 11,351,162 $0.61 $6,924,209 $ 740.89
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Total 26,213,952 $15,990,510 $1,710.98
(1) Represents shares to be sold by selling shareholders.
(2) Represents shares issuable to the selling shareholders as payment of
interest or principal on the Series K Convertible Notes.
(3) Offering price computed in accordance with Rule 457(c).
Pursuant to Rule 416, this Registration Statement includes such
indeterminate number of additional securities as may be required for issuance
upon the exercise of the warrants as a result of any adjustment in the number of
securities issuable by reason of stock splits or similar capital
reorganizations.
The registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of l933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
2
PROSPECTUS
CEL-SCI CORPORATION
Common Stock
By means of this prospectus fifteen shareholders of CEL-SCI Corporation
are offering to sell approximately 15,000,000 shares of CEL-SCI's common stock,
which shares may be issued upon the conversion of Series K notes sold by CEL-SCI
as well as shares of common stock issuable upon the exercise of CEL-SCI's Series
K warrants. The actual number of shares issuable upon the conversion of the
Series K promissory notes or upon the exercise of the Series K warrants may
increase as the result of future sales of CEL-SCI's common stock at prices below
either the note conversion price or warrant exercise price, as the case may be,
or the market price of CEL-SCI's common stock. See "Description of Securities"
for information concerning the terms of the Series K notes and the Series K
warrants. The selling shareholders may be considered "underwriters" as that term
is defined in the Securities Act of 1933.
By means of this prospectus CEL-SCI may also issue shares of its common
stock to the holders of the Series K notes as payment of interest or principal.
The actual number of shares which may be issued as payment of interest or
principal may increase if the price of CEL-SCI's common stock is below the then
applicable conversion price of the Series K notes.
CEL-SCI's common stock is quoted on the American Stock Exchange under the
symbol "CVM." On August 25, 2006 the closing price for one share of the
CEL-SCI's common stock was $0.61.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
accuracy or adequacy of this prospectus. Any representation to the contrary is a
criminal offense.
These securities are speculative and involve a high degree of risk. For a
description of certain important factors that should be considered by
prospective investors, see "Risk Factors" beginning on page 5 of this Prospectus
The date of this prospectus is August __, 2006
3
PROSPECTUS SUMMARY
THIS SUMMARY IS QUALIFIED BY THE MORE DETAILED INFORMATION APPEARING ELSEWHERE
IN THIS PROSPECTUS.
CEL-SCI
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CEL-SCI is involved in the research and development of drugs for cancer
and infectious diseases. CEL-SCI's lead product Multikine(R) is being developed
as a cancer drug. In 2005 the Canadian regulatory agency, the Biologics and
Genetic Therapies Directorate (B>D), concurred with the initiation of a global
Phase III clinical trial in head and neck cancer patients using Multikine. The
formal "no objection" letter from the B>D to the Clinical Trial Application
(CTA) enables CEL-SCI to initiate the Canadian arm of the Phase III Multikine
trial.
About 500 patients will be enrolled worldwide in the Phase III trial. The
protocol is designed to develop conclusive evidence of the efficacy of Multikine
in the treatment of advanced primary squamous cell carcinoma of the oral cavity
(head and neck cancer). A successful outcome from this trial should enable
CEL-SCI to apply for a Biologics License to market Multikine for the treatment
of this patient population.
The trial will test the hypothesis that Multikine treatment administered prior
to the current standard therapy for head and neck cancer patients (surgical
resection of the tumor and involved lymph nodes followed by radiotherapy or
radiotherapy and concurrent chemotherapy) will enhance the local/regional
control of the disease, reduce the rate of disease progression and extend the
time of progression free survival in patients with advanced oral squamous cell
carcinoma.
Head and neck cancer is an aggressive cancer that affects about 500,000 people
per annum worldwide.
Multikine is a patented immunotherapeutic agent consisting of a mixture of
naturally occurring cytokines, including interleukins, interferons, chemokines
and colony-stimulating factors, currently being developed for treatment of
cancer.
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:
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(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.
In May 2006 CEL-SCI the presented long-term survival data from its Phase
II clinical trial in patients with head and neck cancer (oral squamous cell
carcinoma -- OSCC) treated with its anti-cancer drug Multikine(R). The addition
of Multikine as first-line treatment prior to the standard of care treatment
resulted in a 33-40% improvement in the median survival at 3 1/2 years
post-surgery, when compared to the results of 39 OSCC clinical trials published
in the scientific literature between 1987 and 2004. 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.
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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 (39 OSCC clinical trials published between 1987 and 2004)
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.
The median survival of patients in this clinical trial was 67% at a median
follow-up of 42 months post-surgery, excluding the one patient with immediate
post-operative death. The same 39 scientific publications indicate 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 an increase
in survival of 40% 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 trial reported here. Furthermore, the
planned endpoints of the Phase III trial are local regional control,
disease-free survival and overall survival, all of which have shown improvement
compared to historical controls, following Multikine first-line treatment over
the current available treatments for these patients.
CEL-SCI also owns a pre-clinical technology called L.E.A.P.S. (Ligand
Epitope Antigen Presentation System). The lead product derived from this
technology is the CEL-1000 peptide which has shown protection in animals against
herpes, malaria and cancer. With the help of government grants and US Army and
US Navy collaborations, CEL-1000 is now being tested against avian flu, viral
encephalitis, West Nile Virus, SARS, Vaccinia, Smallpox, herpes, malaria and
other agents. If the bio-terrorism tests are successful, CEL-SCI is likely to
push CEL-1000 for potential bio-terrorism disease indications to gain
accelerated approval.
Before human testing can begin with respect to a drug or biological
product, preclinical studies are conducted in laboratory animals to evaluate the
potential efficacy and the safety of a product. Human clinical studies generally
involve a three-phase process. The initial clinical evaluation, Phase I,
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consists of administering the product and testing for safe and tolerable dosage
levels. Phase II trials continue the evaluation of safety and determine the
appropriate dosage for the product, identify possible side effects and risks in
a larger group of subjects, and provide preliminary indications of efficacy.
Phase III trials consist of testing for actual clinical efficacy within an
expanded group of patients at geographically dispersed test sites.
CEL-SCI has funded the costs associated with the clinical trials relating
to CEL-SCI's technologies, research expenditures and CEL-SCI's administrative
expenses with the public and private sales of shares of CEL-SCI's common stock
and borrowings from third parties, including affiliates of CEL-SCI.
All of CEL-SCI's products are in the development stage. As of June 30,
2006, CEL-SCI was not receiving any revenues from the sale of MULTIKINE or any
other products which CEL-SCI was developing.
CEL-SCI does not expect to develop commercial products for several years,
if at all. CEL-SCI has had operating losses since its inception, had an
accumulated deficit of approximately $(102,621,000) at June 30, 2006 and expects
to incur substantial losses for the foreseeable future.
CEL-SCI's executive offices are located at 8229 Boone Blvd., #802, Vienna,
Virginia 22182, and its telephone number is (703) 506-9460.
CEL-SCI's common stock is quoted on the American Stock Exchange under the
symbol "CVM".
THE OFFERING
By means of this prospectus fifteen shareholders of CEL-SCI Corporation
are offering to sell approximately 15,000,000 shares of CEL-SCI's common stock
which shares may be issued upon the conversion of Series K promissory notes sold
by CEL-SCI as well as shares of common stock issuable upon the exercise of
CEL-SCI's Series K warrants. The actual number of shares issuable upon the
conversion of the Series K notes or upon the exercise of the Series K warrants
may increase as the result of future sales of CEL-SCI's common stock at prices
below either the note conversion price or warrant exercise price, as the case
may be, or the market price of CEL-SCI's common stock. See "Description of
Securities" for information concerning the terms of the Series K notes and the
Series K warrants. The selling shareholders may be considered "underwriters" as
that term is defined in the Securities Act of 1933.
By means of this prospectus CEL-SCI may also issue shares of its common
stock to the holders of the Series K notes as payment of interest and principal.
As of August 15, 2006, CEL-SCI had 81,578,488 outstanding shares of common
stock. The number of outstanding shares does not give effect to shares which may
be issued upon the conversion of CEL-SCI's Series K notes, as payment of
interest or principal on the Series K notes, the exercise of CEL-SCI's Series K
warrants or the exercise of other outstanding warrants or options. See
"Comparative Share Data".
7
Use of Proceeds
---------------
CEL-SCI will not receive any proceeds from the sale of the shares by the
selling shareholders. However, CEL-SCI will receive proceeds upon the exercise
of Series K warrants. CEL-SCI expects to use substantially all the net proceeds
for general and administrative expenses, research and clinical trials.
Risk Factors
------------
The purchase of the securities offered by this prospectus involves a high
degree of risk. Risk factors include the lack of revenues and history of loss,
need for additional capital and need for FDA approval. See the "Risk Factors"
section of this prospectus for additional Risk Factors.
Forward Looking Statements
This prospectus contains various forward-looking statements that are based
on CEL-SCI's beliefs as well as assumptions made by and information currently
available to CEL-SCI. When used in this prospectus, the words "believe",
"expect", "anticipate", "estimate" and similar expressions are intended to
identify forward-looking statements. Such statements may include statements
regarding seeking business opportunities, payment of operating expenses, and the
like, and are subject to certain risks, uncertainties and assumptions which
could cause actual results to differ materially from projections or estimates.
Factors which could cause actual results to differ materially are discussed at
length under the heading "Risk Factors". Should one or more of the enumerated
risks or uncertainties materialize, or should underlying assumptions prove
incorrect, actual results may vary materially from those anticipated, estimated
or projected. Investors should not place undue reliance on forward-looking
statements, all of which speak only as of the date made.
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 June 30, 2006 CEL-SCI incurred net losses of
approximately $(102,621,000). 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.
8
Since CEL-SCI does not intend to pay dividends on its common stock, any return
to investors will come only from potential increases in the price of CEL-SCI's
common stock.
At the present time, CEL-SCI intends to use available funds to finance
CEL-SCI's operations. Accordingly, while payment of dividends rests within the
discretion of the Board of Directors, no common stock dividends have been
declared or paid by CEL-SCI and CEL-SCI has no intention of paying any common
stock dividends.
If CEL-SCI cannot obtain additional capital, CEL-SCI may have to postpone
development and research expenditures which will delay CEL-SCI's ability to
produce a competitive product. Delays of this nature may depress the price of
CEL-SCI's common stock.
Clinical and other studies necessary to obtain approval of a new drug can
be time consuming and costly, especially in the United States, but also in
foreign countries. CEL-SCI's estimates of the costs associated with future
clinical trials and research may be substantially lower than the actual costs of
these activities. The different steps necessary to obtain regulatory approval,
especially that of the Food and Drug Administration, involve significant costs
and may require several years to complete. CEL-SCI expects that it will need
substantial additional financing over an extended period of time in order to
fund the costs of future clinical trials, related research, and general and
administrative expenses. Although CEL-SCI's equity line of credit agreement is
expected to be a source of funding, the amounts which CEL-SCI is able to draw
from the equity line during each drawdown period are limited and may not satisfy
CEL-SCI's capital needs.
The extent of CEL-SCI's clinical trials and research programs are
primarily based upon the amount of capital available to CEL-SCI and the extent
to which CEL-SCI has received regulatory approvals for clinical trials. CEL-SCI
is unable to estimate the future costs of clinical trials since CEL-SCI has not
yet met with the FDA to discuss the design of future clinical trials; and until
the scope of future clinical trials is known, CEL-SCI will not be able to price
any trials with clinical trial organizations.
Over the past three years CEL-SCI's research and development expenditures
have decreased, due in part to the capital available to CEL-SCI. The inability
of CEL-SCI to conduct clinical trials or research, whether due to a lack of
capital or regulatory approval, will prevent CEL-SCI from completing the studies
and research required to obtain regulatory approval for any products which
CEL-SCI is developing.
To raise additional capital CEL-SCI will most likely sell shares of its
common stock or securities convertible into common stock at prices that may be
below the prevailing market price of CEL-SCI's common stock at the time of sale.
The issuance of additional shares will have a dilutive impact on other
stockholders and could have a negative effect on the market price of CEL-SCI's
common stock.
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.
9
Multikine is made from components of human blood which involves inherent risks
that may lead to product destruction or patient injury which could materially
harm CEL-SCI's financial results, reputation and stock price.
Multikine is made, in part, from components of human blood. There are
inherent risks associated with products that involve human blood such as
possible contamination with viruses, including Hepatitis or HIV. Any possible
contamination could require CEL-SCI to destroy batches of Multikine or cause
injuries to patients who receive the product thereby subjecting CEL-SCI to
possible financial losses and harm to its business.
Although CEL-SCI has product liability insurance for Multikine, the successful
prosecution of a product liability case against CEL-SCI could have a materially
adverse effect upon its business if the amount of any judgment exceeds CEL-SCI's
insurance coverage.
Although no claims have been brought to date, participants in CEL-SCI's
clinical trials could bring civil actions against CEL-SCI for any unanticipated
harmful effects arising from the use of Multikine or any drug or product that
CEL-SCI may try to develop. Although CEL-SCI believes its insurance coverage of
$1,000,000 per claim is adequate, the defense or settlement of any product
liability claim could adversely affect CEL-SCI even if the defense and
settlement costs did not exceed CEL-SCI's insurance coverage.
CEL-SCI's directors are allowed to issue shares of preferred stock with
provisions that could be detrimental to the interests of the holders of
CEL-SCI's common stock.
The provisions in CEL-SCI's Articles of Incorporation relating to
CEL-SCI's Preferred Stock would allow CEL-SCI's directors to issue Preferred
Stock with rights to multiple votes per share and dividend rights which would
have priority over any dividends paid with respect to CEL-SCI's Common Stock.
The issuance of Preferred Stock with such rights may make more difficult the
removal of management even if such removal would be considered beneficial to
shareholders generally, and will have the effect of limiting shareholder
participation in certain transactions such as mergers or tender offers if such
transactions are not favored by incumbent management.
Risks Related to Government Approvals
-------------------------------------
CEL-SCI's product candidates must undergo rigorous preclinical and clinical
testing and regulatory approvals, which could be costly and time-consuming and
subject CEL-SCI to unanticipated delays or prevent CEL-SCI from marketing any
products.
Therapeutic agents, drugs and diagnostic products are subject to approval,
prior to general marketing, by the FDA in the United States and by comparable
agencies in most foreign countries. Before obtaining marketing approval,
CEL-SCI's product candidates must undergo rigorous preclinical and clinical
testing which is costly and time consuming and subject to unanticipated delays.
There can be no assurance that such approvals will be granted.
CEL-SCI cannot be certain when or under what conditions it will undertake
further clinical trials, including a Phase III program for Multikine. The
clinical trials of CEL-SCI's product candidates may not be completed on
10
schedule, and 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. It is possible
that the FDA will require CEL-SCI to conduct additional studies to demonstrate
that the Multikine that it plans to use for its Phase III program is the same as
the product previously tested in CEL-SCI's phase II studies. Even if CEL-SCI
believes the data collected from its clinical trials are sufficient, the FDA has
substantial discretion in the approval process and may disagree with CEL-SCI's
interpretation of the data. CEL-SCI can make no assurances that the FDA will not
require CEL-SCI to conduct more Phase II studies before beginning Phase III
trials. CEL-SCI's failure to adequately demonstrate the safety and efficacy of
any of its product candidates would delay or prevent regulatory approval of its
product candidates in the United States, which could prevent CEL-SCI from
achieving profitability.
The requirements governing the conduct of clinical trials, manufacturing,
and marketing of CEL-SCI's product candidates, including Multikine, outside the
United States vary widely from country to country. Foreign approvals may take
longer to obtain than FDA approvals and can require, among other things,
additional testing and different trial designs. Foreign regulatory approval
processes include all of the risks associated with the FDA approval processes.
Some of those agencies also must approve prices for products. Approval of a
product by the FDA does not ensure approval of the same product by the health
authorities of other countries. In addition, changes in regulatory policy in the
US or in foreign countries for product approval during the period of product
development and regulatory agency review of each submitted new application may
cause delays or rejections.
In addition to conducting further clinical studies of Multikine and
CEL-SCI's other product candidates, CEL-SCI also must undertake the development
of its manufacturing process and optimize its product formulations.
CEL-SCI has only limited experience in filing and pursuing applications
necessary to gain regulatory approvals, which may impede its ability to obtain
timely approvals from the FDA or foreign regulatory agencies, if at all. CEL-SCI
will not be able to commercialize Multikine and other product candidates until
it has obtained regulatory approval, and any delay in obtaining, or inability to
obtain, regulatory approval could harm its business. In addition, regulatory
authorities may also limit the types of patients to which CEL-SCI or others may
market Multikine or CEL-SCI's other products.
Even if CEL-SCI obtains regulatory approval for its product candidates, CEL-SCI
will be subject to stringent, ongoing government regulation.
Even if CEL-SCI's products receive regulatory approval, either in the
United States or internationally, it will continue to be subject to extensive
regulatory requirements. These regulations are wide-ranging and govern, among
other things:
11
o product design, development, manufacture and testing;
o adverse drug experience and other reporting regulations;
o product advertising and promotion;
o product manufacturing, including good manufacturing practice
requirements;
o record keeping requirements;
o registration of CEL-SCI's establishments with the FDA and certain
state agencies;
o product storage and shipping;
o drug sampling and distribution requirements;
o electronic record and signature requirements; and
o labeling changes or modifications.
CEL-SCI and any third-party manufacturers or suppliers must continually
adhere to federal regulations setting forth requirements, known as current Good
Manufacturing Practices, or cGMPs, and their foreign equivalents, which are
enforced by the FDA and other national regulatory bodies through their
facilities inspection programs. If CEL-SCI's facilities, or the facilities of
its manufacturers or suppliers, cannot pass a pre-approval plant inspection, the
FDA will not approve the marketing application of CEL-SCI's product candidates.
In complying with cGMP and foreign regulatory requirements, CEL-SCI and any of
its potential third-party manufacturers or suppliers will be obligated to expend
time, money and effort in production, record-keeping and quality control to
ensure that its products meet applicable specifications and other requirements.
State regulatory agencies and the regulatory agencies of other countries have
similar requirements.
CEL-SCI has an agreement with Cambrex Bio Science, Inc. whereby Cambrex
agreed to provide CEL-SCI with a facility for the periodic manufacturing of
Multikine in accordance with the cGMPs established by FDA regulations. This
agreement expires on December 31, 2006. If the Cambrex facility were not
available for the production of Multikine, CEL-SCI estimates that it would take
approximately six to ten months to find or build an alternative manufacturing
facility for Multikine. CEL-SCI does not know what cost it would incur to obtain
an alternative source of Multikine.
If CEL-SCI does not comply with regulatory requirements at any stage,
whether before or after marketing approval is obtained, it may be subject to
criminal prosecution, seizure, injuction, fines, or be forced to remove a
product from the market or experience other adverse consequences, including
restrictions or delays in obtaining regulatory marketing approval, which could
materially harm CEL-SCI's financial results, reputation and stock price.
Additionally, CEL-SCI may not be able to obtain the labeling claims necessary or
desirable for product promotion. CEL-SCI may also be required to undertake
post-marketing trials. In addition, if CEL-SCI or other parties identify adverse
effects after any of CEL-SCI's products are on the market, or if manufacturing
problems occur, regulatory approval may be withdrawn and CEL-SCI may be required
to reformulate its products, conduct additional clinical trials, make changes in
its product's labeling or indications of use, or submit additional marketing
applications to support these changes. If CEL-SCI encounters any of the
foregoing problems, its business and results of operations will be harmed and
the market price of our common stock may decline.
12
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 and are expected
to become more active in the future.
CEL-SCI's patents might not protect CEL-SCI's technology from competitors, in
which case CEL-SCI may not have any advantage over competitors in selling any
products which it may develop.
Certain aspects of CEL-SCI's technologies are covered by U.S. and foreign
patents. In addition, CEL-SCI has a number of new patent applications pending.
There is no assurance that the applications still pending or which may be filed
in the future will result in the issuance of any patents. Furthermore, there is
no assurance as to the breadth and degree of protection any issued patents might
afford CEL-SCI. Disputes may arise between CEL-SCI and others as to the scope
and validity of these or other patents. Any defense of the patents could prove
costly and time consuming and there can be no assurance that CEL-SCI will be in
a position, or will deem it advisable, to carry on such a defense. Other private
and public concerns, including universities, may have filed applications for, or
may have been issued, patents and are expected to obtain additional patents and
other proprietary rights to technology potentially useful or necessary to
CEL-SCI. The scope and validity of such patents, if any, the extent to which
CEL-SCI may wish or need to acquire the rights to such patents, and the cost and
availability of such rights are presently unknown. Also, as far as CEL-SCI
relies upon unpatented proprietary technology, there is no assurance that others
may not acquire or independently develop the same or similar technology.
CEL-SCI's first Multikine patent expired in 2000. Since CEL-SCI does not know if
it will ever be able to sell Multikine on a commercial basis, CEL-SCI cannot
predict what effect the expiration of this patent will have on CEL-SCI.
Notwithstanding the above, CEL-SCI believes that later issued patents and trade
secrets will protect the technology associated with Multikine.
13
Risks Related to CEL-SCI's Common Stock
---------------------------------------
Since the market price for CEL-SCI's common stock is volatile, investors in this
offering may not be able to sell any of CEL-SCI's shares at a profit.
The market price of CEL-SCI's common stock, as well as the securities of
other biopharmaceutical and biotechnology companies, have historically been
highly volatile, and the market has from time to time experienced significant
price and volume fluctuations that are unrelated to the operating performance of
particular companies. During the year ended September 30, 2005 CEL-SCI's stock
price has ranged from a low of $0.46 per share to a high of $1.08 per share.
Factors such as fluctuations in CEL-SCI's operating results, announcements of
technological innovations or new therapeutic products by CEL-SCI or its
competitors, governmental regulation, developments in patent or other
proprietary rights, public concern as to the safety of products developed by
CEL-SCI or other biotechnology and pharmaceutical companies, and general market
conditions may have a significant effect on the future market price of CEL-SCI's
common stock.
Shares issuable upon the 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 August 15, 2006 allow the holders to acquire up to approximately 20,300,000
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, or plans to file, registration statements with the
Securities and Exchange Commission so that substantially all of the shares of
common stock which are issuable upon the exercise of outstanding options and
warrants may be sold in the public market. The sale of common stock issued or
issuable upon the exercise of the warrants described above, or the perception
that such sales could occur, may adversely affect the market price of CEL-SCI's
common stock.
14
COMPARATIVE SHARE DATA
Number of Note
Shares Reference
--------- ---------
Shares outstanding as of August 15, 2006: 81,578,488
Shares to be sold in this Offering:
Shares issuable upon conversion of
Series K notes 9,651,162 A
Shares issuable upon exercise of
Series K warrants 5,211,628 A
Shares issuable as payment of interest on
the Series K notes 1,700,000 A
Shares issuable as payment of principal on
the Series K notes 9,651,162 A
Other Shares Which May Be Issued:
---------------------------------
The following table lists additional shares of CEL-SCI's common stock
which may be issued as of August 15, 2006 as the result of the exercise of other
outstanding options or warrants issued by CEL-SCI:
Number of Note
Shares Reference
--------- ---------
Shares issuable upon the exercise of warrants
held by private investors 5,007,744 B
Shares issuable upon exercise of options granted
to CEL-SCI's officers, directors, employees,
consultants, and third parties 10,034,795 C
A. 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 by substantially all
of CEL-SCI's assets.
At the holder's option the Series K notes are convertible into shares of
the Company's common stock at a conversion price of $0.86.
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 $0.95 per share at any time between
February 4, 2007 and February 4, 2012.
15
The actual number of shares issuable upon the conversion of the Series K
promissory notes or upon the exercise of the Series K warrants may increase as
the result of future sales of CEL-SCI's common stock at prices below either the
note conversion price or warrant exercise price, as the case may be, or the
market price of CEL-SCI's common stock.
At CEL-SCI's election, and under certain conditions, CEL-SCI may use
shares of its common stock to make interest or principal payments on the Series
K notes. The actual number of shares which may be issued as payment of interest
or principal may increase if the price of CEL-SCI's common stock is below the
then applicable conversion price of the Series K notes.
To the extent CEL-SCI uses its shares to make principal payments on the
notes, the number of shares which may be issued upon the conversion of the notes
may be less due to reduction in the outstanding principal balance of the notes.
The actual number of shares which will ultimately be issued upon the
payment or conversion of the Series K notes and the exercise of the Series K
warrants (if any) will vary depending upon a number of factors, including the
price at which CEL-SCI sells any additional shares of its common stock prior to
the date the Series K notes are paid or converted or the date the Series K
warrants are exercised or expire. See "Description of Securities" for more
detailed information concerning the Series K notes and warrants.
B. Between August 2001 and May 2006 CEL-SCI sold shares of its common stock in
private transactions.. In some cases, warrants were issued as part of the
financings. The names of the warrant holders and the terms of the warrants are
shown below:
Shares
Issuable
Upon
Issue Exercise of Exercise Expiration
Warrant Holder Date Warrants Price Date
-------------- ------- ----------- -------- ----------
Lamey Corporation 8/17/2001 272,108 $ 1.75 7/1/2007
Karen Carson 2/15/2005 15,000 $ 0.73 2/15/2015
Lucci Financial Group 10/14/2005 80,000 $ 1.00 10/14/2010
Lucci Financial Group 10/14/2005 80,000 $ 2.00 10/14/2010
Mooring Capital 8/16/2003 23,758 $ 0.77 8/17/2006
Eastern Biotech 5/30/2003 400,000 $ 0.47 5/30/2008
Bristol Capital LLC 9/16/2003 197,863 $ 0.83 9/16/2008
Longview Fund, LP 12/1/2003 70,588 $ 1.32 12/1/2006
Longview International
Equity Fund, LP 12/1/2003 70,588 $ 1.32 12/1/2006
Longview Equity Fund, LP 12/1/2003 105,882 $ 1.32 12/1/2006
Capital Ventures
International 12/1/2003 176,460 $ 1.32 12/1/2006
Enable Growth Partners 12/1/2003 35,294 $ 1.32 12/1/2006
Robert Schacter 12/1/2003 48,400 $ 1.32 12/1/2006
Thomas Griesel 12/1/2003 12,115 $ 1.32 12/1/2006
Eric Sloane 12/1/2003 26,000 $ 1.32 12/1/2006
Financial West Group 12/1/2003 4,500 $ 1.32 12/1/2006
16
Cher Ami Holdings 12/1/2003 441,176 $ 0.56 12/1/2007
Wachovia Capital 5/4/2004 76,642 $ 1.37 5/4/2009
Cher Ami Holdings 7/18/2005 375,000 $ 0.65 7/18/2009
Jenna Holdings 10/31/2005 271,370 $ 0.55 10/24/2010
Cher Ami Holdings 2/9/2006 150,000 $ 0.56 2/9/2011
Riviera Ventures Inc. 4/1/2006 375,000 $ 0.73 3/31/2007
Lucci Financial Group 4/12/2006 100,000 $ 1.50 4/12/2009
Eastern Biotech 4/17/2006 800,000 $ 1.25 6/30/08
Cher Ami Holdings 5/18/2006 800,000 $ 0.82 5/17/11
C. The options are exercisable at prices ranging from $0.16 to $6.25 per share.
CEL-SCI may also grant options to purchase additional shares under its Incentive
Stock Option and Non-Qualified Stock Option Plans.
The shares referred to in Note C are being offered for sale by means of
separate registration statements which have been filed with the Securities and
Exchange Commission.
MARKET FOR CEL-SCI'S COMMON STOCK
As of August 15, 2006 there were approximately 2,500 record holders of
CEL-SCI's common stock. CEL-SCI's common stock is traded on the American Stock
Exchange under the symbol "CVM". Set forth below are the range of high and low
quotations for CEL-SCI's common stock for the periods indicated as reported on
the American Stock Exchange. The market quotations reflect inter-dealer prices,
without retail mark-up, mark-down or commissions and may not necessarily
represent actual transactions.
Quarter Ending High Low
-------------- ------- -------
12/31/03 $1.75 $0.91
3/31/04 $1.45 $0.86
6/30/04 $1.30 $0.67
9/30/04 $0.89 $0.52
12/31/04 $0.67 $0.46
3/31/05 $1.08 $0.62
6/30/05 $0.73 $0.48
9/30/05 $0.60 $0.46
12/31/05 $0.69 $0.45
3/31/06 $1.06 $0.49
6/30/06 $1.74 $0.71
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.
17
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.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION
The following selected financial data and discussion should be read in
conjunction with the Consolidated Financial Statements and Notes thereto
appearing elsewhere in this prospectus. As discussed in Note 2 to the
consolidated financial statements, CEL-SCI's financial statements have been
restated. The accompanying management's discussion and analysis gives effect to
that restatement.
For the years ended September 30,
----------------------------------------------------------
Statements of
Operations 2005 2004 (1) 2003 (1) 2002 (1) 2001 (1)
----------
----------------------------------------------------------
Grant revenue and
other $ 269,925 $ 325,479 $ 318,304 $ 384,939 $ 293,871
Other expenses:
Research and
development 2,229,729 1,941,630 1,915,501 4,699,909 7,762,213
Depreciation and
amortization 190,420 198,269 199,117 226,514 209,121
General and
administrative 1,930,543 2,310,279 2,287,019 1,754,332 3,432,437
Gain (loss) on
derivative instruments 363,028 1,174,660 (2,319,005) 5,053,156 55,739
Other income 625,472 - - - -
Other costs of
financing - - (270,664) - (235,563)
Interest income 52,660 51,817 52,502 85,322 376,221
Interest expense - (53,855) (1,365,675) (4,517,716) (7,326,556)
---------- ----------- ----------- ----------- -----------
Net loss (3,039,607) (2,952,077) (7,986,175) (5,675,054)(18,240,059)
========== =========== =========== =========== ===========
Net loss per common
share
Basic $ (0.04) $ (0.04) $ (0.16) $ (0.20) $ (0.84)
Diluted $ (0.05) $ (0.06) $ (0.19) $ (0.24) $ (0.84)
18
Weighted average common
shares outstanding
Basic 72,703,395 67,273,133 50,961,457 28,746,341 21,824,273
Diluted 73,581,925 68,924,099 51,127,439 31,788,281 21,824,273
Nine Months Ended
June 30,
----------------------------------------
2006 2005
-------------------- -------------------
REVENUES:
Grant revenue and other $ 106,370 $ 223,395
EXPENSES:
Research and development, excluding
depreciation of $55,532 and $49,999
include below 1,290,843 1,824,044
Depreciation and amortization 130,143 149,590
General and administrative 2,353,956 1,537,454
GAIN (LOSS) ON DERIVATIVE INSTRUMENTS 13,130 211,715
INTEREST INCOME 33,203 43,309
-------------------- -------------------
NET LOSS $ (3,622,239) $ (3,032,669)
==================== ===================
NET LOSS PER COMMON SHARE (BASIC) $ (0.05) $ (0.04)
NET LOSS PER COMMON SHARE (DILUTED) $ (0.05) $ (0.04)
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING (BASIC AND DILUTED) 78,076,239 72,316,654
(1) The results for fiscal years 2001 through 2004 were restated (see Note 2 to
the Consolidated Financial Statements).
Balance Sheets: September 30,
--------------
--------------------------------------------------------
2005 2004 (1) 2003 (1) 2002 (1) 2001 (1)
--------------------------------------------------------
Working capital
(deficit) $2,238,297 $4,592,332 $ 205,815 $(1,366,925) $2,758,122
Total assets 3,092,352 5,513,810 2,915,206 3,771,258 4,508,920
Convertible debt (2) - - 194,109 1,673,504 -
Note payable -
Covance (2) - - 184,330 - -
Note payable -
Cambrex (2) - - 664,910 1,135,017 -
Series E preferred
stock (2) - - - 2,001,591 6,692,922
Derivative instruments
- current (2) 1,280 - 319,295 4 4,559
Derivative instruments
- noncurrent (2) 811,180 1,175,488 2,517,131 314,844 556,348
Total liabilities 987,313 1,391,468 4,694,385 6,115,876 7,806,174
Stockholders' equity
(deficit) 2,105,039 4,122,342 (1,779,179) (2,344,618) (3,297,254)
19
June 30, 2006
-------------
Working capital $1,843,951
Total Assets 2,728,056
Current Liabilities 252,467
Total Liabilities 255,467
Stockholders' Equity 2,472,589
(1) The results for fiscal years 2001 through 2004 were restated (see Note 2 to
the Consolidated Financial Statements).
(2) Included in total liabilities.
No dividends have been declared on CEL-SCI's common stock.
CEL-SCI's net losses for each fiscal quarter during the two years ended
September 30, 2005 were:
Net income Net income (loss) per share
----------------------------
Quarter (loss) Basic Diluted
------- ------------ ----- -------
12/31/2003 $ (1,381,433) (1) $ (0.02) (1) $(0.02) (1)
3/31/2004 (1,404,976) (1) (0.02) (1) (0.02) (1)
6/30/2004 353,647 (1) 0.01 (1) (0.01) (1)
9/30/2004 (519,315) (1) (0.01) (1) (0.01) (1)
12/31/2004 $ (1,229,443) (2) $ (0.02) (2) (0.02) (2)
3/31/2005 (1,149,440) (2) (0.02) (2) (0.02) (2)
6/30/2005 (653,786) (2) (0.01) (2) (0.01) (2)
9/30/2005 (6,938) -- --
(1) The results for fiscal years 2001 through 2004 were restated (see Note 2 to
the Consolidated Financial Statements).
(2) The results for the quarterly periods in fiscal year 2005 have been
restated.
OVERVIEW
--------
CEL-SCI's most advanced product, Multikine, manufactured using the
Company's proprietary cell culture technologies, is being developed for the
treatment of cancer. Multikine is designed to target the tumor micro-metastases
that are mostly responsible for treatment failure. The basic idea of Multikine
is to make current cancer treatments more successful. Phase II data indicated
that Multikine treatment resulted in a substantial increase in the survival of
patients. The lead indication is advanced primary head & neck cancer (500,000
new cases per annum). Since Multikine is not tumor specific, it may also be
applicable in many other solid tumors.
CEL-SCI also owns a pre-clinical technology called L.E.A.P.S. (Ligand
Epitope Antigen Presentation System). The lead product derived from this
technology is the CEL-1000 peptide which has shown protection in animals against
herpes, malaria and cancer. With the help of government grants, NIAID and US
20
Army and US Navy collaborations, CEL-1000 is now being tested against avian flu,
viral encephalitis, West Nile Virus, SARS, Vaccinia, Smallpox, herpes, malaria
and other agents. If the bio-terrorism tests are successful, CEL-SCI is likely
to push CEL-1000 for potential bio-terrorism disease indications to gain
accelerated approval.
Since inception, CEL-SCI has financed its operations through the issuance
of equity securities, convertible notes, loans and certain research grants.
CEL-SCI's expenses will likely exceed its revenues as it continues the
development of Multikine and brings other drug candidates into clinical trials.
Until such time as CEL-SCI becomes profitable, any or all of these financing
vehicles or others may be utilized to assist CEL-SCI's capital requirements.
Results of Operations
---------------------
Nine Months ended June 30, 2006
-------------------------------
"Grant revenues and other" decreased by $117,025 during the nine months
ended June 30, 2006, compared to the same period of the previous year, due to
the winding down of the work funded by the grants in the summer of 2005. CEL-SCI
is continuing to apply for grants to support its work. Grant revenues and others
remained about the same for the three months ended June 30, 2006 as it was for
the three months ended June 30, 2005.
During the nine-month period ended June 30, 2006, research and development
expenses decreased by $533,201. During the three-month period ended June 30,
2006, research and development expenses decreased by $108,956. In the previous
year, expenses were higher because the Company was doing work in support of the
Phase III application for Multikine.
During the three and nine-month periods ended June 30, 2006, general and
administrative expenses increased by $428,751 and $816,502, respectively. This
change was due to: 1) costs related to the restatement of the financial
statements ($185,800 and $318,750, respectively); 2) an increase in public
relations and corporate presentation expenses ($239,850 and $408,850,
respectively); and 3) the employee stock option expense required by SFAS 123R
($39,100 and $142,700, respectively).
Interest income during the nine months ended June, 2006 decreased by
$10,106. The decrease was due to a decline in the balances in the interest
bearing accounts. Interest income during the three months ended June 30, 2006
decreased by $1,214 for the same reason.
The gain on derivative instruments of $13,130 for the nine months ended
June 30, 2006, compared to a loss of $211,715 for the same period of 2005 was
the result of reclassification to equity of all derivative instruments except
the Series E warrants on December 27, 2005. The gain on derivative instruments
of $1,615 during the three months ended June 30, 2006 compared to a gain of
$319,570 for the same period in 2005 was the result of the reclassification to
equity of all derivative instruments except the Series E warrants.
