CEL-SCI
Empowering Immune Defenses
Annual Report
2010
CEL-SCI Corporation
CEL-SCI Corporation (CEL-SCI) was formed as a Colorado corporation in
1983. CEL-SCI's principal office is located at 8229 Boone Boulevard, Suite 802,
Vienna, VA 22182. CEL-SCI's telephone number is 703-506-9460 and its web site is
www.cel-sci.com. CEL-SCI makes its electronic filings with the Securities and
Exchange Commission (SEC), including its annual reports on Form 10-K, quarterly
reports on Form 10-Q, current reports on Form 8-K and amendments to these
reports available on its website free of charge as soon as practicable after
they are filed or furnished to the SEC.
CEL-SCI'S PRODUCTS AND "COLD FILL" MANUFACTURING SERVICE
CEL-SCI's business consists of the following:
1) Multikine(R) cancer therapy;
2) New "cold fill" manufacturing service to the pharmaceutical industry;
and
3) LEAPS technology, with two products, H1N1 swine flu treatment for H1N1
hospitalized patients and CEL-2000, a rheumatoid arthritis treatment
vaccine.
MULTIKINE
CEL-SCI's lead product, Multikine, is being developed for the treatment of
cancer. It is the first of a new class of cancer immunotherapy drugs called
Combination Immunotherapy because it combines active and passive immunity in one
product. It simulates the activities of a healthy person's immune system, which
battles cancer every day. Multikine is multi-targeted; it is the only cancer
immunotherapy that both kills cancer cells in a targeted fashion and activates
the general immune system to destroy the cancer. CEL-SCI believes Multikine is
the first immunotherapeutic agent being developed as a first-line standard of
care treatment for cancer and it is cleared for a global Phase III clinical
trial in advanced primary (previously untreated) head and neck cancer patients.
Multikine is a new type of immunotherapy in that it is a combination
immunotherapy, incorporating both active and passive immune activity. A
combination immunotherapy most closely resembles the workings of the natural
immune system in the sense that it works on multiple fronts in the battle
against cancer. A combination immunotherapy causes a direct and targeted killing
of the tumor cells and activates the immune system to produce a more robust and
sustainable anti-tumor response.
Multikine is designed to target the tumor micro-metastases that are mostly
responsible for treatment failure. The basic concept is to add Multikine to the
current cancer treatments with the goal of making the overall cancer treatment
more successful. Phase II data indicated that Multikine treatment resulted in a
substantial increase in the survival of patients. The lead indication is
advanced primary (previously untreated) head & neck cancer (about 600,000 new
cases per annum). Since Multikine is not tumor specific, it may also be
applicable in many other solid tumors.
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The following results were seen in CEL-SCI's last Phase II study
conducted with Multikine. This study used the same treatment protocol as will be
used in CEL-SCI's Phase III study:
o 33% improvement in median overall survival: In the last Phase II study
a 33% improvement in median overall survival, at a median of 3.5 years
post surgery, was seen in patients with locally advanced disease
treated with Multikine as first-line therapy (absolute survival rate
63%) as compared to the 3.5 year median overall survival rates of the
same cancer patient population determined from a review of 55 clinical
trials reported in the scientific literature that were conducted
between 1987 and 2007. CEL-SCI's Phase III clinical trial will need to
demonstrate a 10% improvement in overall survival for Multikine to be
successful.
o Average of 50% reduction in tumor cells: The three week Multikine
treatment regimen used in the last Phase II study killed, on average,
approximately half of the cancer cells before the start of standard
therapy such as surgery, radiation and chemotherapy (as determined by
histopathology).
o 12% complete response: In 12% of patients the tumor was completely
eliminated after only a three week treatment with Multikine (as
determined by histopathology).
In January 2007, the US Food and Drug Administration (FDA) concurred with
the initiation of a global Phase III clinical trial in head and neck cancer
patients using Multikine. The Canadian regulatory agency, the Biologics and
Genetic Therapies Directorate, had previously concurred with the initiation of a
global Phase III clinical trial in head and neck cancer patients using
Multikine.
The protocol is designed to develop conclusive evidence of the efficacy of
Multikine in the treatment of advanced primary (previously untreated) squamous
cell carcinoma of the oral cavity (head and neck cancer). A successful outcome
from this trial should enable CEL-SCI to apply for a Biologics License to market
Multikine for the treatment of this patient population.
The trial will test the hypothesis that Multikine treatment administered
prior to the current standard therapy for head and neck cancer patients
(surgical resection of the tumor and involved lymph nodes followed by
radiotherapy or radiotherapy and concurrent chemotherapy) will extend the
overall survival, enhance the local/regional control of the disease and reduce
the rate of disease progression in patients with advanced oral squamous cell
carcinoma.
However, before starting the Phase III trial, CEL-SCI needed to build a
dedicated manufacturing facility to produce Multikine. CEL-SCI estimates the
cost of the Phase III trial, with the exception of the parts that will be paid
by its licensees, Teva Pharmaceuticals and Orient Europharma, to be
approximately $25 - $26 million. Since CEL-SCI has obtained substantial
financing, CEL-SCI is moving forward rapidly to launch its global Phase III
clinical trial.
CEL-SCI, together with its development partners Teva Pharmaceutical
Industries and Orient Europharma, has plans to run the study in about 48 medical
centers in 9 countries.
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CEL-SCI has an agreement with Byron Biopharma LLC which provides Byron
with an exclusive license to market and distribute CEL-SCI's cancer drug
Multikine in the Republic of South Africa. Once Multikine has been approved for
sale, CEL-SCI will be responsible for manufacturing the product, while Byron
will be responsible for sales in South Africa.
Multikine is the first immunotherapeutic agent being developed as a
first-line treatment for cancer. It is administered prior to any other cancer
therapy because that is the period when the anti-tumor immune response can still
be fully activated. Once the patient has had surgery or has received radiation
and/or chemotherapy, the immune system is severely weakened and is less able to
mount an effective anti-tumor immune response. To date, other immunotherapies
have been administered later in cancer therapy (i.e., after radiation,
chemotherapy, surgery).
LEAPS
CEL-SCI's patented T-cell Modulation Process uses "heteroconjugates" to
direct the body to choose a specific immune response. The heteroconjugate
technology, referred to as LEAPS (Ligand Epitope Antigen Presentation System),
is intended to selectively stimulate the human immune system to more effectively
fight bacterial, viral and parasitic infections as well as autoimmune,
allergies, transplantation rejection and cancer, when it cannot do so on its
own. Administered like vaccines, LEAPS combines T-cell binding ligands with
small, disease associated, peptide antigens and may provide a new method to
treat and prevent certain diseases.
The ability to generate a specific immune response is important because
many diseases are often not combated effectively due to the body's selection of
the "inappropriate" immune response. The capability to specifically reprogram an
immune response may offer a more effective approach than existing vaccines and
drugs in attacking an underlying disease.
Using the LEAPS technology, CEL-SCI has created a potential peptide
treatment for H1N1 (swine flu) hospitalized patients. This LEAPS flu treatment
is designed to focus on the conserved, non-changing epitopes of the different
strains of Type A Influenza viruses (H1N1, H5N1, H3N1, etc.), including "swine",
"avian or bird", and "Spanish Influenza", in order to minimize the chance of
viral "escape by mutations" from immune recognition. CEL-SCI's LEAPS flu
treatment contains epitopes known to be associated with immune protection
against influenza in animal models.
On September 16, 2009, the U.S. Food and Drug Administration advised
CEL-SCI that it could proceed with its first clinical trial to evaluate the
effect of LEAPS-H1N1 treatment on the white blood cells of hospitalized H1N1
patients. This followed an expedited initial review of CEL-SCI's regulatory
submission for this study proposal.