21
Fiscal 2005
-----------
"Grant revenues and other" decreased by $55,554 during the year ended
September 30, 2005, compared to 2004. This was due to the winding down of the
work funded by the grants in 2005. CEL-SCI is continuing to apply for grants to
support its work.
During the year ended September 30, 2005, research and development
expenses increased by $288,099. The increase in research and development expense
was due largely to an increase in work related to CEL-SCI's Phase III
application for Multikine.
During the year ended September 30, 2005, general and administrative
expenses decreased by $379,736. The decrease was mostly due to a decrease in
public relations and corporate presentation expenses, filing fees, travel
expenses, accounting fees and legal fees, as CEL-SCI's efforts were primarily
focused on the submission of the Phase III clinical trial application for
Multikine.
CEL-SCI received $625,472 in settlement of a lawsuit in which CEL-SCI was
not a party. The litigation involved a shareholder and three former investors in
CEL-SCI. The lawsuit sought to recover short-swing profits allegedly obtained by
the defendants, their investment advisor and the investment advisor's principal
acting together as a group in trading CEL-SCI securities.
Interest income during the year ended September 30, 2005 increased by $843
as a result of higher balances in interest bearing accounts during the year.
Interest expense decreased to zero as a result of the conversion of the
remaining convertible debt in October 2003. Interest expense for the year ended
September 30, 2004 is primarily for interest related to the convertible debt
payable to Cambrex Biosciences, Inc. and Covance AG.
Gain on derivative instruments for the year ended September 30, 2005
decreased by $811,632 due to a decrease in the number of derivative instruments
outstanding during the year as a result of expiration of certain agreements or
reclassifications of certain instruments to equity.
Fiscal 2004
-----------
Grant revenue and other during fiscal year 2004 remained at approximately
the same level as fiscal year 2003 as work continued on the four grants received
during the fiscal year 2003. Interest income also remained approximately at the
same level.
Research and development expense increased by approximately $26,000 as
CEL-SCI's research and development costs on L.E.A.P.S. increased during fiscal
2004.
General and administrative expenses increased by approximately $23,000
this year. CEL-SCI's cost reduction program continues. This reduction was
substantially offset by an increase in audit and audit-related fees and an
increase in filing and registration fees.
CEL-SCI recognized a gain of $1,174,660 on derivative instruments during
fiscal year 2004 compared to a loss of $2,319,005 for the year ended September
30, 2003. This was due primarily to a decrease in the trading price of CEL-SCI's
22
common stock which is a significant component of fair value of CEL-SCI's
derivative instruments. Also, during fiscal year 2004, several derivative
instruments met the criteria for equity classification after which they were no
longer marked to market.
Other costs of financing decreased by $270,664 during fiscal year 2004
since CEL-SCI did not enter into an equity line of credit financing arrangement
during the year.
Research and Development Expenses
---------------------------------
During the five years ended September 30, 2005 CEL-SCI's research and
development efforts involved Multikine, L.E.A.P.S. and an AIDS vaccine. The
table below shows the research and development expenses associated with each
project during this five-year period.
2005 2004 2003 2002 2001
---- ---- ---- ---- ----
MULTIKINE $1,911,615 $1,539,454 $1,653,904 $4,405,678 $7,365,305
L.E.A.P.S. 318,114 402,176 261,597 244,769 280,766
AIDS Vaccine -- -- -- 43,462 94,642
Other -- -- -- 6,000 21,500
------------ ----------- ---------- ---------- ---------
TOTAL $2,229,729 $1,941,630 $1,915,501 $4,699,909 $7,762,213
========== ========== ========== ========== ==========
CEL-SCI believes that it has compiled sufficient data and clinical
information to justify a Phase III clinical trial which would be designed to
prove the clinical benefit from Multikine as an addition to established
anti-cancer therapies. In 2005, CEL-SCI submitted a protocol to the FDA and the
Canadian regulatory agency, the Biologics and Genetic Therapies Directorate for
Phase III clinical trials. CEL-SCI is unable to estimate the future costs of
research and clinical trials involving Multikine since CEL-SCI has not yet
finalized the protocol with the FDA. Until the scope of these trials is known,
CEL-SCI will not be able to price any future trials.
As explained in the section of this prospectus captioned "Business", as of
February 28, 2006, CEL-SCI was involved in a number of pre-clinical studies with
respect to its L.E.A.P.S. technology. As with Multikine, CEL-SCI does not know
what obstacles it will encounter in future pre-clinical and clinical studies
involving its L.E.A.P.S. technology. Consequently, CEL-SCI cannot predict with
any certainty the funds required for future research and clinical trials and the
timing of future research and development projects.
Clinical and other studies necessary to obtain regulatory approval of a
new drug involve significant costs and require several years to complete. The
extent of CEL-SCI's clinical trials and research programs are primarily based
upon the amount of capital available to CEL-SCI and the extent to which CEL-SCI
has received regulatory approvals for clinical trials. The inability of CEL-SCI
to conduct clinical trials or research, whether due to a lack of capital or
regulatory approval, will prevent CEL-SCI from completing the studies and
research required to obtain regulatory approval for any products which CEL-SCI
is developing. Without regulatory approval, CEL-SCI will be unable to sell any
of its products.
23
Since all of CEL-SCI's projects are under development, CEL-SCI cannot
predict when it will be able to generate any revenue from the sale of any of its
products.
CEL-SCI discontinued its research efforts relating to the AIDS vaccine due
to a lack of government funding in 2000.
Liquidity and Capital Resources
-------------------------------
CEL-SCI has had only limited revenues from operations since its inception
in March l983. CEL-SCI has relied primarily upon proceeds realized from the
public and private sale of its common and preferred stock and convertible notes
to meet its funding requirements. Funds raised by CEL-SCI have been expended
primarily in connection with the acquisition of an exclusive worldwide license
to certain patented and unpatented proprietary technology and know-how relating
to the human immunological defense system, patent applications, the repayment of
debt, the continuation of Company-sponsored research and development,
administrative costs and construction of laboratory facilities. Inasmuch as
CEL-SCI does not anticipate realizing revenues until such time as it enters into
licensing arrangements regarding the technology and know-how licensed to it
(which could take a number of years), CEL-SCI is mostly dependent upon the
proceeds from the sale of its securities to meet all of its liquidity and
capital resource requirements.
In fiscal 2003, CEL-SCI reduced its discretionary expenditures. In fiscal
2004 and 2005 expenditures remained at the 2003 levels. If necessary, CEL-SCI
may reduce discretionary expenditures in fiscal 2006; however such reductions
would further delay the development of CEL-SCI's products.
Multikine has an FDA approved shelf life of two years. Consequently,
Multikine can only be used for two years after it is manufactured. Since the
last batch of Multikine was manufactured over two years ago, CEL-SCI does not
currently have any Multikine available for future clinical studies. As a result,
CEL-SCI will be required to manufacture additional quantities of Multikine for
future research and clinical studies. CEL-SCI anticipates that the Multikine
needed for its planned Phase III clinical trial will be manufactured in several
batches over a two to three year period at a cost of between $4 to $5 million.
CEL-SCI's last batch of Multikine was used during the fall of 2002.
Series K Notes and Warrants
---------------------------
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 by substantially all
of CEL-SCI's assets.
At the holder's option the Series K notes are convertible into shares of
CEL-SCI's common stock at a conversion price of $0.86.
The Series K warrants allow the holders to purchase up to 5,211,628 shares
of CEL-SCI's common stock at a price of $0.95 per share at any time between
February 4, 2007 and February 4, 2012.
24
See "Description of Securities" for more detailed information concerning
the Series K notes and warrants.
Future Capital Requirements
---------------------------
CEL-SCI plans to use its existing financial resources, and any proceeds
received from the exercise of CEL-SCI's outstanding warrants or options to fund
its capital requirements during the year ending September 30, 2006.
Other than funding operating losses, funding its research and development
program, and paying its liabilities, CEL-SCI does not have any material capital
commitments. Material future liabilities as of September 30, 2005 are as
follows:
Contractual Obligations: Years Ending September 30,
-------------------------------------
Total 2006 2007 2008
----- ---- ---- ----
Operating Leases $ 359,921 $156,067 $132,719 71,136
Employment Contracts 1,247,203 702,703 363,000 181,500
----------- --------- --------- ---------
$1,607,124 $858,770 $495,719 $252,636
========== ======== ======== ========
It should be noted that substantial additional funds will be needed for
more extensive clinical trials which will be necessary before CEL-SCI will be
able to apply to the FDA for approval to sell any products which may be
developed on a commercial basis throughout the United States. In the absence of
revenues, CEL-SCI will be required to raise additional funds through the sale of
securities, debt financing or other arrangements in order to continue with its
research efforts. However, there can be no assurance that such financing will be
available or be available on favorable terms. It is the opinion of management
that sufficient funds will be available from external financing and additional
capital and/or expenditure reduction in order to meet CEL-SCI's liabilities and
commitments as they come due during fiscal year 2006. Ultimately, CEL-SCI must
complete the development of its products, obtain appropriate regulatory
approvals and obtain sufficient revenues to support its cost structure.
CEL-SCI's cash flow and earnings are subject to fluctuations due to
changes in interest rates on its certificates of deposit, and, to an immaterial
extent, foreign currency exchange rates.
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:
25
Patents - Patent expenditures are capitalized and amortized using the
straight-line method over 17 years. In the event changes in technology or other
circumstances impair the value or life of the patent, appropriate adjustment in
the asset value and period of amortization is made. An impairment loss is
recognized when estimated future undiscounted cash flows expected to result from
the use of the asset, and from disposition, is less than the carrying value of
the asset. The amount of the impairment loss is the difference between the
estimated fair value of the asset and its carrying value.
Stock Options and Warrants - In October 1996, the Financial Accounting
Standards Board (FASB) issued Statement of Financial Accounting Standards No.
123, Accounting for Stock-Based Compensation (SFAS No. 123). This statement
encouraged but did not require companies to account for employee stock
compensation awards based on their estimated fair value at the grant date with
the resulting cost charged to operations. CEL-SCI had elected to continue to
account for its employee stock-based compensation using the intrinsic value
method prescribed in Accounting Principles Board Opinion No. 25, Accounting for
Stock Issued to Employees and related Interpretations". In December 2004 the
FASB issued SFAS No. 123R, "Share-Based Payment". SFAS No. 123R requires
companies to recognize expense associated with share based compensation
arrangements, including employee stock options, using a fair value-based option
pricing model. SFAS No. 123R applies to all transactions involving issuance of
equity by a company in exchange for goods and services, including employees.
Using the modified prospective transition method of adoption, CEL-SCI reflects
compensation expense in the financial statements beginning October 1, 2005. The
modified prospective transition method does not require restatement of prior
periods to reflect the impact of SFAS No. 123R. As such, compensation expense
will be recognized for awards that were granted, modified, repurchased or
cancelled on or after October 1, 2005 as well as for the portion of awards
previously granted that vested during the period ended June 30, 2006. For the
nine months ended June 30, 2006, CEL-SCI recorded $142,690 in general and
administrative expense for the cost of employee options. The Company's options
vest over a three-year period from the date of grant. After one year, the stock
is one-third vested, with an additional one-third vesting after two years and
the final one-third vesting at the end of the three-year period. There were no
options granted during the nine-month period ended June 30, 2006. Options are
granted with an exercise price equal to the closing bid price of the Company's
stock on the day before the grant. CEL-SCI determines the fair value of the
employee compensation using the Black Scholes method of valuation. No
corresponding expense was recorded for the nine months ended June 30, 2005
because the statement did not require the cost to be recorded in that period.
Under SFAS 148, "Accounting for Stock-Based Compensation - Transition and
Disclosure", which was in effect during the nine months ended June 30, 2005,
CEL-SCI's net loss and net loss per common share would have been increased to
the pro forma amounts indicated below:
Nine Months Ended Three Months Ended
June 30, 2005 June 30, 2005
----------------- ------------------
Net loss:
As reported and amended $ (3,244,384) $ (973,356)
26
Add: Total stock-based employee
compensation expense determined
under fair-value-based method for all
awards, net of related tax effects (419,789) (144,949)
------------- -------------
Pro forma net loss, as amended $ (3,664,173) $ (1,118,305)
============== =============
Net loss per share, as reported and amended $0.04 $0.01
===== =====
Pro forma net loss per share $0.05 $0.02
===== =====
Options to non-employees are accounted for in accordance with FASB's
Emerging Issues Task Force (EITF) Issue 96-18 Accounting for Equity Instruments
That Are Issued to Other Than Employees for Acquiring, or in Conjunction with
Selling, Goods or Services. Accordingly, compensation is recognized when goods
or services are received and is measured using the Black-Scholes valuation
model. The Black-Scholes model requires CEL-SCI's management to make assumptions
regarding the fair value of the options at the date of grant and the expected
life of the options.
Asset Valuations and Review for Potential Impairments - CEL-SCI reviews
its fixed assets every fiscal quarter. This review requires that CEL-SCI make
assumptions regarding the value of these assets and the changes in circumstances
that would affect the carrying value of these assets. If such analysis indicates
that a possible impairment may exist, CEL-SCI is then required to estimate the
fair value of the asset and, as deemed appropriate, expense all or a portion of
the asset. The determination of fair value includes numerous uncertainties, such
as the impact of competition on future value. CEL-SCI believes that it has made
reasonable estimates and judgments in determining whether its long-lived assets
have been impaired; however, if there is a material change in the assumptions
used in its determination of fair values or if there is a material change in
economic conditions or circumstances influencing fair value, CEL-SCI could be
required to recognize certain impairment charges in the future. As a result of
the reviews, no changes in asset values were required.
Prepaid Expenses and Laboratory Supplies--The majority of prepaid expenses
consist of bulk purchases of laboratory supplies used on a daily basis in the
lab and items that will be used for future production. The items in prepaid
expenses are expensed when used in production or daily activity as Research and
Development expenses. These items are disposables and consumables and can be
used for both the manufacturing of Multikine for clinical studies and in the
laboratory for quality control and bioassay use. They can be used in training,
testing and daily laboratory activities. Other prepaid expenses are payments for
services over a long period and are expensed over the time period for which the
service is rendered.
Derivative Instruments--The Company enters into financing arrangements
that consist of freestanding derivative instruments or are hybrid instruments
that contain embedded derivative features. The Company accounts for these
arrangement in accordance with Statement of Financial Accounting Standards No.
133, "Accounting for Derivative Instruments and Hedging Activities", ("SFAS No.
133") and Emerging Issues Task Force Issue No. 00-19, "Accounting for Derivative
Financial Instruments Indexed to, and Potentially Settled in, a Company's Own
Stock", ("EITF 00-19"), as well as related interpretations of these standards.
In accordance with accounting principles generally accepted in the United States
("GAAP"), derivative instruments and hybrid instruments are recognized as either
assets or liabilities in the statement of financial position and are measured at
27
fair value with gains or losses recognized in earnings or other comprehensive
income depending on the nature of the derivative or hybrid instruments. Embedded
derivatives that are not clearly and closely related to the host contract are
bifurcated and recognized at fair value with changes in fair value recognized as
either a gain or loss in earnings if they can be reliably measured. When the
fair value of embedded derivative features can not be reliably measured, the
Company measures and reports the entire hybrid instrument at fair value with
changes in fair value recognized as either a gain or loss in earnings. The
Company determines the fair value of derivative instruments and hybrid
instruments based on available market data using appropriate valuation models,
giving consideration to all of the rights and obligations of each instrument and
precluding the use of "blockage" discounts or premiums in determining the fair
value of a large block of financial instruments. Fair value under these
conditions does not necessarily represent fair value determined using valuation
standards that give consideration to blockage discounts and other factors that
may be considered by market participants in establishing fair value.
Quantitative and Qualitative Disclosure About Market Risks
----------------------------------------------------------
Market risk is the potential change in an instrument's value caused by,
for example, fluctuations in interest and currency exchange rates. CEL-SCI
enters into financing arrangements that are or include freestanding derivative
instruments or that are or include hybrid instruments that contain embedded
derivative features. CEL-SCI does not enter into derivative instruments for
trading purposes. Additional information is presented in the Notes to
Consolidated Financial Statements. The fair value of these instruments is
affected primarily by volatility of the trading prices of the CEL-SCI's common
stock. For the years ended September 30, 2005, 2004 and 2003, CEL-SCI recognized
a gain of $363,028, a gain of $1,174,660, and a loss of $2,319,005,
respectively, resulting from changes in fair value of derivative instruments.
CEL-SCI has no exposure to risks associated with foreign exchange rate changes
because none of the operations of CEL-SCI are transacted in a foreign currency.
(The interest rate risk on investments is considered immaterial due to the
dollar value of investments as of September 30, 2004 and June 30, 2005.)
Recent Accounting Pronouncements
--------------------------------
In November 2004 the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 151, "Inventory Costs,
an amendment of Accounting Research Bulletin (ARB) 43, Chapter 4, Inventory
Pricing". This statement amends ARB 43, Chapter 4, to clarify accounting for
abnormal amounts of idle facility expense, freight, handling costs and wasted
material. SFAS No. 151 requires that those items be recognized as current-period
charges in all circumstances. SFAS No. 151 is effective for fiscal years
beginning after June 15, 2005. CEL-SCI does not believe that the adoption of
SFAS No. 151 will have a material effect on its financial position, results of
operations or cash flows.
In December 2004 the FASB issued SFAS No. 123R, "Share-Based Payment".
SFAS No. 123R requires companies to recognize 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
28
beginning October 1, 2005. The modified prospective transition method does not
require restatement of prior periods to reflect the impact of SFAS No. 123R. As
such, compensation expense will be recognized for awards that were granted,
modified, repurchased or cancelled on or after October 1, 2005 as well as for
the portion of awards previously granted that vested during the period ended
June 30, 2006.
On December 16, 2004, the FASB issued SFAS No. 153, "Exchange of
Non-monetary Assets", an amendment of Accounting Principles Board ("APB")
Opinion No. 29. Statement No. 153 replaces the exception from fair value
measurement in APB No. 29, with a general exception from fair value measurement
for exchanges of non-monetary assets that do not have commercial substance. The
Statement is to be applied prospectively and is effective for non-monetary asset
exchanges occurring in fiscal periods beginning after June 15, 2005. CEL-SCI
does not believe that SFAS No. 153 will have a material impact on its results of
operations or cash flows.
In March 2005, the FASB issued FIN No. 47, "Accounting for Conditional
Asset Retirement Obligations - an Interpretation of FASB Statement No. 143". The
interpretation clarifies terms used in FASB Statement No. 143 and is effective
no later than the end of fiscals ending after December 15, 2005. CEL-SCI does
not believe that FIN No. 47 will have a material impact on its results of
operations or cash flows.
In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error
Corrections--A replacement of APB Opinion No. 20 and FASB Statement No. 3". The
statement requires that retrospective application of a change in accounting
principle be limited to the direct effects of the change and is part of a
broader effort by the FASB to improve the comparability of cross-border
financial reporting by working with the International Accounting Standards Board
(IASB) toward development of a single set of high-quality accounting standards.
In February 2006, the FASB issued SFAS No. 155, "Hybrid Instruments". The
statement amends SFAS No. 133 and SFAS No. 140, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities". The statement
also resolves issues addressed in Statement 133 Implementation Issue No. D1,
"Application of Statement 133 to Beneficial Interests in Securitized Financial
Assets." The statement: a) permits fair value remeasurement for any hybrid
financial instrument that contains an embedded derivative that otherwise would
require bifurcation, b) clarifies which interest-only strips and principal-only
strips are not subject to the requirements of SFAS No. 133, c) establishes a
requirement to evaluate interests in securitized financial assets to identify
interests that are freestanding derivatives or that are hybrid financial
instruments that contain an embedded derivative requiring bifurcation, d)
clarifies that concentrations of credit risk in the form of subordination are
not embedded derivatives, and e) amends Statement 140 to eliminate the
prohibition on a qualifying special purpose entity from holding a derivative
financial instrument that pertains to a beneficial interest other than another
derivative financial instrument. CEL-SCI does not believe that SFAS No. 155 will
have a material impact on its results of operations or cash flows.
In March 2006, FASB issued SFAS No. 156, "Accounting for Servicing of
Financial Assets - an amendment of FASB Statement No. 140". The statement
requires: 1) an entity to recognize a servicing asset or servicing liability
each time it undertakes an obligation to service a financial asset; 2) requires
all separately recognized servicing assets and servicing liabilities to be
29
initially measured at fair value; 3) permits an entity to choose either the
amortization method or the fair value measurement method for measuring the asset
or liability; 4) permits a one-time reclassification of available-for-sale
securities to trading securities; and 5) requires separate presentation of
servicing assets and servicing liabilities subsequently measured at fair value
in the statement of financial position. Since CEL-SCI has no servicing assets or
servicing liabilities, CEL-SCI believes that there will be no impact on its
results of operations or cash flows. The statement is effective for fiscal years
beginning after September 15, 2006.
BUSINESS
CEL-SCI Corporation was formed as a Colorado corporation in 1983.
CEL-SCI's principal office is located at 8229 Boone Boulevard, Suite 802,
Vienna, VA 22182. CEL-SCI's telephone number is 703-506-9460 and its web site is
www.cel-sci.com. CEL-SCI makes its electronic filings with the Securities and
Exchange Commission (SEC), including its annual reports on Form 10-K, quarterly
reports on Form 10-Q, current reports on Form 8-K and amendments to these
reports available on its website free of charge as soon as practicable after
they are filed or furnished to the SEC.
OVERVIEW
--------
CEL-SCI's lead product, Multikine(R), is being developed for the treatment
of cancer. Multikine is a patented immunotherapeutic agent consisting of a
mixture of naturally occurring cytokines, including interleukins, interferons,
chemokines and colony-stimulating factors, currently being developed for
treatment of cancer. Multikine is designed to target the tumor micro-metastases
that are mostly responsible for treatment failure. The basic concept is to add
Multikine to the current cancer treatments with the goal of making the overall
cancer treatment more successful. Phase II data indicated that Multikine
treatment resulted in a substantial increase in the survival of patients. The
lead indication is advanced primary head & neck cancer (500,000 new cases per
annum). Since Multikine is not tumor specific, it may also be applicable in many
other solid tumors.
In August 2005, the Canadian regulatory agency, the Biologics and Genetic
Therapies Directorate, concurred with the initiation of a global Phase III
clinical trial in head and neck cancer patients using Multikine. The formal "no
objection" letter from the Biologics and Genetic Therapies Directorate to the
Clinical Trial Application (CTA) enables CEL-SCI to initiate the Canadian arm of
the Phase III Multikine trial.
About 500 patients will be enrolled worldwide in the Phase III trial. The
protocol is designed to develop conclusive evidence of the efficacy of Multikine
in the treatment of advanced primary squamous cell carcinoma of the oral cavity
(head and neck cancer). A successful outcome from this trial should enable
CEL-SCI to apply for a Biologics License to market Multikine for the treatment
of this patient population.
The trial will test the hypothesis that Multikine treatment administered
prior to the current standard therapy for head and neck cancer patients
(surgical resection of the tumor and involved lymph nodes followed by
radiotherapy or radiotherapy and concurrent chemotherapy) will enhance the
local/regional control of the disease, reduce the rate of disease progression
30
and extend the time of progression-free survival in patients with advanced oral
squamous cell carcinoma.
Clinical trials in over 200 patients have been completed with Multikine with
the following results:
1) It has been demonstrated to be safe and non-toxic.
2) It has been shown to render cancer cells much more susceptible to
radiation therapy (The Laryngoscope, December 2003, Vol.113 Issue 12).
3) A publication in the Journal of Clinical Oncology (Timar et al, JCO,
23(15): May 2005), revealed the following:
(i) Multikine induced anti-tumor immune responses through the combined
activity of the different cytokines present in Multikine following
local administration of Multikine for only three weeks.
(ii) The combination of the different cytokines caused the induction,
recruitment into the tumor bed, and proliferation of anti-tumor
T-cells and other anti-tumor inflammatory cells, leading to a
massive anti-tumor immune response.
(iii) Multikine induced a reversal of the CD4/CD8 ratio in the tumor
infiltrating cells, leading to a marked increase of CD4 T-cells in
the tumor, which resulted in the prolongation of the anti-tumor
immune response and tumor cell destruction.
(iv) The anti-tumor immune-mediated processes continued long after the
cessation of Multikine administration.
(v) A three-week Multikine treatment of patients with advanced primary
oral squamous cell carcinoma resulted in an overall response rate
of 42% prior to standard therapy, with 12% of the patients having
a complete response.
(vi) A histopathology study showed that the tumor load in Multikine
treated patients was reduced by nearly 50% as compared to tumors
from control patients in the same pathology study.
(vii) The tumors of all of the patients in this Phase II trial who
responded to Multikine treatment were devoid of the cell surface
marker for HLA Class II. This finding, if confirmed in this global
Phase III clinical trial, may lead to the establishment of a
marker for selecting the patient population best suited for
treatment with Multikine.
CEL-SCI also owns a pre-clinical technology called L.E.A.P.S.TM (Ligand
Epitope Antigen Presentation System). The lead product derived from this
technology is the CEL-1000 peptide which has shown protection in animals against
herpes, malaria, viral encephalitis and cancer. With the help of government
grants, NIAID and US Army and US Navy collaborations, CEL-1000 is now being
31
tested against avian flu, viral encephalitis, West Nile Virus, SARS, Vaccinia,
Smallpox, herpes, malaria and other agents.
MULTIKINE
---------
Multikine has been tested in 200 patients in clinical trials conducted in
the U.S., Canada, Europe and Israel. Most of these patients were head and neck
cancer patients, but some studies were also conducted in prostate cancer
patients, HIV-infected patients and HIV-infected women with Human Papilloma
Virus ("HPV")-induced cervical dysplasia, the precursor stage before the
development of cervical cancer. The safety profile was found to be very good and
CEL-SCI believes that the clinical data suggests that further studies are
warranted.
The function of the immunological system is to protect the body against
infectious agents, including viruses, bacteria, parasites and malignant (cancer)
cells. An individual's ability to respond to infectious agents and to other
substances (antigens) recognized as foreign by the body's immune system is
critical to health and survival. When the immune response is adequate, infection
is usually combated effectively and recovery follows. Severe infection can occur
when the immune response is inadequate. Such immune deficiency can be present
from birth but, in adult life, it is frequently acquired as a result of intense
sickness or as a result of the administration of chemotherapeutic drugs and/or
radiation. It is also recognized that, as people reach middle age and
thereafter, the immune system grows weaker.
Two classes of white blood cells, macrophages and lymphocytes, are
believed to be primarily responsible for immunity. Macrophages are large cells
whose principal immune activity is to digest and destroy infectious agents.
Lymphocytes are divided into two sub-classes. One sub-class of lymphocytes,
B-cells, produces antibodies in response to antigens. Antibodies have unique
combining sites (specificities) that recognize the shape of particular antigens
and bind with them. The combination of an antibody with an antigen sets in
motion a chain of events which may neutralize the effects of the foreign
substance. The other sub-class of lymphocytes, T-cells, regulates immune
responses. T-cells, for example, amplify or suppress antibody formation by
B-cells, and can also directly destroy "foreign" cells by activating "killer
cells."
It is generally recognized that the interplay among T-cells, B-cells and
the macrophages determines the strength and breadth of the body's response to
infection. It is believed that the activities of T-cells, B-cells and
macrophages are controlled, to a large extent, by a specific group of hormones
called cytokines. Cytokines regulate and modify the various functions of both
T-cells and B-cells. There are many cytokines, each of which is thought to have
distinctive chemical and functional properties. IL-2 is but one of these
cytokines and it is on IL-2 and its synergy with other cytokines that CEL-SCI
has focused its attention. Scientific and medical investigation has established
that IL-2 enhances immune responses by causing activated T-cells to proliferate.
Without such proliferation no immune response can be mounted. Other cytokines
support T-cell and B-cell proliferation. However, IL-2 is the only known
cytokine which causes the proliferation of T-cells. IL-2 is also known to
activate B-cells in the absence of B-cell growth factors.
Although IL-2 is one of the best characterized cytokines with anticancer
potential, CEL-SCI is of the opinion that to have optimum therapeutic value,
IL-2 should be administered not as a single substance but rather as a mixture of
IL-2 and certain cytokines, i.e. as a "cocktail". This approach, which was
32
pioneered by CEL-SCI, makes use of the synergism between these cytokines. It
should be noted, however, that neither the Food and Drug Administration (FDA)
nor any other agency has determined that CEL-SCI's Multikine product will be
effective against any form of cancer.
Research and human clinical trials sponsored by CEL-SCI have indicated a
correlation between administration of Multikine to cancer patients and
immunological responses. On the basis of these experimental results, CEL-SCI
believes that Multikine may have application for the treatment of solid tumors
in humans.
Between 1985 and 1988 Multikine was tested at St. Thomas Hospital in
London, UK in forty-eight patients with various types of cancers. Multikine was
shown to be safe when used by these patients.
In November 1990, the Florida Department of Health and Rehabilitative
Services ("DHRS") gave the physicians at a southern Florida medical institution
approval to start a clinical cancer trial in Florida using CEL-SCI's Multikine
product. The focus of the trial was unresectable head and neck cancer.
In 1991, four patients with regionally advanced squamous cell cancer of
the head and neck were treated with CEL-SCI's Multikine product. The patients
had previously received radical surgery followed by radiation therapy but
developed recurrent tumors at multiple sites in the neck and were diagnosed with
terminal cancer.
Significant tumor reduction occurred in three of the four patients as a
result of the treatment with Multikine. Negligible side effects, such as
injection site soreness and headaches, were observed and the patients were
treated as outpatients. Notwithstanding the above, it should be noted that these
trials were only preliminary and were only conducted on a small number of
patients. It remains to be seen if Multikine will be effective in treating any
form of cancer.
These results caused CEL-SCI to embark on a major manufacturing program
for Multikine with the goal of being able to produce a drug that would meet the
stringent regulatory requirements for advanced human studies. This program
included building a pilot scale manufacturing facility.
The objective of CEL-SCI scientists is to use Multikine as an adjunct
(additive) therapy to the existing treatment of previously untreated head & neck
cancer patients with the goal of reducing cancer recurrence and ultimately
increasing survival. However, pursuant to FDA regulations, CEL-SCI was required
to test the drug first for safety in locally recurrent, locally metastatic head
and neck cancer patients who had failed other cancer therapies. This dose
escalation study was started in 1995 at several centers in Canada and the US
where 16 patients were enrolled at 4 different dosage levels. The study ended in
1998 and showed Multikine to be safe and well tolerated at all dose levels.
Because CEL-SCI scientists have determined that patients with previously
untreated disease would most likely benefit more from Multikine treatment,
CEL-SCI started a safety trial in Canada in 1997 in advanced primary head & neck
cancer patients who had just recently been diagnosed with head & neck cancer.
This study ultimately enrolled 28 patients, also at 4 different dosage levels,
33
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).
While CEL-SCI scientists believe partial and complete tumor responses to
be very important, they also believe that other findings with Multikine in these
studies are equally important since they may serve to enhance existing cancer
therapies, thereby affecting the clinical outcome of the cancer patient's
treatment.
The initial results of the Hungarian study were published in December
2003. Data from a Phase I/II clinical trial in fifty-four (54) advanced primary
head and neck cancer patients (half treated, half control), the first part of
the Hungarian study, were published in The Laryngoscope, December 2003, Vol.113
(12). The title of the article is "The Effect of Leukocyte Interleukin Injection
(MULTIKINE) on the Peritumoral and Intratumoral Subpopulation of Mononuclear
Cells and on Tumor Epithelia: A Possible New Approach to Augmenting Sensitivity
to Radiation Therapy and Chemotherapy in Oral Cancer - A Multi Center Phase I/II
Clinical Trial".
The data demonstrates that treatment with Multikine rendered a high
proportion of the tumor cell population highly susceptible to radiation therapy.
This finding represents a major advance in the treatment of cancer since, under
current standard therapy, only about 5%-10% of the cancer cells are thought to
be susceptible to radiation therapy at any one point in time.
The increased sensitivity of the Multikine-treated tumors to radiation was
derived from a dramatic increase in the number of proliferating (those that are
in cell cycle) cancer cells. Following Multikine treatment, the great majority
of the tumor cells were in a proliferative state, as measured by the
well-established cell proliferation marker Ki67. The control patients (not
treated with Multikine) had only low expression (near background) of the same
proliferation marker (Ki67) in this study. These findings were statistically
significant (p<0.05, ANOVA).
This is an important finding because the ability of radiation therapy (and
chemotherapy) to kill tumor cells is dependent, in large part, on the
proliferative state of the tumor cells at the time of radiation (and
chemotherapy) treatment. As seen in the control group in this study, and also in
many other tumor types, the great majority of tumor cells (about 90% or more)
are in a "resting" state (non-proliferating). It is generally accepted that
tumor cells in the "resting" state are by-and-large resistant to radiation and
chemotherapy. However, Multikine treatment induced a reversal of this
34
non-proliferative state of the tumor cells and caused the great majority of the
tumor cells to enter into the proliferative state, thereby rendering the tumor
highly susceptible to radiation therapy (and chemotherapy).
The results of the Israeli trial have been published in Archives of
Otolaryngology - Head & Neck Surgery, August 2003, Vol.129. This paper on 12
patients treated by Dr. Feinmesser shows positive safety, tumor response and
clinical outcome data, but no firm conclusions can be drawn from a study of only
12 patients.
Results from the Multikine Phase II clinical trials were published in June
2004 at the 40th ASCO Annual Meeting. The study involved 39 head & neck cancer
patients, 19 of whom were treated with CEL-SCI's immunotherapy drug Multikine
prior to surgery and radiation. The other 20 patients served as matched
controls, meaning that they did not receive Multikine prior to surgery and
radiation. In a comparison pathology study of the tumors, Multikine treatment
caused a significant shift in the ratio of key immune cells that infiltrate the
tumor. The cancer patients treated with Multikine were shown to have much higher
rate of tumor cell killing, resulting in a 42% overall response rate, including
12% complete responses.
The tumors of the 39 head & neck cancer patients were analyzed by three
independent pathologists, blinded to the study. Of the 19 Multikine treated
patients in this study, 2 patients (12%) had no remaining cancer cells, another
2 patients (12%) had a reduction in the cancer cell mass greater than 50% and an
additional 4 patients (21%) had a reduction in the cancer cell mass of more than
30%. The objective response rate in this trial was 21%, with an overall response
rate of 42%, as determined by pathology.
This study, which used a three-week, non-toxic treatment with Multikine,
caused a shift from a low CD4/CD8 cell ratio (less than one CD4 cell for each
CD8 cell) to a high (over 2.5 - 3) CD4/CD8 cell ratio (2.5 - 3 CD4 cells for
each CD8 cell) in the tumor. This indicates that Multikine treatment shifts the
immune response from a mainly CD8 cell anti-tumor response to a predominately
CD4 anti-tumor response. Both CD4 and CD8 are key cells of the immune system.
The change in the immune response from CD8 to CD4 cells is very important
for the cancer patient because the cancer cells seem to have learned to shut
down the CD8 anti-tumor immune response. This "shut-down" of the CD8 cells was
evident in the tumors of the control (non-Multikine treated) group. The control
group had predominately CD8 cell infiltrate which was inactive against the
tumor. The Multikine treated group, on the other hand, had a predominately CD4
cell infiltrate. The tumor was unable, or less able, to shut down the Multikine
induced CD4 cell immune response and, as a result thereof, the cancer patients
treated with Multikine were shown to have a much higher rate of tumor cell
killing.
A publication in the Journal of Clinical Oncology (Timar et al, JCO,
23(15): May 2005), revealed the following:
(i) Multikine induced anti-tumor immune responses through the combined
activity of the different cytokines present in Multikine following
local administration of Multikine for only three weeks.
35
(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.
In May 2006 CEL-SCI the presented long-term survival data from its Phase
II clinical trial in patients with head and neck cancer (oral squamous cell
carcinoma -- OSCC) treated with its anti-cancer drug Multikine(R). The addition
of Multikine as first-line treatment prior to the standard of care treatment
resulted in a 33-40% improvement in the median survival at 3 1/2 years
post-surgery, when compared to the results of 39 OSCC clinical trials published
in the scientific literature between 1987 and 2004. 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.
36
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 (39 OSCC clinical trials published between 1987 and 2004)
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.
The median survival of patients in this clinical trial was 67% at a median
follow-up of 42 months post-surgery, excluding the one patient with immediate
post-operative death. The same 39 scientific publications indicate 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 an increase
in survival of 40% 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 trial reported here. Furthermore, the
planned endpoints of the Phase III trial are local regional control,
disease-free survival and overall survival, all of which have shown improvement
compared to historical controls, following Multikine first-line treatment over
the current available treatments for these patients.
In 2005 CEL-SCI submitted a protocol for a worldwide Phase III clinical
trial to the FDA and to the Canadian Biologics and Genetic Therapies
Directorate. The protocol for the Phase III clinical trial was designed to
develop conclusive evidence of the safety and efficacy of Multikine in the
treatment of advanced primary squamous cell carcinoma of the oral cavity.