On November 6, 2009, CEL-SCI announced that The Johns Hopkins University
School of Medicine had given clearance for CEL-SCI's first clinical study to
proceed using LEAPS-H1N1. This study started one week later. Since the disease
disappeared about one month later, the study has been unable to enroll many
patients.
To fully consider a next-stage clinical trial to evaluate LEAPS-H1N1
treatment of hospitalized patients with laboratory-confirmed H1N1 Pandemic Flu
under an Exploratory IND, the FDA has asked CEL-SCI to submit a detailed
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follow-up regulatory filing with extensive additional data. Thus, in parallel
with preparing for this first study, CEL-SCI is proceeding on an expedited basis
to complete this next submission. Recognizing that it cannot proceed with its
next-stage clinical trial without the FDA's concurrence, CEL-SCI anticipates
engaging in a detailed dialogue with the FDA regarding the proposed LEAPS-H1N1
clinical-development program following this future filing.
With its LEAPS technology, CEL-SCI also discovered a second peptide named
CEL-2000, a potential rheumatoid arthritis vaccine. The data from animal studies
of rheumatoid arthritis using the CEL-2000 treatment vaccine demonstrated that
CEL-2000 is an effective treatment against arthritis with fewer administrations
than those required by other anti-rheumatoid arthritis treatments, including
Enbrel(R). CEL-2000 is also potentially a more disease type-specific therapy, is
calculated to be significantly less expensive and may be useful in patients
unable to tolerate or who may not be responsive to existing anti-arthritis
therapies.
In February 2010 CEL-SCI announced that its CEL-2000 vaccine demonstrated
that it was able to block the progression of rheumatoid arthritis in a mouse
model. The results were published in the scientific peer-reviewed Journal of
International Immunopharmacology (online edition) in an article titled
"CEL-2000: A Therapeutic Vaccine for Rheumatoid Arthritis Arrests Disease
Development and Alters Serum Cytokine/Chemokine Patterns in the Bovine Collagen
Type II Induced Arthritis in the DBA Mouse Model" with lead author Dr. Daniel
Zimmerman. The study was co-authored by scientists from CEL-SCI, Washington
Biotech, Northeastern Ohio Universities Colleges of Medicine and Pharmacy and
Boulder BioPath.
None of the products or vaccines which are in development using the LEAPS
technology have been approved by the FDA or any other government agency. Before
obtaining marketing approval from the FDA in the United States, and by
comparable agencies in most foreign countries, these product candidates must
undergo rigorous preclinical and clinical testing which is costly and time
consuming and subject to unanticipated delays. There can be no assurance that
these approvals will be granted.
UNIQUE COLD FILL CONTRACT MANUFACTURING SERVICE TO BE OFFERED
AT CEL-SCI'S NEW MANUFACTURING FACILITY
CEL-SCI's new, state-of-the-art manufacturing facility will be used to
manufacture Multikine for CEL-SCI's Phase III clinical trial. Located near
Baltimore, MD, it was designed over several years, and was built out to
CEL-SCI's specifications. CEL-SCI leased this specially designed and built out
facility, rather than having Multikine produced by a third party on a contract
basis, since regulatory agencies prefer that the same facility be used to
manufacture Multikine for both the Phase III trials and commercial sales,
assuming the Phase III trial is successful. As is customary with large, complex
construction projects, the manufacturing facility required a number of
construction, utility and equipment adjustments as well as "punch list" items
that required additional time to complete. This resulted in a gap between the
time when CEL-SCI took over the facility and the time when validations and other
CEL-SCI specific activities could commence. In addition to using this facility
to manufacture Multikine, CEL-SCI will offer the use of the facility as a
service to pharmaceutical companies and others, particularly those that need to
"fill and finish" their drugs in a cold environment (4 degrees Celsius, or
approximately 39 degrees Fahrenheit). Fill and finish is the process of filling
injectable drugs in a sterile manner and is a key part of the manufacturing
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process for many medicines. However, this service will only be offered when
CEL-SCI has the time and resources available, with priority always given to
Multikine.
The fastest area of growth in the biopharmaceutical and pharmaceutical
markets is biologics, and most recently stem cell products. These compounds and
therapies are derived from or mimic human cells or proteins and other molecules
(e.g., hormones, etc.). Nearly all of the major drugs developed for unmet
medical needs (e.g., Avastin(R), Erbitux(R), Rituxan(R), Herceptin(R),
Copaxon(R), etc.) are biologics. Biologics are usually very sensitive to heat
and quickly lose their biological activity if exposed to room or elevated
temperature. Room or elevated temperatures may also affect the shelf-life of a
biologic with the result that the product cannot be stored for as long as
desired. However, these products do not generally lose activity when kept at 4
degrees Celsius.
The FDA and other regulatory agencies require a drug developer to
demonstrate the safety, purity and potency of a drug being produced for use in
humans. When filling a product at 4 degrees Celsius, minimal to no biological
losses occur and therefore the potency of the drug is maintained throughout the
final critical step of the drug's manufacturing process. If the same temperature
sensitive drug is instead aseptically filled at room temperature, expensive and
time-consuming validation studies must be conducted, first, to be able to obtain
a complete understanding of the product's potency loss during the room
temperature fill process, and second, to create solutions to the drug's potency
losses, which require further testing and validation.
CEL-SCI's unique, cold aseptic filling suite can be operated at
temperatures between 2 degrees Celsius and room temperatures, and at various
humidity levels. CEL-SCI's aseptic filling suites are maintained at FDA and EU
ISO classifications of 5/6. CEL-SCI also has the capability to formulate,
inspect, label and package biologic products at cold temperatures.
MARKET FOR CEL-SCI'S STOCK
As of November 30, 2010, there were approximately 1,100 record holders of
CEL-SCI's common stock. CEL-SCI's common stock is traded on the NYSE Amex
(formerly the American Stock Exchange) under the symbol "CVM". Set forth below
are the range of high and low quotations for CEL-SCI's common stock for the
periods indicated as reported on the NYSE Amex. The market quotations reflect
inter-dealer prices, without retail mark-up, mark-down or commissions and may
not necessarily represent actual transactions.
Quarter Ended High Low
12/31/08 $0.50 $0.18
3/31/09 $0.40 $0.14
6/30/09 $0.80 $0.20
9/30/09 $2.10 $0.38
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12/31/09 $1.79 $0.85
3/31/10 $1.12 $0.50
6/30/10 $0.76 $0.45
9/30/10 $0.84 $0.43
Holders of common stock are entitled to receive dividends as may be
declared by the Board of Directors out of legally available funds and, in the
event of liquidation, to share pro rata in any distribution of CEL-SCI's assets
after payment of liabilities. The Board of Directors is not obligated to declare
a dividend. CEL-SCI has not paid any dividends on its common stock and CEL-SCI
does not have any current plans to pay any common stock dividends.
The provisions in CEL-SCI's Articles of Incorporation relating to
CEL-SCI's preferred stock would allow CEL-SCI's directors to issue preferred
stock with rights to multiple votes per share and dividend rights which would
have priority over any dividends paid with respect to CEL-SCI's common stock.
The issuance of preferred stock with such rights may make more difficult the
removal of management even if such removal would be considered beneficial to
shareholders generally, and will have the effect of limiting shareholder
participation in certain transactions such as mergers or tender offers if such
transactions are not favored by incumbent management.
The market price of CEL-SCI's common stock, as well as the securities of
other biopharmaceutical and biotechnology companies, have historically been
highly volatile, and the market has from time to time experienced significant
price and volume fluctuations that are unrelated to the operating performance of
particular companies. Factors such as fluctuations in CEL-SCI's operating
results, announcements of technological innovations or new therapeutic products
by CEL-SCI or its competitors, governmental regulation, developments in patent
or other proprietary rights, public concern as to the safety of products
developed by CEL-SCI or other biotechnology and pharmaceutical companies, and
general market conditions may have a significant effect on the market price of
CEL-SCI's common stock.
The graph below matches the cumulative 5-year total return of holders of
CEL-SCI Corporation's common stock with the cumulative total returns of the
NYSE Amex Composite index and the RDG MicroCap Biotechnology index. The graph
assumes that the value of the investment in the CEL-SCI's common stock and in
each of the indexes (including reinvestment of dividends) was $100 on
9/30/2005 and tracks it through 9/30/2010.
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-------------------------------------------------------------------------------
9/05 9/06 9/07 9/08 9/09 9/10
-------------------------------------------------------------------------------
CEL-SCI Corporation 100.00 131.91 133.02 85.11 365.96 137.02
NYSE Amex Composite 100.00 110.90 139.96 108.28 113.40 134.71
RDG MicroCap Biotechnology 100.00 70.80 60.46 32.97 32.69 21.73
The stock price performance included in this graph is not necessarily
indicative of future stock price performance.
SELECTED FINANCIAL DATA
The following selected historical consolidated financial data are
qualified by reference to, and should be read in conjunction with the
consolidated financial statements and the related notes thereto, appearing
elsewhere in this report.
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Statements of Operations 2010 2009 2008 2007 2006
------------------------ ---- ---- ---- ---- ----
Rent and grant revenue
and other $ 153,300 80,093 $ 5,065 $ 57,043 $125,457
Operating expenses:
Research and development 11,911,626 6,011,750 4,101,563 2,528,528 1,896,976
Depreciation and
amortization 516,117 417,205 215,060 176,186 170,903
General and
administrative 6,285,810 5,671,595 5,200,735 6,704,538 3,406,774
Gain (loss) on
derivative instruments 28,843,772 (28,491,650) 1,799,393 868,182 2,325,784
Other costs of financing - - - - (4,791,548)
Interest income 362,236 - 483,252 562,973 92,487
Interest expense (162,326) (397,923) (473,767) (1,708,603) (216,737)
----------- ----------- ---------- ---------- ----------
Net income (loss) 10,483,429 (40,910,030) (7,703,415) (9,629,657) (7,939,210)
----------- ----------- ---------- ---------- ----------
Modification of warrants (1,532,456) (490,728) (424,815) - -
----------- ----------- ---------- ---------- ----------
Net income (loss)
available to common
shareholders $ 8,950,973 (41,400,758) (8,128,230) (9,629,657) (7,939,210)
----------- ----------- ---------- ---------- ----------
Statements of Operations
------------------------
Net income (loss) per
common share
Basic $ 0.04 $ (0.31) $ (0.07) $ (0.10) $ (0.10)
Diluted $ (0.05) $ (0.31) $ (0.07) $ (0.10) $ (0.11)
Weighted average common
shares outstanding
Basic 202,102,859 133,535,050 117,060,866 97,310,488 78,971,290
Diluted (1) 226,277,913 133,535,050 117,060,866 97,310,488 93,834,078
Balance Sheets
---------------
Statements of Operations 2010 2009 2008 2007 2006
------------------------ ---- ---- ---- ---- ----
Working capital $25,799,304 $34,339,772 $(2,492,555) $10,257,568 $7,109,879
Total assets 37,804,985 46,027,598 14,683,672 20,730,802 9,653,277
Derivative instruments -
current (2) 424,286 - 3,018,697 782,732 1,670,234
Derivative instruments -
noncurrent (2) 6,521,765 35,113,970 - 4,831,252 8,645,796
Total liabilities 9,950,220 37,186,954 3,847,637 6,060,703 10,583,878
Stockholders' equity
(deficit) 27,854,765 8,840,644 10,836,035 14,670,099 (930,601)
(1) The calculation of diluted earnings per share for the years ended September
30, 2009, 2008 and 2007 excluded the potentially dilutive shares because
their effect would have been anti-dilutive.
(2) Included in total liabilities.
No dividends have been declared on CEL-SCI's common stock. However, in
December 2007, warrants held by third parties were extended, resulting in a
$424,815 charge, which was treated as a deemed dividend and is shown as such in
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the consolidated financial statements. In the third and fourth quarters of the
fiscal year ended September 30, 2009, additional shares were issued and others
extended in accordance with previous financings, resulting in a $490,728 charge,
which was treated as a deemed dividend and is shown as such in the consolidated
financial statements. In March 2010, CEL-SCI temporarily reduced the exercise
price of the Series M Warrants, increasing the value of the warrants by
$1,432,456. In August 2010, CEL-SCI amended the Series M warrants held by an
investor, increasing the value of those warrants by $100,000.
CEL-SCI's net income (losses) available to common shareholders for each
fiscal quarter during the two years ended September 30, 2010 were:
Net income (loss) per share
Net income ----------------------------
Quarter (loss) Basic Diluted
------- ------------ ----- -------
12/31/2008 $ (2,173,513) $(0.02) $(0.02)
3/31/2009 $ (2,117,280) $(0.02) $(0.02)
6/30/2009 $ (6,705,731) $(0.05) $(0.05)
9/30/2009 $(30,404,234) $(0.19) $(0.19)
12/31/2009 $ 19,159,517 $ 0.10 $ 0.02
3/31/2010 $ (2,176,975) $(0.01) $(0.03)
6/30/2010 $ (601,124) $(0.00) $(0.01)
9/30/2010 $ (7,330,445) $(0.04) $(0.04)
First three quarters of fiscal year 2009 as adjusted.
CEL-SCI has experienced large swings in its quarterly gains and losses in 2010
and 2009. These swings are caused by the changes in the fair value of the
convertible debt and warrants each quarter. These changes in the fair value of
the convertible debt and warrants are recorded on the consolidated statements of
operations. In addition, the cost of options granted to consultants has affected
the quarterly losses recorded by CEL-SCI.
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the
consolidated financial statements and the related notes thereto appearing
elsewhere in this report.
CEL-SCI's most advanced product, Multikine, which is cleared for a Phase
III clinical trial in the U.S. and in Canada, is being developed for the
treatment of cancer.
CEL-SCI also owns a pre-clinical technology called L.E.A.P.S. (Ligand
Epitope Antigen Presentation System).
All of CEL-SCI's projects are under development. As a result, CEL-SCI
cannot predict when it will be able to generate any revenue from the sale of any
of its products.
Since inception, CEL-SCI has financed its operations through the issuance
of equity securities, convertible notes, loans and certain research grants.
CEL-SCI's expenses will likely exceed its revenues as it continues the
development of Multikine and brings other drug candidates into clinical trials.
Until such time as CEL-SCI becomes profitable, any or all of these financing
vehicles or others may be utilized to assist CEL-SCI's capital requirements.
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Results of Operations
Fiscal 2010
During the year ended September 30, 2010, research and development
expenses increased by $5,899,876 compared to the year ended September 30, 2009.
This increase was due to continuing expenses relating to the preparation for the
Phase III clinical trial on Multikine.
During the year ended September 30, 2010, general and administrative
expenses increased by $614,215 compared to the year ended September 30, 2009,
primarily due to legal fees caused by the Iroquois lawsuit.
Interest income during the year ended September 30, 2010 increased by
$362,236 compared to the year ended September 30, 2009. The increase was due to
the greater amount of capital CEL-SCI had for investment in money market funds.