CEL-SCI is in discussion with the FDA about this study. CEL-SCI received a "no
objection" letter from the Canadian Biologics and Genetic Therapies Directorate
which enables CEL-SCI to begin its Phase III clinical trial in Canada.
The Phase III trial will test the hypothesis that Multikine administered
prior to the current standard therapy for head and neck cancer patients
(surgical resection of the tumor and involved lymph nodes followed by
radiotherapy or radiotherapy and concurrent chemotherapy) will enhance the
local/regional control of the disease, reduce the rate of disease progression
and extend the time for survival in patients with advanced oral squamous cell
carcinoma. The submission to the Canadian Biologics and Genetic Therapies
37
Directorate was the same as that submitted to the FDA. A successful outcome from
this trial should enable CEL-SCI to apply for a Biologics License to market
Multikine for the treatment of this patient population.
In May 2005 CEL-SCI was issued a new U.S. patent covering Multikine. The
patent, No. 6,896,879, relates to a new method for pre-sensitizing cancer with
Multikine prior to therapeutic treatment such as chemotherapy, radiation therapy
or immunotherapy.
Multikine has also been tested in 15 HIV-infected patients (1998 - 1999)
in California. This small study found Multikine to be safe in the HIV-infected
population and showed preliminary evidence of improved delayed type
hypersensitivity response to recall antigens. The results of this study were
reported in Antiviral Therapy 5 (Supplement), 2000.
Another study at the Thomas Jefferson Medical Center (1998) used very
small amounts of Multikine to determine the feasibility of injecting Multikine
into the prostate of 5 hormonal therapy refractive prostate cancer patients
scheduled for prostatectomy. Although deemed safe by the investigators,
Multikine administration in this trial directly into the prostate (under
ultrasound guidance) resulted in occasional mild dysuria and mild increase in
urinary frequency. Two out of the five treated cases had an inflammatory
response in the prostate and a third case had fibrosis. The Company believes
that more Multikine injections will need to be given to achieve a potential
outcome as seen in head & neck cancer. None of the prostate cancer patients
received more than half of the amounts given to the head & neck cancer patients.
Also, no testing was done at the time to determine if Multikine would enhance
susceptibility to radiation therapy in the prostate. The results of this trial
were published in Seminars in Oncology Vol. 26 (4) (August) 1999.
In May 2001, CEL-SCI also started a Phase I clinical trial at the
University of Maryland Biotechnology Institute (UMBI). The focus of this study
was HIV-infected women with Human Papilloma Virus (HPV)-induced cervical
dysplasia, the precursor stage before the development of cervical cancer. The
goal of the study was to obtain safety and preliminary efficacy data on
Multikine as a treatment for pre-cancerous lesions of the cervix (dysplasia).
Most cervical dysplasia and cancer is due to infection with HPV. The rationale
for using Multikine in the treatment of cervical dysplasia/cancer is that
Multikine may safely boost the patients' immune systems to the point where their
immune systems can eliminate the virally-induced cancer. Cervical cancer is the
second leading cause of cancer death in women worldwide.
The HIV-infected women with HPV-induced cervical dysplasia were chosen as
a study group because of the high morbidity and low success rate of current
surgical therapies. Since HIV infection results in immune suppression,
HPV-induced cervical dysplasia follows a more malignant and aggressive course of
disease in such women. Co-infection with HPV is common in HIV-positive women
(about 83%) and cervical cancer is considered an AIDS-defining illness.
HPV infection is also a leading health problem in non HIV-infected
American college-age women. A large concern among women who have HPV-induced
cervical dysplasia is that the repeated surgical procedures will lead to a
hysterectomy and the inability to bear children.
At the March 2002 33rd Annual Meeting of the Society of Gynecological
Oncologists in Miami, Florida, scientists from UMBI and CEL-SCI presented data
from this trial in HIV-infected women with HPV induced cervical dysplasia. The
results were as follows: 8 patients had been treated with no major toxicity. The
38
lower dosage group had 3 out of 5 patients resolved/improved with 2 out of 5
patients with no change in their cervical dysplasia status as compared to the
patient's own baseline disease. The higher dosage group had 2 out of 3 patients
who improved and 1 out of 3 patients with no change. The changes in disease
status were determined by both Colposcopy and Histology.
Subsequent HPV testing during 2001 and 2002 of the first three patients
revealed the elimination of HPV virus types (using in situ PCR) following
treatment with Multikine and ranged from 54% to 84% (Avg = 68%) reduction in HPV
virus in the cervical tissue of Multikine treated HIV/HPV co-infected patients.
The study was closed due to the inability to enroll further patients.
CEL-SCI's future studies in the HPV-induced cervical dysplasia area will
only be conducted with grant or government funds as CEL-SCI plans to devote its
resources to head and neck cancer, the area where it has the most data.
In November 2000, CEL-SCI concluded a development, supply and distribution
agreement with Orient Europharma of Taiwan. The agreement gives Orient
Europharma the exclusive marketing rights to Multikine for all cancer
indications in Taiwan, Singapore, Hong Kong and Malaysia. The agreement provides
for Orient Europharma to fund the clinical trials needed to obtain marketing
approvals in the four countries for head and neck cancer, naso-pharyngeal cancer
and potentially cervical cancer, which are very prevalent in Far East Asia.
CEL-SCI may use the clinical data generated in these trials to support
applications for marketing approvals for Multikine in other parts of the world.
Under the agreement, CEL-SCI will manufacture Multikine and Orient
Europharma will purchase the product from CEL-SCI for distribution in the
territory. Both parties will share in the revenue from the sale of Multikine. As
of September 30, 2005 Orient Europharma had not started any clinical trials
since CEL-SCI's plan is for Orient Europharma to begin a Phase III clinical
trial when CEL-SCI begins its Phase III clinical trial or to do one combined
Phase III clinical trial. The above will be finalized in the future.
In May 2003, CEL-SCI entered into an agreement with Eastern Biotech which
provided Eastern Biotech with the following (i) the exclusive right to
distribute Multikine and CEL-1000 in Greece, Serbia and Croatia, (ii) a royalty
equal to 1% of CEL-SCI's net sales of Multikine and CEL-1000 prior to May 30,
2033, (iii) 1,100,000 shares of CEL-SCI's common stock and, (iv) warrants which
allow Eastern Biotech to purchase an additional 1,100,000 shares of CEL-SCI's
common stock at a price of $0.47 per share at any time prior to May 30, 2008. In
consideration for the above Eastern Biotech paid CEL-SCI $500,000. Because the
Company did not register these shares prior to September 30, 2003, the royalty
percentage increased to 2%. If Eastern Biotech did not meet certain clinical
development milestones within one year, it would lose the right to sell both
products in these three countries. As of June 1, 2004, Eastern Biotech lost its
exclusive right to market, distribute and sell Multikine in accordance with the
agreement.
Since 1985, Multikine has been well tolerated in clinical studies
involving over 200 patients. Forty-eight patients were treated in the United
States in accordance with clinical trials authorized by the FDA. The remaining
patients were treated outside of the United States in accordance with protocols
authorized by comparable health regulatory authorities in the countries where
39
the patients were treated. All the clinical trials were conducted in accordance
with the Declaration of Helsinki (1985), and informed consent was obtained from
each patient volunteer. This process is the standard procedure for the conduct
of human clinical trials.
Proof of efficacy for anti-cancer drugs is a lengthy and complex process.
At this early stage of clinical investigation, it remains to be proven that
Multikine will be effective against any form of cancer. Even if some form of
Multikine is found to be effective in the treatment of cancer, commercial use of
Multikine may be several years away due to extensive safety and effectiveness
tests that would be necessary before required government approvals are obtained.
It should be noted that other companies and research teams are actively involved
in developing treatments and/or cures for cancer, and accordingly, there can be
no assurance that CEL-SCI's research efforts, even if successful from a medical
standpoint, can be completed before those of its competitors.
T-CELL MODULATION PROCESS
-------------------------
CEL-SCI's patented T-cell Modulation Process uses "heteroconjugates" to
direct the body to choose a specific immune response. The heteroconjugate
technology, referred to as L.E.A.P.S. (Ligand Epitope Antigen Presentation
System), is intended to selectively stimulate the human immune system to more
effectively fight bacterial, viral and parasitic infections and cancer, when it
cannot do so on its own. Administered like vaccines, L.E.A.P.S. combines T-cell
binding ligands with small, disease associated, peptide antigens and may provide
a new method to treat and prevent certain diseases.
The ability to generate a specific immune response is important because
many diseases are often not combated effectively due to the body's selection of
the "inappropriate" immune response. The capability to specifically reprogram an
immune response may offer a more effective approach than existing vaccines and
drugs in attacking an underlying disease.
Using the LEAPS technology, CEL-SCI discovered a peptide, named CEL-1000,
which is currently being tested in animals for the prevention/treatment of avian
flu, herpes simplex, malaria, viral encephalitis, smallpox, vaccinia and a
number of other indications.
In the Spring of 2002, CEL-SCI, in conjunction with The Naval Medical
Research Center, announced that CEL-1000 provided 100% protection against
malaria infection in a mouse model. The same peptide also induced protective
effects in mouse models for herpes simplex virus and cancer. In the Fall of 2002
CEL-SCI announced that it had signed a Cooperative Research and Development
Agreement (CRADA) with the U.S. Navy for CEL-1000 in malaria.
CEL-SCI received two grants in April 2003, one grant in May 2003, and one
grant in September 2003, all from the National Institutes of Health (NIH). The
first grant totaling $1,100,000 was awarded to Northeastern Ohio Universities
College of Medicine (NEOUCOM) with CEL-SCI as a subcontractor. The grant is for
a period of three years and is intended to support the development of CEL-SCI's
new compound, CEL-1000, as a possible treatment for viral encephalitis, a
potentially lethal inflammation of the brain. The grant was awarded following a
peer review process and will fund pre-clinical studies leading up to toxicology
studies. The second grant, totaling $134,000 and awarded to CEL-SCI with Johns
40
Hopkins Medical Institutions as a subcontractor, is a Phase I Small Business
Innovation Research (SBIR) grant for the further development of a potential
treatment for autoimmune myocarditis, a heart disease. The third grant,
announced on May 7, 2003 for $162,000 was awarded to CEL-SCI with NEOUCOM as a
sub-contractor, and is a Phase I SBIR grant for the further development of
CEL-1000 against Herpes Simplex. The fourth grant, totaling $104,000 was awarded
to CEL-SCI with the University of Nebraska as a sub-contractor, and is a Phase I
SBIR grant from the National Institute of Allergy and Infectious Diseases
(NIAID), NIH, for the development of CEL-1000 as a potential therapeutic and
prophylactic agent against vaccinia and smallpox infections as a single agent
and as an adjuvant for vaccinia vaccines. Vaccinia is the virus used in the
smallpox vaccine. The grant funds are disbursed for the necessary expenses
incurred by the Company for each specific grant. The Company submits its
expenses by accessing the Division of Payment Management, a Health and Human
Services program support center, when CEL-SCI is the primary contractor, or,
when CEL-SCI is a sub-contractor, by invoicing the primary contractor of the
grant, on a monthly basis, for expenses incurred for the grant.
As of September 30, 2005 approximately $288,000 remained from the viral
encephalitis grant. The other three grants were closed out during fiscal year
2005. As of September 30, 2005 CEL-SCI had received approximately $591,000 from
these grants. The remaining funds will be spent over the next six months.
In June 2003 CEL-SCI signed a Cooperative Agreement with the NIAID and the
U.S. Army Medical Research Institute of Infectious Disease (USAMRIID) to test
CEL-1000 against various bio-terrorism agents as well as other hard to treat
diseases.
In May 2005 CEL-SCI scientists, in collaboration with scientists from the
laboratory of Dr. Noel Rose at The Johns Hopkins University Department of
Pathology, presented animal data showing that pretreatment and early therapy of
Experimental Autoimmune Myocarditis with a compound developed by CEL-SCI
resulted in significant reduction in heart enlargement and disease associated
histopathological changes. The compound used to achieve these results was
derived from CEL-SCI's patented L.E.AP.S. technology.
This new finding could potentially lead to the development of a treatment
for autoimmune myocarditis, a life threatening heart disease which is
characterized by an enlarged and weakened heart. Myocarditis is a precursor to
dilated cardiomyopathy, a condition leading to a form of chronic heart failure
(CHF) characterized by an inflamed heart. End state CHF requires a heart
transplant or death ensues. The incidence in the United States alone of dilated
cardiomyopathy is about 200,000 people.
The protection observed was statistically significant for both
pretreatment and early therapy. This protective effect was shown to be
antigen-specific and was associated with an increase in IL-13 in both the sera
and heart tissue and of IL-1a in the sera of the protected mice. Other studies
from Dr. Rose's laboratory with IL-13 knockout mice (mice missing the IL-13
gene) demonstrate the importance of IL-13 in this model of Experimental
Autoimmune Myocarditis and corroborated these findings.
In December 2005 CEL-SCI signed an agreement with the National Institute
for Allergy and Infectious Diseases (NIAID), whereby NIAID agreed to test our
CEL-1000 drug against the avian flu virus in animal models.
41
RESEARCH AND DEVELOPMENT
------------------------
Since 1983, and through September 30, 2005, approximately $50,794,000 has
been expended on CEL-SCI-sponsored research and development, including
approximately $2,326,000, $2,052,000 and $2,030,000 respectively during the
years ended September 30, 2005, 2004 and 2003.
The extent of CEL-SCI's clinical trials and research programs is primarily
based upon the amount of capital available to CEL-SCI and the extent to which
CEL-SCI has received regulatory approvals for clinical trials. CEL-SCI's
research and development expenditures have decreased in the past three years
compared to previous years due in part to the capital available to CEL-SCI and
due in part to the fact that the costs involved in manufacturing Multikine for
use in clinical trials and costs involved in validating the manufacturing
process were primarily incurred in fiscal 2001 and prior periods.
The costs associated with the clinical trials relating to CEL-SCI's
technologies, research expenditures and CEL-SCI's administrative expenses have
been funded with the public and private sales of CEL-SCI's securities and
borrowings from third parties, including affiliates of CEL-SCI.
GOVERNMENT REGULATION
---------------------
New drug development and approval process
Regulation by governmental authorities in the United States and other
countries is a significant factor in the manufacture and marketing of biological
and other drug products and in ongoing research and product development
activities. CEL-SCI's products will require regulatory approval by governmental
agencies prior to commercialization. In particular, these products are subject
to rigorous preclinical and clinical testing and other premarket approval
requirements by the FDA and regulatory authorities in other countries. In the
United States, various statutes and regulations also govern or influence the
manufacturing, safety, labeling, storage, record keeping and marketing of
pharmaceutical and biological drug products. The lengthy process of seeking
these approvals, and the subsequent compliance with applicable statutes and
regulations, require the expenditure of substantial resources. CEL-SCI believes
that it is currently in compliance with applicable statutes and regulations that
are relevant to its operations. CEL-SCI has no control, however, over compliance
by its manufacturing and other partners.
The FDA's statutes, regulations, or policies may change and additional
statutes or government regulations may be enacted which could prevent or delay
regulatory approvals of biological or other drug products. CEL-SCI cannot
predict the likelihood, nature or extent of adverse governmental regulation that
might arise from future legislative or administrative action, either in the U.S.
or abroad.
Regulatory approval, when and if obtained, may be limited in scope. In
particular, regulatory approvals will restrict the marketing of a product to
specific uses. Further, approved biological and other drugs, as well as their
manufacturers, are subject to ongoing review. Discovery of previously unknown
problems with these products may result in restrictions on their manufacture,
42
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.
43
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
44
the clinical trials. Under the Pediatric Research Equity Act of 2003, a company
is also required to include an assessment, generally based on clinical study
data, on the safety and efficacy of the drug candidate for all relevant
pediatric populations before submitting an application. The statute provides for
waivers or deferrals in certain situations but no assurance can be made that
such situations will apply to a particular product.
The FDA reviews all NDAs and BLAs submitted before it accepts them for
filing. It may request additional information rather than accepting an
application for filing. In this event, the application must be resubmitted with
the additional information. The resubmitted application is also subject to
review before the FDA accepts it for filing. Once the submission is accepted for
filing, the FDA begins an in-depth review of the application. The FDA may refer
the application to an appropriate advisory committee, typically a panel of
clinicians, for review, evaluation and a recommendation. The FDA is not bound by
the recommendation of an advisory committee. If FDA evaluations of the NDA or
BLA and the manufacturing facilities are favorable, the FDA may issue an
approval letter authorizing commercial marketing of the drug or biological
candidate for specified indications. The FDA could also issue an approvable
letter, which usually contains a number of conditions that must be met in order
to secure final approval of the NDA or BLA. When and if those conditions have
been met to the FDA's satisfaction, the FDA will issue an approval letter. On
the other hand, if the FDA's evaluation of the NDA or BLA or manufacturing
facilities is not favorable, the FDA may refuse to approve the application or
issue a non-approvable letter.
Among the conditions for NDA or BLA approval is the requirement that each
prospective manufacturer's quality control and manufacturing procedures conform
to current good manufacturing practice standards and requirements (cGMPs).
Manufacturing establishments are subject to periodic inspections by the FDA and
by other federal, state or local agencies.
COMPETITION AND MARKETING
-------------------------
Many companies, nonprofit organizations and governmental institutions are
conducting research on cytokines. Competition in the development of therapeutic
agents incorporating cytokines is intense. Large, well-established
pharmaceutical companies are engaged in cytokine research and development and
have considerably greater resources than CEL-SCI has to develop products. The
establishment by these large companies of in-house research groups and of joint
research ventures with other entities is already occurring in these areas and
will probably become even more prevalent. In addition, licensing and other
collaborative arrangements between governmental and other nonprofit institutions
and commercial enterprises, as well as the seeking of patent protection of
inventions by nonprofit institutions and researchers, could result in strong
competition for CEL-SCI. Any new developments made by such organizations may
render CEL-SCI's licensed technology and know-how obsolete.
Several biotechnology companies are producing IL-2-like compounds. CEL-SCI
believes, however, that it is the only producer of a patented IL-2 product using
a patented cell-culture technology with normal human cells. CEL-SCI foresees
that its principle competition will come from producers of
genetically-engineered IL-2-like products. However, it is CEL-SCI's belief,
based upon growing scientific evidence, that its natural IL-2 products have
advantages over the genetically engineered, IL-2-like products. Evidence
indicates that genetically engineered, IL-2-like products, which lack sugar
45
molecules and typically are not water soluble, may be recognized by the
immunological system as a foreign agent, leading to a measurable antibody
build-up and thereby possibly voiding their therapeutic value. Furthermore,
CEL-SCI's research has established that to have optimum therapeutic value IL-2
should be administered not as a single substance but rather as an IL-2-rich
mixture of certain cytokines and other proteins, i.e. as a "cocktail". If these
differences prove to be of importance, and if the therapeutic value of its
Multikine product is conclusively established, CEL-SCI believes it will be able
to establish a strong competitive position in a future market.
CEL-SCI has not established a definitive plan for marketing nor has it
established a price structure for CEL-SCI's saleable products. However, CEL-SCI
intends, if CEL-SCI is in a position to begin commercialization of its products,
to enter into written marketing agreements with various major pharmaceutical
firms with established sales forces. The sales forces in turn would probably
target CEL-SCI's products to cancer centers, physicians and clinics involved in
immunotherapy.
CEL-SCI may encounter problems, delays and additional expenses in
developing marketing plans with outside firms. In addition, CEL-SCI may
experience other limitations involving the proposed sale of its products, such
as uncertainty of third-party reimbursement. There is no assurance that CEL-SCI
can successfully market any products which they may develop or market them at
competitive prices.
Some of the clinical trials funded to date by CEL-SCI have not been
approved by the FDA, but rather have been conducted pursuant to approvals
obtained from certain states and foreign countries. Conducting clinical studies
in foreign countries is normal industry practice since these studies can often
be completed in less time and are less expensive than studies conducted in the
U.S. Conducting clinical studies in foreign countries is also beneficial since
CEL-SCI will need the approval from a foreign country prior to the time CEL-SCI
can market any of its drugs in the foreign country. However, since the results
of these clinical trials may not be accepted by the FDA, competitors conducting
clinical trials approved by the FDA may have an advantage in that the products
of such competitors are further advanced in the regulatory process than those of
CEL-SCI. CEL-SCI is conducting its trials in compliance with internationally
recognized standards. By following these standards, CEL-SCI anticipates
obtaining acceptance from world regulatory bodies, including the FDA.
EMPLOYEES
---------
As of June 30, 2006 CEL-SCI had 19 employees. Seven employees are involved
in administration, 10 employees are involved in manufacturing and 2 employees
are involved in general research and development with respect to CEL-SCI's
products.
PROPERTIES
----------
CEL-SCI leases office space at 8229 Boone Blvd., Suite 802, Vienna,
Virginia at a monthly rental of approximately $6,750. The lease on the office
space expires in June 2007. CEL-SCI believes this arrangement is adequate for
the conduct of its present business.
46
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.
MANAGEMENT
Officers and Directors
Name Age Position
---- --- --------
Maximilian de Clara 76 Director and President
Geert R. Kersten, Esq. 47 Director, Chief Executive Officer and Treasurer
Patricia B. Prichep 54 Senior Vice President of Operations and Secretary
Dr. Eyal Talor 49 Senior Vice President of Research and
Manufacturing
Dr. Daniel H. Zimmerman 64 Senior Vice President of Research, Cellular
Immunology
John Cipriano 63 Senior Vice President of Regulatory Affairs
Alexander G. Esterhazy 61 Director
Dr. C. Richard Kinsolving 69 Director
Dr. Peter R. Young 61 Director
The directors of CEL-SCI serve in such capacity until the next annual
meeting of CEL-SCI's shareholders and until their successors have been duly
elected and qualified. The officers of CEL-SCI serve at the discretion of
CEL-SCI's directors.
Mr. Maximilian de Clara, by virtue of his position as an officer and
director of CEL-SCI, may be deemed to be the "parent" and "founder" of CEL-SCI
as those terms are defined under applicable rules and regulations of the SEC.
The principal occupations of CEL-SCI's officers and directors, during the
past several years, are as follows:
Maximilian de Clara. Mr. de Clara has been a Director of CEL-SCI since its
inception in March l983, and has been President of CEL-SCI since July l983.
Prior to his affiliation with CEL-SCI, and since at least l978, Mr. de Clara was
involved in the management of his personal investments and personally funding
research in the fields of biotechnology and biomedicine. Mr. de Clara attended
the medical school of the University of Munich from l949 to l955, but left
before he received a medical degree. During the summers of l954 and l955, he
worked as a research assistant at the University of Istanbul in the field of
cancer research. For his efforts and dedication to research and development in
the fight against cancer and AIDS, Mr. de Clara was awarded the "Pour le Merit"
honorary medal of the Austrian Military Order "Merito Navale" as well as the
honor cross of the Austrian Albert Schweitzer Society.
Geert R. Kersten, Esq. Mr. Kersten was Director of Corporate and Investment
Relations for CEL-SCI between February 1987 and October 1987. In October of
1987, he was appointed Vice President of Operations. In December 1988, Mr.
Kersten was appointed Director of the Company. Mr. Kersten also became CEL-SCI's
Treasurer in 1989. In May 1992, Mr. Kersten was appointed Chief Operating
Officer and in February 1995, Mr. Kersten became CEL-SCI's Chief Executive
Officer. In previous years, Mr. Kersten worked as a financial analyst with
Source Capital, Ltd., an investment advising firm in McLean, Virginia. Mr.
47
Kersten is a stepson of Maximilian de Clara, who is the President and a Director
of CEL-SCI. Mr. Kersten attended George Washington University in Washington,
D.C. where he earned a B.A. in Accounting and an M.B.A. with emphasis on
International Finance. He also attended law school at American University in
Washington, D.C. where he received a Juris Doctor degree.
Patricia B. Prichep has been the Company's Senior Vice President of
Operations since March 1994. Between December 1992 and March 1994, Ms. Prichep
was the Company's Director of Operations. Ms. Prichep became CEL-SCI's Corporate
Secretary in May 2000. From June 1990 to December 1992, Ms. Prichep was the
Manager of Quality and Productivity for the NASD's Management, Systems and
Support Department. Between 1982 and 1990, Ms. Prichep was Vice President and
Operations Manager for Source Capital, Ltd.
Eyal Talor, Ph.D. has been CEL-SCI's Senior Vice President of Research and
Manufacturing since March 1994. From October 1993 until March 1994, Dr. Talor
was Director of Research, Manufacturing and Quality Control, as well as the
Director of the Clinical Laboratory, for Chesapeake Biological Laboratories,
Inc. From 1991 to 1993, Dr. Talor was a scientist with SRA Technologies, Inc.,
as well as the director of SRA's Flow Cytometry Laboratory (1991-1993) and
Clinical Laboratory (1992-1993). During 1992 and 1993, Dr. Talor was also the
Regulatory Affairs and Safety Officer For SRA. Since 1987, Dr. Talor has held
various positions with the Johns Hopkins University, including course
coordinator for the School of Continuing Studies (1989-Present), research
associate and lecturer in the Department of Immunology and Infectious Diseases
(1987-1991), and associate professor (1991-Present).
Daniel H. Zimmerman, Ph.D. has been CEL-SCI's Senior Vice President of
Cellular Immunology since January 1996. Dr. Zimmerman founded CELL-MED, Inc. and
was its president from 1987-1995. From 1973 to 1987 Dr. Zimmerman served in
various positions at Electronucleonics, Inc. including Scientist, Senior
Scientist, Technical Director and Program Manager. From 1969-1973 Dr. Zimmerman
was a Senior Staff Fellow at NIH.
John Cipriano, has been CEL-SCI's Senior Vice President of Regulatory
Affairs since March 2004. Mr. Cipriano brings to CEL-SCI over 30 years of
experience in both biotech and pharmaceutical companies. In addition, he held
positions at the United States Food and Drug Administration (FDA) as Deputy
Director, Division of Biologics Investigational New Drugs, Office of Biologics
Research and Review and was the Deputy Director, IND Branch, Division of
Biologics Evaluation, Office of Biologics. Mr. Cipriano completed his B.S. in
Pharmacy from the Massachusetts College of Pharmacy in Boston, Massachusetts and
his M.S. in Pharmaceutical Chemistry from Purdue University in West Lafayette,
Indiana.
Alexander G. Esterhazy has been an independent financial advisor since
November 1997. Between July 1991 and October 1997 Mr. Esterhazy was a senior
partner of Corpofina S.A. Geneva, a firm engaged in mergers, acquisitions and
portfolio management. Between January 1988 and July 1991 Mr. Esterhazy was a
managing director of DG Bank in Switzerland. During this period Mr. Esterhazy
was in charge of the Geneva, Switzerland branch of the DG Bank, founded and
served as vice president of DG Finance (Paris) and was the President and Chief
Executive officer of DG-Bourse, a securities brokerage firm.
C. Richard Kinsolving, Ph.D. has been a Director of CEL-SCI since April
2001. Since February 1999 Dr. Kinsolving has been the Chief Executive Officer of
BioPharmacon, a pharmaceutical development company. Between December 1992 and
48
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 American Stock Exchange. The members of the
compensation committee are Maximilian de Clara, Alexander Esterhazy and C.
Richard Kinsolving.
CEL-SCI has adopted a Code of Ethics which is applicable to CEL-SCI'S
principal executive, financial, and accounting officers and persons performing
similar functions. The Code of Ethics is available on CEL-SCI's website, located
at www.cel-sci.com.
If a violation of this code of ethics act is discovered or suspected, the
Senior Officer must (anonymously, if desired) send a detailed note, with
relevant documents, to CEL-SCI's Audit Committee, c/o Dr. Peter Young, 1247
Dodgeton Drive, Frisco, TX 75034-1432.
EXECUTIVE COMPENSATION
----------------------
The following table sets forth in summary form the compensation received
by (i) the Chief Executive Officer of CEL-SCI and (ii) by each other executive
officer of CEL-SCI who received in excess of $100,000 during the fiscal year
ended September 30, 2005.
49
All
Other Other
Annual Restric- Com-
Compen- ted Stock Options pensa-
Name and Princi- Fiscal Salary Bonus sation Awards Granted tion
pal Position Year (1) (2) (3) (4) (5) (6)
---------------- ------ ------ ----- ------- -------- ------- ------
Maximilian de Clara, 2005 $363,000 -- $72,041 -- 50,000 --
President 2004 $363,000 -- $60,165 -- 50,000 --
2003 $363,000 -- $65,121 -- 574,999 $72,600
Geert R. Kersten, 2005 $370,585 -- $18,260 $12,700 50,000 $ 30
Chief Executive 2004 $366,673 -- $18,690 $11,296 50,000 --
Officer and 2003 $354,087 -- $12,558 $ 9,244 1,890,000 $71,068
Treasurer
Patricia B. Prichep 2005 $159,864 -- $ 3,000 $ 9,404 30,000 $ 30
Senior Vice President 2004 $148,942 -- $ 3,000 $ 7,110 50,000 --
of Operations and 2003 $147,904 -- $ 3,000 $ 4,902 580,000 --
Secretary
Eyal Talor, Ph.D. 2005 $201,154 -- $ 3,000 $ 8,400 30,000 $ 30
Senior Vice President 2004 $192,373 -- $ 3,000 $ 4,797 50,000 --
of Research and 2003 $191,574 -- $ 3,000 $ 4,950 374,166 --
Manufacturing
Daniel Zimmerman, 2005 $154,350 -- $ 3,000 $ 9,059 30,000 $ 30
Ph.D, 2004 $147,613 -- $ 3,000 $ 7,176 50,000 --
Senior Vice 2003 $147,000 -- $ 3,000 $ 5,005 392,000 --
President of
Cellular Immuno-
logy
John Cipriano 2005 $150,000 -- -- $ 9,000 30,000 $ 30
Senior Vice President
of Regulatory Affairs
(1) The dollar value of base salary (cash and non-cash) received. During the
year ended September 30, 2005, $11,089 of the total salaries paid to the
persons shown in the table were paid in restricted shares of CEL-SCI's
common stock.
Information concerning the issuance of these restricted shares is shown in
the following table:
Date Shares Number of Price
Were Issued Shares Issued Per Share
----------- ------------- ---------
10/07/03 133,390 $1.00
09/15/04 19,511 $0.62
50
On each date the amount of compensation satisfied through the issuance of
shares was determined by multiplying the number of shares issued by the Price
Per Share. The price per share was equal to the closing price of CEL-SCI's
common stock on the date prior to the date the shares were issued.
(2) The dollar value of bonus (cash and non-cash) received.
(3) Any other annual compensation not properly categorized as salary or bonus,
including perquisites and other personal benefits, securities or property.
Amounts in the table represent automobile, parking and other transportation
expenses, plus, in the case of Maximilian de Clara and Geert Kersten,
director's fees of $8,000 each.
(4) During the periods covered by the table, the value of the shares of
restricted stock issued as compensation for services to the persons listed
in the table. In the case of all other persons listed in the table, the
shares were issued as CEL-SCI's contribution on behalf of the named officer
to CEL-SCI's 401(k) retirement plan.
As of September 30, 2005, the number of shares of CEL-SCI's common stock,
owned by the officers included in the table above, and the value of such shares
at such date, based upon the market price of CEL-SCI's common stock were:
Name Shares Value
---- ------ -----
Maximilian de Clara 537,527 $ 252,638
Geert R. Kersten 2,663,868 $1,252,018
Patricia B. Prichep 519,485 $ 244,158
Eyal Talor, Ph.D. 423,796 $ 199,184
Daniel Zimmerman, Ph.D. 445,616 $ 209,440
John Cipriano 24,287 $ 11,415
Dividends may be paid on shares of restricted stock owned by CEL-SCI's
officers and directors, although CEL-SCI has no plans to pay dividends.
(5) The shares of Common Stock to be received upon the exercise of all stock
options granted during the periods covered by the table. Includes certain
options issued in connection with CEL-SCI's Salary Reduction Plans as well
as certain options purchased from CEL-SCI. See "Options Granted During
Fiscal Year Ended September 30, 2005" below.
(6) All other compensation received that CEL-SCI could not properly report in
any other column of the table including annual Company contributions or
other allocations to vested and unvested defined contribution plans, and
the dollar value of any insurance premiums paid by, or on behalf of,
CEL-SCI with respect to term life insurance for the benefit of the named
executive officer, and the full dollar value of the remainder of the
premiums paid by, or on behalf of, CEL-SCI. Amounts in the table for fiscal
2003 represent the value of CEL-SCI's common stock issued at below market
prices and discussed in (1) above.
51
Long Term Incentive Plans - Awards in Last Fiscal Year
------------------------------------------------------
None.
Employee Pension, Profit Sharing or Other Retirement Plans
----------------------------------------------------------
During 1993 CEL-SCI implemented a defined contribution retirement plan,
qualifying under Section 401(k) of the Internal Revenue Code and covering
substantially all the Company's employees. Prior to January 1, 1998 CEL-SCI's
contribution was equal to the lesser of 3% of each employee's salary, or 50% of
the employee's contribution. Effective January 1, 1998 the plan was amended such
that the Company's contribution is now made in shares of CEL-SCI's common stock
as opposed to cash. Each participant's contribution is matched by CEL-SCI with
shares of common stock which have a value equal to 100% of the participant's
contribution, not to exceed the lesser of $1,000 or 6% of the participant's
total compensation. CEL-SCI's contribution of common stock is valued each
quarter based upon the closing price of the Company's common stock. The fiscal
2005 expenses for this plan were $79,406. Other than the 401(k) Plan, CEL-SCI
does not have a defined benefit, pension plan, profit sharing or other
retirement plan.
Compensation of Directors
-------------------------
Standard Arrangements. CEL-SCI currently pays its directors $2,000 each
per quarter, plus expenses. CEL-SCI has no standard arrangement pursuant to
which directors of CEL-SCI are compensated for any services provided as a
director or for committee participation or special assignments.
Other Arrangements. CEL-SCI has from time to time granted options to its
outside directors. See Stock Options below for additional information concerning
options granted to CEL-SCI's directors.
Employment Contracts.
---------------------
In April 2005 the Company entered into a three-year employment agreement
with Mr. de Clara which expires April 30, 2008. The employment agreement
provides that CEL-SCI will pay Mr. de Clara an annual salary of $363,000 during
the term of the agreement. In the event that there is a material reduction in
Mr. de Clara's authority, duties or activities, or in the event there is a
change in the control of the Company, then the agreement allows Mr. de Clara to
resign from his position at the Company and receive a lump-sum payment from
CEL-SCI equal to 18 months salary. For purposes of the employment agreement, a
change in the control of CEL-SCI means the sale of more than 50% of the
outstanding shares of CEL-SCI's Common Stock, or a change in a majority of
CEL-SCI's directors.
The Employment Agreement will also terminate upon the death of Mr. de
Clara, Mr. de Clara's physical or mental disability, the conviction of Mr. de
Clara for any crime involving fraud, moral turpitude, or CEL-SCI's property, or
a breach of the Employment Agreement by Mr. de Clara. If the Employment
Agreement is terminated for any of these reasons, Mr. de Clara, or his legal
representatives, as the case may be, will be paid the salary provided by the
Employment Agreement through the date of termination.
52
Effective September 1, 2003, CEL-SCI entered into a three-year employment
agreement with Mr. Kersten. The employment agreement provides that during the
term of the employment agreement CEL-SCI will pay Mr. Kersten an annual salary
of $370,585. In the event there is a change in the control of CEL-SCI, the
agreement allows Mr. Kersten to resign from his position at CEL-SCI and receive
a lump-sum payment from CEL-SCI equal to 24 months salary. For purposes of the
employment agreement a change in the control of CEL-SCI means: (1) the merger of
CEL-SCI with another entity if after such merger the shareholders of CEL-SCI do
not own at least 50% of voting capital stock of the surviving corporation; (2)
the sale of substantially all of the assets of CEL-SCI; (3) the acquisition by
any person of more than 50% of CEL-SCI's common stock; or (4) a change in a
majority of CEL-SCI's directors which has not been approved by the incumbent
directors.
The Employment Agreement will also terminate upon the death of Mr.
Kersten, Mr. Kersten's physical or mental disability, willful misconduct, an act
of fraud against CEL-SCI, or a breach of the Employment Agreement by Mr.
Kersten. If the Employment Agreement is terminated for any of these reasons Mr.
Kersten, or his legal representatives, as the case may be, will be paid the
salary provided by the Employment Agreement through the date of termination.
Compensation Committee Interlocks and Insider Participation
-----------------------------------------------------------
CEL-SCI has a compensation committee comprised of all of CEL-SCI's
directors, with the exception of Mr. Kersten. During the year ended September
30, 2005, Mr. de Clara was the only officer participating in deliberations of
CEL-SCI's compensation committee concerning executive officer compensation.
During the year ended September 30, 2005, no director of CEL-SCI was also
an executive officer of another entity, which had an executive officer of
CEL-SCI serving as a director of such entity or as a member of the compensation
committee of such entity.