The gain on derivative instruments of $28,843,772 for the year ended
September 30, 2010, was the result of the change in the fair value of the
derivative liabilities on the balance sheet. The Series A-E warrants issued in
conjunction with several financings during the fiscal year ended September 30,
2009, as well as others are considered derivative liabilities and must be valued
at the end of each period. The fluctuation of the price of CEL-SCI's common
stock is a major cause of derivative gains or losses.
The interest expense of $162,326 for the year ended September 30, 2010 was
interest on the related party loan. Previous years included amortization of the
Series K discount and the premium on the related party loan.
Fiscal 2009
During the year ended September 30, 2009, research and development
expenses increased by $1,910,187 compared to the year ended September 30, 2008.
This increase was due to continuing expenses relating to the preparation for the
Phase III clinical trial on Multikine.
During the year ended September 30, 2009, general and administrative
expenses increased by $470,860 compared to the year ended September 30, 2008,
primarily because of an increase in the Codification 718-10-30-3 "Share Based
Payment" costs of approximately $1,138,062. The Codification 718-10-30-3 "Share
Based Payment" cost is a non-cash charge. This increase was primarily offset by
a reduction in travel costs ($51,349), shareholder costs ($82,983) and
presentation costs ($242,497).
Interest income during the year ended September 30, 2009 decreased by
$483,252 compared to the year ended September 30, 2008. The decrease was due to
lower interest rates and a decline in the funds available to invest, until the
later part of the year.
The loss on derivative instruments of $28,491,650 for the year ended
September 30, 2009, was the result of the change in fair value of the Series A-E
Warrants as well as the Series K Notes and Series K Warrants during the period.
The Series A-E warrants issued in conjunction with several financings are
considered derivative liabilities and must be valued at the end of each period.
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The fair value of these warrants was calculated to be $29,741,372 at September
30, 2009. In addition, the remaining Series K warrants were valued at $5,372,598
at September 30, 2009. This loss was due to three factors: 1) an increase in the
Company's share price, and 2) the repricing of the Series K notes to $0.40 as a
result of the June 2009 financing, and 3) the resulting increase in the number
of shares and warrants owned by the Series K investors.
The interest expense of $397,923 for the year ended September 30, 2009 was
composed of five elements: 1) amortization of the Series K discount and short
term loan discount ($438,980), 2) interest paid and accrued on the Series K debt
($115,559), 3) other interest ($81,602), 4) interest on the short term loan
($279,158), and net of 5) amortization of loan premium $517,376. This represents
a decrease of $75,844 from the year ended September 30, 2008 due to the cost of
the warrants issued to the short term note holder, a noncash cost. The
corresponding amounts for the year ended September 30, 2008 are: 1) $249,106, 2)
$217,140, 3) $7,521, 4) $0, and 5) $0.
Research and Development Expenses
During the five years ended September 30, 2010 CEL-SCI's research and
development efforts involved Multikine and LEAPS. The table below shows the
research and development expenses associated with each project during this
five-year period.
2010 2009 2008 2007 2006
---- ---- ---- ---- ----
MULTIKINE $10,868,046 $5,281,999 $3,765,258 $2,217,108 $1,656,362
LEAPS 1,043,580 729,751 336,305 311,420 240,614
----------- ---------- ---------- ---------- ----------
TOTAL $11,911,626 $6,011,750 $4,101,563 $2,528,528 $1,896,976
=========== ========== ========== ========== ==========
In January 2007, FDA gave the go-ahead for the Phase III clinical trial
which had earlier been cleared by the Canadian regulatory agency, the Biologics
and Genetic Therapies Directorate.
As of September 30, 2010, CEL-SCI was involved in a number of pre-clinical
studies with respect to its LEAPS technology. As with Multikine, CEL-SCI does
not know what obstacles it will encounter in future pre-clinical and clinical
studies involving its LEAPS technology. Consequently, CEL-SCI cannot predict
with any certainty the funds required for future research and clinical trials
and the timing of future research and development projects.
Clinical and other studies necessary to obtain regulatory approval of a
new drug involve significant costs and require several years to complete. The
extent of CEL-SCI's clinical trials and research programs are primarily based
upon the amount of capital available to CEL-SCI and the extent to which CEL-SCI
has received regulatory approvals for clinical trials. The inability of CEL-SCI
to conduct clinical trials or research, whether due to a lack of capital or
regulatory approval, will prevent CEL-SCI from completing the studies and
research required to obtain regulatory approval for any products which CEL-SCI
is developing. Without regulatory approval, CEL-SCI will be unable to sell any
of its products.
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Liquidity and Capital Resources
CEL-SCI has had only limited revenues from operations since its inception
in March l983. CEL-SCI has relied primarily upon proceeds realized from the
public and private sale of its common and preferred stock and convertible notes
to meet its funding requirements. Funds raised by CEL-SCI have been expended
primarily in connection with the acquisition of an exclusive worldwide license
to, and later purchase of, certain patented and unpatented proprietary
technology and know-how relating to the human immunological defense system,
patent applications, the repayment of debt, the continuation of research and
development sponsored by CEL-SCI, administrative costs and construction of
laboratory facilities. Inasmuch as CEL-SCI does not anticipate realizing
revenues until such time as it enters into licensing arrangements regarding the
technology and know-how licensed to it (which could take a number of years),
CEL-SCI is mostly dependent upon the proceeds from the sale of its securities to
meet all of its liquidity and capital resource requirements.
In August 2007, CEL-SCI leased a building near Baltimore, Maryland. The
building, which consists of approximately 73,000 square feet, has been remodeled
in accordance with CEL-SCI's specifications so that it can be used by CEL-SCI to
manufacture Multikine for CEL-SCI's Phase III clinical trials and sales of the
drug if approved by the FDA. The lease expires on October 31, 2028, and requires
annual base rent payments of approximately $1,667,000 during the twelve months
ending October 31, 2011.
In August 2006, CEL-SCI sold Series K convertible notes, plus Series K
warrants, to independent private investors for $8,300,000. The notes were
convertible into shares of CEL-SCI's common stock. On August 31, 2009, all of
the Series K notes had either been repaid or had been converted into shares of
CEL-SCI's common stock.
As of November 30, 2010, 9,208,642 Series K warrants had been exercised.
The remaining Series K warrants allow the holders to purchase up to 2,638,163
shares of CEL-SCI's common stock at a price of $0.40 per share at any time prior
to February 4, 2012. If CEL-SCI sells any additional shares of common stock, or
any securities convertible into common stock at a price below the $0.40, the
warrant exercise price will be lowered to the price at which the shares were
sold or the lowest price at which the securities are convertible, as the case
may be.
One of the Series K note holders, Iroquois Master Fund Ltd., has indicated
that it believes the conversion price of the Series K notes, as well as the
exercise price of the Series K warrants, should be $0.20 as opposed to $0.40. It
is CEL-SCI's position that the correct conversion price was $0.40 and the
correct exercise price of the warrants is $0.40.
On October 21, 2009, Iroquois filed suit against CEL-SCI. In its
complaint, alleging breach of contract, breach of fiduciary duty, conversion,
and negligence, Iroquois seeks actual and punitive damages, the issuance by
CEL-SCI of additional shares and warrants, and a ruling by the court that the
conversion price of the notes and the exercise price of the warrants are both
$0.20.
On August 18, 2008, CEL-SCI sold 1,383,389 shares of common stock and
2,075,084 warrants in a private financing for $1,037,500. The shares were sold
at $0.75, a significant premium over the closing price of CEL-SCI's common
stock. In June 2009, an additional 1,166,667 shares and 1,815,698 warrants were
13
issued to the investors. Each warrant entitles the holder to purchase one share
of CEL-SCI's common stock at a price of $0.40 per share at any time prior to
August 18, 2014.