Stock Options
-------------
The following tables set forth information concerning the options granted
during the fiscal year ended September 30, 2005, to the persons named below, and
the fiscal year-end value of all unexercised options (regardless of when
granted) held by these persons.
Options Granted During Fiscal Year Ended September 30, 2005
-----------------------------------------------------------
Potential Realizable
% of Total Value at Assumed
Options Annual Rates of Stock
Granted to Exercise Price Appreciation
Options Employees in Price Per Expiration for Option Term (1)
Name Granted (#) Fiscal Year Share Date 5% 10%
------ ----------- ------------ --------- ---------- ----- -----
Maximilian de Clara 50,000 11.16% $0.48 9/21/2015 $12,007 $24,014
Geert R. Kersten 50,000 11.16% $0.48 9/21/2015 $12,007 $24,014
Patricia B. Prichep 30,000 6.70% $0.48 9/21/2015 $ 7,204 $14,408
Eyal Talor, Ph.D. 30,000 6.70% $0.48 9/21/2015 $ 7,204 $14,408
Daniel Zimmerman,
Ph.D. 30,000 6.70% $0.48 9/21/2015 $ 7,204 $14,408
John Cipriano 30,000 6.70% $0.48 9/21/2015 $ 7,204 $14,408
53
(1) The potential realizable value of the options shown in the table assuming
the market price of CEL-SCI's Common Stock appreciates in value from the
date of the grant to the end of the option term at 5% or 10%.
Option Exercises and Year-End Option Values
Value (in $) of
Unexercised
Number of In-the-Money
Unexercised Options at Fiscal
Shares Options (3) Year-End (4)
Acquired On Value Exercisable/ Exercisable/
Name Exercise (1) Realized (2) Unexercisable Unexercisable
---- ------------ ------------ ------------- -------------
Maximilian de Clara -- -- 939,999 / 274,999 $95,833 / 47,917
Geert R. Kersten -- -- 2,794,667 / 713,333 $315,000 / $157,500
Patricia Prichep -- -- 886,334 / 256,666 $103,667 / $48,333
Eyal Talor -- -- 613,277 / 188,055 $69,361 / 31,181
Daniel Zimmerman -- -- 611,001 / 193,999 $72,334 / 32,667
John Cipriano -- -- 40,001 / 109,999 $ -- / $ 0
(1) The number of shares received upon exercise of options during the fiscal
year ended September 30, 2005.
(2) With respect to options exercised during CEL-SCI's fiscal year ended
September 30, 2005, the dollar value of the difference between the option
exercise price and the market value of the option shares purchased on the
date of the exercise of the options.
(3) The total number of unexercised options held as of September 30, 2005,
separated between those options that were exercisable and those options
that were not exercisable.
(4) For all unexercised options held as of September 30, 2005, the market value
of the stock underlying those options as of September 30, 2005.
Stock Option and Bonus Plans
----------------------------
CEL-SCI has Incentive Stock Option Plans, Non-Qualified Stock Option Plans
and Stock Bonus Plans. All Stock Option and Bonus Plans have been approved by
the stockholders. A summary description of these Plans follows. In some cases
these Plans are collectively referred to as the "Plans".
Incentive Stock Option Plan. The Incentive Stock Option Plans authorize
the issuance of shares of CEL-SCI's common stock to persons who exercise options
granted pursuant to the Plan. Only Company employees may be granted options
pursuant to the Incentive Stock Option Plan.
To be classified as incentive stock options under the Internal Revenue
Code, options granted pursuant to the Plans must be exercised prior to the
following dates:
54
(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 the Committee but cannot be less than the market
price of CEL-SCI's Common Stock on the date the option is granted.
Stock Bonus Plan. Under the Stock Bonus Plans shares of CEL-SCI's common
stock may be issued to CEL-SCI's employees, directors, officers, consultants and
advisors, provided however that bona fide services must be rendered by
consultants or advisors and such services must not be in connection with the
offer or sale of securities in a capital-raising transaction.
Other Information Regarding the Plans. The Plans are administered by
CEL-SCI's Compensation Committee ("the Committee"), each member of which is a
director of the Company. The members of the Committee were selected by CEL-SCI's
Board of Directors and serve for a one-year tenure and until their successors
are elected. A member of the Committee may be removed at any time by action of
the Board of Directors. Any vacancies which may occur on the Committee will be
filled by the Board of Directors. The Committee is vested with the authority to
interpret the provisions of the Plans and supervise the administration of the
Plans. In addition, the Committee is empowered to select those persons to whom
55
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 sets forth certain information, as of August 15,
2006, 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.
56
Total Shares
Shares Reserved for Shares Remaining
Reserved Outstanding Issued as Options/Shares
Name of Plan Under Plans Options Stock Bonus Under Plans
------------ ----------- ------------ ----------- --------------
Incentive Stock Option
Plans 6,100,000 3,969,433 N/A 1,989,316
Non-Qualified Stock
Option Plans 9,760,000 6,065,362 N/A 2,018,005
Stock Bonus Plans 3,940,000 N/A 1,540,864 2,399,136
Of the shares issued pursuant to CEL-SCI's Stock Bonus Plans 803,748
shares were issued as part of CEL-SCI's contribution to its 401(k) plan.
The following table shows the weighted average exercise price of the
outstanding options granted pursuant to the Company's Incentive and
Non-Qualified Stock Option Plans as of September 30, 2005, CEL-SCI's most recent
fiscal year end. CEL-SCI's Incentive and Non-Qualified Stock Option Plans have
been approved by CEL-SCI's shareholders.
Number of Securities
Number Remaining Available
of Securities For Future Issuance
to be Issued Weighted-Average Under Equity
Upon Exercise Exercise Price of Compensation Plans,
of Outstanding of Outstanding Excluding Securities
Plan Category Options (a) Options Reflected in Column (a)
------------- -------------- ----------------- -----------------------
Incentive Stock Option Plans 3,972,633 $0.67 1,999,115
Non-Qualified Stock Option Plans 6,215,363 $0.66 2,018,005
PRINCIPAL SHAREHOLDERS
The following table shows, as of August 15, 2006, information with respect
to the only persons owning beneficially 5% or more of the outstanding Common
Stock and the number and percentage of outstanding shares owned by each director
and officer and by the officers and directors as a group. Unless otherwise
indicated, each owner has sole voting and investment powers over his shares of
Common Stock.
Name and Address Number of Shares (1) Percent of Class (3)
---------------- ---------------- ----------------
Maximilian de Clara 1,283,076 1.6%
Bergstrasse 79
6078 Lungern,
Obwalden, Switzerland
Geert R. Kersten 6,224,392 (2) 7.3%
8229 Boone Blvd., Suite 802
Vienna, VA 22182
57
Name and Address Number of Shares (1) Percent of Class (3)
---------------- ---------------- ----------------
Patricia B. Prichep 1,635,459 2.0%
8229 Boone Blvd., Suite 802
Vienna, VA 22182
Eyal Talor, Ph.D. 1,199,537 1.5%
8229 Boone Blvd., Suite 802
Vienna, VA 22182
Daniel H. Zimmerman, Ph.D. 1,197,635 1.5%
8229 Boone Blvd., Suite 802
Vienna, VA 22182
John Cipriano 124,671 0.1%
8229 Boone Blvd., Suite 802
Vienna, VA 22182
Alexander G. Esterhazy 198,333 0.2%
20 Chemin du Pre-Poiset
CH- 1253 Vandoeuvres
Geneve, Switzerland
C. Richard Kinsolving 427,424 0.5%
P.O. Box 20193
Bradenton, FL 34204-0193
Peter R. Young, Ph.D. 199,601 0.2%
1247 Dodgeton Drive
Frisco, TX 75034-1432
All Officers and Directors 12,490,128 13.9%
as a Group (9 persons)
* Less than 1%
(1) Includes shares issuable prior to October 31, 2006 upon the exercise of
options or warrants granted to the following persons:
Options or Warrants Exercisable
Name Prior to October 31, 2006
---- ------------------------------------
Maximilian de Clara 1,164,999
Geert R. Kersten 3,458,001
Patricia B. Prichep 1,104,834
Eyal Talor, Ph.D. 764,666
Daniel H. Zimmerman, Ph.D. 768,334
John Cipriano 90,001
Alexander G. Esterhazy 198,333
C. Richard Kinsolving, Ph.D. 358,334
58
Peter R. Young, Ph.D. 185,000
(2) Amount includes shares held in trust for the benefit of Mr. Kersten's minor
children. Geert R. Kersten is the stepson of Maximilian de Clara.
(3) Amount includes shares referred to in (1) above but excludes shares which
may be issued upon the exercise or conversion of other options, warrants
and other convertible securities previously issued by CEL-SCI.
SELLING SHAREHOLDERS AND PLAN OF DISTRIBUTION
The owners of the Series K notes and the Series K warrants, are referred
to in this prospectus as the "selling shareholders". CEL-SCI will not receive
any proceeds from the sale of the shares by the selling shareholders.
The names of and the shares to be sold by the selling shareholders are:
Shares Which Shares Which
May be May be Shares
Acquired Upon Acquired Upon Received as Owner-
Conversion of Exercise of Total of Payment of ship
Series K Series K Columns Principal After
Name Notes Warrants A and B or Interest Offering
----- -------------- ------------- -------- ------------ --------
A B
Iroquois Master Fund Ltd. 2,325,581 1,162,791 3,488,372 (1) --
Smithfield Fiduciary LLC 1,162,791 581,395 1,744,186 (1) --
Castlerigg Master
Investments Ltd. 1,162,791 581,395 1,744,186 (1) --
Portside Growth and
Opportunities Fund 697,674 348,837 1,046,511 (1) --
Bristol Investment Fund, Ltd. 697,674 348,837 1,046,511 (1) --
Cranshire Capital, LP 581,395 290,698 872,093 (1) --
Rockmore Investment
Master Fund Ltd 581,395 290,698 872,093 (1) --
Longview Fund, LP 581,395 290,698 872,093 (1) --
Nite Capital, LP 465,116 232,558 697,674 (1) --
Crescent International Ltd. 465,116 232,558 697,674 (1) --
Truk Opportunity Fund, LLC 423,256 211,628 634,884 (1) --
59
Truk International Fund, LP 41,860 20,930 62,790 (1) --
Otago Partners, LLC 232,558 116,279 348,837 (1) --
Paragon Capital LP 232,558 116,279 348,837 (1) --
Maxim Partners LLC (2) -- 386,047 386,047 (1) --
(1) At CEL-SCI's election, and under the conditions described in the section of
the prospectus captioned "Description of Securities", CEL-SCI may use
shares of its common stock to make interest or principal payments on the
Series K notes. The actual number of shares which may be issued as payment
of interest or principal cannot be predicted at this time and will depend
upon a variety of factors, including the dates, if any, any of the notes
are converted, the principal amounts of notes which are converted and
CEL-SCI's decision, or ability, to pay interest or principal with shares of
its common stock.
(2) Maxim Group, LLC acted as the placement agent in connection with the
private placement of the Series K notes and warrants and received a cash
fee of $498,000 and warrants to purchase an aggregate of 386,047 shares of
common stock. Maxim Group LLC assigned its warrants to Maxim Partners LLC.
Iroquois Master Fund Ltd. Joshua Silverman has voting control and
investment decision over securities held by Iroquois Capital, LP. Mr. Silverman
disclaims beneficial ownership of the shares held by Iroquois Capital, LP.
Smithfield Fiduciary LLC. Highbridge Capital Management, LLC is the trading
manager of Smithfield Fiduciary LLC and consequently has voting control and
investment discretion over securities held by Smithfield Fiduciary LLC. Glenn
Dubin and Henry Swieca control Highbridge Capital Management, LLC and have
voting and investment control over the securities held by Smithfield Fiduciary
LLC. Each of Highbridge Capital Management, LLC, Glenn Dubin and Henry Swieca
disclaims beneficial ownership of the securities held by Smithfield Fiduciary
LLC.
Castlerigg Master Investments Ltd. Sandell Asset Management Corp. ("SAMC"),
is the investment manager of Castlerigg Master Investments Ltd. ("Master").
Thomas Sandell is the controlling person of SAMC and may be deemed to share
beneficial ownership of the shares beneficially owned by Master. Castlerigg
International Ltd. ("Castlerigg International") is the controlling shareholder
of Castlerigg International Holdings Limited ("Holdings"). Holdings is the
controlling shareholder of Master. Each of Holdings and Castlerigg International
may be deemed to share beneficial ownership of the shares beneficially owned by
Castlerigg Master Investments. SAMC, Mr. Sandell, Holdings and Castlerigg
International each disclaims beneficial ownership of the securities with respect
to which indirect beneficial ownership is described.
Portside Growth and Opportunity Fund. Ramius Capital Group, L.L.C. ("Ramius
Capital") is the investment advisor of Portside Growth and Opportunity Fund
("Portside") and consequently has voting control and investment discretion over
securities held by Portside. Ramius Capital disclaims beneficial ownership of
the shares held by Portside. Peter A. Cohen, Morgan B. Stark, Thomas W. Stauss
and Jeffrey M. Solomon are the sole managing members of C4S & Co., L.L.C., the
sole managing member of Ramius Capital. As a result, Messers. Cohen, Strauss and
Solomon may be considered beneficial owners of any shares deemed to be
beneficially owned by Ramius Capital. Messrs. Cohen, Stark, Strauss and Solomon
disclaim beneficial ownership of these shares.
Bristol Investment Fund, Ltd. Bristol Capital Advisors, LLC ("BCA") is the
investment advisor to Bristol Investment Fund, Ltd. ("Bristol"). Paul Kessler is
the manager of BCA and as such has voting and investment control over the
securities held by Bristol. Mr. Kessler disclaims beneficial ownership of these
securities.
Cranshire Capital, L.P. Mitchell P. Kopin, the president of Downview
Capital, Inc., the general partner of Cranshire Capital, L.P, has sole voting
control and investment discretion over securities held by Cranshire Capital,
60
L.P. Each of Mitchell P. Kopin and Downview Capital, Inc. disclaims beneficial
ownership of the shares held by Cranshire Capital, L.P.
Rockmore Investment Master Fund Ltd. Bruce Bernstein has voting control
and investment decision over securities held by Rockmore Investment Master Fund
Ltd. Mr. Bernstein disclaims beneficial ownership of the shares held by Rockmore
Investment Master Fund Ltd.
Longview Fund, LP is a private investment fund that is in the business of
investing in publicly-traded securities for its own accounts and is structured
as a limited partnership whose limited partners are the investors in the fund.
The General Partner of the fund is Viking Asset Management, LLC, a California
limited liability company which manages the operations of the fund. Peter T.
Benz is the managing member of Viking Asset Management, LLC. As the control
person of the shares owned by Longview Fund, LP, Peter T. Benz may be viewed as
the beneficial owner of such shares pursuant to Rule 13d-3 under the Securities
Exchange Act of 1934..
Nite Capital, LP. Keith Goodman, Manager of the General Partner of Nite
Capital, LP has voting control and investment discretion over securities held by
Nite Capital, LP. Mr. Goodman disclaims beneficial ownership of the shares held
by Nite Capital, LP.
Crescent International Ltd. Maxi Brezzi and Bachir Taleb-Ibrahimi, in
their capacity as managers of Cantara (Switzerland) SA, the investment advisor
to Crescent International, Ltd., have voting control and investment discretion
over the shares owned by Crescent International, Ltd. Messrs, Brezzi and
Taleb-Ibrahimi disclaim beneficial ownership of such shares.
Truk Opportunity Fund, LLC. Michael E. Fein and Stephen E. Saltzstein, as
principals of Atoll Asset Management, LLC, the Managing Member of Truk
Opportunity Fund, LLC, exercise investment and voting control over the
securities owned by Truk Opportunity Fund, LLC. Both Mr. Fein and Mr. Saltzstein
disclaim beneficial ownership of the securities owned by Truk Opportunity Fund,
LLC.
Truk International Fund, LP. Michael E. Fein and Stephen E. Saltzstein, as
principals of Atoll Asset Management, LLC, the Managing Member of Truk
International Fund, LP, exercise investment and voting control over the
securities owned by Truk International Fund, LP. Both Mr. Fein and Mr.
Saltzstein disclaim beneficial ownership of the securities owned by Truk
International Fund, LP.
Otago Partners, LLC Lindsay A. Rosenwald, M.D., is the managing member of
Otago Partners, LLC. Dr. Rosenwald is also the sole shareholder and Chairman of
Paramount BioCapital, Inc., an NASD Member broker dealer, and Paramount
BioCapital Asset Management, Inc. an investment advisor registered with the SEC.
Paragon Capital LP is controlled by Alan P. Donenfeld.
Maxim Partners LLC. Michael Rabinowitz, James P. Orazio and Edward L. Rose
have investement control over these warrants. Maxim Group LLC, an affiliate of
Maxim Partners LLC, served as placement agent in connection with the sale of the
Series K notes and warrants.
The number of shares issuable upon the payment of interest or principal on
the Series K notes, the conversion of the Series K notes, or the exercise of the
Series K warrants are subject to adjustment under those conditions explained in
the section of the prospectus entitled "Description of Securities - Series K
61
Notes and Warrants". So that additional shares will be available for sale if
there is any adjustment to the number of shares issuable to the holders of the
Series K notes or warrants, the registration statement, of which this prospectus
is a part, has registered 26,213,952 shares of CEL-SCI's common stock for sale
by the selling shareholders.
Each Series K note holder is prohibited from converting the notes to the
extent that such conversion would result in such holder, together with any
affiliate of the holder, beneficially owning in excess of 4.999% of the
outstanding shares of CEL-SCI's common stock following such conversion. This
restriction may be waived by each holder on not less than 61 days' notice to
CEL-SCI. However, the 4.999% limitation would not prevent each note holder from
acquiring and selling in excess of 4.999% of CEL-SCI's common stock through a
series of acquisitions and sales so long as the holder never beneficially owns
more than 4.999% of CEL-SCI's common stock at any one time.
Each Series K warrant holder is prohibited from exercising the warrants to
the extent that such exercise would result in such holder, together with any
affiliate of the warrant holder, beneficially owning in excess of 4.999% of the
outstanding shares of CEL-SCI's common stock following such exercise. This
restriction may be waived by each holder on hot less than 61 day's notice to
CEL-SCI. However, the 4.999% limitation would not prevent each warrant holder
from acquiring and selling in excess of 4.999% CEL-SCI's common stock through a
series of acquisitions and sales under the warrants so long as the warrant
holder never beneficially owns more than 4.999% of CEL-SCI's common stock at any
one time.
Manner of Sale.
The selling stockholders may, from time to time, sell any or all of their
shares of common stock on any stock exchange, market or trading facility on
which the shares are traded or in private transactions. These sales may be at
fixed or negotiated prices. The selling stockholders may use any one or more of
the following methods when selling shares:
o ordinary brokerage transactions and transactions in which the
broker-dealer solicits purchasers;
o block trades in which the broker-dealer will attempt to sell the
shares as agent but may position and resell a portion of the block as
principal to facilitate the transaction;
o purchases by a broker-dealer as principal and resale by the
broker-dealer for its account;
o an exchange distribution in accordance with the rules of the
applicable exchange;
o privately negotiated transactions;
o short sales;
o broker-dealers may agree with the selling stockholders to sell a
specified number of such shares at a stipulated price per share;
62
o a combination of any such methods of sale; and
o any other method permitted pursuant to applicable law.
The selling stockholders may also sell shares under Rule 144 under the
Securities Act, if available, rather than under this prospectus.
The selling stockholders may also engage in short sales against the box,
puts and calls and other transactions in our securities or derivatives of our
securities and may sell or deliver shares in connection with these trades.
The selling stockholders may sell shares of common stock short and deliver
shares of common stock covered by this prospectus to close out short positions
and to return borrowed shares in connection with such short sales.
Broker-dealers engaged by the selling stockholders may arrange for other
brokers-dealers to participate in sales. Broker-dealers may receive commissions
or discounts from the selling stockholders (or, if any broker-dealer acts as
agent for the purchaser of shares, from the purchaser) in amounts to be
negotiated. The selling stockholders do not expect these commissions and
discounts to exceed what is customary in the types of transactions involved. Any
profits on the resale of shares of common stock by a broker-dealer acting as
principal might be deemed to be underwriting discounts or commissions under the
Securities Act. Discounts, concessions, commissions and similar selling
expenses, if any, attributable to the sale of shares will be borne by a selling
stockholder. The selling stockholders may agree to indemnify any agent, dealer
or broker-dealer that participates in transactions involving sales of the shares
if liabilities are imposed on that person under the Securities Act.
The selling stockholders may from time to time pledge or grant a security
interest in some or all of the shares of common stock owned by them and, if they
default in the performance of their secured obligations, the pledgees or secured
parties may offer and sell the shares of common stock from time to time under
this prospectus after we have filed an amendment to this prospectus under Rule
424(b)(3) or other applicable provision of the Securities Act of 1933 amending
the list of selling stockholders to include the pledgee, transferee or other
successors in interest as selling stockholders under this prospectus.
The selling stockholders also may transfer the shares of common stock in
other circumstances, in which case the transferees, pledgees or other successors
in interest will be the selling beneficial owners for purposes of this
prospectus and may sell the shares of common stock from time to time under this
prospectus after we have filed an amendment to this prospectus under Rule
424(b)(3) or other applicable provision of the Securities Act of 1933 amending
the list of selling stockholders to include the pledgee, transferee or other
successors in interest as selling stockholders under this prospectus.
The selling stockholders and any broker-dealers or agents that are
involved in selling the shares of common stock may be deemed to be
"underwriters" within the meaning of the Securities Act in connection with such
sales. In such event, any commissions received by such broker-dealers or agents
and any profit on the resale of the shares of common stock purchased by them may
be deemed to be underwriting commissions or discounts under the Securities Act.
63
We are required to pay all fees and expenses incident to the registration
of the shares of common stock. We have agreed to indemnify the selling
stockholders against certain losses, claims, damages and liabilities, including
liabilities under the Securities Act.
The selling stockholders have advised us that they have not entered into
any agreements, understandings or arrangements with any underwriters or
broker-dealers regarding the sale of their shares of common stock, nor is there
an underwriter or coordinating broker acting in connection with a proposed sale
of shares of common stock by any selling stockholder. If we are notified by any
selling stockholder that any material arrangement has been entered into with a
broker-dealer for the sale of shares of common stock, if required, we will file
a supplement to this prospectus. If the selling stockholders use this prospectus
for any sale of the shares of common stock, they will be subject to the
prospectus delivery requirements of the Securities Act.
The anti-manipulation rules of Regulation M under the Securities Exchange
Act of 1934 may apply to sales of our common stock and activities of the selling
stockholders.
Payment of Interest or Principal With Shares of Common Stock
By means of this prospectus CEL-SCI may also issue shares of its common
stock to the holders of the Series K notes as payment of interest and principal.
See "Description of Securities - Series K Notes and Warrants" for more
information concerning the conditions involving the issuance of these shares.
See "Description of Securities" for more detailed information concerning
the circumstances relating to the payment of interest or principal with shares
of common stock, notes and warrants.
DESCRIPTION OF SECURITIES
Common Stock
------------
CEL-SCI is authorized to issue 200,000,000 shares of common stock, (the
"common stock"). Holders of common stock are each entitled to cast one vote for
each share held of record on all matters presented to shareholders. Cumulative
voting is not allowed; hence, the holders of a majority of the outstanding
common stock can elect all directors.
Holders of common stock are entitled to receive such dividends as may be
declared by the Board of Directors out of funds legally available therefor and,
in the event of liquidation, to share pro rata in any distribution of CEL-SCI's
assets after payment of liabilities. The board is not obligated to declare a
dividend. It is not anticipated that dividends will be paid in the foreseeable
future.
Holders of common stock do not have preemptive rights to subscribe to
additional shares if issued by CEL-SCI. There are no conversion, redemption,
sinking fund or similar provisions regarding the common stock . All of the
outstanding shares of Common stock are fully paid and non-assessable.
64
Preferred Stock
---------------
CEL-SCI is authorized to issue up to 200,000 shares of preferred stock.
CEL-SCI's Articles of Incorporation provide that the Board of Directors has the
authority to divide the preferred stock into series and, within the limitations
provided by Colorado statute, to fix by resolution the voting power,
designations, preferences, and relative participation, special rights, and the
qualifications, limitations or restrictions of the shares of any series so
established. As the Board of Directors has authority to establish the terms of,
and to issue, the preferred stock without shareholder approval, the preferred
stock could be issued to defend against any attempted takeover of CEL-SCI.
Series K Notes and Warrants
---------------------------
On August 4, 2006, CEL-SCI sold Series K convertible notes, plus Series K
warrants, to a group of private investors for $8,300,000. The notes bear
interest annually at the greater of 8% or the six months LIBOR plus 3% per year.
The Notes are due and payable on August 4, 2011 and are secured by substantially
all of CEL-SCI's assets.
Interest is payable quarterly with the first interest payment due on
September 30, 2006. Beginning March 4, 2007 CEL-SCI is required to make monthly
payments of $207,500 toward the principal amount of the Notes.
At the holder's option the Series K notes are convertible into shares of
CEL-SCI's common stock equal in number to the amount determined by dividing each
$1,000 of note principal to be converted by the Conversion Price. Initially, the
Conversion Price is $0.86.
At CEL-SCI's election, interest or principal may be paid in CEL-SCI's
common stock. In the event CEL-SCI elects to pay interest or principal in shares
of its common stock, the number of shares of common stock to be issued to each
holder will be determined by dividing the amount payable by the lower of the
Conversion Price (as it may be adjusted in accordance with the terms of the
note), or the Market Price as of the applicable payment date,
CEL-SCI may not use its common stock to pay interest or principal unless
each of the following conditions is satisfied: (i) the number of authorized but
unissued and otherwise unreserved shares of common stock is sufficient for the
issuance; (ii) the shares of common stock to be issued in payment for principal
and interest may be sold by the Holder pursuant to an effective Registration
Statement covering the shares or, in the alternative, all the shares may be sold
without volume restrictions pursuant to Rule 144(k); (iii) CEL-SCI's common
stock is listed (and is not suspended from trading) on the American Stock
Exchange and the shares of common stock are approved for listing on the American
Stock Exchange upon issuance; (iv) CEL-SCI is not the subject of any bankruptcy
proceeding; (v) CEL-SCI is not in default with respect to any material
obligation in its agreements with the investors which purchased the convertible
notes; and (vi) no public announcement of a proposed change in the control of
CEL-SCI has occurred that has not been consummated.
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
65
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
reduced to equal the amount determined by the following formula:
CP x (S1 + S2) = NCP
----------------
S3
Where:
CP = the Conversion Price in effect immediately prior to the
issuance of common stock or securities convertible into common
stock
S1 = the sum of the number of shares of CEL-SCI's common stock
outstanding immediately prior to the issuance;
S2 = the number of shares of CEL-SCI's common stock that the
price paid for the common stock issued (or the lowest price at
which securities are convertible into CEL-SCI's common stock)
would purchase at the average closing price of CEL-SCI's
common stock over the five trading days prior to the sale of
the shares
S3 = the number of shares of common stock outstanding, or which
would be outstanding if all convertible securities were
converted into shares of CEL-SCI's common stock, immediately
after the issuance.
NCP = New Conversion Price
However, the Conversion Price will not be adjusted as the result of shares
issued in connection with a Permitted Financing. A Permitted Financing involves
shares of common stock issued or sold:
o in connection with a bona fide joint venture, strategic partnership,
or strategic alliance, the primary purpose of which is not to raise
cash;
o upon the exercise of options or the issuance of common stock to
CEL-SCI's employees, officers, directors, consultants and vendors in
accordance with the Company's stock option, stock bonus or similar
plans.;
o to key officers of CEL-SCI in lieu of their respective salaries.
o pursuant to the conversion or exercise of securities which were
outstanding prior to August 4, 2006;
o pursuant to a firm commitment underwritten public offering in an
amount greater than $15,000,000;
66
The Conversion Price will also be proportionately adjusted in the event of
any stock splits.
So long as the Series K notes are outstanding CEL-SCI may not:
o declare or pay any dividends (other than a stock dividend or stock
split) or make any distributions to any holders of its common stock;
o purchase or otherwise acquire for value any of its capital stock;
o become obligated on any debt that is senior or equal in any respect to
CEL-SCI's obligations under the Series K Notes, other than
indebtedness secured by purchase money security interests (which will
be senior only as to the underlying assets purchased) or indebtedness
under capital lease obligations (which will be senior only as to the
assets leased);
o issue securities convertible into common stock with a conversion price
or a number of shares issuable upon conversion that floats or is
subject to adjustment based upon the market price of CEL-SCI's common
stock.
Upon the occurrence of any of the following events CEL-SCI is required to
collectively pay the holders of the Series K notes $124,500 in cash at the time
of the occurance and each month that the occurrence continues:
o the effectiveness of the Registration Statement, of which this
prospectus is a part, lapses for any reason or the Registration
Statement is unavailable to the note holders and the lapse or
unavailability continues for a period of three or more consecutive
trading days, or five trading days which need not be consecutive, in
any twelve month period;
o the suspension from listing or the failure of CEL-SCI's common stock
to be listed on the American Stock Exchange for a period of three
consecutive trading days or seven trading days, which need not be
consecutive, in any twelve month period;
o the Series K warrants may not be exercised for any reason;
The $124,500 referred to above will be increased to $166,000 if any event
listed above occurs on or after February 1, 2007.
CEL-SCI will not have any liability when the shares of common stock issued
or issuable upon the conversion of the Series K Notes or the exercise of the
Series K Warrants can be sold pursuant to Rule 144(k) or to any note holder
which requires CEL-SCI to purchase the notes in an event of default.
The Series K warrants allow the note holders to initially purchase up to
5,211,628 shares of CEL-SCI's common stock at a price of $0.95 per share at any
time between February 4, 2007 and February 4, 2012.
67
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 the following formula:
EP x (S1 + S2) = NEP
----------------
S3
Where:
EP = the Exercise Price in effect immediately prior to the issuance
of common stock or securities convertible into common stock
S1 = the sum of the number of shares of CEL-SCI's common stock
outstanding immediately prior to the issuance;
S2 = the number of shares of CEL-SCI's common stock that the price
paid for the common stock issued (or the lowest price at which
securities are convertible into CEL-SCI's common stock) would
purchase at the average closing price of CEL-SCI's common stock
over the five trading days prior to the sale of the shares
S3 = the number of shares of common stock outstanding, or which would
be outstanding if all convertible securities were converted into
shares of CEL-SCI's common stock, immediately after the issuance.
NEP = New Exercise Price.
If the warrant exercise price is decreased, the number of shares of common
stock issuable upon the exercise of the warrant will be increased according to
the following formula:
WS x EP1 = NWS
---
EP2
Where:
WS = The number of shares issuable upon the exercise of warrants
based upon the exercise price prior to adjustment.
EP1 = The old exercise price of the warrants.
EP2 = The new exercise price of the warrants.
68
NWS = The number of shares of CEL-SCI's common stock issuable based
upon the new exercise price of the warrants.
The exercise price of the warrants, as well as the shares issuable upon
the exercise of the warrants, will also be proportionately adjusted in the event
of any stock splits.
However, neither the exercise price of the Series K warrants nor the
shares issuable upon the exercise of the warrant will be adjusted as the result
of shares issued in connection with a Permitted Financing.
Any of the following are an event of default:
o CEL-SCI fails to make any interest or principal payment when due;
o CEL-SCI fails for any reason to deliver a certificate within five
trading days after delivery of the certificate is required pursuant to
any agreement with the note holders;
o the conversion or exercise rights of the note or warrant holders is
suspended for any reason;
o CEL-SCI fails to have available a sufficient number of authorized but
unissued shares of common stock available for issuance upon the
conversion of the notes or the exercise of the warrants;
o CEL-SCI's common stock is not listed on the American Stock Exchange or
other public trading market
o the effectiveness of the Registration Statement, of which this
prospectus is a part, lapses for any reason
o the holders of the notes and warrants are not permitted to sell any
shares under the Registration Statement, in either case, for three or
more consecutive trading days or five trading days (which need not be
consecutive trading days in any twelve month period) and the common
stock issued or issuable upon the conversion of the notes cannot be
sold pursuant to Rule 144(k);
o CEL-SCI breaches any representation or warranty or covenant or
defaults in the timely performance of any other obligation in its
agreement with the note holders and the breach or default continues
uncured for a period of 20 days after the date on which notice of the
breach or default is first given to CEL-SCI.
o CEL-SCI defaults in any of its obligations under any other note or
credit agreement or long term lease in an amount exceeding $1,000,000,
and the default continues for a period of five days and results in the
indebtedness becoming payable prior to the date on which it would
otherwise become payable;
69
o a judgment or judgments for the payment of money in excess of $250,000
are rendered against CEL-SCI and are not bonded, discharged or stayed
pending appeal within sixty (60) days after the entry of the judgment,
or are not discharged within sixty (60) days after the expiration of
the stay; provided, however, that any judgment which is covered by
insurance or an indemnity from a creditworthy party shall not be
included in calculating the $250,000 amount; or
o CEL-SCI files for protection from its creditors under the federal
bankruptcy code or a third party files an involuntary bankruptcy
petition against CEL-SCI.
At any time after an event of default, any holder has the option to
require CEL-SCI to repurchase all or any portion of:
o the outstanding principal amount of the note, at a price equal to the
greater of 115% of the outstanding principal, plus all accrued but
unpaid interest, or the Event Equity Value of the shares issuable upon
conversion of the outstanding note principal and all accrued but
unpaid interest, and
o any shares issued to the holder upon any conversion of notes, and
still owned by the holder, at a price per share equal to the Event
Equity Value for the shares.
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.
So long as the Series K notes are outstanding, the note holders have a
right to participate in any subsequent financings involving CEL-SCI.
CEL-SCI has filed a registration statement, of which this prospectus is a
part, with the Securities and Exchange Commission in order 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.
For purposes of the notes the term:
"LIBOR" means the annual rate of interest offered for deposits in U.S.
dollars which appears on page six of any relevant Telerate, Bloomberg or Reuter
page as of 11:00 a.m. London time two business days prior to the first day of
any calendar quarter.
"Event Equity Value" means 115% of the average of the VWAP for each of the
five trading days preceding the date of the notice requiring any payment by this
method.
"Market Price" means 90% of the arithmetic average of the VWAP for each
of the 20 trading days ending immediately prior to the applicable interest or
principal payment date, as the case may be.
70
"VWAP" means for any particular period the volume weighted average trading
price per share of CEL-SCI's common stock.
Maxim Group, LLC acted as the placement agent for the sale of the Series K
notes and warrants. For its services in this regard, the Maxim Group received
$498,000 in cash from CEL-SCI, plus 386,047 Series K warrants.
Warrants Held by Private Investors
----------------------------------
See "Comparative Share Data" for information concerning the terms of
warrants held by private investors.
Transfer Agent
--------------
Computershare Trust Company, Inc., of Denver, Colorado, is the transfer
agent for CEL-SCI's common stock.
EXPERTS
The financial statements for the year ended September 30, 2005 included in
this prospectus have been audited by BDO Seidman LLP, an independent registered
public accounting firm, as stated in their reports appearing herein and
elsewhere in the registration statement, and are included in reliance upon the
reports of such firm given upon their authority as experts in accounting and
auditing.
The consolidated financial statements as of September 30, 2004 and for each
of the two years in the period ended September 30, 2004, in this prospectus have
been audited by Deloitte & Touche LLP, an independent registered public
accounting firm, as stated in their report appearing herein and elsewhere in
this prospectus (which report expresses an unqualified opinion and includes an
explanatory paragraph relating to the restatement of the 2004 and 2003 financial
statements), and has been so included in reliance upon the report of such firm
given upon their authority as experts in accounting and auditing.
INDEMNIFICATION
CEL-SCI's bylaws authorize indemnification of a director, officer,
employee or agent of CEL-SCI against expenses incurred by him in connection with
any action, suit, or proceeding to which he is named a party by reason of his
having acted or served in such capacity, except for liabilities arising from his
own misconduct or negligence in performance of his duty. In addition, even a
director, officer, employee, or agent of CEL-SCI who was found liable for
misconduct or negligence in the performance of his duty may obtain such
indemnification if, in view of all the circumstances in the case, a court of
competent jurisdiction determines such person is fairly and reasonably entitled
to indemnification. Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers, or persons
controlling CEL-SCI pursuant to the foregoing provisions, CEL-SCI has been
informed that in the opinion of the Securities and Exchange Commission, such
indemnification is against public policy as expressed in the Act and is
therefore unenforceable.
71
ADDITIONAL INFORMATION
CEL-SCI is subject to the requirements of the Securities Exchange Act of
l934 and is required to file reports, proxy statements and other information
with the Securities and Exchange Commission. Copies of any such reports, proxy
statements and other information filed by CEL-SCI can be read and copied at the
Commission's Public Reference Room at 100 F. Street, N.E., Washington, D.C.