On March 6, 2009, CEL-SCI sold 3,750,000 Units as further consideration
under a licensing agreement to Byron Biopharma at a price of $0.20 per Unit
totaling $750,000. Each Unit consisted of one share of CEL-SCI's common stock
and two warrants. Each warrant entitles the holder to purchase one share of
CEL-SCI's common stock at a price of $0.25 per share. The warrants are
exercisable at any time prior to March 6, 2016.
Between June 23 and July 8, 2009, CEL-SCI sold 15,349,346 shares of its
common stock at a price of $0.40 per share totaling $6,139,739. The investors in
this offering also received 10,284,060 Series A warrants. Each Series A warrant
entitles the holder to purchase one share of CEL-SCI's common stock. The Series
A warrants may be exercised at any time on or after December 24, 2009 and on or
prior to December 24, 2014 at a price of $0.50 per share. As of November 30,
2010, 8,813,088 Series A warrants had been exercised. The remaining Series A
warrants allow the holders to purchase up to 1,470,972 shares of CEL-SCI's
common stock. As of September 30, 2010, the fair value of the warrants was
determined to be $676,647.
On July 31, 2009, CEL-SCI borrowed $2,000,000 from two institutional
investors. The loans were repaid on September 29, 2009. The Series B note
holders also received Series B warrants which allow the holders to purchase up
to 500,000 shares of CEL-SCI's common stock at a price of $0.68 per share. The
Series B warrants may be exercised at any time on or after March 3, 2010 and on
or prior to March 3, 2015. The fair value of these warrants was determined to be
$245,000 at the time of issuance. This cost was expensed at the time the loan
was repaid. As of September 30, 2010, the fair value of the warrants was
determined to be $220,000.
On August 20, 2009, CEL-SCI sold 10,784,435 shares of its common stock to
a group of private investors for $4,852,995 or $0.45 per share. The investors
also received Series C warrants which entitle the investors to purchase
5,392,217 shares of CEL-SCI's common stock. The Series C warrants may be
exercised at any time on or after February 20, 2010 and on or prior to February
20, 2015 at a price of $0.55 per share. As of September 30, 2010, the fair value
of the warrants was determined to be $2,480,420.
On September 21, 2009, CEL-SCI Corporation sold 14,285,715 shares of its
common stock to a group of private investors for $20,000,000 or $1.40 per share.
The investors also received Series D warrants which entitle the investors to
purchase up to 4,714,284 shares of CEL-SCI's common stock. The Series D warrants
may be exercised at any time prior to September 21, 2011, at a price of $1.50
per share. As of September 30, 2010, the fair value of the Series D warrants was
determined to be $424,286. In addition, the broker for the placement agent
received 714,286 Series E warrants. The Series E warrants may be exercised at
any time prior to August 12, 2014, at a price of $1.75. As of September 30,
2010, the fair value of the Series E warrants was determined to be $235,714.
On December 10, 2010 CEL-SCI entered into a sales agreement with McNicoll
Lewis & Vlak LLC relating to the sale of shares of its common stock which have
been registered by means of a shelf registration statement CEL-SCI filed with
14
the Securities and Exchange Commission in July 2009. In accordance with the
terms of the sales agreement, CEL-SCI may offer and sell shares of its common
stock through McNicoll Lewis & Vlak acting as CEL-SCI's agent.
Under the terms of the sales agreement, CEL-SCI may also sell its common
stock to McNicoll Lewis & Vlak, as principal for its own account, at a price
negotiated at the time of sale.
Sales of CEL-SCI's common stock, if any, may be made in sales deemed to be
"at-the-market" equity offerings as defined in Rule 415 of the Securities and
Exchange Commission, including sales made directly on or through the NYSE Amex,
the existing trading market for CEL-SCI's common stock, sales made to or through
a market maker other than on an exchange or otherwise, in negotiated
transactions at market prices prevailing at the time of sale or at prices
related to such prevailing market prices, and/or any other method permitted by
law. CEL-SCI is not required to sell any shares to McNicoll Lewis & Vlak and
McNicoll Lewis & Vlak is not required to sell any shares on CEL-SCI's behalf or
purchase any of CEL-SCI's shares for its own account.
McNicoll Lewis & Vlak will be entitled to a commission in an amount equal
to the greater of 3% of the gross proceeds from each sale of the shares, or
$0.025 for each share sold, provided, that, in no event will McNicoll Lewis &
Vlak receive a commission greater than 8.0% of the gross proceeds from the sale
of the shares. In connection with the sale of the common stock on CEL-SCI's
behalf, McNicoll Lewis & Vlak may be deemed to be an "underwriter" within the
meaning of the Securities Act of 1933, as amended, and the compensation of
McNicoll Lewis & Vlak may be deemed to be underwriting commissions or discounts.
Between December 2008 and June 2009, Maximilian de Clara, CEL-SCI's
President and a director, loaned CEL-SCI $1,104,057. The loan was initially
payable at the end of March 2009, but was extended to the end of June 2009. At
the time the loan was due, and in accordance with the loan agreement, CEL-SCI
issued Mr. de Clara a warrant which entitles Mr. de Clara to purchase 1,648,244
shares of CEL-SCI's common stock at a price of $0.40 per share. The warrant is
exercisable at any time prior to December 24, 2014. Although the loan was to be
repaid from the proceeds of CEL-SCI's recent financing, CEL-SCI's Directors
deemed it beneficial not to repay the loan and negotiated a second extension of
the loan with Mr. de Clara on terms similar to the June 2009 financing. Pursuant
to the terms of the second extension the note is now due on July 6, 2014, but,
at Mr. de Clara's option, the loan can be converted into shares of CEL-SCI's
common stock. The number of shares which will be issued upon any conversion will
be determined by dividing the amount to be converted by $0.40. As further
consideration for the second extension, Mr. de Clara received warrants which
allow Mr. de Clara to purchase 1,849,295 shares of CEL-SCI's common stock at a
price of $0.50 per share at any time prior to January 6, 2015. The loan from Mr.
de Clara bears interest at 15% per year and is secured by a lien on
substantially all of CEL-SCI's assets. CEL-SCI does not have the right to prepay
the loan without Mr. de Clara's consent.
Between July 29, 2009 and March 18, 2010, CEL-SCI received approximately
$14,900,000 from the exercise of stock options and other warrants (including a
number of CEL-SCI's Series A, J, K and L warrants) previously issued to private
investors.
15
Inventory has increased significantly in the fiscal year ended September
30, 2010. CEL-SCI has been purchasing supplies for the manufacturing of
Multikine in order to begin the Phase III trial. In addition, prepaids have
increased with the purchase of insurance for the Phase III trials.
Future Capital Requirements
Other than funding operating losses, funding its research and development
program, and paying its liabilities, CEL-SCI does not have any material capital
commitments. Material future liabilities as of September 30, 2010 are as
follows:
Contractual Obligations:
Years Ending September 30,
---------------------------------------------------------------------------
Total 2011 2012 2013 2014 2015 2015 & thereafter
----- ---- ---- ---- ---- ---- -----------------
Operating Leases $35,250,284 $1,903,471 $1,896,205 $1,855,889 $1,579,931 $1,572,839 $26,441,949
Employment Contracts $2,730,152 $1,202,250 $ 797,166 $ 730,736 -- -- --
In addition, CEL-SCI has an additional contract with a consultant for a
nine-month period ending in fiscal year 2011. This contract totals approximately
$45,000.
Further, CEL-SCI has contingent obligations with vendors for work that
will be completed in relation to the Phase III trial. The timing of these
obligations cannot be determined at this time. The amount of these obligations
for the Phase III trial is approximately $27 million with the net cost to
CEL-SCI being between $25 - $26 million.
CEL-SCI believes that its capital will allow it to enroll the patients in
the Phase III clinical trial. CEL-SCI will need to raise additional funds,
either through its existing warrants/options, through a debt or equity financing
or a partnering arrangement, to complete the Phase III trial and bring Multikine
to market. CEL-SCI management believes that all of the above will be much easier
than it used to be in the past since CEL-SCI will be involved in a very large
Phase III clinical trial for an unmet medical need and should therefore be more
attractive as an investment.
Clinical and other studies necessary to obtain regulatory approval of a
new drug involve significant costs and require several years to complete. The
extent of CEL-SCI's clinical trials and research programs are primarily based
upon the amount of capital available to CEL-SCI and the extent to which CEL-SCI
has received regulatory approvals for clinical trials. The inability of CEL-SCI
to conduct clinical trials or research, whether due to a lack of capital or
regulatory approval, will prevent CEL-SCI from completing the studies and
research required to obtain regulatory approval for any products which CEL-SCI
is developing. Without regulatory approval, CEL-SCI will be unable to sell any
of its products.
In the absence of revenues, CEL-SCI will be required to raise additional
funds through the sale of securities, debt financing or other arrangements in
order to continue with its research efforts. However, there can be no assurance
that such financing will be available or be available on favorable terms.
Ultimately, CEL-SCI must complete the development of its products, obtain
appropriate regulatory approvals and obtain sufficient revenues to support its
cost structure.
16
Since all of CEL-SCI's projects are under development CEL-SCI cannot
predict with any certainty the funds required for future research and clinical
trials, the timing of future research and development projects, or when it will
be able to generate any revenue from the sale of any of its products.
CEL-SCI's cash flow and earnings are subject to fluctuations due to
changes in interest rates on its certificates of deposit, and, to an immaterial
extent, foreign currency exchange rates.
Critical Accounting Policies
CEL-SCI's significant accounting policies are more fully described in Note
1 to the consolidated financial statements included as part of this report.
However, certain accounting policies are particularly important to the portrayal
of financial position and results of operations and require the application of
significant judgments by management. As a result, the consolidated financial
statements are subject to an inherent degree of uncertainty. In applying those
policies, management uses its judgment to determine the appropriate assumptions
to be used in the determination of certain estimates. These estimates are based
on CEL-SCI's historical experience, terms of existing contracts, observance of
trends in the industry and information available from outside sources, as
appropriate. CEL-SCI's significant accounting policies include:
Patents - Patent expenditures are capitalized and amortized using the
straight-line method over 17 years. In the event changes in technology or other
circumstances impair the value or life of the patent, appropriate adjustment in
the asset value and period of amortization is made. An impairment loss is
recognized when estimated future undiscounted cash flows expected to result from
the use of the asset, and from disposition, is less than the carrying value of
the asset. The amount of the impairment loss is the difference between the
estimated fair value of the asset and its carrying value.
Stock Options and Warrants - Codification 718-10-30-3 requires companies
to recognize expense associated with share based compensation arrangements,
including employee stock options, using a fair value-based option pricing model.
Codification 718-10-30-3 applies to all transactions involving issuance of
equity by a company in exchange for goods and services, including employees.
Using the modified prospective transition method of adoption, CEL-SCI reflected
compensation expense in its financial statements beginning October 1, 2005. The
modified prospective transition method does not require restatement of prior
periods to reflect the impact of Codification 718-10-30-3. As such, compensation
expense is recognized for awards that were granted, modified, repurchased or
cancelled on or after October 1, 2005.
Options to non-employees are accounted for in accordance with Codification
505-50-S99-1 Accounting for Equity Instruments That Are Issued to Other Than
Employees for Acquiring, or in Conjunction with Selling, Goods or Services.
Accordingly, compensation is recognized when goods or services are received and
is measured using the Black-Scholes valuation model. The Black-Scholes model
requires CEL-SCI's management to make assumptions regarding the fair value of
the options at the date of grant and the expected life of the options.
17
Asset Valuations and Review for Potential Impairments - CEL-SCI reviews its
fixed assets, intangibles and deferred rent every fiscal quarter. This review
requires that CEL-SCI make assumptions regarding the value of these assets and
the changes in circumstances that would affect the carrying value of these
assets. If such analysis indicates that a possible impairment may exist, CEL-SCI
is then required to estimate the fair value of the asset and, as deemed
appropriate, expense all or a portion of the asset. The determination of fair
value includes numerous uncertainties, such as the impact of competition on
future value. CEL-SCI believes that it has made reasonable estimates and
judgments in determining whether its long-lived assets have been impaired;
however, if there is a material change in the assumptions used in its
determination of fair values or if there is a material change in economic
conditions or circumstances influencing fair value, CEL-SCI could be required to
recognize certain impairment charges in the future. As a result of the reviews,
no changes in asset values were required.
Prepaid Expenses and Inventory--Inventory consists of bulk purchases of
laboratory supplies used on a daily basis in the lab and items that will be used
for future production. The items in inventory are expensed when used in
production or daily activity as Research and Development expenses. These items
are disposables and consumables and can be used for both the manufacturing of
Multikine for clinical studies and in the laboratory for quality control and
bioassay use. They can be used in training, testing and daily laboratory
activities. Prepaid expenses are payments for services over a long period and
are expensed over the time period for which the service is rendered.
Derivative Instruments--CEL-SCI enters into financing arrangements that
consist of freestanding derivative instruments or hybrid instruments that
contain embedded derivative features. CEL-SCI accounts for these arrangement in
accordance with Codification 815-10-50, "Accounting for Derivative Instruments
and Hedging Activities", "Accounting for Derivative Financial Instruments
Indexed to, and Potentially Settled in, a Company's Own Stock", as well as
related interpretations of these standards. In accordance with accounting
principles generally accepted in the United States ("GAAP"), derivative
instruments and hybrid instruments are recognized as either assets or
liabilities in the statement of financial position and are measured at fair
value with gains or losses recognized in earnings or other comprehensive income
depending on the nature of the derivative or hybrid instruments. Embedded
derivatives that are not clearly and closely related to the host contract are
bifurcated and recognized at fair value with changes in fair value recognized as
either a gain or loss in earnings if they can be reliably measured. When the
fair value of embedded derivative features cannot be reliably measured, CEL-SCI
measures and reports the entire hybrid instrument at fair value with changes in
fair value recognized as either a gain or loss in earnings. CEL-SCI determines
the fair value of derivative instruments and hybrid instruments based on
available market data using appropriate valuation models, giving consideration
to all of the rights and obligations of each instrument and precluding the use
of "blockage" discounts or premiums in determining the fair value of a large
block of financial instruments. Fair value under these conditions does not
necessarily represent fair value determined using valuation standards that give
consideration to blockage discounts and other factors that may be considered by
market participants in establishing fair value.
Accounting Pronouncements
In March 2008, the FASB issued Codification 815-20-50-1, "Disclosures about
Derivative Instruments and Hedging Activities - an amendment of FASB Statement
18
No. 133", which changes disclosure requirements for derivative instruments and
hedging activities. The statement is effective for periods ending on or after
November 15, 2008, with early application encouraged. CEL-SCI has adopted this
statement with no effect on its consolidated financial statements.
In June 2008, the FASB finalized Codification 815-40-15-7, "Determining
Whether an Instrument (or Embedded Feature) is Indexed to an Entity's Own
Stock". The EITF lays out a procedure to determine if the debt instrument is
indexed to its own common stock. The EITF is effective for fiscal years
beginning after December 15, 2008. CEL-SCI has adopted this codification and
reviewed all outstanding options and warrants as of October 1, 2009. See Note 11
in the financial statements included as part of this report for a discussion.