20549. The public may obtain information on the operation of the Public
Reference Room by calling the Commission at 1-800-SEC-0330. The Commission
maintains an Internet site that contains reports, proxy and information
statements, and other information regarding CEL-SCI. The address of that site is
http://www.sec.gov.
CEL-SCI will provide, without charge, to each person to whom a copy of this
prospectus is delivered, including any beneficial owner, upon the written or
oral request of such person, a copy of any or all of the documents incorporated
by reference below (other than exhibits to these documents, unless the exhibits
are specifically incorporated by reference into this prospectus). Requests
should be directed to:
CEL-SCI Corporation
8229 Boone Blvd., #802
Vienna, Virginia 22182
(703) 506-9460
CEL-SCI has filed with the Securities and Exchange Commission a
Registration Statement under the Securities Act of l933, as amended, with
respect to the securities offered by this prospectus. This prospectus does not
contain all of the information set forth in the Registration Statement. For
further information with respect to CEL-SCI and such securities, reference is
made to the Registration Statement and to the exhibits filed with the
Registration Statement. Statements contained in this prospectus as to the
contents of any contract or other documents are summaries which are not
necessarily complete, and in each instance reference is made to the copy of such
contract or other document filed as an exhibit to the Registration Statement,
each such statement being qualified in all respects by such reference. The
Registration Statement and related exhibits may also be examined at the
Commission's internet site.
72
CEL-SCI CORPORATION
Consolidated Financial Statements for the Years
Ended September 30, 2005, 2004 (as restated), and 2003 (as
restated), and
Reports of Independent Registered Public Accounting Firms
CEL-SCI CORPORATION
TABLE OF CONTENTS
Page
----
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM F-2
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM F-3
CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS
ENDED SEPTEMBER 30, 2005, 2004 (AS RESTATED), AND 2003 (AS RESTATED):
Consolidated Balance Sheets F-4
Consolidated Statements of Operations F-5
Consolidated Statements of Stockholders' Equity F-6 - F-7
Consolidated Statements of Cash Flows F-8 - F-11
Notes to Consolidated Financial Statements F-12 - F-44
F - 1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
CEL-SCI Corporation
Vienna, Virginia
We have audited the accompanying consolidated balance sheet of CEL-SCI
Corporation as of September 30, 2005 and the related consolidated statements of
operations, stockholders' equity, and cash flows for the year then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of CEL-SCI Corporation
at December 31, 2005, and the results of its operations and its cash flows for
the year ended December 31, 2005, in conformity with accounting principles
generally accepted in the United States of America.
/s/ BDO SEIDMAN LLP
Bethesda, Maryland
April 6, 2006
F - 2
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
CEL-SCI Corporation
Vienna, Virginia
We have audited the accompanying consolidated balance sheet of CEL-SCI
Corporation and subsidiary (the "Company") as of September 30, 2004, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for the years ended September 30, 2004 and 2003. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company as of September 30,
2004, and the results of its operations and its cash flows for the years ended
September 30, 2004 and 2003, in conformity with accounting principles generally
accepted in the United States of America.
As discussed in Note 2 to the consolidated financial statements, the 2004 and
2003 consolidated financial statements have been restated.
/s/ DELOITTE & TOUCHE LLP
McLean, Virginia
January 6, 2005 (April 21, 2006 as to the effects of the restatement discussed
in Note 2)
F - 3
CEL-SCI CORPORATION
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2005 AND 2004
---------------------------------------------------------------------------
ASSETS 2005 2004
(as restated,
see Note 2)
CURRENT ASSETS:
Cash and cash equivalents $ 1,957,614 $ 4,263,631
Interest and other receivables 21,164 21,256
Prepaid expenses 432,652 508,597
Deposits - 14,828
------------- -------------
Total current assets 2,411,430 4,808,312
RESEARCH AND OFFICE EQUIPMENT--Less
accumulated depreciation of $1,690,788
and $1,651,759 181,541 233,612
PATENT COSTS--Less accumulated
amortization of $816,169 and $745,321 484,553 471,886
DEPOSITS 14,828 -
------------- -------------
$ 3,092,352 $ 5,513,810
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 74,354 $ 143,300
Accrued expenses 74,619 64,360
Due to employees 22,880 5,320
Deposits held - 3,000
Derivative instruments - current portion 1,280 -
------------- -------------
Total current liabilities 173,133 215,980
Derivative instruments - noncurrent
portion 811,180 1,175,488
Deposits held 3,000 -
------------- -------------
Total liabilities 987,313 1,391,468
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value--authorized,
200,000,000 shares; issued and
outstanding, 74,494,206 and 72,147,367
shares at September 30, 2005 and 2004,
respectively 744,942 721,474
Unearned compensation - (14,237)
Additional paid-in capital 100,359,296 99,374,697
Accumulated deficit (98,999,199) (95,959,592)
------------- -------------
Total stockholders' equity 2,105,039 4,122,342
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 3,092,352 $ 5,513,810
============= =============
See notes to consolidated financial statements.
F-4
CEL-SCI CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED SEPTEMBER 30, 2005, 2004, AND
2003
--------------------------------------------------------------------------------
2005 2004 2003
(as restated, (as restated,
see Note 2) see Note 2)
---------- ------------- ------------
GRANT REVENUE AND OTHER $ 269,925 $ 325,479 $ 318,304
OPERATING EXPENSES:
Research and development (excluding
R&D depreciation of $96,442, $110,297
and $115,420 respectively,
included below) 2,229,729 1,941,630 1,915,501
Depreciation and amortization 190,420 198,269 199,117
General and administrative 1,930,543 2,310,279 2,287,019
------------ ----------- -----------
Total operating expenses 4,350,692 4,450,178 4,401,637
------------ ------------ ------------
NET OPERATING LOSS (4,080,767) (4,124,699) (4,083,333)
GAIN (LOSS) ON DERIVATIVE INSTRUMENTS 363,028 1,174,660 (2,319,005)
OTHER INCOME 625,472 - -
OTHER COSTS OF FINANCING - - (270,664)
INTEREST INCOME 52,660 51,817 52,502
INTEREST EXPENSE - (53,855) (1,365,675)
----------- ----------- -----------
NET LOSS (3,039,607) (2,952,077) (7,986,175)
============ ============ ===========
NET LOSS PER COMMON SHARE
BASIC $ (0.04) $ (0.04) $ (0.16)
DILUTED $ (0.05) $ (0.06) $ (0.19)
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING
BASIC 72,703,395 67,273,133 50,961,457
DILUTED 73,581,925 68,924,099 51,127,439
See notes to consolidated financial statements.
F-5
CEL-SCI CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(DEFICIT)
YEARS ENDED SEPTEMBER 30, 2005, 2004, AND
2003
-----------------------------------------------------------------------------------------------------------------------------------
Preferred Additional
Series E Stock Common Stock Paid-In Unearned Accumulated
Shares Amount Shares Amount Capital Compensation Deficit Total
-----------------------------------------------------------------------------------------------------------------------------------
BALANCE, October 1, 2002, as
previously reported 1,192 $ 12 37,255,142 $ 372,551 $80,871,758 $ - $(80,182,150) $1,062,171
Prior period corrections
(see Note 2) (1,192) (12) 1,432,413 (4,839,190) (3,406,789)
-------------- ----------- ---------- --------- ----------- ---------- ------------- -----------
BALANCE, October 1, 2002
(as restated, see Note 2) - - 37,255,142 372,551 82,304,171 - (85,021,340) (2,344,618)
Exercise of warrants (as
restated, see Note 2) 1,435,500 14,355 1,043,327 1,057,682
Stock issued to employees
for service 4,409,932 44,099 920,117 964,216
Stock options issued to
nonemployees for service 6,727 6,727
Stock issued to nonemployees
for service 559,089 5,591 123,100 128,691
Conversion of Preferred
Series E Stock to common stock
(as restated, see Note 2) 1,018,439 10,184 282,339 292,523
Dividends on Preferred Series
E Stock paid in common stock
(as restated, see Note 2) 97,389 974 98,650 99,624
Conversion of Series F convertible
debt (as restated, see Note 2) 979,670 9,797 206,525 216,322
Interest on Series F convertible
debt paid in common stock (as
restated, see Note 2) 22,608 226 844 1,070
Conversion of Series G
convertible debt (as restated,
see Note 2) 8,076,420 80,764 2,119,830 2,200,594
Interest on Series G convertible
debt paid in common stock (as
restated, see Note 2) 109,428 1,094 31,677 32,771
Conversion of Series H
convertible debt (as
restated, see Note 2) 3,003,929 30,039 2,562,145 2,592,184
Interest on Series H
convertible debt paid in
common stock (as restated,
see Note 2) 80,010 800 56,988 57,788
Costs for equity related
transactions (40,600) (40,600)
Sale of common stock to
Eastern Biotech (as
restated, see Note 2) 1,100,000 11,000 10,306 21,306
Exercise of stock options 6,667 67 2,133 2,200
401(k) contributions paid
in common stock 134,336 1,344 45,707 47,051
Issuance of common stock
for equity line of credit
(as restated, see Note 2) 2,877,786 28,778 842,687 871,465
Net loss (as restated,
see Note 2) (7,986,175) (7,986,175)
-------------- ----------- ---------- --------- ----------- ---------- ------------- -----------
BALANCE, SEPTEMBER 30, 2003
(as restated, see Note 2) - $ - 61,166,345 $ 611,663 $90,616,673 $ - $(93,007,515)$(1,779,179)
See notes to consolidated financial statements.
F-6
CEL-SCI CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED SEPTEMBER 30, 2005, 2004, AND
2003
-----------------------------------------------------------------------------------------------------------------------------------
Preferred Additional
Series E Stock Common Stock Paid-In Unearned Accumulated
Shares Amount Shares Amount Capital Compensation Deficit Total
-----------------------------------------------------------------------------------------------------------------------------------
BALANCE, SEPTEMBER 30, 2003
(as restated, see Note 2) - $ - 61,166,345 $ 611,663 $90,616,673 $ - $(93,007,515)$(1,779,179)
Exercise of warrants (as
restated, see Note 2) 614,520 6,145 893,277 899,422
Stock issued to employees
for service 180,959 1,810 169,630 (14,237) 157,203
Stock issued to nonemployees
for service 7,414 74 7,859 7,933
Conversion of Series H
convertible debt (as
restated, see Note 2) 179,436 1,794 184,819 186,613
Interest on Series H
convertible debt paid in
common stock (as restated,
see Note 2) 3,210 32 3,306 3,338
Exercise of stock options 213,503 2,135 103,731 105,866
Modification of employee
stock options 7,597 7,597
401(k) contributions paid
in common stock 72,495 725 51,751 52,476
Issuance of common stock
for equity line of credit
(as restated, see Note 2) 307,082 3,071 341,994 345,065
Sale of common stock (as
restated, see Note 2) 9,402,403 94,025 6,899,679 6,993,704
Costs for equity related
transactions (591,611) (591,611)
Reclassification of derivative
instruments to equity (as
restated, see Note 2) 685,992 685,992
Net loss (as restated,
see Note 2) (2,952,077) (2,952,077)
-------------- ----------- ---------- --------- ----------- ---------- ------------- -----------
BALANCE, SEPTEMBER 30, 2004
(as restated, see Note 2) - - 72,147,367 721,474 99,374,697 (14,237) (95,959,592) 4,122,342
Stock issued to nonemployees
for service 8,687 86 4,084 4,170
Exercise of stock options 200,669 2,007 47,778 49,785
Issuance of stock options
to nonemployees 7,972 7,972
401(k) contributions paid
in common stock 144,469 1,445 77,423 78,868
Issuance of common stock
for equity line of credit 743,014 7,430 359,842 367,272
Expense of unearned compensation 14,237 14,237
Private placement 1,250,000 12,500 487,500 500,000
Net loss (3,039,607) (3,039,607)
-------------- ----------- ---------- --------- ----------- ---------- ------------- -----------
BALANCE, SEPTEMBER 30, 2005 - $ - 74,494,206 $ 744,942 $100,359,296 $ - $(98,999,199) $2,150,039
============== =========== ========== ========= ============ ========== ============= ===========
See notes to consolidated financial statements.
F-7
CEL-SCI CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED SEPTEMBER 30, 2005, 2004, AND 2003
--------------------------------------------------------------------------------
2005 2004 2003
(as (as
restated, restated,
see Note 2) see Note 2)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (3,039,607) $ (2,952,077) $ (7,986,175)
Adjustments to reconcile net
loss to net cash used for
operating activities:
Depreciation and amortization 190,420 198,269 199,117
Issuance of stock options to
nonemployees for services 7,972 - 6,727
Issuance of common stock for services 4,170 165,136 1,092,907
Modification of stock options - 7,597 -
Common stock contributed to 401(k) plan 78,868 52,476 47,051
Decrease in unearned compensation 14,237 - -
Impairment loss on abandonment of patents 3,716 43,351 9,828
(Gain) loss on retired equipment 1,806 - (5,913)
Gain on sale of equipment - - (26,463)
Amortization of deferred financing costs - 16,243 385,170
Amortization of discount on note payable - - 37,500
Accretion of Series E Stock to
redemption value - - 98,791
Debt issuance discount charged to
interest expense - - 699,802
Amortization of discount on
convertible note - 22,082 62,025
(Gain) loss on derivative instruments (363,028) (1,174,660) 2,319,005
Other costs of financing, noncash
expenses - - 270,664
Changes in assets and liabilities:
Decrease (increase) in interest
and other receivables 92 25,795 (15,574)
Decrease (increase) in prepaid
expenses 75,945 (151,066) 87,752
Decrease in accounts payable (71,782) (385,952) (65,548)
Increase (decrease) in accrued
expenses 10,259 (30,055) 59,195
Increase (decrease) in due to
employees 17,560 (221,795) 197,523
Increase in deposits held - - 3,000
Decrease in deferred rent - (5,540) (15,192)
------------- ------------ ------------
Net cash used for operating activities (3,069,372) (4,390,196) (2,538,808)
------------- ------------ ------------
CASH FLOWS USED FOR INVESTING ACTIVITIES:
Proceeds from disposal of equipment - - 7,812
Purchases of equipment (65,736) (52,175) (6,905)
Expenditures for patent costs (87,966) (121,430) (93,509)
------------- ------------ ------------
Net cash used for investing activities (153,702) (173,605) (92,602)
------------- ------------ ------------
(Continued)
See notes to consolidated financial statements.
F-8
CEL-SCI CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED SEPTEMBER 30, 2005, 2004, AND 2003
--------------------------------------------------------------------------------
2005 2004 2003
(as (as
restated, restated,
see Note 2) see Note 2)
CASH FLOWS PROVIDED BY
FINANCING ACTIVITIES:
Proceeds from issuance of common stock 500,000 7,799,970 500,000
Proceeds from exercise of warrants - 291,222 269,382
Draw-downs on equity line of credit 367,272 340,000 725,000
Proceeds from exercise of stock options 49,785 105,866 2,200
Proceeds from short-term loan - - 25,000
Payment on short-term loan - - (25,000)
Payments on notes payable - (871,322) (276,122)
Proceeds from convertible debt - - 1,350,000
Costs for convertible debt transactions - - (224,419)
Costs for equity related transactions - (591,611) (40,600)
------------- ------------ -----------
Net cash provided by financing activities 917,057 7,074,125 2,305,441
------------- ------------ ------------
NET (DECREASE) INCREASE IN CASH (2,306,017) 2,510,324 (325,969)
CASH, BEGINNING OF YEAR 4,263,631 1,753,307 2,079,276
------------- ------------ ------------
CASH, END OF YEAR $ 1,957,614 $ 4,263,631 $1,753,307
============= ============ =============
(continued)
See notes to consolidated financial statements.
F-9
CEL-SCI CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED SEPTEMBER 30, 2005, 2004, AND 2003
--------------------------------------------------------------------------------
2005 2004 2003
(as (as
restated, restated,
see Note 2) see Note 2)
----------- ------------ -------------
CONVERSION OF PREFERRED STOCK INTO COMMON STOCK:
Decrease in preferred stock $ - $ - $ (292,523)
Increase in common stock - - 10,184
Increase in additional paid-in capital - - 282,339
----------- ------------ -------------
$ - $ - $ -
=========== ============ =============
COMMON STOCK IN LIEU OF CASH DIVIDENDS AND INTEREST
ON PREFERRED STOCK:
Decrease in accrued liabilities $ - $ - $ (99,625)
Increase in common stock - - 974
Increase in additional paid-in capital - - 98,651
----------- ------------ -------------
$ - $ - $ -
=========== ============ =============
CONVERSION OF CONVERTIBLE DEBT INTO COMMON STOCK:
Decrease in convertible debt $ - $ (186,613) $(5,009,100)
Increase in common stock - 1,794 120,600
Increase in additional paid-in capital - 184,819 4,888,500
----------- ------------ -------------
$ - $ - $ -
=========== ============ =============
CONVERSION OF INTEREST ON CONVERTIBLE DEBT
INTO COMMON STOCK:
Decrease in accrued liabilities $ - $ (3,338) $ (91,629)
Increase in common stock - 32 2,120
Increase in additional paid-in capital - 3,306 89,509
----------- ------------ -------------
$ - $ - $ -
=========== ============ =============
MODIFICATION OF CAMBREX NOTE:
Increase in derivative instruments $ - $ - $ 84,107
Decrease in Cambrex note - - (84,107)
----------- ------------ -------------
$ - $ - $ -
=========== ============ =============
EXERCISE OF WARRANTS
Decrease in derivative instruments $ - $ (77,900) $ (788,300)
Increase in additional paid-in capital - 77,900 788,300
----------- ------------ -------------
$ - $ - $ -
=========== ============ =============
SETTLEMENT OF DERIVATIVE INSTRUMENTS ON DRAW DOWNS
OF EQUITY LINES OF CREDIT
Decrease in derivative instruments $ - $ (5,065) $ (146,465)
Increase in additional paid-in capital - 5,065 146,465
----------- ------------ -------------
$ - $ - $ -
=========== ============ =============
See notes to consolidated financial statements. (continued)
F-10
See notes to consolidated financial statements.
CEL-SCI CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED SEPTEMBER 30, 2005, 2004, AND 2003
--------------------------------------------------------------------------------
SUPPLEMENTAL INFORMATION ON NONCASH TRANSACTIONS 2005 2004 2003
(as (as
restated, restated,
see Note 2) see Note 2)
------------ --------------------------
ISSUANCE OF WARRANTS ON SALE OF COMMON STOCK
Increase in derivative instruments $ - $ 806,266 478,694
Decrease in additional paid-in capital - (806,266) (478,694)
------------ ------------ ------------
$ - $ - $ -
============ ============ ============
EQUIPMENT COSTS INCLUDED IN ACCOUNTS PAYABLE:
Increase in research and office equipment $ (268) $ (31,728) $ (157)
Increase in accounts payable 268 31,728 157
------------ ------------ ------------
$ - $ - $ -
============ ============ ============
PATENT COSTS INCLUDED IN ACCOUNTS PAYABLE:
Increase in patent costs $ (2,568) $ (15,539) $ (11,659)
Increase in accounts payable 2,568 15,539 11,659
------------ ------------ ------------
$ - $ - $ -
============ ============ ============
SURRENDER OF DEPOSIT AND SALE OF EQUIPMENT TO
REDUCE NOTE PAYABLE:
Decrease in deposits $ - $ - $ 125,000
Decrease in research equipment, net - - 100,000
Decrease in notes payable - - (225,000)
------------ ------------ ------------
$ - $ - $ -
============ ==========================
CONVERSION OF ACCOUNTS PAYABLE INTO NOTES PAYABLE:
Decrease in accounts payable $ - $ - $ (199,928)
Increase in notes payable - - 199,928
------------ ------------ ------------
$ - $ - $ -
============ ============ ============
RECLASS OF INVENTORY TO EQUIPMENT:
Decrease in inventory $ - $ - $ 6,839
Increase in research equipment - - (6,839)
------------ ------------ ------------
$ - $ - $ -
============ ============ ============
CASHLESS EXERCISE OF WARRANTS:
Decrease in derivative instruments $ - $ (530,300) $ -
Increase in common stock - 3,698 -
Increase in additional paid-in capital - 526,602 -
------------ ------------ ------------
$ - $ - $ -
============ ============ ============
RECLASSIFICATION OF DERIVATIVE INSTRUMENTS
Decrease in derivative instruments $ - $ (685,992) $ -
Increase in additional paid-in capital - 685,992 -
------------ ------------ ------------
$ - $ - $ -
============ ============ ============
See notes to consolidated financial statements.
F-11
CEL-SCI CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 2005, 2004 and 2003
--------------------------------------------------------------------------------
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CEL-SCI Corporation (the "Company") was incorporated on March 22, 1983, in
the state of Colorado, to finance research and development in biomedical
science and ultimately to engage in marketing and selling products.
Significant accounting policies are as follows:
a. Principles of Consolidation--The consolidated financial statements
include the accounts of the Company and its wholly owned subsidiary,
Viral Technologies, Inc. (VTI). VTI discontinued its research efforts
in 2000 due to a lack of government funding. All significant
intercompany transactions have been eliminated upon consolidation.
b. Cash and Cash Equivalents--For purposes of the statements of cash
flows, cash and cash equivalents consists principally of unrestricted
cash on deposit and short-term money market funds. The Company
considers all highly liquid investments with a maturity when purchased
of less than three months, and those investments that are readily
convertible to known amounts of cash and are so close to maturity that
they bear no interest rate risk, as cash and cash equivalents.
c. Investments--Investments that may be sold as part of the liquidity
management of the Company or for other factors are classified as
available-for-sale and are carried at fair market value. Unrealized
gains and losses on such securities are reported as a separate
component of stockholders' equity. Realized gains and losses on sales
of securities are reported in earnings and computed using the specific
identified cost basis. For the years ended September 30, 2005, 2004
and 2003 there were no realized or unrealized gains or losses.
d. Prepaid Expenses--The majority of prepaid expenses consist of
manufacturing production advances and bulk purchases of laboratory
supplies to be consumed in the manufacturing of the Company's product
for clinical studies. During the year ended September 30, 2004,
$43,184 in expired (but still useable) inventory was returned to the
vendor and replaced by the vendor at no cost.
e. Research and Office Equipment--Research and office equipment is
recorded at cost and depreciated using the straight-line method over
estimated useful lives of five to seven years. Leasehold improvements
are depreciated over the shorter of the estimated useful life of the
asset or the terms of the lease. Repairs and maintenance which do not
extend the life of the asset are expensed when incurred.
f. Patents--Patent expenditures are capitalized and amortized using the
straight-line method over 17 years. In the event changes in technology
or other circumstances impair the value or life of the patent,
appropriate adjustment in the asset value and period of amortization
F-12
is made. An impairment loss is recognized when estimated future
undiscounted cash flows expected to result from the use of the asset,
and from disposition, is less than the carrying value of the asset.
The amount of the impairment loss is the difference between the
estimated fair value of the asset and its carrying value. During the
years ended September 30, 2005, 2004 and 2003, the Company recorded
patent impairment charges of $3,716, $43,351 and $9,828, respectively,
for the net book value of patents abandoned during the year. These
amounts are included in general and administrative expenses.
g. Derivative Instruments--The Company enters into financing arrangements
that consist of freestanding derivative instruments or are hybrid
instruments that contain embedded derivative features. The Company
accounts for these arrangement in accordance with Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities", ("SFAS No. 133") and Emerging
Issues Task Force Issue No. 00-19, "Accounting for Derivative
Financial Instruments Indexed to, and Potentially Settled in, a
Company's Own Stock", ("EITF 00-19"), as well as related
interpretations of these standards. In accordance with accounting
principles generally accepted in the United States ("GAAP"),
derivative instruments and hybrid instruments are recognized as either
assets or liabilities in the statement of financial position and are
measured at fair value with gains or losses recognized in earnings or
other comprehensive income depending on the nature of the derivative
or hybrid instruments. Embedded derivatives that are not clearly and
closely related to the host contract are bifurcated and recognized at
fair value with changes in fair value recognized as either a gain or
loss in earnings if they can be reliably measured. When the fair value
of embedded derivative features can not be reliably measured, the
Company measures and reports the entire hybrid instrument at fair
value with changes in fair value recognized as either a gain or loss
in earnings. The Company determines the fair value of derivative
instruments and hybrid instruments based on available market data
using appropriate valuation models, giving consideration to all of the
rights and obligations of each instrument and precluding the use the
"blockage" discounts or premiums in determining the fair value of a
large block of financial instruments. Fair value under these
conditions does not necessarily represent fair value determined using
valuation standards that give consideration to blockage discounts and
other factors that may be considered by market participants in
establishing fair value.
h. Research and Development Grant Revenues--The Company's grant
arrangements are handled on a reimbursement basis. Grant revenues
under the arrangements are recognized as grant revenue when costs are
incurred.
i. Research and Development Costs--Research and development expenditures
are expensed as incurred. The Company has an agreement with an
unrelated corporation for the production of Multikine, which is the
Company's only product source. Total research and development costs,
excluding depreciation, were $2,326,171, $2,051,927 and $2,030,921 for
the years ended September 30, 2005, 2004 and 2003.
j. Other Costs of Financing--Other costs of financing represent the
excess fair value of warrants issued in conjunction with financing
arrangements where the warrants are required to be recorded as
derivatives over the proceeds of the financing received at issuance.
F-13
k. Net Loss Per Common Share--Net loss per common share is computed by
dividing the net loss by the weighted average number of common shares
outstanding during the period. Potentially dilutive common stock
equivalents, including convertible preferred stock, convertible debt
and options to purchase common stock, were excluded from the
calculation for all periods presented as they were antidilutive.
l. Income Taxes--Income taxes are accounted for using the asset and
liability method under which deferred tax liabilities or assets are
determined based on the difference between the financial statement and
tax basis of assets and liabilities (i.e., temporary differences) and
are measured at the enacted tax rates. Deferred tax expense is
determined by the change in the liability or asset for deferred taxes.
The difference in the Company's U.S. Federal statutory income tax rate
and the Company's effective tax rate is primarily attributable to the
recording of a valuation allowance due to the uncertainty of the
amount of future tax benefits that will be realized because it is more
likely than not that future taxable income will not be sufficient to
realize such tax benefits.
m. Use of Estimates--The preparation of financial statements in
conformity with accounting principles generally accepted in the United
States of America requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates. Accounting for derivatives is based upon valuations of
derivative instrument determined using various valuation techniques
including the Black-Scholes and binomial pricing methodologies. The
Company considers such valuations to be significant estimates.
n. Recent Accounting Pronouncements--In November 2004 the Financial
Accounting Standards Board ("FASB") issued Statement of Financial
Accounting Standards ("SFAS") No. 151, "Inventory Costs, an amendment
of Accounting Research Bulletin (ARB) 43, Chapter 4, Inventory
Pricing". This statement amends ARB 43, Chapter 4 "Inventory Pricing",
to clarify accounting for abnormal amounts of idle facility expense,
freight, handling costs and wasted material. SFAS No. 151 requires
that those items be recognized as current-period charges in all
circumstances. SFAS No. 151 is effective for fiscal years beginning
after June 15, 2005. The Company does not believe that the adoption of
SFAS No. 151 will have a material effect on its financial position,
results of operations or cash flows.
In December 2004 the FASB issued SFAS No. 123R, "Share-Based Payment".
SFAS No. 123R requires companies to recognize compensation expense in
an amount equal to the fair value of the share-based payment (stock
options and restricted stock) issued to employees. 123R applies to all
transactions involving issuance of equity by a Company in exchange for
goods and services, including transactions with employees. SFAS No.
123R is effective for the first fiscal period in the fiscal year
beginning after June 15, 2005. The Company has not determined the
impact of adopting SFAS No. 123R.
On December 16, 2004, the FASB issued SFAS No. 153, "Exchange of
Nonmonetary Assets", an amendment of Accounting Principles Board
("APB") Opinion No. 29, which differed from the International
Accounting Standards Board's ("IASB") method of accounting for
exchanges of similar productive assets. Statement No. 153 replaces the
exception from fair value measurement in APB No. 29, with a general
exception from fair value measurement for exchanges of non-monetary
assets that do not have commercial substance. The Statement is to be
F-14
applied prospectively and is effective for nonmonetary asset exchanges
occurring in fiscal periods beginning after June 15, 2005. The Company
does not believe that SFAS No. 153 will have a material impact on its
results of operations or cash flows.
In March 2005, the FASB issued FIN No. 47, "Accounting for Conditional
Asset Retirement Obligations - an Interpretation of FASB Statement No.
143". The interpretation clarifies terms used in FASB Statement No.
143 and is effective no later than the end of fiscal periods ending
after December 15, 2005. The Company does not believe that FIN No. 47
will have a material impact on its results of operations or cash
flows.
In February 2006, the FASB issued SFAS No. 155, "Hybrid Instruments".
The statement amends SFAS No. 133 and SFAS No. 140, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities". The statement also resolves issues addressed in
Statement 133 Implementation Issue No. D1, "Application of Statement
133 to Beneficial Interests in Securitized Financial Assets." The
statement: a) permits fair value remeasurement for any hybrid
financial instrument that contains an embedded derivative that
otherwise would require bifurcation, b) clarifies which interest-only
strips and principal-only strips are not subject to the requirements
of SFAS No. 133, c) establishes a requirement to evaluate interests in
securitized financial assets to identify interests that are
freestanding derivatives or that are hybrid financial instruments that
contain an embedded derivative requiring bifurcation, d) clarifies
that concentrations of credit risk in the form of subordination are
not embedded derivatives, and e) amends Statement 140 to eliminate the
prohibition on a qualifying special purpose entity from holding a
derivative financial instrument that pertains to a beneficial interest
other than another derivative financial instrument. CEL-SCI does not
believe that SFAS No. 155 will have a material impact on its results
of operations or cash flows.
o. Stock-Based Compensation-- In October 1996, the FASB issued SFAS No.
123, "Accounting for Stock-Based Compensation". This statement
encourages but does not require companies to account for employee
stock compensation awards based on their estimated fair value at the
grant date with the resulting cost charged to operations. The Company
has elected to continue to account for its employee stock-based
compensation using the intrinsic value method prescribed in Accounting
Principles Board No. 25, "Accounting for Stock Issued to Employees,
and related Interpretations". In December 2002, the FASB issued SFAS
No. 148, "Accounting for Stock-Based Compensation - Transition and
Disclosure" which amends SFAS No. 123. SFAS 148 provides alternative
methods of transition for a voluntary change to the fair value based
method of accounting for stock-based employee compensation and
requires more prominent and more frequent disclosures in the financial
statements of the effects of stock-based compensation. The provisions
of SFAS 148 are effective for fiscal years ending after December 15,
2002. The Company has elected to continue to account for its employee
stock-based compensation using the intrinsic value method. If the
Company had elected to recognize compensation expense based on the
fair value of the awards granted, consistent with the provisions of
SFAS No. 123, the Company's net loss and net loss per common share
would have been increased to the pro forma amounts indicated below:
F-15
Year ended September 30,
2005 2004 2003
--------- --------- --------
Net loss:
As reported $ (3,039,607) $ (2,952,077) $ (7,986,175)
Add: Compensation expense for
stock-based performance awards
included in reported net loss,
net of related tax effects - 63,755 48,437
Subtract: Total stock-based
employee compensation expense
determined under fair-value
based method for all awards,
net of related tax effects (575,716) (1,106,271) (1,019,513)
--------------- ------------- ------------
Pro forma net loss $ (3,615,323) $ (3,994,593) (8,957,251)
=============== ============= ============
Net loss per common share:
As reported $ (0.04) $ (0.04) $ (0.16)
Pro forma $ (0.05) $ (0.06) $ (0.18)
The weighted average fair value at the date of grant for options granted
during fiscal years 2005, 2004 and 2003 was $0.48, $0.48, and $0.22 per
option, respectively.
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following assumptions:
2005 2004 2003
---- ---- ----
Expected stock risk volatility 74% 88% 77%
Risk-free interest rate 4.21% 3.13-4.25% 3.12%
Expected life options 5 Years 5 Years 5 Years
Expected dividend yield - - -
The effects of applying SFAS No. 123 in this pro forma disclosure are not
necessarily indicative of the effect on future amounts.
The Company's stock options are not transferable, and the actual value of the
stock options that an employee may realize, if any, will depend on the excess
of the market price on the date of exercise over the exercise price. The
Company has based its assumption for stock price volatility on the variance
of monthly closing prices of the Company's stock. The risk-free rate of
return used for fiscal years 2005 and 2004 equals the yield on five-year
zero-coupon U.S. Treasury issues on the grant date. The risk-free rate of
return used for fiscal year 2003 equals the yield on one to six year
zero-coupon U.S. Treasury issues on the date of grant. No discount was
applied to the value of the grants for non-transferability or risk of
forfeiture.
F-16
2. RESTATEMENT OF FINANCIAL STATEMENTS
Subsequent to the issuance of the Company's September 30, 2004 consolidated
financial statements, the Company determined that it had erroneously
accounted for certain financial instruments, including free-standing and
embedded derivatives within such instruments, issued by the Company from
fiscal year 1992 through November 2003. Specifically, the instruments
erroneously accounted for were: the Series E Preferred Stock, the Cambrex
Convertible Note Payable, Series F, G and H Convertible Debt, the equity line
of credit agreements, as well as Series I and J warrants and various other
warrants. The Company has concluded that these instruments were either
freestanding derivative instruments in their entirety, or contained embedded
derivatives, and should have been accounted for under SFAS No. 133 and EITF
00-19, as well as related interpretations of these standards. All such
derivatives were required to be recognized as either assets or liabilities in
the statement of financial position and measured at fair value in the
statement of operations, unless a scope exception applied. The Company's
assessment of each instrument is as follows:
Series E Convertible Preferred Stock ("Series E Stock") and Series E Callable
and Non-Callable Stock Purchase Warrants -The Company issued Series E
Convertible Preferred Stock, with detachable Series E Callable Stock Purchase
Warrants, and contingently issuable Series E Non-Callable Stock Purchase
Warrants in August 2001, in exchange for shares of common stock and other
warrants. The Series E Stock was originally accounted for at par value as an
equity restructuring. In connection with the restructuring, the Company
determined the total implied value of the equity securities received and
allocated the proceeds between the Series E Stock and Callable Warrants based
on their relative fair values. The Company also calculated a beneficial
conversion discount, which included the fair value of the Non-Callable
Warrants, as they were to be issued on the Automatic Conversion Date. This
discount was accreted to additional paid-in capital over the two-year period
to the Automatic Conversion Date, and was adjusted for conversions of the
Series E Stock to common stock. Periodic accretion was recognized as a deemed
dividend to the holders of the Series E Stock. Dividends, which accrued on
the preferred stock at a rate of 6% per annum, were recorded as additional
paid-in capital.
The Company has now determined that the Series E Stock was a hybrid
instrument that had characteristics of a debt host agreement and contained
embedded derivative features that had characteristics and risks that were not
clearly and closely associated with the debt host. Certain of the embedded
derivatives could not be reliably measured and therefore, the Series E Stock
should have been recorded as a liability at the fair value of the hybrid
instrument with changes in fair value recognized in earnings as either a gain
or loss. The Series E Stock was immediately convertible into a variable
number of shares of common stock at a fixed percentage of stated value. The
fixed percentage doubled after the passage of two years. The Company
determined that the Series E Stock should have been recorded at the fair
value of the common shares into which it was convertible. The Series E Stock
should also have been accreted to the percentage the stock was convertible
into after two years. The accretion and dividends recorded on the stock
should have been recorded as interest expense, consistent with the
classification of a debt host.
The Company has also now determined that the Series E Callable Warrants and
Non-Callable Warrants were freestanding derivative instruments while
outstanding, because the Company was required to maintain an effective
registration statement covering the underlying shares. As freestanding
F-17
derivative instruments, the warrants should have been carried at fair value
with changes in fair value recognized in earnings as either a gain or loss.
Series F, G, and H Convertible Notes and Warrants- The Company issued Series
F, G and H convertible notes and detachable stock purchase warrants in fiscal
years 2002 and 2003. The proceeds from the notes were originally allocated
between the notes and warrants based on the relative fair value of the notes
and the warrants. The fair value of the warrants, as well as the beneficial
conversion feature related to the notes, were recorded as discounts on the
notes and amortized to interest expense over the term of the notes and
accelerated on a pro-rata basis as the notes were converted.
The Company has now determined that each of the Series F, G, and H Notes were
hybrid instruments that had the characteristics of a debt host agreement and
that contained embedded derivative features that should have been bifurcated
and accounted for separately. The Company determined that certain of the
embedded derivatives could not be reliably measured and therefore, the notes
should have been recorded at the fair value of the hybrid instrument as a
derivative liability with changes in fair value recognized in earnings as
either a gain or loss. As the notes were immediately convertible into a
variable number of shares based on a discount applied to the lowest three
trading prices in a set period preceding the date of conversion, the Company
determined that it should have recorded the notes at the fair value of the
common shares into which the notes were convertible. The notes also bore
interest that was convertible into a variable number of common shares at a
fixed percentage. The Company has now determined that it should have accrued
interest on the notes at the fair value of the shares into which the interest
was convertible.