In September 2008, the FASB staff issued Codification 815-10-50-1A,
"Disclosures about Credit Derivatives and Certain Guarantees: An Amendment of
FASB Statement No. 133 and FASB Interpretation No. 45; and Clarification of the
Effective Date of FASB Statement No. 161". The codification applies to credit
derivatives within the scope of Statement 133 and hybrid instruments that have
embedded credit derivatives. It deals with disclosures related to these
derivatives and is effective for reporting periods ending after November 15,
2008. It also clarifies the effective date of Codification 815-20-50-1 as any
reporting period beginning after November 15, 2008. CEL-SCI has adopted this
codification and it had no impact on its consolidated financial statements.
In April 2009, the FASB issued Codification 825-10-65-1, "Interim
Disclosures about Fair Value of Financial Instruments". The codification amends
FASB Statement No. 107, "Disclosures about Fair Values of Financial
Instruments", to require disclosures about fair values of financial instruments
for interim reporting periods of publicly traded companies as well as in annual
financial statements. The codification also amends APB Opinion No. 28, "Interim
Financial Reporting", to require those disclosures in summarized financial
information at interim reporting periods. This Codification topic became
effective for interim and annual reporting periods ending after June 15, 2009.
CEL-SCI adopted this codification in the quarter ended June 30, 2009. There was
no significant impact from this adoption on CEL-SCI's consolidated financial
statements.
In May 2009, the FASB issued Codification 855-10-50, "Subsequent Events",
which establishes general standards of accounting for and disclosure of events
that occur after the balance sheet date but before the financial statements are
issued or are available to be issued. It requires the disclosure of the date
through which an entity has evaluated subsequent events and the basis for that
date. The codification establishes the period after the balance sheet date
during which management of a reporting entity should evaluate events or
transactions that may occur for potential recognition or disclosure in the
financial statements, the circumstances under which an entity should recognize
events or transactions occurring after the balance sheet date in its financial
statements and the disclosures that an entity should make about events or
transactions that occurred after the balance sheet date. The codification became
effective for CEL-SCI for the period ended June 30, 2009 and is to be applied
prospectively. The impact of the adoption was not significant.
In January 2010, the FASB amended Codification 820-10, "Improving
Disclosures about Fair Value Measurement", effective for interim periods
beginning after December 15, 2009. This amendment changes disclosures required
19
for interim and annual periods with respect to fair value measurements. CEL-SCI
has adopted the change in the disclosure requirements and the effect was
immaterial.
Market RisksS
Market risk is the potential change in an instrument's value caused by,
for example, fluctuations in interest and currency exchange rates. CEL-SCI
enters into financing arrangements that are or include freestanding derivative
instruments or that are, or include, hybrid instruments that contain embedded
derivative features. CEL-SCI does not enter into derivative instruments for
trading purposes. Additional information is presented in the notes to
consolidated financial statements. The fair value of these instruments is
affected primarily by volatility of the trading prices of the CEL-SCI's common
stock. For three years ended September 30, 2010, CEL-SCI recognized a gain or
(loss) of $28,843,772, $(28,491,650) and $1,799,393, respectively, resulting
from changes in fair value of derivative instruments. CEL-SCI has no exposure to
risks associated with foreign exchange rate changes because none of the
operations of CEL-SCI are transacted in a foreign currency. The interest risk on
investments on September 30, 2010 was considered immaterial due to the fact that
the interest rates at that time were nominal at best and CEL-SCI keeps its cash
and cash equivalents in short term maturities.
20
CEL-SCI CORPORATION
Consolidated Financial Statements for the Years
Ended September 30, 2010, 2009, and 2008, and
Report of Independent Registered Public Accounting Firm
CEL-SCI CORPORATION
Consolidated Financial Statements for the Years
Ended September 30, 2010, 2009, and 2008, and
Report of Independent Registered Public Accounting Firm
CEL-SCI CORPORATION
TABLE OF CONTENTS
Page
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM F-2
CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED
SEPTEMBER 30, 2010, 2009, AND 2008:
Consolidated Balance Sheets F-3
Consolidated Statements of Operations F-4
Consolidated Statements of Stockholders' Equity F-5
Consolidated Statements of Cash Flows F-7
Notes to Consolidated Financial Statements F-10
Report of Independent Registered Public Accounting Firm
Board of Directors and Stockholders
CEL-SCI Corporation
Reston, VA
We have audited the accompanying consolidated balance sheets of CEL-SCI
Corporation as of September 30, 2010 and 2009 and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
three years in the period ended September 30, 2010. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of CEL-SCI Corporation
at September 30, 2010 and 2009, and the results of its operations and its cash
flows for each of the three years in the period ended September 30, 2010, in
conformity with accounting principles generally accepted in the United States of
America.
As described in Note 10, effective October 1, 2009, the Company adopted ASC
815-40, "Determining Whether an Instrument (or Embedded Feature) Is Indexed to a
Company's Own Stock".
We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), CEL-SCI Corporation's internal
control over financial reporting as of September 30, 2010, based on criteria
established in Internal Control - Integrated Framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission (COSO) and our report
dated December 10, 2010 expressed an unqualified opinion thereon.
/s/ BDO USA, LLP
----------------
Bethesda, Maryland
December 10, 2010
CEL-SCI CORPORATION
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2010 AND 2009
ASSETS 2010 2009
------ ------
CURRENT ASSETS:
Cash and cash equivalents $26,568,243 $33,567,516
Prepaid expenses 298,719 39,972
Inventory used for R&D and manufacturing 1,476,234 399,474
Deferred rent - current portion 751,338 806,425
Deposits - 1,585,064
----------- -----------
Total current assets 29,094,534 36,398,451
RESEARCH AND OFFICE EQUIPMENT AND
LEASEHOLD IMPROVEMENTS-- less accumulated
depreciation of $2,626,759 and $2,259,237 1,264,831 1,200,611
PATENT COSTS--less accumulated
amortization of $1,205,690 and $1,132,612 356,079 423,104
RESTRICTED CASH 21,357 68,552
DEFERRED RENT - net of current portion 7,068,184 7,936,880
----------- -----------
TOTAL ASSETS $37,804,985 $46,027,598
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 1,497,383 $ 793,148
Accrued expenses 223,696 98,665
Due to employees 45,808 49,527
Related party loan 1,104,057 1,107,339
Deposits held - 10,000
Derivative instruments - current portion 424,286 -
---------- -----------
Total current liabilities 3,295,230 2,058,679
Derivative instruments - net of
current portion 6,521,765 35,113,970
Deferred revenue 125,000 -
Deferred rent 8,225 14,305
----------- -----------
Total liabilities 9,950,220 37,186,954
----------- -----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value--authorized
100,000 shares, issued and outstanding, -0- - -
Common stock, $.01 par value--authorized
450,000,000 shares; issued and outstanding,
204,868,853 and 191,972,021 shares at
September 30, 2010 and 2009, respectively 2,048,689 1,919,720
Additional paid-in capital 187,606,044 173,017,978
Accumulated deficit (161,799,968) (166,097,054)
----------- -----------
Total stockholders' equity 27,854,765 8,840,644
----------- -----------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 37,804,985 $46,027,598
============ ===========
See notes to consolidated financial statements
F-3
CEL-SCI CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED SEPTEMBER 30, 2010, 2009 AND 2008
2010 2009 2008
----------- ---------- ---------
RENT INCOME AND OTHER $ 153,300 $ 80,093 $ 5,065
OPERATING EXPENSES:
Research and development (excluding
R&D depreciation of $434,030, $329,866
and $91,292 respectively, included
below) 11,911,626 6,011,750 4,101,563
Depreciation and amortization 516,117 417,205 215,060
General & administrative 6,285,810 5,671,595 5,200,735
----------- ----------- ----------
Total operating expenses 18,713,553 12,100,550 9,517,358
----------- ----------- ----------
OPERATING LOSS (18,560,253) (12,020,457) (9,512,293)
GAIN (LOSS) ON DERIVATIVE INSTRUMENTS 28,843,772 (28,491,650) 1,799,393
INTEREST INCOME 362,236 - 483,252
INTEREST EXPENSE (162,326) (397,923) (473,767)
----------- ----------- ----------
NET INCOME (LOSS) 10,483,429 (40,910,030) (7,703,415)
MODIFICATIONS OF WARRANTS (1,532,456) (490,728) (424,815)
----------- ----------- ----------
NET INCOME (LOSS) AVAILABLE TO COMMON
SHAREHOLDERS $ 8,950,973 $(41,400,758 $(8,128,230)
=========== ============ ===========
NET INCOME (LOSS) PER COMMON SHARE
BASIC $ 0.04 $ (0.31) $ (0.07)
DILUTED $ (0.05) $ (0.31) $ (0.07)
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING
BASIC 202,102,859 133,535,050 117,060,866
DILUTED 226,277,913 133,535,050 117,060,866
See notes to consolidated financial statements.