The Company has now determined that the Series F, G and H warrants were
freestanding derivative instruments because exercise of the individual
warrants was required to be settled in registered shares, at issuance the
number of potentially issuable shares of common stock required to satisfy
exercise of the warrants and all other commitments that may require issuance
of common stock was not determinable, and under certain circumstances the
holders could require the Company to settle the warrants in cash. As
freestanding derivative instruments, the warrants should have been carried at
fair value with changes in fair value recognized in earnings as either a gain
or loss.
Cambrex Note - The Company issued a convertible note to Cambrex which was
convertible into a variable number of shares at a fixed percentage discount
in December 2003. The Company had originally recorded a beneficial conversion
feature as a discount on the note, which was amortized to interest expense
over the term of the note and also accelerated on a pro-rata basis as the
note was repaid.
The Company has now determined that the Cambrex note was a hybrid instrument
that had the characteristics of a debt host agreement and that contained an
embedded derivative conversion feature that should have been bifurcated and
accounted for separately as an embedded derivative as it was not clearly and
closely related to the debt host. The conversion feature should have been
carried at fair value with changes in fair value recognized in earnings as
either a gain or loss in earnings.
2001 and 2003 Equity Lines of Credit and Stock Purchase Warrants- In April
2001 and September 2003, the Company entered into two equity lines of credit
F-18
with detachable stock purchase warrants. The lines of credit were originally
accounted for only upon the issuance of common stock by recording shares
issued at at the fair value of the common stock drawn. The warrants were
recorded as additional paid-in capital as a cost of obtaining equity
financing.
The Company has now determined that both equity lines of credit are
freestanding derivative instruments because, under certain conditions, the
Company could be required to compensate the investor for any decreases in the
common stock price during the terms of the agreements. As freestanding
derivative instruments, these equity lines of credit should have been carried
as an asset or liability at fair value with changes in fair value recognized
in earnings as either a gain or loss.
The Company has now determined that the warrants issued with both equity
lines of credit are freestanding derivative instruments. Warrants issued with
the 2001 Equity Line of Credit should have been accounted for as derivative
liabilities because the common shares underlying the warrants are required to
be registered. Warrants issued with the 2003 Equity Line of Credit should
have been accounted for as derivative liabilities because, under certain
conditions, the Company could be required to compensate the investor for any
decreases in the common stock price underlying the warrants during the term
of the agreement.
Series I Warrants - In May 2003, the Company issued Series I stock purchase
warrants in conjunction with the sale of common stock. The proceeds from the
sale of common shares and warrants was originally allocated between the
shares and warrants based on relative fair value, with the value of the
warrants recorded as additional paid-in capital as a cost of obtaining equity
financing.
The Company has now determined that these warrants were freestanding
derivative instruments because exercise of the individual warrants was
required to be settled in registered shares, at issuance the number of
potentially issuable shares of common stock required to satisfy exercise of
the warrants and all other commitments that may require issuance of common
stock was not determinable, and under certain circumstances the holders could
require the Company to settle the warrants in cash. As freestanding
derivative instruments, the warrants should have been carried at fair value
with changes in fair value recognized in earnings as either a gain or loss.
Series J Warrants - In December 2003, the Company issued Series J stock
purchase warrants in conjunction with the sale of common stock. The proceeds
from the sale of common shares and warrants was originally allocated between
the shares and warrants based on relative fair value, with the value of the
warrants recorded as additional paid-in capital as a cost of obtaining equity
financing.
The Company has now determined that the Series J warrants were freestanding
derivative instrument from the date of issuance, December 2003, until the
shares were registered in May 2004, because the warrants were required to be
settled in registered shares.
Other Warrants - The Company issued certain other warrants in connection with
equity financings that closed during fiscal years 1992 through 2001. These
warrants were originally recorded as additional paid-in capital as costs of
obtaining equity funding.
The Company has now determined that these warrants were freestanding
derivative instruments during the period August 16, 2001 through October 2,
2003, because as of August 16, 2001 there were not sufficient authorized and
F-19
unissued shares of common stock to satisfy exercise of the warrants, as the
number of shares that could potentially be issued to satisfy all other
commitments that may require the issuance of common stock was not
determinable. As freestanding derivative instruments, the warrants should
have been recorded at fair value with changes in fair value recognized in
earnings as either a gain or loss in earnings. Warrants still outstanding
were reclassified to equity on October 2, 2003, as there were sufficient
authorized and unissued shares to satisfy all other commitments that may
require the issuance of common stock at that date.
As a result, the accompanying consolidated financial statements as of
September 30, 2004 and for the years ended September 30, 2004 and 2003 have
been restated from amounts previously reported to correct the accounting for
these transactions. The following is a summary of the effects of the
restatement on the Company's consolidated financial statements.
As previously
reported As restated
-------------- -----------
Year ended September 30, 2004
---------------------------------------
Gain (loss) on derivative instruments $ - $ 1,174,660
Interest expense (126,840) (53,855)
Net loss (4,199,722) (2,952,077)
Net loss attributable to common
shareholders (4,199,722) (2,952,077)
Loss per common share - basic (0.06) (0.04)
Loss per common share - diluted (0.06) (0.06)
Year ended September 30, 2003
---------------------------------------
Gain (loss) on derivative instruments $ - $ (2,319,005)
Other costs of financing - (270,664)
Interest expense (2,340,667) (1,365,675)
Net loss (6,371,498) (7,986,175)
Accrued dividends on preferred stock (32,101) -
Accretion of beneficial conversion
feature on preferred stock (76,720) -
Net loss attributable to common
shareholders (6,480,319) (7,986,175)
Loss per common share - basic (0.13) (0.16)
Loss per common share - diluted (0.13) (0.19)
As of September 30, 2004
---------------------------------------
Derivative instruments - noncurrent $ - $ 1,175,488
Total liabilities 215,981 1,391,468
Additional paid-in capital 95,343,962 99,374,697
Accumulated deficit (90,753,370) (95,959,592)
Total stockholders' equity 5,297,829 4,122,342
Total liabilities and stockholders' equity 5,513,810 5,513,810
F-20
As previously
reported As restated
-------------- -----------
Year ended September 30, 2004
---------------------------------------
Cash flow from operating activities
Net loss $ (4,199,722) $ (2,952,077)
Adjustments to reconcile net loss
to net cash used for operating
activities:
Repricing of stock options - 7,597
Amortization of discount on
note payable 30,916 -
Amortization of discount on
convertible note 67,118 22,082
(Gain) loss on derivative
instruments - (1,174,660)
Changes in assets and liabilities:
Increase (decrease) in accrued expenses (33,022) (30,055)
Net cash used for operating activities (4,397,793) (4,390,196)
Cash flow from financing activities
activities
Proceeds from exercise of stock options 113,463 105,866
Net cash provided by financing activities 7,081,722 7,074,125
Year ended September 30, 2003
---------------------------------------
Cash flow from operating activities
Net loss $ (6,371,498) $ (7,986,175)
Adjustments to reconcile net loss
to net cash used for operating
activities:
Amortization of discount on note
payable 113,300 37,500
Accretion of Series E Stock to
redemption value - 98,791
Debt issuance discount charged to
interest expense - 699,802
Amortization of discount on
convertible note 1,738,241 62,025
(Gain) loss on derivative
instruments - 2,319,005
Other costs of financing, noncash
expenses - 270,664
Changes in assets and liabilities:
Decrease in accounts payable (65,548) (65,548)
Increase (decrease) in accrued expenses 80,764 59,195
The effects of the restatement on the accounting for certain noncash
transactions are reflected in the supplementary information on noncash
transactions in the accompanying consolidated statements of cash flows.
F-21
3. OPERATIONS AND FINANCING
The Company has incurred significant costs since its inception in connection
with the acquisition of certain patented and unpatented proprietary
technology and know-how relating to the human immunological defense system,
patent applications, research and development, administrative costs,
construction of laboratory facilities, and clinical trials. The Company has
funded such costs with proceeds realized from the public and private sale of
its common and preferred stock. The Company will be required to raise
additional capital or find additional long-term financing in order to
continue with its research efforts. The Company expects to receive additional
funding from private investors subsequent to September 30, 2005; however,
there can be no assurances that the Company will be able to raise additional
capital or obtain additional financing. To date, the Company has not
generated any revenue from product sales. The ability of the Company to
complete the necessary clinical trials and obtain FDA approval for the sale
of products to be developed on a commercial basis is uncertain.
The Company plans to seek continued funding of the Company's development by
raising additional capital. In fiscal year 2003, the Company reduced its
discretionary expenditures. Fiscal year 2005 expenditures remained in line
with fiscal year 2004 expenditures. If necessary, the Company plans to
further reduce discretionary expenditures in fiscal year 2006; however such
reductions would further delay the development of the Company's products. It
is the opinion of management that sufficient funds will be available from
external financing and additional capital and/or expenditure reductions in
order to meet the Company's liabilities and commitments as they come due
during fiscal year 2006. Ultimately, the Company must complete the
development of its products, obtain the appropriate regulatory approvals and
obtain sufficient revenues to support its cost structure.
4. RESEARCH AND OFFICE EQUIPMENT
Research and office equipment at September 30, 2005 and 2004, consists of the
following:
2005 2004
------ ------
Research equipment $ 1,718,895 $1,619,780
Furniture and equipment 110,393 222,549
Leasehold improvements 43,041 43,041
----------- ----------
1,872,329 1,885,370
Less: Accumulated depreciation and
amortization (1,690,788) (1,651,758)
----------- ----------
Net research and office equipment $ 181,541 $ 233,612
=========== ==========
F-22
5. INCOME TAXES
At September 30, 2005 the Company had a federal net operating loss
carryforward of approximately $80.3 million expiring from 2006 through 2025.
The Company has deferred tax assets of approximately $32.4 million and $30.8
million at September 30, 2005 and 2004, respectively. The deferred tax assets
are principally a result of the net operating loss carryforwards.
At both September 30, 2005 and 2004, the Company has recognized a valuation
allowance to the full extent of its deferred tax assets. In assessing the
realization of the deferred tax assets, management considered whether it was
more likely than not that some portion or all of the deferred tax asset will
be realized. The ultimate realization of the deferred tax assets are
dependent upon the generation of future taxable income. Management has
considered the history of the Company's operating losses and believes that
the realization of the benefit of the deferred tax assets cannot be
determined. In addition, under the Internal Revenue Code Section 382, the
Company's ability to utilize these net operating loss carryforwards may be
limited or eliminated in the event of a change in ownership. Internal Revenue
Code Section 382 generally defines a change in ownership as the situation
where there has been a more than 50 percent change in ownership of the value
of the Company within the last three years.
The Company's effective tax rate is different from the applicable federal
statutory tax rate. The reconciliation of these rates for the years ended
September 30 is as follows:
2005 2004 2003
---- ---- ----
Expected statutory rate (35.0%) (35.0%) (34.0%)
State tax rate, net of federal benefit (3.9%) (3.9%) (4.0%)
Nondeductible interest 0.0% 0.3% 4.2%
Nondeductible (nontaxable) derivative
losses (gains) (4.6%) (15.5%) 11.0%
Other nondeductible expenses 15.2% 0.2% 1.4%
Increase in valuation allowance 28.3% 53.9% 21.4%
------- -------- --------
Effective tax rate 0.0% 0.0% 0.0%
======= ======== ========
F-23
6. STOCK OPTIONS, BONUS PLAN AND WARRANTS
Non-Qualified Stock Option Plan--At September 30, 2005, the Company has
collectively authorized the issuance of 9,760,000 shares of common stock
under the Non-Qualified Stock Option Plan. Options typically vest over a
three-year period and expire no later than ten years after the grant date.
Terms of the options are to be determined by the Company's Compensation
Committee, which administers all of the plans. The Company's employees,
directors, officers, and consultants or advisors are eligible to be granted
options under the Non-Qualified Stock Option Plan.
Information regarding the Company's Non-Qualified Stock Option Plan is
summarized as follows:
Outstanding Exercisable
-------------------- ---------------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
------- -------- ------ --------
Options outstanding,
October 1, 2002 4,073,434 $ 1.10 3,159,938 $ 1.25
Options granted 2,582,165 0.22
Options exercised (6,667) 0.33
Options forfeited (194,959) 1.44
------------
Options outstanding,
September 30, 2003 6,453,973 0.74 3,319,317 1.18
Options granted 670,000 0.61
Options exercised (198,503) 0.43
Options forfeited (26,332) 0.28
-------------
Options outstanding,
September 30, 2004 6,899,138 0.74 4,288,847 0.98
-----------
Options granted 278,000 0.48
Options exercised (174,001) 0.24
Options forfeited (787,774) 1.35
--------------
Options outstanding,
September 30, 2005 6,215,363 0.66 4,642,893 0.76
===========
F-24
At September 30, 2005, options outstanding and exercisable were as follows:
Weighted
Weighted Weighted Average
Range of Average Average Exercise
Exercise Number Exercise Price Remaining Number Price
Prices Outstanding Outstanding Contractual Life Exercisable Exercisable
------- ----------- -------------- ---------------- ----------- -----------
$0.16 - $0.24 2,282,996 $ 0.22 7.49 years 1,445,184 $ 0.22
$0.33 - $0.50 659,666 0.40 8.04 years 371,666 0.33
$0.54 - $0.81 961,500 0.59 8.19 years 514,842 0.57
$1.05 - $1.58 1,976,266 1.07 3.02 years 1,976,266 1.07
$1.67 - $2.51 310,835 1.93 3.24 years 310,835 1.93
$3.25 - $4.88 23,300 3.29 1.76 years 23,300 3.29
$6.25 - $9.38 800 6.25 3.00 years 800 6.25
During March 2000, the Company agreed to restore and vest 40,000 options at
prices ranging from $5.25 to $5.62, to one former Director and one Director
as part of a settlement agreement. The options will expire on September 25,
2006. As of September 30, 2005, 20,000 options had been exercised.
In July 2001, the Company repriced 1,298,098 outstanding employee and
director stock options under the Nonqualified Plans that were priced over
$2.00 down to $1.05. In accordance with FASB Interpretation No. 44 (FIN 44),
such repriced options are considered to be variable options. Changes in the
fair market value of the Company's stock may result in future charges to
compensation expense. There was no expense recorded during the years ended
September 30, 2005, 2004 and 2003 because the exercise price of the options
exceeded the fair market value of the Company's common stock. As of September
30, 2005, 777,266 of these options remain outstanding.
In November 2001, the Company extended the expiration date on 242,000 options
at $1.05 from the Nonqualified Plans. The options were to expire between June
2002 and October 2002 and were extended by one year to June 2003 through
October 2003. The options had originally been granted between October 1989 to
December 1995. These dates were considered a new measurement date with
respect to all of the modified options. In addition, in February, April, and
July 2002, the Company modified options outstanding to employees who had been
terminated in conjunction with their change in employee status so that all
options vested on the date of termination. These dates were considered a new
measurement date with respect to all of the newly vested options. At each of
the dates of modification, the exercise price of the options exceeded the
fair market value of the Company's common stock and no compensation expense
was recorded.
F-25
In November 2002 and March 2003, the Company extended the expiration date on
897,000 options from the Nonqualified Stock Option Plan with exercise prices
ranging from $1.05 to $1.94. The options originally would have expired from
January 2003 to October 2003, but were extended to expiration dates ranging
from January 2005 to October 2005. Each of these extension dates was
considered a new measurement date. At each of the dates of modification, the
exercise price of the options exceeded the fair market value of the Company's
common stock and no compensation expense was recorded.
In June 2004, the vesting of 10,700 nonqualified stock options was
accelerated for an employee leaving the Company. Compensation expense of
$7,597 was recorded for the modification.
In April 2005, the Company extended the expiration date on 1,625,333 options
from the Nonqualified Stock Option Plan with exercise prices ranging from
$1.05 to $1.94. The options originally would have expired from June 2005 to
October 2005 and were extended for three years to expiration dates ranging
from June 2008 to October 2008. This extension was considered a new
measurement date with respect to the modified options. At the date of
modification, the exercise price of the options exceeded the fair market
value of the Company's common stock and no compensation expense was recorded.
As of September 30, 2005, all of these options remain outstanding.
Incentive Stock Option Plan--At September 30, 2005, the Company has
collectively authorized the issuance of 6,100,000 shares of common stock
under the Incentive Stock Option Plan. Options vest after a one-year to
three-year period and expire no later than ten years after the grant date.
Terms of the options are to be determined by the Company's Compensation
Committee, which administers all of the plans. Only the Company's employees
and directors are eligible to be granted options under the Incentive Plan.
Information regarding the Company's Incentive Stock Option Plan is summarized
as follows:
Outstanding Exercisable
-------------------- ---------------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
------- -------- ------ --------
Options outstanding,
October 1, 2002 1,251,100 $1.62 1,062,769 $1.69
Options granted 2,550,000 0.22
Options exercised -
Options forfeited -
-------------
Options outstanding,
September 30, 2003 3,801,100 0.68 1,162,768 1.65
Options granted 100,000 1.13
Options exercised (15,000) 1.05
F-26
Options forfeited (53,000) 1.15
-------------
Options outstanding,
September 30, 2004 3,833,100 0.68 2,006,435 1.05
Options granted 170,000 0.48
Options exercised (26,667) 0.22
Options forfeited (3,800) 2.16
-------------
Options outstanding,
September 30, 2005 3,972,633 0.68 2,885,968 0.81
=============
At September 30, 2005, options outstanding and exercisable were as follows:
Weighted
Weighted Weighted Average
Range of Average Average Exercise
Exercise Number Exercise Price Remaining Number Price
Prices Outstanding Outstanding Contractual Life Exercisable Exercisable
------- ----------- -------------- ---------------- ----------- -----------
$0.22 - $0.33 2,523,333 $ 0.22 7.50 years 1,673,334 $ 0.22
$0.48 - $0.72 170,000 0.48 9.98 years 0 0.00
$1.00 - $1.50 1,038,766 1.08 3.78 years 972,100 1.08
$1.85 - $2.78 81,167 2.00 1.87 years 81,167 2.00
$2.87 - $4.31 28,667 3.38 0.58 years 28,667 3.38
$4.50 - $6.75 129,600 5.06 2.69 years 129,600 5.06
$9.00 - $13.50 1,100 10.09 0.73 years 1,100 10.09
During fiscal year 2001, the Company extended the expiration date on 50,000
options at $2.87 from the Incentive Stock Option Plan. The options were to
expire November 1, 2001, and were extended to November 1, 2002. The options
had originally been granted in November 1991. November 1, 2001 was considered
a new measurement date; however, the exercise price on all the options
modified exceeded the fair market value of the Company's common stock, and
therefore, no compensation expense was recorded. In March 2003, the options
were further extended to November 1, 2005. There was no compensation expense
recorded because the exercise price on these options exceeded the fair market
value of the Company's common stock.
In July 2001, the Company repriced 816,066 outstanding employee and director
stock options under the Incentive Stock Option Plan that were priced over
$2.00 down to $1.05. In accordance with FIN 44, such repriced options are
F-27
considered to be variable options. No expense was recorded during the years
ended September 30, 2003, 2004 or 2005 related to these options because the
exercise price of these options exceeded the fair market value of the
Company's common stock. As of September 30, 2005, 748,766 of these options
remain outstanding. Changes in the fair market value of the Company's common
stock may result in future changes in compensation expenses.
In November 2001, the Company extended the expiration date on 56,000 options
at $1.05 from the Incentive Stock Option Plan. The options were to expire
between November 2002 and December 2002, and were extended by one year to
November 2003 and December 2003. The options had originally been granted
between November 1999 and December 1992. This date was considered a new
measurement date with respect to the modified options. At each of the dates
of modification, the exercise price of the options exceeded the fair market
value of the Company's common stock and no compensation expense was recorded.
In March 2003, the Company extended the expiration date on 105,500 options
from the Incentive Stock Option Plan with exercise prices ranging from $1.05
to $1.94. The options originally would have expired from August 2003 to March
2004 but were extended to expiration dates ranging from August 2005 to March
2006. This was considered a new measurement date with respect to all of the
modified options. At each of the dates of modification, the exercise price of
the options exceeded the fair market value of the Company's common stock and
no compensation expense was recorded.
In April 2005, the Company extended the expiration date on 128,100 options
from the Incentive Stock Option Plan with exercise prices ranging from $1.05
to $1.94. The options originally would have expired from July 2005 to
December 2005 and were extended for three years to expiration dates ranging
from July 2008 to December 2008. This was considered a new measurement date
with respect to all of the modified options. At each of the dates of
modification, the exercise price of the options exceeded the fair market
value of the Company's common stock and no compensation expense was recorded.
As of September 30, 2005, all options remain outstanding.
Other Options and Warrants--In connection with the 1992 public offering,
5,175,000 Public Warrants were issued. Every ten warrants entitled the holder
to purchase one share of common stock at a price of $15.00 per share.
Subsequently, the expiration date of the warrants was extended to February
1998. Effective June 1, 1997, the exercise price of warrants was lowered from
$15 to $6 and only five warrants, rather than 10 warrants, were required to
purchase one share of common stock. Warrant holders who tendered five
warrants and $6.00 between January 9, 1998, and February 7, 1998, would
receive one share of the Company's common stock and one New Warrants. The New
Warrants would permit the holder to purchase one share of the Company's
common stock at a price of $10.00 per share prior to February 7, 2000. During
fiscal year 1998, the expiration date of the Public Warrants was extended to
July 31, 1998, and 582,025 Public warrants were tendered for 116,405 common
shares and 116,405 New Warrants. All remaining Public Warrants expired as of
September 30, 1999. In January 2001, the Company extended the expiration date
on the 116,405 New Warrants to August 2001 and repriced them from $10.00 to
$3.00 per share. In July 2001, the Company extended the expiration date
further to February 2002. On August 16, 2001, the New Warrants no longer met
the requirements for equity classification, because there were not sufficient
authorized and unissued shares of the Company's common stock to satisfy
F-28
exercise of the warrants, as the number of potentially issuable shares of
common stock required to satisfy all other commitments that may require the
issuance of common stock was not determinable. The fair value of the warrants
as of August 16, 2001, of $12,157 was reclassified from equity to a
liability. During the year ended September 30, 2003, the Company recognized a
gain on derivative of $4 arising from changes in the fair value of the
warrants. All New Warrants expired on February 6, 2003.
During fiscal year 1999, the Company granted a consultant options to purchase
a total of 50,000 shares of the Company's common stock. The fair value of the
options is expensed over the life of the consultant's contract. All 50,000
options became exercisable during fiscal year 1999 at $2.50 per share. All
options expired unexercised February 4, 2004.
During fiscal year 2001, the Company granted options to consultants to
purchase a total of 180,000 shares of the Company's common stock at exercise
prices ranging from $1.05 to $1.63 expiring from June to July of 2006. As of
September 30, 2005, all of these options were outstanding.
In connection with the April 2001 Equity Line of Credit stock sale agreement
discussed in Note 13, the Company issued 200,800 common stock purchase
warrants. Each warrant entitled the holder to purchase one share of common
stock at $1.64 per share. The warrants represented derivative instruments and
were recorded as a liability upon issuance, as the common shares underlying
the warrants were required to be registered. The fair value of the warrants
totaling $235,562 was recorded as a derivative liability and a cost of
financing. For the years ended September 30, 2004 and 2003, the Company
recognized a gain of $36,597 and a loss of $34,307, respectively, resulting
from changes in fair value of the warrants. The warrants expired unexercised
in April 2004.
In August 2001, the Company issued 272,108 common stock purchase warrants in
connection with a private offering of common stock as discussed in Note 14.
Each warrant entitled the holder to purchase one share of common stock at
$1.75 per share. The warrants would have expired in July 2004, but were
extended to July 2007. At issuance the warrants did not meet the requirements
for equity classification because there were not sufficient authorized and
unissued shares of the Company's common stock to satisfy exercise of the
warrants, as the number of potentially issuable shares of common stock
required to satisfy all other commitments that may require the issuance of
common stock was not determinable. The fair value of the warrants totaling
$286,617 was recorded as a liability and offset against the proceeds from the
sale of stock as a cost of obtaining equity capital. On October 2, 2003, as
there were sufficient unauthorized and unissued shares to satisfy all other
commitments that may require the issuance of common stock, the fair value of
the warrants of $111,418 was reclassified from liabilities to equity. During
the years ended September 30, 2004 and 2003, the Company recognized losses of
$38,561 and $68,245, respectively, arising from changes in the fair value of
the warrants. As of September 30, 2005, 272,108 warrants remain outstanding.
In October 2001, the Company issued 150,000 shares of common stock in a
private offering for proceeds of $150,000. The investor also received
warrants which entitled the holder to purchase 75,000 shares of common stock
at $1.50 per share, expiring October 2004. Upon issuance, the warrants did
not meet the requirements for equity classification because there were not
sufficient authorized and unissued shares of the Company's common stock to
F-29
satisfy exercise of the warrants, as the number of potentially issuable
shares of common stock required to satisfy all other commitments that may
require the issuance of common stock was not determinable. Accordingly, the
warrants were accounted for as freestanding derivative instruments from the
date of issuance. Changes in the fair value of the warrants was recognized in
earnings as either a gain or loss in such period as the change occurred. The
warrants had a fair value of the warrants at issuance of $88,045 was recorded
as a liability and offset against proceeds from the sale of stock as a cost
of obtaining equity capital. On October 2, 2003, as there were sufficient
unauthorized and unissued shares to satisfy all other commitments that may
require the issuance of common stock, the fair value of the warrants of
$37,236 was reclassified from liabilities to equity. During the years ended
September 30, 2004 and 2003, the Company recognized losses of $12,031 and
$23,415, respectively, arising from changes in the fair value of the
warrants.
Series E Callable Warrants were issued in connection with the issuance of
Series E Preferred Stock in August 2001. The Series E Callable Warrants
allowed the holders to purchase up to 815,351 shares of the Company's common
stock at a price of $1.19 per share expiring August 16, 2004. During the year
ended September 30, 2004, 244,724 warrants were exercised for proceeds of
$291,222. Upon issuance, the warrants did not meet the requirements for
equity classification because the Company was required to maintain an
effective registration statement covering the underlying shares. Accordingly,
the Series E Callable Warrants were accounted for as freestanding derivative
instruments from the date of issuance. As there were no proceeds associated
with the issuance of the Series E Preferred Stock, the fair value of the
warrants totaling $119,434 was recorded as a liability and charged to other
costs of financing. For the years ended September 30, 2004 and 2003, the
Company recognized a gain of $59,156 and a loss of $125,204, respectively,
arising from changes in fair value of the warrants.
In August 2003, in accordance with the Series E Stock agreement discussed in
Note 14 the Company issued 23,758 of Series E Non-Callable Warrants to
purchase shares of common stock at a price of $0.77 per share expiring August
16, 2006. The Series E Non-Callable Warrants are exercisable at any time
prior to August 17, 2006 and, upon issuance, did not meet the requirements
for equity classification because the Company was required to maintain an
effective registration statement covering the underlying shares. Accordingly,
the Series E Non-Callable Warrants were accounted for as freestanding
derivative instruments from date of issuance. As there were no proceeds from
the issuance, the fair value of the warrants totaling $12,374 was recorded as
a liability and charged to other costs of financing. For the years ended
September 30, 2005, 2004 and 2003, the Company recognized a gain of $5,042, a
gain of $9,363 and a loss of $3,311, respectively, arising from changes in
fair value of the warrants.
Series F Warrants were issued in connection with the issuance of convertible
debt in December 2001. The Series F Warrants allowed the holders to purchase
up to 960,000 shares of the Company's common stock at $0.76 per share for
seven years from date of issuance. The warrant price was adjustable if the
Company sold any additional shares of its common stock or convertible
securities for less than fair market value or at an amount lower than the
exercise price of the Series F Warrants. The exercise price was adjusted
every three months to an amount equal to 110% of the conversion price on such
date, provided that the adjusted price was lower than the exercise price on
that date. During the year ended September 30, 2003, 435,500 warrants were
exercised for proceeds of $66,632. During the year ended September 30, 2004,
F-30
420,000 warrants were exercised in a cashless exercise. As of September 30,
2004 there were no remaining Series F warrants outstanding. Upon issuance,
the warrants did not meet the requirements for equity classification because
exercise of the individual warrants was required to be settled in registered
shares, at issuance the number of potentially issuable shares of common stock
required to satisfy exercise of the warrants and all other commitments that
may require issuance of common stock was not determinable, and under certain
circumstances the holders could require the Company to settle the warrants in
cash. Accordingly, the Series F Warrants were accounted for as a derivative
liability and a discount on the debt which was immediately accreted to
interest expense. At each subsequent period, through November 19, 2003, when
all Series F warrants had been exercised, the warrants were marked to market
with changes in fair value recognized in earnings as gains or losses on
derivatives. During the years ended September 30, 2004 and 2003, the Company
recognized losses of $167,000 and $394,500, respectively, arising from
changes in the fair value of the Series F Warrants.
Series G Warrants were issued in connection with the issuance of convertible
debt in July 2002. The Series G Warrants allowed the holders to purchase up
to 900,000 shares of the Company's common stock at a price equal to $0.25 per
share at any time prior to July 12, 2009. If the Company sells any additional
shares of common stock, or any securities convertible into common stock at a
price below the then applicable warrant exercise price, the warrant exercise
price will be lowered to the price at which the shares were sold or the
lowest price at which the securities were convertible, as the case may be.
The warrant exercise price is adjusted every three months to an amount equal
to 110% of the Series G note conversion price on such date, provided that the
adjusted price is lower than the warrant exercise price on that date. If the
warrant exercise price is adjusted, the number of shares of common stock
issuable upon the exercise of the warrant would be increased by the product
of the number of shares of common stock issuable upon the exercise of the
warrant immediately prior to the sale multiplied by the percentage by which
the warrant exercise price was reduced. In accordance with the terms of the
warrants, the exercise price was adjusted to $0.18 on December 9, 2002. The
exercise price was adjusted to $0.145 on March 9, 2003. In accordance with
the terms of the warrants, there were no further adjustments since the price
would have been higher. During the year ended September 30, 2003, 450,000
warrants were exercised for proceeds of $65,250. Upon issuance, the warrants
did not meet the requirements for equity classification because exercise of
the individual warrants was required to be settled in registered shares, at
issuance the number of potentially issuable shares of common stock required
to satisfy exercise of the warrants and all other commitments that may
require issuance of common stock was not determinable, and under certain
circumstances the holders could require the Company to settle the warrants in
cash. Accordingly, the Series G warrants were recorded at fair value as a
derivative liability and a discount on debt which was immediately accreted to
interest expense. Subsequent changes in fair value are recognized in earnings
as either a gain or loss. As of September 30, 2005, 450,000 Series G Warrants
remain outstanding. As of September 30, 2005 and 2004, the fair value of the
Series G warrants was $186,200 and $235,100, respectively. During the years
ended September 30, 2005, 2004 and 2003, the Company recognized a gain of
$48,900, a gain of $172,100, and a loss of $468,300, respectively, arising
from changes in the fair value of the Series G warrants.
Series H Warrants were issued in connection with the issuance of convertible
debt in January 2003. The Series H Warrants allowed the holders to purchase
up to 1,100,000 shares of the Company's common stock at a price equal to
F-31
$0.25 per share at any time prior to January 7, 2010. If the Company sells
any additional shares of common stock, or any securities convertible into
common stock at a price below the then applicable exercise price of the
Series H warrants, the exercise price of the Series H warrants will be
lowered to the price at which the shares were sold or the lowest price at
which the securities are convertible. If the exercise price of the Series H
warrants is adjusted, the number of shares of common stock issuable upon the
exercise of the Series H warrants will be increased by the product of the
number of shares of common stock issuable upon the exercise of the warrant
immediately prior to the sale multiplied by the percentage by which the
warrant exercise price is reduced. However, neither the exercise price nor
the shares issuable upon the exercise of the Series H warrants will be
adjusted as the result of shares issued in connection with a permitted
financing, as defined in the agreement. Every three months after June 26,
2003, the exercise price of the Series H warrants will be adjusted to an
amount equal to 110% of the Series H notes conversion price on such date,
provided that the adjusted price is lower than the warrant exercise price on
that date. During the year ended September 30, 2003, 550,000 warrants were
exercised at $0.25 for proceeds of $137,500. Upon issuance, the warrants did
not meet the requirements for equity classification because exercise of the
individual warrants was required to be settled in registered shares, at
issuance the number of potentially issuable shares of common stock to satisfy
exercise of the warrants and all other commitments that may require issuance
of common stock was not determinable, and under certain circumstances the
holders could require the Company to settle the warrants in cash.
Accordingly, the Series H warrants were initially recorded at fair value as a
derivative liability and a discount on debt which was immediately accreted to
interest expense. Subsequent changes in fair value are recognized in earnings
as either a gain or loss in the period such change occurs. As of September
30, 2005, 550,000 Series H Warrants remain. As of September 30, 2005 and
2004, the fair value of the Series H warrants was $223,500 and $290,800,
respectively. During the years ended September 30, 2005, 2004 and 2003, the
Company recognized a gain of $67,300, a gain of $193,500, and loss of
$697,100, respectively, arising from changes in the fair value of the Series
H warrants.
Warrants were issued in connection with obtaining an equity line of credit in
September 2003, discussed in Note 13. There were 395,726 warrants issued at
an exercise price of $0.83, which expire in September 2008. Upon issuance,
the warrants did not meet the requirements for equity classification because,
under certain conditions, the Company could be required to compensate the
investor for any decreases in the common stock price underlying the warrants
and are therefore accounted for as a derivative liability. Subsequent changes
in fair value are recognized in earnings as either a gain or loss in the
period such change occurs. The warrants were initially classified in
liabilities upon issuance at fair value of $258,290, as determined using the
Black-Scholes pricing methodology and the Company recognized a charge of
$258,290 which was included in other costs of financing as there were no
proceeds from the issuance of the agreement. As of September 30, 2005 and
2004, the fair value of the warrants was $93,745 and $165,359, respectively.
During the years ended September 30, 2005, 2004 and 2003, the Company
recognized a gain of $71,613, a gain of $151,943, and a loss of $59,012,
respectively, arising from changes in the fair value of the warrants.
In May 2003, 30,000 options were issued to a consultant at a price of $0.41
per share. The options vest over a three year period and expire in May 2013.
The compensation expense for these options was determined using the Black
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Scholes pricing methodology with the following assumptions:
Expected stock risk volatility 84%
Risk-free interest rate 2.0%
Expected life of warrant 3 Years
Expected dividend yield -0-
The fair value of the options was recorded as a general and administrative
expense. Compensation expense of $6,727 was recorded for the year ended
September 30, 2003.
In connection with an agreement with a private investor in May 2003,
1,100,000 Series I Warrants were issued with an exercise price of $0.47. The
warrants were to initially expire May 30, 2006. In accordance with the terms
of the agreement, the warrant expiration was extended to May 30, 2008 on
September 30, 2003. Upon issuance, the warrants did not meet the requirements
for equity classification because exercise of the individual warrants was
required to be settled in registered shares, at issuance the number of
potentially issuable shares of common stock required to satisfy exercise of
the warrants and all other commitments that may require issuance of common
stock was not determinable, and under certain circumstances the holders could
require the Company to cash settle the warrants and are therefore accounted
for as freestanding derivative liabilities. Subsequent changes in fair value
are recognized in earnings as either a gain or loss. The fair value of the
warrants of $478,694 was recorded as a liability and offset against the
proceeds from the sale of stock as a cost of obtaining equity capital. As of
September 30, 2005 and 2004, the fair value of the warrants was $307,734 and
$477,904, respectively. For the years ended September 30, 2005, 2004 and
2003, the Company recognized a loss of $170,173, a gain of $426,232 and a
loss of $425,445, respectively, arising from changes in fair value of the
warrants.
On December 1, 2003, CEL-SCI sold 2,999,964 shares of its common stock, to a
group of private institutional investors for approximately $2,550,000, or
$0.85 per share. As part of this transaction, the investors in the private
offering received Series J Warrants which allow the investors to purchase
991,003 shares of CEL-SCI's common stock exercisable at a price of $1.32 per
share exercisable at any time prior to December 1, 2006. Additionally, an
investment broker received warrants totaling 5% of the investment of its
clients in the common stock of the Company at $1.32 per share at any time
prior to December 1, 2006. Upon issuance, the warrants did not meet the
requirements for equity classification until the shares were registered in
May 2004, because the warrants are required to be settled in registered
shares and were therefore accounted for as freestanding derivative
instruments. The fair value of the warrants of $806,266 was recorded as a
liability and offset against the proceeds from the sale as a cost of
obtaining equity capital. Subsequent changes in fair value were recognized in
earnings as either a gain or loss. On May 8, 2004 the criteria for equity
classification were met, as a registration statement covering the underlying
common shares was declared effective, and the fair value of the warrants
totaling $537,338 was reclassified from liabilities to equity. For the year
ended September 30, 2004, the Company recognized a gain of $268,928 arising
from changes in fair value of the warrants.
On May 4, 2004, the Company sold 6,402,439 shares of its common stock to a
group of private institutional investors for $5,250,000 and total offering
costs of $498,452. As part of this transaction, the investors in the private
offering received warrants which allow the investors to purchase 76,642
F-33
shares of the Company's common stock at a price of $1.37 per share at any
time prior to May 4, 2009. These warrants were valued at $38,127. This fair
value was determined using the Black-Scholes pricing methodology with the
following assumptions:
Expected stock risk volatility 87%
Risk-free interest rate 2.00%
Expected life of options 3 Years
Expected dividend yield -0-
In February 2005, the Company granted a consultant options to purchase 15,000
shares of the Company's common stock at a price of $0.73 per share. The
options vest over a three year period and expire in February 2015. The
compensation expense for these options was determined using the Black Scholes
pricing methodology with the following assumptions:
Expected stock risk volatility 93%
Risk-free interest rate 3.89%
Expected life of warrant 5 Years
Expected dividend yield -0-
The fair value of the options was recorded as general and administrative
expense. Compensation expense of $7,972 was recorded for the year ended
September 30, 2005.
On July 18, 2005, CEL-SCI sold 1,250,000 shares of its common stock and
375,000 warrants to one investor for $500,000. Each warrant entitles the
holder to purchase one share of CEL-SCI's common stock at a price of $0.65
per share at any time prior to July 18, 2009. The shares of common stock and
warrants are "restricted" securities as defined in Rule 144 of the Securities
and Exchange Commission. The warrants were valued at $155,671. The value was
determined using the Black Scholes pricing methodology with the following
assumptions:
Expected stock risk volatility 75%
Risk-free interest rate 3.92%
Expected life of warrant 5 Years
Expected dividend yield -0-
Stock Bonus Plan -- At September 30, 2005, the Company had been authorized to
issue up to 3,940,000 shares of common stock under the Stock Bonus Plan. All
employees, directors, officers, consultants, and advisors are eligible to be
granted shares. During the year ended September 30, 2003, 134,336 shares with
a fair value of $47,051 were issued under the Plan and recorded in the
consolidated statement of operations. During the year ended September 30,
2004, 72,495 shares were issued under the Plan with a fair value of $52,476.
During the year ended September 30, 2005, 144,469 shares were issued to the
Company's 401(k) plan for a cost of $78,868.
Stock Compensation Plan-- During the year ended September 30, 2005, 1,500,000
shares were authorized for use in the Company's stock compensation plan.
During the year ended September 30, 2004, 1,000,000 shares were authorized
for use in the Company's stock compensation plan. Of these shares, 25,050
shares were issued during the year ended September 30, 2004 as compensation
in lieu of salary increases extending through August 31, 2005. The shares
F-34
were issued at $0.62 per share for a total cost of $15,531. Of this, $14,237
was recorded as unearned compensation in the consolidated balance sheet
during the year ended September 30, 2004. This amount was recorded as expense
during the year ended September 30, 2005.
7. EMPLOYEE BENEFIT PLAN
The Company maintains a defined contribution retirement plan, qualifying
under Section 401(k) of the Internal Revenue Code, subject to the Employee
Retirement Income Security Act of 1974, as amended, and covering
substantially all Company employees. Each participant's contribution is
matched by the Company with shares of common stock that have a value equal to
100% of the participant's contribution, not to exceed the lesser of $10,000
or 6% of the participant's total compensation. The Company's contribution of
common stock is valued each quarter based upon the closing bid price of the
Company's common stock. The expense for the years ended September 30, 2005,
2004, and 2003, in connection with this Plan was $79,406, $56,158, and
$48,437, respectively.
8. OPTIONAL SALARY ADJUSTMENT PLAN
In July 2001, the Company adopted an "Optional Salary Adjustment Plan" (the
"Plan"). In accordance with the Plan, employees received 40,000 stock options
for each salary increment of $6,000 that they elect to forgo. The total
amount of options to be granted under the Plan is limited to 1,200,000.
During the years ended September 30, 2005, 2004 and 2003, there were no
options issued in lieu of compensation.
9. COMMITMENTS AND CONTINGENCIES
Operating Leases-The future minimum annual rental payments due under
noncancelable operating leases for office and laboratory space are as
follows:
Year Ending September 30,
------------------------
2006 $156,067
2007 132,719
2008 71,136
2009 29,640
2010 -
----------
Total minimum lease payments $389,562
==========
Rent expense for the years ended September 30, 2005, 2004, and 2003, was
$253,180, $282,138 and $276,564, respectively. Minimum payments have not been
reduced by minimum sublease rental receivable under future cancelable
subleases.
Employment Contracts--In April 2005 the Company entered into a three year
employment agreement with its President and Chairman of the Board which
expires April 30, 2008. The employment agreement provides that CEL-SCI will
pay him an annual salary of $363,000 during the term of the agreement. In the
event that there is a material reduction in his authority, duties or
activities, or in the event there is a change in the control of the Company,
then the agreement allows him to resign from his position at the Company and
F-35
receive a lump-sum payment from CEL-SCI equal to 18 months salary. For
purposes of the employment agreement, a change in the control of CEL-SCI
means the sale of more than 50% of the outstanding shares of CEL-SCI's Common
Stock, or a change in a majority of CEL-SCI's directors.
Effective September 1, 2003, the Company entered into a three-year employment
agreement with its Chief Executive and Financial Officer. The employment
agreement provides that during the term of the employment agreement the
Company will pay him an annual salary of $370,585. In the event there is a
change in the control of the Company, the agreement allows him to resign from
his position at the Company and receive a lump-sum payment from the Company
equal to 24 months of salary. For purposes of the employment agreement a
change in the control of the Company means: (1) the merger of the Company
with another entity if after such merger the shareholders of the Company do
not own at least 50% of voting capital stock of the surviving corporation;
(2) the sale of substantially all of the assets of the Company; (3) the
acquisition by any person of more than 50% of the Company's common stock; or
(4) a change in a majority of the Company's directors which has not been
approved by the incumbent directors.
10. CAMBREX NOTE
On November 15, 2001, the Company signed an agreement with Cambrex Bio
Science, Inc., (Cambrex) in which Cambrex provided manufacturing space and
support to the Company during November and December 2001 and January 2002. In
exchange, the Company signed a $1,172,517 note, which included imputed
interest of $300,000. In December 2001, the note was amended to extend the
due date to January 2, 2003. Unpaid principal began accruing interest on
November 16, 2002, at the Prime Rate plus 3%. The note was collateralized by
certain equipment. The imputed interest on this note was capitalized and was
expensed over the life of the loan. In December 2002, the Company negotiated
an extension of the note with Cambrex. Per the agreement, the Company gave
Cambrex certain equipment and surrendered a security deposit, which reduced
the amount owed by $225,000. The remaining balance was payable pursuant to a
note due January 2, 2004. In addition, the agreement required the Company to
pay $150,000 from the Series H convertible debt and 10% of all other future
financing transactions, including draws on the equity line-of-credit. There
were also conversion features added with the amendment allowing Cambrex to
convert either all or part of the note into shares of the Company's common
stock. The principal balance of the note and any accrued interest were
convertible into common stock at 90% of the average of the closing prices of
the common stock for the three trading days immediately prior to the
conversion date, subject to a floor of $0.22 per share. During the year ended
September 30, 2003, the Company paid down the note by $485,524. The Company
also recorded interest expense of $49,486 and amortized the remaining
discount of $37,500 relating to the imputed interest.
The Company accounted for the amendment of the Cambrex note in December 2002
as a modification of the existing note under EITF 96-19, "Debtor's Accounting
for a Modification or Exchange of Debt Instruments". No gain or loss was
recorded at the time of the amendment. The Cambrex note was accounted for as
a hybrid instrument that had the characteristics of a debt host agreement and
contained an embedded conversion feature that was not clearly and closely
related to the debt host, and required bifurcation. The Company recorded a
liability of $84,107, the fair value of the embedded derivative feature in
F-36
connection with the December 2002 note modification, with a corresponding
offset to the note payable as a discount. The discount was amortized to
interest expense over the term of the note. As of September 30, 2003, the
remaining unamortized discount of $22,082 was amortized and recorded as
interest expense through December 23, 2003, when the note was paid in full.
During the years ended September 30, 2004 and 2003, the Company recognized a
gain of $72,785 and $11,322 resulting from changes in fair value of the
derivative liability. The Company also recognized additional interest expense
of $22,082 and $99,525, for the years ended September 30, 2004 and 2003, from
amortization of the discounts.
11. COVANCE NOTE
On October 8, 2002, the Company signed an agreement with Covance AG
(Covance), a Swiss Corporation. Pursuant to the agreement, amounts owed to
Covance totaling $199,928 as of June 30, 2003 were converted to a note
payable. The note was payable on January 2, 2004. Interest was payable at an
annual rate of 8%. Until the entire amount was paid to Covance, Covance was
entitled to receive 2% of any draw-down of the Company's equity credit line,
2% of any net funds received from outside financings of less than $1 million,
3% of any net funds received from outside financings greater than $1 million
but less than $2 million and 4% of any net funds received from outside
financings greater than $2 million. During the year ended September 30, 2003,
the Company paid $15,598 on the note payable to Covance in accordance with
the agreement. In December 2003, the note was repaid along with accrued
interest of $2,581.
12. CONVERTIBLE DEBT
As of September 30, 2005, there is no outstanding convertible debt.
In December 2001, the Company sold Series F Notes and Series F warrants, to a
group of private investors for proceeds of $1,600,000, less transaction costs
of $276,410. The notes bore interest at 7% per year and were due and payable
December 31, 2003. The notes contained features that constituted embedded
derivatives, certain of which could not be reliably measured. As a result,
the Company accounted for the entire instrument at fair value. The Series F
Notes were immediately convertible into a variable number of shares based on
76% applied to the average of the lowest three trading prices in a twenty day
period immediately preceding such conversion. The Company determined the fair
value of the notes for accounting purposes was equal to the fair value of the
shares into which it was convertible at each measurement date. No additional
value has been ascribed to the other embedded derivative features of the
Series F Notes in determining fair value of the Series F Notes as the Company
believes that the value of such features can not be reasonably estimated or
reliably measured due to the contingent nature of their occurrence. The notes
were recorded at the fair value of 131.58%, and accordingly, the discount
associated with the warrants was immediately accreted to interest expense.
The Company has also accrued interest on the notes at a rate of 9.2%
representing the stated 7% interest rate adjusted for the 76% rate at which
the interest was convertible into common shares. During the year ended
September 30, 2003 the Company recognized a loss of $43,923 arising from
changes in the fair value of the Series F Notes. As of November 30, 2002, all
convertible debt had been converted into a total of 6,592,461 shares of
common stock. The Series F Warrants are discussed in Note 6.
F-37
In July and September 2002, CEL-SCI sold Series G Notes, plus Series G
Warrants, to a group of private investors for $1,300,000. The notes bore
interest at 7% per year and were due and payable in July and September 2004.
The notes contained features that constituted embedded derivatives, certain
of which could not be reliably measured. As a result, the Company accounted
for the entire instrument at fair value. The Series G Notes were immediately
convertible into a variable number of shares based on a factor of 76% applied
to the average of the lowest three trading prices in a fifteen day period
immediately preceding such conversion. The Company determined the fair value
of the notes for accounting purposes was equal to the fair value of the
shares into which it was convertible at each measurement date. No additional
value has been ascribed to the other embedded derivative features of the
Series G Notes in determining fair value of the Series G Notes as the Company
believes that the value of such features can not be reasonably estimated or
reliably measured due to the contingent nature of their occurrence. The notes
were recorded at the fair value of 131.58%, and accordingly, the discount
associated with the warrants was immediately accreted to interest expense.
The Company has also accrued interest on the notes at a rate of 9.2%
representing the stated 7% interest rate adjusted for the 76% rate at which
the interest was convertible into common shares. During the year ended
September 30, 2003, the Company recognized a loss of $701,001 arising from
changes in the fair value of the Series G Notes. As of June 30, 2003 all of
the Series G Notes had been converted into 8,390,746 shares of CEL-SCI's
common stock. The Series G Warrants are discussed in Note 6.
In January and July 2003, CEL-SCI sold Series H Notes, plus Series H
Warrants, to a group of private investors for $1,350,000. The notes bore
interest at 7% per year and were due and payable in January and July 2005.
The notes contained features that constituted embedded derivatives, certain
of which could not be reliably measured. Because certain of the embedded
derivatives could not be reliably measured, the Company accounted for the
entire instrument at fair value. The Series H Notes were immediately
convertible into a variable number of shares based on a factor of 76% applied
to the average of the lowest three trading prices in a fifteen day period
immediately preceding such conversion. The Company determined the fair value
of the notes for accounting purposes was equal to the fair value of the
shares into which it was convertible at each measurement date. No additional
value has been ascribed to the other embedded derivative features of the
Series H Notes in determining fair value of the Series H Notes as the Company
believes that the value of such features can not be reasonably estimated or
reliably measured due to the contingent nature of their occurrence. The notes
were recorded at the fair value of 131.58%, and accordingly, the discount
associated with the warrants was immediately accreted to interest expense.
The Company has also accrued interest on the notes at a rate of 9.2%
representing the stated 7% interest rate adjusted for the 76% rate at which
the interest was convertible into common shares. On May 30, 2003, fair value
for accounting purposes was adjusted to 142.86% of outstanding face value due
to a change in the discount factor used to compute the conversion price of
the Series H Notes, triggered by the failure of the Company to have a
registration statement declared effective. During the years ended September
30, 2004 and 2003, the Company recognized a gain of $6,703 and a loss of
$947,963, respectively, arising from changes in the fair value of the Series
H Notes. As of October 2, 2003 all of the Series H Notes had been converted
into 3,233,229 shares of CEL-SCI's common stock. The Series H Warrants are
discussed in Note 6.
F-38
13. EQUITY LINES OF CREDIT
In April 2001, the Company entered into the 2001 Equity Line of Credit that
allowed the Company at its discretion to sell up to $10 million of common
stock in increments of a minimum of $100,000 and a maximum of $2 million for
general operating requirements. The Company was restricted from entering into
any other equity line of credit arrangement and the agreement expired in June
2003. As discussed in Note 6, the Company issued 200,800 warrants to the
issuer pursuant to this agreement. The Company accounted for the 2001 Equity
Line of Credit as a freestanding derivative instrument as the Company could
be required to compensate the investor for any decreases in the price of the
Company's common stock during the term of the agreement. For the year ended
September 30, 2003, the Company recognized a loss of $146,465 resulting from
changes in fair value of the 2001 Equity Line of Credit.
In September 2003, the Company entered into the 2003 Equity Line of Credit
that allows the Company at its discretion to sell up to $10 million of common
stock in increments of a minimum of $100,000 and a maximum amount that can be
drawn down at any one time that will be determined at the time of the
drawdown request, using a formula contained in the agreement. The Company is
restricted from entering into any other equity line of credit arrangement
until the earlier of the expiration of the agreement or two years from the
date of registration of the shares underlying the agreement. As discussed in
Note 6, the Company issued 395,726 warrants to the issuer at a price of $0.83
exercisable through September 16, 2008. The Company accounted for the 2003
Equity Line of Credit as a freestanding derivative instrument as the Company
could be required to compensate the investor for any decreases in the price
of the Company's common stock during the term of the agreement. The Company
determined that the instrument had no fair value as of September 30, 2005 and
2004. For the years ended September 30, 2005 and 2004, the Company recognized
a gain of $16,223 and a loss of $5,065, respectively resulting from changes
in fair value of the 2003 Equity Line of Credit. Expenses of $40,600 were
charged to additional paid-in capital as a cost of equity related transaction
during the year ended September 30, 2003. During the year ended September 30,
2005, the Company sold 743,014 shares of its common stock pursuant to this
agreement for gross proceeds of $366,238, net of related costs of $1,035.
During the year ended September 30, 2004, the Company sold 307,082 shares of
its common stock pursuant to this agreement for gross proceeds of $340,000,
net of related costs of $4,090. During the year ended September 30, 2003, the
Company sold 2,877,786 shares of its common stock pursuant to this agreement
for net proceeds of $725,000.
14. STOCKHOLDERS' EQUITY
In October 2001, the Company issued 150,000 shares of common stock in a
private offering for proceeds of $150,000. The investor also received
warrants which entitled the holder to purchase 75,000 shares of common stock
at $1.50 per share. These warrants expired unexercised October 5, 2004 and
are discussed in Note 6.
In May 2003, the Company sold 1,100,000 shares of common stock and an
additional 1,100,000 warrants to purchase common stock in conjunction with a
marketing agreement. The Company received proceeds of $500,000 for the stock
and warrants. The warrants are exercisable at a price of $0.47 per share. The
warrants initially expired May 30, 2006. In accordance with the terms of the
F-39
agreement, the expiration was extended to May 30, 2008. The warrants are
discussed in Note 6.
On December 1, 2003, CEL-SCI sold 2,999,964 shares of its common stock, to a
group of private institutional investors for approximately $2,550,000, or
$0.85 per share. There were associated costs of $93,159. As part of this
transaction, the investors in the private offering received Series J Warrants
which allow the investors to purchase 991,003 shares of CEL-SCI's common
stock at a price of $1.32 per share at any time prior to December 1, 2006.
See discussion of accounting for the Series J Warrants in Note 6.
On May 4, 2004, the CEL-SCI sold 6,402,439 shares of its common stock to a
group of private institutional investors at $0.82 per share for $5,250,000
and associated costs of $498,452. As part of this transaction, the investment
banker of the private offering received warrants which allow the investors to
purchase 76,642 shares of CEL-SCI's common stock at a price of $1.37 per
share at any time prior to May 4, 2009. See discussion of accounting for
warrants in Note 6.
On July 18, 2005, CEL-SCI sold 1,250,000 shares of its common stock and
375,000 warrants to one investor for $500,000. Each warrant entitles the
holder to purchase one share of CEL-SCI's common stock at a price of $0.65
per share at any time prior to July 18, 2009. The shares of common stock and
warrants are "restricted" securities as defined in Rule 144 of the Securities
and Exchange Commission.
15. SERIES E PREFERRED STOCK
During August 2001, three private investors exchanged shares of the Company's
common stock and remaining Series D Warrants for 6,288 shares of the
Company's Series E preferred stock ("Series E Stock"). These investors also
exchanged their Series A and Series C Warrants for new Series E Callable
Warrants discussed in Note 6. During the year ended September 30, 2002, 4,671
shares of the Series E Stock were converted into 4,282,150 shares of common
stock. During the year ended September 30, 2003, 1,192 shares of the Series E
Stock were converted into 1,018,439 shares of common stock. As of September
30, 2003, there were no shares of Series E Preferred stock remaining. The
Series E Stock contained features that constituted embedded derivatives,
certain of which could not be reliably measured. As a result, Company
recorded the entire instrument at fair value. The Series E Stock was recorded
at 107.53% of outstanding stated value. This represents the estimated fair
value of the common shares that were deliverable upon conversion. The Series
E Stock was immediately convertible into a variable number of shares based on
a factor of 93% applied to the volume weighted average price for a period of
five days preceding such conversion. No additional value has been ascribed to
the other embedded derivative features of the Series E Stock in determining
fair value of the Series E Stock as the Company believes that the value of
such features can not be reasonably estimated or reliably measured due to the
contingent nature of their occurrence. Additionally, the Company accreted the
accounting fair value of the Series E Stock from 107.53% of stated value to
215.06% of stated value over a two-year period through August 16, 2003,
since, as of that date, the Company was required to deliver to holders of
Series E Stock shares of common stock having a value of 215.06% of stated
value under the automatic conversion provisions of the Series E Stock. During
the year ended September 30, 2003, the Company recognized a gain of
$1,807,859 arising from changes in the fair value of the Series E Stock. The
Company also incurred $109,580 of interest expense on the Series E Stock
F-40
representing accretion of $98,791 and dividends classified as interest
expense of $10,789. During the year ended September 30, 2003, $99,624 in
accrued dividends and interest were converted into 97,389 shares of common
stock. All outstanding shares of the Company's Series E Preferred Stock, 39
shares, were automatically converted on August 17, 2003, into 47,531 common
shares. In addition, on August 17, 2003, the Company issued 23,758 Series E
Non-Callable common stock purchase warrants. See Note 6 for further
discussion of the Series E Non-Callable Warrants.
16. NET LOSS PER COMMON SHARE
Basic earnings per share (EPS) excludes dilution and is computed by dividing
net income by the weighted average of common shares outstanding for the
period. Diluted EPS reflects the potential dilution that could occur if
securities or other common stock equivalents (convertible preferred stock,
convertible debt, warrants to purchase common stock and common stock options)
were exercised or converted into common stock. The following table provides a
reconciliation of the numerators and denominators of the basic and diluted
per-share computations.
2005 2004 2003
------------- ------------ ------------
Net loss - basic $(3,039,607) $(2,952,077) $(7,986,175)
Add: Interest on convertible
preferred stock - - 75,574
Interest on convertible debt - 12,950 -
Gain on derivative instruments (286,373) (1,033,418) (1,807,859)
------------- ------------ ------------
Net loss - diluted $(3,325,980) $(3,972,545) $(9,718,460)
============= ============ ============
Weighted average number of
shares - basic 72,703,395 67,273,133 50,961,457
Incremental shares from:
Warrants 878,530 1,461,552 -
Convertible preferred stock - - 165,982
Convertible debt - 189,414 -
------------- ------------ ------------
Weighted average number of
shares - diluted 73,581,925 68,924,099 51,127,439
============= ============ ============
Earnings per share - basic $ (0.04) $ (0.04) $ (0.16)
Earnings per share - diluted $ (0.05) $ (0.06) $ (0.19)
Excluded from the above computations of weighted-average shares for diluted
net loss per share were options and warrants to purchase 10,787,480,
13,429,012 and 14,689,497 shares of common stock as of September 30, 2005,
2004 and 2003, respectively and convertible notes and accrued interest which
are convertible to 4,236,901 shares of common stock as of September 30, 2003.
These securities were excluded because their inclusion would have an
anti-dilutive effect on net loss per share.
F-41
17. SEGMENT REPORTING
SFAS No. 131, "Disclosure about Segments of an Enterprise and Related
Information" establishes standards for reporting information regarding
operating segments in annual financial statements and requires selected
information for those segments to be presented in interim financial reports
issued to stockholders. SFAS No. 131 also establishes standards for related
disclosures about products and services and geographic areas. Operating
segments are identified as components of an enterprise about which separate
discrete financial information is available for evaluation by the chief
operating decision maker, or decision-making group, in making decisions how
to allocate resources and assess performance. The Company's chief decision
maker, as defined under SFAS No. 131, is the Chief Executive Officer. To
date, the Company has viewed its operations as principally one segment, the
research and development of certain drugs and vaccines. As a result, the
financial information disclosed herein, materially represents all of the
financial information related to the Company's principal operating segment.
18. SUBSEQUENT EVENTS
In order to provide a possible source of funding for CEL-SCI's current
activities and for the development of its current and planned products,
CEL-SCI entered into an equity line of credit agreement with Jena Holdings
LLC on October 31, 2005.
Under the equity line of credit agreement, Jena Holdings LLC has agreed to
provide CEL-SCI with up to $5,000,000 of funding for a two year period which
will begin on the date that a registration statement filed by CEL-SCI to
register the shares to be sold to Jena Holdings LLC is declared effective by
the Securities and Exchange Commission. During this two year period, CEL-SCI
may request a drawdown under the equity line of credit by selling shares of
its common stock to Jena Holdings LLC, and Jena Holdings LLC will be
obligated to purchase the shares. The minimum amount CEL-SCI can draw down at
any one time is $100,000, and the maximum amount CEL-SCI can draw down at any
one time will be determined at the time of the drawdown request using a
formula contained in the equity line of credit agreement. CEL-SCI may request
a drawdown once every 22 trading days, although CEL-SCI is under no
obligation to request any drawdowns under the equity line of credit.
During the 22 trading days following a drawdown request, CEL-SCI will
calculate the amount of shares it will sell to Jena Holdings LLC and the
purchase price per share. The purchase price per share of common stock will
be based on the daily volume weighted average price of CEL-SCI's common stock
during each of the 22 trading days immediately following the drawdown date,
less a discount of 11%.
As consideration for extending the equity line of credit, CEL-SCI granted
Jena Holdings LLC warrants to purchase 271,370 shares of common stock at a
price of $0.55 per share at any time prior to October 24, 2010.
CEL-SCI will be registering the shares of common stock issuable to Jena
Holdings under the equity line of credit, as well as 271,370 shares
underlying the warrants that CEL-SCI granted to Jena Holdings LLC.
F-42
19. QUARTERLY INFORMATION (UNAUDITED)
The following quarterly data are derived from the Company's Consolidated
Statements of Operations and have been restated to reflect the effect of
adjustments discussed in Note 2 to the consolidated financial statements.
Financial Data
Fiscal 2004
Three Three Three Three
months months months months
ended ended ended ended Year ended
December September September
31, March 31, June 30, 30, 30
2003 2004 2004 2004 2004
------------------------------------------------------------
Revenue $ 73,235 $ 99,214 $ 81,532 $ 71,498 $ 325,479
Operating expenses 1,063,715 1,313,234 988,965 1,084,264 4,450,178
Nonoperating (expense) income
as previously reported (115,613) 8,747 13,823 18,020 (75,023)
Nonoperating (expense) income
(as restated, see Note 2) (390,953) (190,956) 1,261,080 493,451 1,172,622
Net loss as previously reported (1,106,093) (1,205,273) (893,610) (994,746) (4,199,722)
Net income (loss) (as restated,
see Note 2) (1,381,433) (1,404,976) 353,647 (519,315) (2,952,077)
Net loss attributable to common
shareholders as previously
reported (1,106,093) (1,205,273) (893,610) (994,746) (4,199,722)
Net income (loss) attributable
to common shareholders
(as restated, see Note 2) (1,381,433) (1,404,976) 353,647 (519,315) (2,952,077)
Loss per common share - basic
as previously reported (0.02) (0.02) (0.01) (0.01) (0.06)
Income (loss) per common share
- basic (as restated,
see Note 2) (0.02) (0.02) 0.01 (0.01) (0.04)
Loss per common share - diluted
as previously reported (0.02) (0.02) (0.01) (0.01) (0.06)
Income ( loss) per common share
- diluted (as restated,
see Note 2) (0.02) (0.02) (0.01) (0.01) (0.06)
F-43
Fiscal 2005
Three Three Three Three
months months months months
ended ended ended ended Year ended
December September September
31, March 31, June 30, 30, 30
2004 2005 2005 2005 2005
------------------------------------------------------------
Revenue $ 75,507 $ 109,785 $ 38,103 $ 46,530 $ 269,925
Operating expenses 1,289,997 1,198,617 1,022,474 839,604 4,350,692
Nonoperating (expense) income
as previously reported 17,820 14,474 11,015 * *
Nonoperating (expense) income
(as restated, see Note 2) (14,953) (60,608) 330,585 786,136 1,041,160
Net loss as previously reported (1,196,670) (1,074,358) (973,356) * *
Net income (loss) (as restated,
see Note 2) (1,229,443) (1,149,440) (653,786) (6,938) (3,039,607)
Net loss attributable to
common shareholders as
previously reported (1,196,670) (1,074,358) (973,356) * *
Net income (loss) attributable
to common shareholders
(as restated, see Note 2) (1,229,443) (1,149,440) (653,786) (6,938) (3,039,607)
Loss per common share - basic
as previously reported (0.02) (0.01) (0.01) * *
Income ( loss) per common share
- basic (as restated,
see Note 2) (0.02) (0.02) (0.01) - (0.04)
Loss per common share - diluted
as previously reported (0.02) (0.01) (0.01) * *
Income ( loss) per common share
- diluted (as restated,
see Note 2) (0.02) (0.02) (0.01) - (0.05)
* Amounts for the three months ended September 30, 2005 and for the year ended
September 30, 2005 have not been previously reported or restated.
F-44
CEL-SCI CORPORATION
INTERIM FINANCIAL STATEMENTS
JUNE 30, 2006
(UNAUDITED)
Item 1. FINANCIAL STATEMENTS
CEL-SCI CORPORATION
-------------------
CONDENSED CONSOLIDATED BALANCE SHEETS
------------------------
(unaudited)
ASSETS June 30, September 30,
2006 2005
-------- -------------
CURRENT ASSETS:
Cash and cash equivalents $ 1,360,943 $ 1,957,614
Interest and other receivables 30,419 21,164
Prepaid expenses and laboratory supplies 700,056 432,652
Deferred financing costs 5,000 --
------------ ------------
Total current assets 2,096,418 2,411,430
RESEARCH AND OFFICE EQUIPMENT-
Less accumulated depreciation of
$1,760,760 and $1,690,788 112,163 181,541
PATENT COSTS- less accumulated
amortization of $875,694 and $816,169 504,647 484,553
DEPOSITS 14,828 14,828
------------ ------------
TOTAL ASSETS $ 2,728,056 $ 3,092,352
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 112,083 $ 74,354
Accrued expenses 78,007 74,619
Due to employees 60,882 22,880
Derivative instruments - current portion 1,495 1,280
------------ ------------
Total current liabilities 252,467 173,133
Derivative instruments - noncurrent portion -- 811,180
Deposits held 3,000 3,000
------------ ------------
Total liabilities 255,467 987,313
STOCKHOLDERS' EQUITY
Common stock, $.01 par value; authorized,
200,000,000 shares; issued and outstanding,
81,462,038 and 74,494,206 shares at June 30,
2006 and September 30, 2005, respectively 814,620 744,942
Additional paid-in capital 104,279,407 100,359,296
Accumulated deficit (102,621,438) (98,999,199)
------------ ------------
Total stockholders' equity 2,472,589 2,105,039
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 2,728,056 $ 3,092,352
============= ============
See notes to condensed consolidated financial statements.
3
CEL-SCI CORPORATION
-------------------
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
---------------------------------
(unaudited)
Nine Months Ended June 30,
-------------------------
2006 2005
---- ----
REVENUES:
Grant revenue and other $ 106,370 $ 223,395
---------- -----------
EXPENSES:
Research and development excluding
depreciation of $55,532 and $49,999
included below 1,290,843 1,824,044
Depreciation and amortization 130,143 149,590
General and administrative 2,353,956 1,537,454
----------- ------------
Total Operating Expenses 3,774,942 3,511,088
----------- ------------
NET OPERATING LOSS (3,668,572) (3,287,693)
GAIN ON DERIVATIVE INSTRUMENTS 13,130 211,715
INTEREST INCOME 33,203 43,309
----------- ------------
NET LOSS $(3,622,239) $(3,032,669)
=========== ===========
NET LOSS PER COMMON SHARE (BASIC) $ (0.05) $ (0.04)
============ ============
NET LOSS PER COMMON SHARE (DILUTED) $ (0.05) $ (0.04)
============ ============
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING 78,076,239 72,316,654
============= ==========
See notes to condensed consolidated financial statements.
4
CEL-SCI CORPORATION
-------------------
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
---------------------------------
(unaudited)
Three Months Ended June 30,
--------------------------
2006 2005
---- ----
REVENUES:
Grant revenue and other $ 39,708 $ 38,103
------------ -------------
EXPENSES:
Research and development, excluding
depreciation of $18,511 and $16,666
included below 429,097 538,053
Depreciation and amortization 42,718 39,822
General and administrative 873,350 444,599
------------ -------------
Total Operating Expenses 1,345,165 1,022,474
------------ -------------
NET OPERATING LOSS (1,305,457) (984,371)
GAIN ON DERIVATIVE INSTRUMENTS 1,615 319,570
INTEREST INCOME 9,801 11,015
------------ -------------
NET LOSS $ (1,294,041) $ (653,786)
============= =============
NET LOSS PER COMMON SHARE (BASIC) $ (0.02) $ (0.01)
============= =============
NET LOSS PER COMMON SHARE (DILUTED) $ (0.02) $ (0.01)
============= =============
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING 80,874,687 72,484,497
============= =============
See notes to condensed consolidated financial statements.
5
CEL-SCI CORPORATION
-------------------
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
---------------------------------
(unaudited)
Nine Months Ended June 30,
2006 2005
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
NET LOSS $ (3,622,239) $ (3,032,669)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 130,143 149,590
Issuance of common stock, warrants and
stock options for services 605,951 7,972
Employee option cost 142,690 --
Common stock contributed to 401(k) plan 64,663 60,928
Decrease in unearned compensation -- 11,649
Impairment loss on abandonment of patents -- 3,716
Impairment loss on retired equipment 645 267
Gain on derivative instruments (13,130) (211,715)
(Increase) decrease in receivables (9,255) 4,880
(Increase) decrease in prepaid expenses (267,404) 123,069
Increase in deferred financing costs (5,000) --
Increase in accrued expenses 3,388 20,959
Increase in amount due to employees 38,002 15,166
Increase (decrease) in accounts payable 28,580 (28,173)
------------- -------------
NET CASH USED FOR OPERATING ACTIVITIES (2,902,966) (2,874,361)
------------- -------------
CASH FLOWS USED FOR INVESTING ACTIVITIES:
Purchase of equipment (1,885) (65,735)
Patent costs (70,470) (39,992)
------------- -------------
NET CASH USED FOR INVESTING ACTIVITIES (72,355) (105,727)
------------- -------------
CASH FLOWS PROVIDED BY FINANCING ACTIVITIES:
Private placement proceeds 1,000,000 --
Drawdown on equity line (net) 677,727 163,636
Proceeds from exercise of stock options
and warrants 700,923 41,501
------------- -------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 2,378,650 205,137
------------ -------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (596,671) (2,774,951)
CASH AND CASH EQUIVALENTS:
Beginning of period 1,957,614 4,263,631
------------- -------------
End of period $ 1,360,943 $ 1,488,680
=========== ===========
(continued)
See notes to condensed consolidated financial statements.
6
CEL-SCI CORPORATION
-------------------
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
---------------------------------
(unaudited)
(continued)
Nine Months Ended June 30,
2006 2005
---- ----
SUPPLEMENTAL INFORMATION ON NONCASH TRANSACTIONS:
Patent costs included in accounts payable:
Increase in accounts payable $ 9,149 $ 38,135
Increase in patent costs (9,149) (38,135)
------------ -------------
$ -- $ --
============= =============
Reclassification of derivative instruments:
Decrease in derivative instruments $ 797,835 $ --
Increase in additional paid-in capital (797,835) --
------------ -------------
$ -- $ --
============= =============
Cost of new warrants and repricing of
old warrants on private placement:
Decrease in additional paid-in capital $ 1,192,949 $ --
Increase in additional paid-in capital (1,192,949) --
------------ -------------
$ -- $ --
============ =============
Cashless exercise of warrants:
Decrease in additional paid-in capital $ 8,822 $ --
Increase in common stock (8,822) --
------------ -------------
$ -- $ --
============ =============
concluded
See notes to condensed consolidated financial statements.
7
CEL-SCI CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED JUNE 30, 2006 AND 2005
(unaudited)
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying condensed consolidated financial statements of CEL-SCI
Corporation and subsidiary (the Company) are unaudited and certain
information and footnote disclosures normally included in the annual
financial statements prepared in accordance with accounting principles
generally accepted in the United States of America have been omitted
pursuant to the rules and regulations of the Securities and Exchange
Commission. While management of the Company believes that the disclosures
presented are adequate to make the information presented not misleading,
interim consolidated financial statements should be read in conjunction
with the consolidated financial statements and notes included in the
Company's annual report on Form 10-K for the year ended September 30,
2005.
In the opinion of management, the accompanying unaudited condensed
consolidated financial statements contain all accruals and adjustments
(each of which is of a normal recurring nature) necessary for a fair
presentation of the financial position as of June 30, 2006 and the results
of operations for the three and nine-month periods then ended. The
condensed consolidated balance sheet as of September 30, 2005 is derived
from the September 30, 2005 audited consolidated financial statements.
Significant accounting policies have been consistently applied in the
interim financial statements and the annual financial statements. The
results of operations for the three and nine-month periods ended June 30,
2006 are not necessarily indicative of the results to be expected for the
entire year.
Significant accounting policies are as follows:
Principles of Consolidation -- The consolidated financial statements
include the accounts of CEL-SCI Corporation and its wholly owned
subsidiary, Viral Technologies, Inc. All intercompany transactions have
been eliminated upon consolidation.
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 term of the lease. Repairs and maintenance are expensed when incurred.
During the nine-month periods ended June 30, 2006 and 2005, the Company
retired equipment with a net book value of $645 and $267 respectively.
Research and Development Costs -- Research and development (R&D)
expenditures are expensed as incurred. The Company has an agreement with
Cambrex Bio Science, an unrelated corporation, for the production of
Multikine(R), which is the Company's only product source. All production
costs of Multikine are expensed to R&D immediately.
8
CEL-SCI CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED JUNE 30, 2006 AND 2005
(unaudited)
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.
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 would be the difference between the estimated fair value of the asset
and its carrying value. During the nine months ended June 30, 2006 and
2005, the Company recorded patent impairment charges of $-0- and $3,716,
respectively. These charges are the net book value of patents abandoned
during the period and such amount is included in general and
administrative expenses. Based on current patent applications and issued
patents, CEL-SCI expects that the amortization of patent expenses will
total approximately $350,000 during the next five years.
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 shares,
including convertible options to purchase common stock, were excluded from
the calculation because they are antidilutive.
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 R&D 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.
Cash and Cash Equivalents -- For purposes of the statements of cash flows,
cash and cash equivalents consists principally of unrestricted cash on
deposit and short-term money market funds. The Company considers all
highly liquid investments with a maturity when purchased of less than
three months, and those investments that are readily convertible to known
amounts of cash and are so close to maturity that they bear no interest
rate risk, to be cash equivalents.
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.
9
CEL-SCI CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED JUNE 30, 2006 AND 2005
(unaudited)
Asset Valuations and Review for Potential Impairment -- The Company
reviews its fixed assets every quarter. This review requires that the
Company 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,
the Company 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. The Company 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 our determination of fair values or if
there is a material change in economic conditions or circumstances
influencing fair value, the Company could be required to recognize certain
impairment charges in the future.
Stock-Based Compensation -- In October 1996, the Financial Accounting
Standards Board (FASB) issued Statement of Financial Accounting Standards
No. 123, Accounting for Stock-Based Compensation (SFAS No. 123). This
statement encouraged but did not require companies to account for employee
stock compensation awards based on their estimated fair value at the grant
date with the resulting cost charged to operations. The Company had
elected to continue to account for its employee stock-based compensation
using the intrinsic value method prescribed in Accounting Principles Board
Opinion No. 25, Accounting for Stock Issued to Employees and related
Interpretations". In December 2004 the FASB issued SFAS No. 123R,
"Share-Based Payment". SFAS No. 123R requires companies to recognize
expense associated with share based compensation arrangements, including
employee stock options, using a fair value-based option pricing model.
SFAS No. 123R applies to all transactions involving issuance of equity by
a company in exchange for goods and services, including employees. Using
the modified prospective transition method of adoption, CEL-SCI reflects
compensation expense in the financial statements beginning October 1,
2005. The modified prospective transition method does not require
restatement of prior periods to reflect the impact of SFAS No. 123R. As
such, compensation expense will be recognized for awards that were
granted, modified, repurchased or cancelled on or after October 1, 2005 as
well as for the portion of awards previously granted that vested during
the period ended June 30, 2006. For the nine months ended June 30, 2006,
the Company recorded $142,690 in general and administrative expense for
the cost of employee options. The Company's options vest over a three-year
period from the date of grant. After one year, the stock is one-third
vested, with an additional one-third vesting after two years and the final
one-third vesting at the end of the three-year period. There were no
options granted during the nine-month period ended June 30, 2006. Options
are granted with an exercise price equal to the closing bid price of the
Company's stock on the day before the grant. The Company determines the
fair value of the employee compensation using the Black Scholes method of
valuation. This method requires several assumptions, including the
following assumptions for the options vesting during the nine-months ended
June 30, 2006.
10
Volatility 74% - 106%
Dividend yield 0%
Risk-free interest rate 3.12% - 4.25%
Expected average life 5 years
Exercise price per option $0.22 - $1.67
CEL-SCI has Incentive Stock Option Plans, Non-Qualified Stock Option
Plans, a Stock Compensation Plan and Stock Bonus Plans. All Stock Option
and Bonus Plans have been approved by the stockholders. A summary
description of these Plans follows. In some cases these Plans are
collectively referred to as the "Plans".
Incentive Stock Option Plan. The Incentive Stock Option Plans authorize
the issuance of shares of CEL-SCI's common stock to persons who exercise
options granted pursuant to the Plan. Only Company employees may be
granted options pursuant to the Incentive Stock Option Plan.
To be classified as incentive stock options under the Internal Revenue
Code, options granted pursuant to the Plans must be exercised prior to the
following dates:
(a) The expiration of three months after the date on which an option
holder's employment by CEL-SCI is terminated (except if such
termination is due to death or permanent and total disability);
(b) The expiration of 12 months after the date on which an option
holder's employment by CEL-SCI is terminated, if such termination is
due to the Employee's permanent and total disability;
(c) In the event of an option holder's death while in the employ of
CEL-SCI, his executors or administrators may exercise, within three
months following the date of his death, the option as to any of the
shares not previously exercised;
The total fair market value of the shares of Common Stock (determined at
the time of the grant of the option) for which any employee may be granted
options which are first exercisable in any calendar year may not exceed
$100,000.
Options may not be exercised until one year following the date of grant.
Options granted to an employee then owning more than 10% of the Common
Stock of CEL-SCI may not be exercisable by its terms after five years from
the date of grant. Any other option granted pursuant to the Plan may not
be exercisable by its terms after ten years from the date of grant.
11
CEL-SCI CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED JUNE 30, 2006 AND 2005
(unaudited)
The purchase price per share of Common Stock purchasable under an option
is determined by the Committee but cannot be less than the fair market
value of the Common Stock on the date of the grant of the option (or 110%
of the fair market value in the case of a person owning more than 10% of
CEL-SCI's outstanding shares).
Non-Qualified Stock Option Plans. The Non-Qualified Stock Option Plans
authorize the issuance of shares of CEL-SCI's common stock to persons that
exercise options granted pursuant to the Plans. CEL-SCI's employees,
directors, officers, consultants and advisors are eligible to be granted
options pursuant to the Plans, provided however that bona fide services
must be rendered by such consultants or advisors and such services must
not be in connection with the offer or sale of securities in a
capital-raising transaction. The option exercise price is determined by
the Committee but cannot be less than the market price of CEL-SCI's Common
Stock on the date the option is granted.
The following table summarizes stock option activity for the nine months
ended June 30, 2006.
Non-Qualified Stock Option Plan
Outstanding Exercisable
------------------------------------------------------ ------------------------------------------------------
Weighted Weighted
Average Average
Weighted Remaining Aggregate Weighted Remaining Aggregate
Number of Average Contractual Intrinsic Number of Average Contractual Intrinsic
Shares Exercise Price Term (Years) Value Shares Exercise Price Term (Years) Value
------------------------------------------------------ ------------------------------------------------------
Outstanding
at October
1, 2005 6,215,363 $ 0.66 5.80 $ 642,085 4,642,893 $ 0.76 4.98 $432,032
Vested - -
Granted - -
Exercised (71,335) 0.22 7.33 19,260 (71,335) 0.22 7.33 19,260
Forfeited - -
Expired - -
--------- --------
Outstanding
at December
31, 2005 6,144,028 0.67 5.80 659,395 4,571,558 0.77 4.98 434,222
Vested - -
Granted
Exercised - -
Forfeited - -
Expired -
--------- --------
Outstanding
at March 31,
2006 6,144,028 0.67 5.51 1,486,298 4,571,558 0.77 4.77 932,715
12
Outstanding Exercisable
------------------------------------------------------ ------------------------------------------------------
Weighted Weighted
Average Average
Weighted Remaining Aggregate Weighted Remaining Aggregate
Number of Average Contractual Intrinsic Number of Average Contractual Intrinsic
Shares Exercise Price Term (Years) Value Shares Exercise Price Term (Years) Value
------------------------------------------------------ ------------------------------------------------------
Vested -- 847,812 0.22
Granted -- -
Exercised (65,966) 0.26 6.55 40,048 (65,966) 0.26 6.55 40,048
Forfeited -- -
Expired -- -
-------- -------
Outstanding 6,078,062 $0.67 5.33 $1,953,297 5,353,404 $ 0.71 4.70 $1,326,170
at June 30,
2006
Incentive Stock Option Plan
Outstanding Exercisable
------------------------------------------------------ ------------------------------------------------------
Weighted Weighted
Average Average
Weighted Remaining Aggregate Weighted Remaining Aggregate
Number of Average Contractual Intrinsic Number of Average Contractual Intrinsic
Shares Exercise Price Term (Years) Value Shares Exercise Price Term (Years) Value
------------------------------------------------------ ------------------------------------------------------
Outstanding
at October
1, 2005 3,972,633 $ 0.68 6.18 $ 630,833 2,885,968 $ 0.81 5.52 $ 418,334
Vested - -
Granted - -
Exercised - -
Forfeited - -
Expired - -
--------- ---------
Outstanding
at December
31, 2005 3,972,633 0.68 6.18 683,000 2,885,968 0.81 5.52 451,800
Vested - 33,333 1.13
Granted - -
Exercised - -
Forfeited - -
Expired (1,500) 1.05 (1,500) 1.05
--------- ---------
Outstanding
at March 31,
2006 3,971,133 0.68 5.93 1,329,400 2,917,801 0.82 5.35 853,400
Vested - 849,999 0.22
Granted - -
Exercised - -
Forfeited (1,200) 8.43 (1,200) 8.43
Expired - -
-------- ---------
Outstanding 3,969,933 $0.67 5.68 $1,679,533 3,766,600 $0.88 6.09 $1,365,120
at
June 30,
2006
The total intrinsic value of options exercised during the nine months ended June
30, 2006 and 2005 was $60,955 and $79,263, respectively.
A summary of the status of the Company's non-vested options as of June 30, 2006
is presented below:
13
Weighted
Average
Number of Grant Date
Shares Fair Value
--------- ----------
Non-Qualified Stock Option Plan
-------------------------------
Nonvested at October 1, 2005 1,572,470 $ 0.25
Vested -
Granted -
Forfeited -
Expired -
---------
Nonvested at December 31, 2005 1,572,470 0.25
Vested -
Granted -
Forfeited -
Expired -
---------
Nonvested at March 31, 2006 1,572,470 0.25
Vested (847,812) 0.22
Granted -
Forfeited -
Expired -
---------
Nonvested at June 30, 2006 724,658 $ 0.56
Incentive Stock Option Plan
---------------------------
Nonvested at October 1, 2005 1,086,665 $ 0.21
Vested
Granted -
Forfeited -
Expired -
---------
Nonvested at December 31, 2005 1,086,665 0.21
Vested (33,333) 0.79
Granted -
Forfeited -
Expired -
----------
Nonvested at March 31, 2006 1,053,332 0.18
Vested (849,999) 0.22
Granted -
Forfeited -
Expired -
---------
Nonvested at June 30, 2006 203,333 $ 0.59
14
No corresponding expense was recorded for the nine months ended June 30,
2005 because the statement did not require the cost to be recorded in that
period. Under SFAS 148, "Accounting for Stock-Based Compensation -
Transition and Disclosure", which was in effect during the nine months
ended June 30, 2005, the Company's net loss and net loss per common share
would have been increased to the pro forma amounts indicated below:
Nine Three
Months Months
Ended Ended
June 30, June 30,
2005 2005
---------- ----------
Net loss:
As reported and amended $(3,244,384) $(973,356)
Add: Total stock-based employee compensation
expense determined under fair-value-based
method for all awards, net of related tax
effects (419,789) (144,949)
----------- --------
Pro forma net loss, as amended $(3,664,173) $(1,118,305)
=========== ===========
Net loss per share, as reported and amended $ 0.04 $ 0.01
=========== ===========
Pro forma net loss per share $ 0.05 $ 0.02
=========== ===========
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 management
to make assumptions regarding the fair value of the options at the date of
grant and the expected life of the options.
B. NEW ACCOUNTING PRONOUNCEMENTS
In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error
Corrections--A replacement of APB Opinion No. 20 and FASB Statement No.
3". The statement requires that retrospective application of a change in
accounting principle be limited to the direct effects of the change and is
part of a broader effort by the FASB to improve the comparability of
cross-border financial reporting by working with the International
Accounting Standards Board (IASB) toward development of a single set of
high-quality accounting standards. The Company does not believe that SFAS
No. 154 will have a material impact on its results of operations or cash
flows.
15
In March 2005, the FASB issued FIN No. 47, "Accounting for Conditional
Asset Retirement Obligations - an Interpretation of FASB Statement No.
143". The interpretation clarifies terms used in FASB Statement No. 143 and
is effective no later than the end of fiscal years ending after December
15, 2005. The Company does not believe that FIN No. 47 will have a material
impact on its results of operations or cash flows.
In February 2006, the FASB issued SFAS No. 155, "Hybrid Instruments". The
statement amends SFAS No. 133 and SFAS No. 140, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities". The
statement also resolves issues addressed in Statement 133 Implementation
Issue No. D1, "Application of Statement 133 to Beneficial Interests in
Securitized Financial Assets." The statement: a) permits fair value
remeasurement for any hybrid financial instrument that contains an embedded
derivative that otherwise would require bifurcation, b) clarifies which
interest-only strips and principal-only strips are not subject to the
requirements of SFAS No. 133, c) establishes a requirement to evaluate
interests in securitized financial assets to identify interests that are
freestanding derivatives or that are hybrid financial instruments that
contain an embedded derivative requiring bifurcation, d) clarifies that
concentrations of credit risk in the form of subordination are not embedded
derivatives, and e) amends Statement 140 to eliminate the prohibition on a
qualifying special purpose entity from holding a derivative financial
instrument that pertains to a beneficial interest other than another
derivative financial instrument. CEL-SCI does not believe that SFAS No. 155
will have a material impact on its results of operations or cash flows.
FASB issued SFAS No. 156, "Accounting for Servicing of Financial Assets -
an amendment of FASB Statement No. 140". The statement requires: 1) an
entity to recognize a servicing asset or servicing liability each time it
undertakes an obligation to service a financial asset; 2) requires all
separately recognized servicing assets and servicing liabilities to be
initially measured at fair value; 3) permits an entity to choose either the
amortization method or the fair value measurement method for measuring the
asset or liability; 4) permits a one-time reclassification of
available-for-sale securities to trading securities; and 5) requires
separate presentation of servicing assets and servicing liabilities
subsequently measured at fair value in the statement of financial position.
Since the Company has no servicing assets or servicing liabilities, the
Company believes that there will be no impact on its results of operations
or cash flows. The statement is effective for fiscal years beginning after
September 15, 2006.
C. STOCKHOLDERS' EQUITY
During the nine months ended June 30, 2006, the Company issued stock and
stock warrants for services to a nonemployee with a fair value of $605,951.
During the nine months ended June 30, 2005, the Company issued stock or
stock options for services to a nonemployee with a fair value of $7,972.
16
D. FINANCING TRANSACTIONS
In July and September 2002, the Company sold convertible notes, plus
Series G warrants, to a group of private investors. As of the year ended
September 30, 2003, all of the notes had been converted into common stock.
The Series G warrants allow the holders to purchase up to 900,000 shares
of the Company's common stock. As of June 30, 2006, all warrants had been
exercised. In addition, in January 2003, the Company sold convertible
notes, plus Series H warrants to purchase 1,100,000 shares of common
stock, to a group of private investors. As of October 2, 2003, all of the
Series H notes had been converted into common stock. As of June 30, 2006,
all Series H warrants had been exercised. Both the Series G and Series H
warrants were exercised in a cashless transaction.
On December 1, 2003, the Company sold 2,994,964 shares of its common stock
to a group of private institutional investors for approximately
$2,550,000, or $0.85 per share. As part of this transaction, the investors
in the private offering received warrants which allow the investors to
purchase 991,003 shares of the Company's common stock at a price of $1.32
per share at any time prior to December 1, 2006. As of June 30, 2006, all
warrants remain outstanding.
In connection with this private placement, the Company was required to
file a registration statement by December 31, 2003. The registration
statement was to have been declared effective by the SEC no later than
March 30, 2004. If the registration statement was declared effective later
than March 30, 2004, the Company was subject to paying liquidated damages
to the investors. In accordance with this agreement, the Company recorded
an expense of $76,499 during the year ended September 30, 2004.
On May 4, 2004, the Company announced the completion of an offering of
6,402,439 shares of registered common stock at $0.82 per share to one
institutional investor. This sale resulted in gross proceeds of $5.25
million and associated costs of $498,452. The stock was offered pursuant
to an existing shelf registration statement and Wachovia Capital Markets,
LLC acted as the placement agent for the offering. The Company used the
proceeds of the offering to advance the clinical development of Multikine
for the treatment of cancer. In addition, 76,642 warrants were issued to
Wachovia at a price of $1.37 and the warrants expire May 4, 2009. The
warrants were valued using the Black-Scholes valuation method and an
expense of $38,127 was recorded to additional paid-in capital as a cost of
equity related transaction during the year ended September 30, 2004.
On July 18, 2005, CEL-SCI sold 1,250,000 shares of its common stock and
375,000 warrants to one investor for $500,000. Each warrant entitles the
holder to purchase one share of CEL-SCI's common stock at a price of $0.65
per share at any time prior to July 18, 2009. The shares of common stock
and warrants are "restricted" securities as defined in Rule 144 of the
Securities and Exchange Commission. The warrants were valued at $155,671.
17
In order to provide a possible source of funding for CEL-SCI's current
activities and for the development of its current and planned products,
CEL-SCI entered into an equity line of credit agreement with Jena Holdings
LLC on October 31, 2005.
Under the equity line of credit agreement, Jena Holdings LLC has agreed to
provide CEL-SCI with up to $5,000,000 of funding for a two year period
which will begin on the date that a registration statement filed by
CEL-SCI to register the shares to be sold to Jena Holdings LLC is declared
effective by the SEC. During this two year period, CEL-SCI may request a
drawdown under the equity line of credit by selling shares of its common
stock to Jena Holdings LLC, and Jena Holdings LLC will be obligated to
purchase the shares. The minimum amount CEL-SCI can draw down at any one
time is $100,000, and the maximum amount CEL-SCI can draw down at any one
time will be determined at the time of the drawdown request using a
formula contained in the equity line of credit agreement. CEL-SCI may
request a drawdown once every 22 trading days, although CEL-SCI is under
no obligation to request any drawdowns under the equity line of credit.
During the 22 trading days following a drawdown request, CEL-SCI will
calculate the amount of shares it will sell to Jena Holdings LLC and the
purchase price per share. The purchase price per share of common stock
will be based on the daily volume weighted average price of CEL-SCI's
common stock during each of the 22 trading days immediately following the
drawdown date, less a discount of 11%. As consideration for extending the
equity line of credit, CEL-SCI granted Jena Holdings LLC warrants to
purchase 271,370 shares of common stock at a price of $0.55 per share at
any time prior to October 24, 2010. CEL-SCI will be registering the shares
of common stock issuable to Jena Holdings under the equity line of credit,
as well as 271,370 shares underlying the warrants that CEL-SCI granted to
Jena Holdings LLC. During the three-month period ended December 31, 2005,
the Company made drawdowns on a previous equity line of credit totaling
$677,727, selling 1,419,446 shares of common stock. This equity line of
credit expired on December 29, 2005.
On February 9, 2006, CEL-SCI sold 2,500,000 unregistered shares of its
common stock and 750,000 unregistered 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 issued to the investor in December 2003 were repriced and
extended for one year. The revaluing of the warrants was valued at
$76,122. In addition, on May 18, 2006, 800,000 unregistered warrants were
issued to the same investor at a strike price of $0.82. These warrants
were valued using the Black Scholes method at $416,921 (73% volatility, 5
years expected life, 4.96% discount rate) and expire in 5 years. These
warrants were recorded in equity.
18
On April 17, 2006, 800,000 unregistered warrants were issued to an investor
with a strike price of $1.25 per share. These warrants were valued at
$460,920 using the Black Scholes method (77% volatility, 2.17 years
expected life, 4.91% discount rate) and expire in August of 2008. They were
recorded in equity. An additional 100,000 unregistered warrants were issued
to an investor relations consultant on April 12, 2006. These warrants were
valued at $79,976 using the Black Scholes method (77% volatility, 3 years
expected life, 4.90% discount rate) and expire in April 2009. They were
recorded as general and administrative expense. A public relations and
corporate presentation consultant group was issued 375,000 unregistered
shares of CEL-SCI Corporation common stock and 375,000 unregistered
warrants to purchase additional shares at $0.73. These warrants will be
expensed to general and administrative expense over the one-year contract
period. These warrants expire March 31, 2007 and were valued at $58,005
using the Black Scholes method (77% volatility, 1 year expected life, 4.86%
discount rate). Also during the quarter ended June 30, 2006, 1,300,000
warrants were exercised, resulting in an increase in equity of $665,000.
Cashless exercise of 882,222 warrants also occurred during the quarter
ended June 30, 2006.
E. RESTATEMENT OF FINANCIAL STATEMENTS
Subsequent to the issuance of the Company's September 30, 2004 consolidated
financial statements, the Company determined that it had erroneously
accounted for certain financial instruments, including free-standing and
embedded derivatives within such instruments, issued by the Company from
fiscal year 1992 through November 2003. Specifically, the instruments
erroneously accounted for were: the Series E Preferred Stock, the Cambrex
Convertible Note Payable, Series F, G and H Convertible Debt, the equity
line of credit agreements, as well as Series I and J warrants and various
other warrants. The Company has concluded that these instruments were
either freestanding derivative instruments in their entirely, or contained
embedded derivatives, and should have been accounted for under SFAS No. 133
and EITF 00-19, as well as related interpretations of these standards. All
such derivatives were required to be recognized as either assets or
liabilities in the statement of financial position and measured at fair
value in the statement of operations. At June 30, 2006, the only remaining
instrument that needs this valuation is the Series E warrants, which expire
on August 16, 2006. For a further discussion of this restatement and an
assessment of each instrument, please see the Company's September 30, 2005
10-K, footnote 2.
F. OPERATIONS AND FINANCING
The Company has incurred significant costs since its inception in
connection with the acquisition of an exclusive worldwide license to
certain patented and unpatented proprietary technology and know-how
relating to the human immunological defense system, patent applications,
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
19
product sales. The ability of the Company to complete the necessary
clinical trials and obtain FDA approval for the sale of products to be
developed on a commercial basis is uncertain. The Company plans to seek
continued funding of the Company's development by raising additional
capital. It is the opinion of management that sufficient funds will be
available from external financing and additional capital and/or expenditure
reductions in order to meet the Company's liabilities and commitments as
they come due during fiscal years 2006 and 2007. Ultimately, the Company
must complete the development of its products, obtain the appropriate
regulatory approvals and obtain sufficient revenues to support its cost
structure.
G. SUBSEQUENT EVENT
CONVERTIBLE DEBT INSTRUMENT AND WARRANT LIABILITIES
In August 2006, the Company issued $8,300,000 million in aggregate principal
amount of convertible notes (the "Notes") together with warrants to purchase
4,825,581 shares of the Company's common stock (the "Warrants"). Additionally,
in connection with issuance of the Notes and 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 approximately $7.75 million, net of approximately $550,000 in direct
transaction costs, including the placement agent fee.
Features of the Convertible Debt Instrument and Warrants
The Notes are convertible into 9,651,163 shares of the Company's common stock at
the option of the holder at any time prior to maturity at a conversion price of
$0.86 per share, subject to adjustment for certain events described below. The
Warrants are exercisable over a five-year period from February 4, 2007 through
February 4, 2012 at $0.95 per share.
The Notes bear interest at the greater of 8% or six month LIBOR plus 300 basis
points, and are required to be repaid in thirty equal monthly installments
beginning in March 7, 2007 and continuing through September 7, 2010. Interest is
payable quarterly beginning in September 30, 2006. Each payment of principal and
accrued interest may be settled in cash or in shares of common stock at the
option of the Company. The number of shares deliverable under the
share-settlement option is determined based on the lower of (a) $0.86 per share,
as adjusted pursuant to the terms of the 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 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)
20
all other amounts due in connection with the 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 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 Notes
can be converted be declared effective by the SEC within 120 days of the
issuance date of the 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
Notes (the "Issuable Maximum"), unless prior approval is given by vote of at
least a majority of the shares. 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 Notes
will depend on future share prices. As required by the transaction documents for
these securities, the Company is seeking shareholder approval for the issuance
of in excess of the Issuable Maximum, even though the Issuable Maximum may not
be exceeded.
The conversion price of the Notes and exercise price of the 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 will account for the Warrants as derivative liabilities in
accordance with SFAS No. 133, "Accounting for Derivative Financial Instruments
Indexed to and Potentially Settled in a Company's Own Stock." The Company has
determined that the Notes constitute a hybrid instrument that have 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. As permitted by SFAS No. 155,
"Accounting for Certain Hybrid Financial Instruments--an amendment of FASB
Statements No. 133 and 140", the Company will irrevocably electe to initially
and subsequently measure the Notes in their entirety at fair value with changes
in fair value recognized as either a gain or loss.
Upon issuance of the Notes and Warrants, the Company will allocate proceeds
received to the Notes and the Warrants on a relative fair value basis. The Notes
will then be immediately marked to fair value and a charge to change in fair
value of convertible debt instrument and warrant liabilities will be recorded.
21
The debt discount in the Notes resulting from the allocation of proceeds will be
amortized to interest expense using the effective interest method over the
expected term of the Notes.
Upon issuance, the 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 will allocate a portion of the initial proceeds to the Warrants and
immediately mark them to fair value which will result in a derivative liability
and a charge to change in fair value of convertible debt instrument and warrant
liabilities.
Transaction costs will be 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 Notes at fair
value with changes in fair value recognized in earnings.
22
No dealer salesman or other person has been authorized to give any
information or to make any representations, other than those contained in this
prospectus. Any information or representation not contained in this prospectus
must not be relied upon as having been authorized by CEL-SCI. This prospectus
does not constitute an offer to sell, or a solicitation of an offer to buy, the
securities offered hereby in any state or other jurisdiction to any person to
whom it is unlawful to make such offer or solicitation. Neither the delivery of
this prospectus nor any sale made hereunder shall, under any circumstances,
create an implication that there has been no change in the affairs of CEL-SCI
since the date of this prospectus.
TABLE OF CONTENTS
Page
Prospectus Summary .......................................
Risk Factors ..............................................
Comparative Share Data ....................................
Market for CEL-SCI's Common Stock..........................
Management's Discussion and Analysis of.
Financial Condition and Results of Operations............
Business...................................................
Management.................................................
Principal Shareholders ....................................
Selling Shareholders and Plan of Distribution .............
Description of Securities .................................
Experts ...................................................
Indemnification ...........................................
Additional Information ....................................
Financial Statements ......................................
Common stock
CEL-SCI CORPORATION
PROSPECTUS
PART II
Information Not Required in Prospectus
Item 13. Other Expenses of Issuance and Distribution
-------------------------------------------
SEC Filing Fee $ 1,711
Legal Fees and Expenses 40,000
Accounting Fees and Expenses 40,000
Miscellaneous Expenses 8,289
-------
TOTAL $ 90,000
=======
All expenses other than the SEC filing fees are estimated.
Item 14. Indemnification of Officers and Directors.
-----------------------------------------
Section 7-109-102 of the Colorado Revised Statutes and CEL-SCI's Bylaws
provides that CEL-SCI may indemnify any and all of its officers, directors,
employees or agents or former officers, directors, employees or agents, against
expenses actually and necessarily incurred by them, in connection with the
defense of any legal proceeding or threatened legal proceeding, except as to
matters in which such persons shall be determined to not have acted in good
faith and in the best interest of CEL-SCI.
Item 15. Recent Sales of Unregistered Securities.
----------------------------------------
The following table lists all unregistered sales of CEL-SCI's common stock
during the past three years.
Number of
Shareholder Date Issued Shares Consideration
----------- ----------- ---------- -------------
$
Bristol DLP, LLC 5/30/2003 200,000 29,000
SDS Merchant Fund, L.P. 6/2/2003 414,702 111,347
Periscope Partners, L.P. 6/2/2003 65,500 10,022
Bristol DLP, LLC 6/3/2003 765,736 205,600
Bristol DLP, LLC 6/4/2003 372,398 102,819
Mooring Capital Fund, LLC 6/5/2003 25,844 27,912
Eastern Biotech 6/10/2003 1,100,000 499,950
Bristol DLP, LLC 7/16/2003 682,796 345,973
SDS Merchant Fund, L.P. 7/24/2003 310,256 153,266
Geert Kersten 7/25/2003 15,620 10,153
Maximilian de Clara 7/25/2003 3,077 2,000
Patricia Prichep 7/25/2003 23,698 15,404
W. Brooke Jones 7/25/2003 14,376 9,344
1
Number of
Shareholder Date Issued Shares Consideration
----------- ----------- ---------- -------------
$
Eyal Talor 7/25/2003 30,491 19,819
Daniel Zimmerman 7/25/2003 22,692 14,750
C. Richard Kinsolving 7/25/2003 3,077 2,000
Peter Young 7/25/2003 3,077 2,000
Gavin de Windt 7/25/2003 4,500 2,925
Bristol DLP, LLC 8/1/2003 550,000 137,500
SDS Merchant Fund, L.P. 8/5/2003 211,677 102,431
Mooring Capital Fund LLC 8/16/2003 71,994 39,000
SDS Merchant Fund, L.P. 9/5/2003 105,392 51,526
SDS Merchant Fund, L.P. 9/8/2003 207,245 101,322
Mooring Capital Fund LLC 9/9/2003 47,831 25,911
SDS Merchant Fund, L.P. 9/18/2003 207,603 101,497
SDS Merchant Fund, L.P. 9/26/2003 187,480 101,633
SDS Merchant Fund, L.P. 10/3/2003 182,646 101,789
Geert Kersten 10/7/2003 46,918 46,918
Maximilian de Clara 10/7/2003 42,750 42,750
Patricia Prichep 10/7/2003 15,403 15,403
W. Brooke Jones 10/7/2003 9,344 9,344
Eyal Talor 10/7/2003 19,819 19,819
Daniel Zimmerman 10/7/2003 14,750 14,750
C. Richard Kinsolving 10/7/2003 2,000 2,000
Peter Young 10/7/2003 2,000 2,000
Gavin de Windt 10/7/2003 2,925 2,925
Advantage Fund II 10/23/2003 75,000 89,250
Advantage Fund II 10/27/2003 50,000 59,500
Advantage Fund II 10/29/2003 89,724 106,772
Advantage Fund II 11/10/2003 30,000 35,700
Sargon Capital Int'l Fund 11/19/2003 369,796 56,579
Longview Fund, LP 12/1/2003 235,294 200,000
Longview Int'l Equity Fund LP 12/1/2003 235,294 200,000
Longview Equity Fund, LP 12/1/2003 352,941 300,000
Capital Ventures International 12/1/2003 588,200 499,970
Enable Growth Partners 12/1/2003 117,647 100,000
Cher Ami Holdings 12/1/2003 1,470,588 1,250,000
Riverview Group LLC 5/4/2004 6,402,439 5,250,000
Patricia Prichep 9/15/2004 5,860 3,633
Eyal Talor 9/15/2004 7,724 4,789
Daniel Zimmerman 9/15/2004 5,927 3,675
W. Brooke Jones 9/15/2004 5,539 3,434
Cher Ami Holdings Inc. 7/26/2005 1,250,000 500,000
Hilda Maibach 9/21/2005 8,687 4,170
Lucci Financial Group, LLC 10/14/2005 80,000 36,000
2
Number of
Shareholder Date Issued Shares Consideration
----------- ----------- ---------- -------------
$
TGR Group LLC 2/1/2006 150,000 78,000
Cher Ami Holdings Inc. 2/10/2006 2,500,000 1,000,000
SDS Capital Group SPC, Ltd. 3/7/2006 121,750 30,438
SDS Capital Group SPC, Ltd. 3/7/2006 148,806 37,202
Riviera Ventures 4/1/2006 375,000 273,750
SDS Capital Group SPC, Ltd. 4/10/2006 237,418 59,355
SDS Capital Group SPC, Ltd. 4/10/2006 290,177 72,544
Eastern Biotech 4/17/2006 700,000 329,000
Cher Ami Holdings Inc. 5/15/2006 600,000 336,000
Cher Ami Holdings Inc. 6/9/2006 25,000 *
Cher Ami Holdings Inc. 7/10/06 50,000 *
Cher Ami Holdings Inc. 8/4/06 50,000 *
Rivera Ventures 8/4/06 3,750 *
* Penalty for not having registration statement effective within time
required by agreement.
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 by substantially all
of CEL-SCI's assets. At the holder's option the Series K notes are convertible
into shares of the Company's common stock at a conversion price of $0.86. 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 $0.95 per share at any time between
February 4, 2007 and February 4, 2012.
The foregoing securities were not issued under the Securities Act of 1933
but were issued or sold in reliance upon the exemption provided by Section 4(2)
of the Act. The persons who acquired these securities were either accredited or
sophisticated investors. The securities were acquired for investment purposes
only and without a view to distribution. The persons who acquired these
securities were informed and advised about matters concerning the Company,
including the Company's business, financial affairs and other matters. The
investors acquired these shares for their own accounts. The certificates
representing the securities bear legends stating that they may not be offered,
sold or transferred other than pursuant to an applicable exemption from
registration. The shares are "restricted" securities as that term is defined in
Rule 144 of the Securities and Exchange Commission.
3
Item 16. 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.
(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.
(c) Amended Articles (Name Filed as Exhibit 3(c) to CEL-SCI's
change only) Registration Statement on Form S-1
Registration Statement (No. 33-34878).
(d) Bylaws Incorporated by reference to Exhibit
3(b) of CEL-SCI's Registration Statement
on Form S-1, Registration Nos. 2-85547-D
and 33-7531.
(a) Specimen copy of Stock Incorporated by reference to Exhibit
Certificate 4(a) of CEL-SCI's Registration Statement
on Form S-1 Registration Nos. 2-85547-D
and 33-7531.
(b) Designation of Series E Incorporated by reference to Exhibit 4
Preferred Stock to report on Form 8-K dated August 21,
2001.
5. Opinion of Counsel _____________________________________
10(d) Employment Agreement with Incorporated by reference to Exhibit
Maximilian de Clara 10(d) to CEL-SCI's Registration
Statement on Form S-1 (Commission File
#333-102639).
10(e) Employment Agreement with Incorporated by reference to Exhibit
Geert Kersten 10(e) of CEL-SCI's Registration
Statement on Form S-3(Commission File
#106879).
10(f) Distribution and Royalty Incorporated by reference to Exhibit
Agreement 10(x) with Eastern Biotech 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 to CEL-SCI's Report on Form 8-K dated
required by Instruction 2 to August 4, 2005.
Item 601 of Regulation S-K)
pertaining to Series K notes
and warrants, together with
The exhibits to the Securities
Purchase Agreement.
23(a) Consent of Hart & Trinen
------------------------------
(b) Consent of Deloitte & Touche LLP
------------------------------
(c) Consent of BDO Seidman LLP
------------------------------
Item 17. Undertakings.
------------
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this Registration Statement.
(i) To include any prospectus required by Section l0(a)(3) of the
Securities Act of l933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the Registration Statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the Registration
Statement;
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the Registration Statement or any
material change to such information in the Registration Statement, including
(but not limited to) any addition or deletion of a managing underwriter.
(2) That, for the purpose of determining any liability under the
Securities Act of l933, each such post-effective amendment shall be deemed to be
a new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the termination of
the offering.
Insofar as indemnification for liabilities arising under the Securities
Act of l933 may be permitted to directors, officers and controlling persons of
the Registrant, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy
as expressed in the Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the Registrant will, unless
5
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question of whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
6
POWER OF ATTORNEY
The registrant and each person whose signature appears below hereby
authorizes the agent for service named in this Registration Statement, with full
power to act alone, to file one or more amendments (including post-effective
amendments) to this Registration Statement, which amendments may make such
changes in this Registration Statement as such agent for service deems
appropriate, and the Registrant and each such person hereby appoints such agent
for service as attorney-in-fact, with full power to act alone, to execute in the
name and in behalf of the Registrant and any such person, individually and in
each capacity stated below, any such amendments to this Registration Statement.
SIGNATURES
Pursuant to the requirements of the Securities Act of l933, the Registrant
certifies that it has reasonable grounds to believe that it meets all the
requirements for filing on Form S-1 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Vienna, Commonwealth of Virginia, on the 29th day of
August 2006.
CEL-SCI CORPORATION
By: /s/ Maximilian de Clara
-----------------------------
Maximilian de Clara, President
Pursuant to the requirements of the Securities Act of l933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
Signature Title Date
/s/ Maximilian de Clara Director and Principal August 29, 2006
------------------------
Maximilian de Clara Executive Officer
/s/ Geert R. Kersten Director, Principal August 29, 2006
------------------------
Geert R. Kersten Financial Officer, Principal
Accounting Officer and Chief
Executive Officer
/s/ Alexander G. Esterhazy Director August 29, 2006
------------------------
Alexander G. Esterhazy
/s/ C. Richard Kinsolving Director August 29, 2006
------------------------
C. Richard Kinsolving, Ph.D.
/s/ Peter R. Young Director August 29, 2006
------------------------
Peter R. Young, Ph.D.
CEL-SCI CORPORATION
REGISTRATION STATEMENT ON
FORM S-1
EXHIBITS