F-4
CEL-SCI CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED SEPTEMBER 30, 2010, 2009 AND 2008
Additional
Common Stock Paid-In Accumulated
Shares Amount Capital Deficit Total
---------- --------- ------------ ------------ ---------
BALANCE, SEPTEMBER 30, 2007 115,678,662 $1,156,787 $130,081,378 $(116,568,066) $14,670,099
Sale of common stock 1,383,389 13,834 1,023,708 1,037,542
401(k) contributions paid
in common stock 205,125 2,051 106,539 108,590
Issuance of common stock
to employees 1,789,451 17,894 1,306,580 1,324,474
Exercise of stock options 50,467 505 13,898 14,403
Correction of stock
overpayment pricing 1,471 1,471
Stock issued to
nonemployees for service 1,689,000 16,890 251,858 268,748
Issuance of stock options
to nonemployees 12,342 12,342
Employee option cost 561,387 561,387
Modification of stock options 564,189 564,189
Financing costs (23,795) (23,795)
Dividends 424,815 (424,815) -
Net loss (7,703,415) (7,703,415)
---------- --------- ----------- ----------- ---------
BALANCE, SEPTEMBER 30,
2008 120,796,094 $1,207,961 $134,324,370 $(124,696,296) $10,836,035
(continued)
F-5
CEL-SCI CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (cont'd)
YEARS ENDED SEPTEMBER 30, 2010, 2009 AND 2008
Additional
Additional
Common Stock Paid-In Accumulated
Shares Amount Capital Deficit Total
---------- --------- ------------ ------------ ---------
Sale of common stock 45,451,547 $ 454,515 $31,788,201 $32,242,716
401(k) contributions paid
in common stock 91,766 917 56,912 57,829
Exercise of stock options 15,659,116 156,591 8,524,663 8,681,254
Stock issued to
nonemployees for service 3,316,438 33,164 1,528,179 1,561,343
Stock issued to employees 1,324,385 13,244 672,614 685,858
Stock issued for
principal payments on
Series K notes 972,753 9,728 275,272 285,000
Stock issued for interest
on Series K Notes 177,403 1,774 41,111 42,885
Issuance of stock options
and warrants to
nonemployees 449,641 449,641
Loss on conversion of
convertible debt 2,145,754 2,145,754
Issuance of warrants for
short term loan 65,796 65,796
Modification of options 6,142 6,142
Employee option cost 1,699,448 1,699,448
Premium on loan from
shareholder 489,776 489,776
Conversion of convertible debt -
into common stock 3,015,852 30,159 1,176,182 1,206,341
Cost of derivative
liabilities (8,632,217) (8,632,217)
Financing costs (2,072,927) (2,072,927)
Dividends 1,166,667 11,667 479,061 (490,728) -
Net loss (40,910,030) (40,910,030)
---------- --------- ----------- ----------- -----------
BALANCE, SEPTEMBER 30,
2009 191,972,021 1,919,720 173,017,978 (166,097,054) 8,840,644
401(k) contributions paid
in common stock 182,233 1,822 110,503 112,325
Exercise of warrants and
stock options 12,249,441 122,495 6,186,379 6,308,874
Stock issued to employees and
nonemployees for service 465,158 4,652 1,236,374 1,241,026
Exercise of derivative
liabilities 5,510,490 5,510,490
Modification of stock
options and warrants 227,921 227,921
Employee option cost 1,316,399 1,316,399
Adoption of ASC 815-40 (6,186,343) (6,186,343)
Net income 10,483,429 10,483,429
---------- --------- ----------- ----------- ---------
BALANCE, SEPTEMBER 30,
2010 204,868,853 $2,048,689 $187,606,044 $(161,799,968) $27,854,765
=========== ========== ============ ============= ===========
See notes to consolidated financial statements
F-6
CEL-SCI CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED SEPTEMBER 30, 2010, 2009 AND 2008
2010 2009 2008
---------- ---------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $10,483,429 $(40,910,030) $(7,703,415)
Adjustments to reconcile net
income (loss) to net cash
used for operating activities:
Depreciation and amortization 516,117 417,205 215,060
Issuance of stock options and
warrants to nonemployees for
services - 449,641 12,342
Issuance of common stock for
services 1,241,026 1,561,343 268,748
Correction of stock overpayment
pricing - - 1,471
Premium on loan - 341,454 -
Loan premium adjustment - 489,776 -
Amortization of loan premium (3,282) (338,172) -
Modification of stock options
and warrants 227,921 6,142 564,189
Issuance of stock to employees - 685,858 1,324,474
Loss on conversion of
convertible notes - 2,145,754 -
Employee option cost 1,316,399 1,699,448 561,387
Common stock contributed to
401(k) plan 112,325 57,829 108,590
Warrants issued in
consideration for loan - 65,796 -
Impairment loss on abandonment
of patents 13,877 138,525 8,114
Loss on retired equipment 2,323 270 595
Deferred rent (6,080) 7,688 5,151
Amortization of discount on
convertible note - 193,980 249,106
(Gain)/loss on derivative
instruments (28,843,772) 25,514,667 (1,799,393)
Change in assets and
liabilities:
Decrease/(increase) in deposits 1,585,064 4,764 (1,575,000)
Decrease/(increase) in deferred
rent 955,842 622,350 (142,117)
(Increase)/decrease in prepaid
expenses (258,747) (12,763) 7,369
Increase in inventory used in
R&D and manufacturing (1,076,760) (4,304) (9,520)
Increase/(decrease) in
accounts payable 693,799 343,208 (36,622)
Increase/(decrease) in
accrued expenses 125,031 (14,514) 14,576
Decrease in accrued interest on
convertible debt - (2,674) (23,237)
Increase in deferred revenue 125,000 - -
(Decrease)/increase in due to
employees (3,719) 13,450 9,342
(Decrease)/increase in
deposits held (10,000) 10,000 (3,000)
------------ ------------ -----------
Net cash used in operating
activities (12,804,207) (6,513,309) (7,941,790)
------------ ------------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additional investment in
manufacturing facility (32,059) (505,225) (2,359,473)
Decrease in restricted cash 47,195 919,100 1,180,977
Investment in available-for-sale
securities - - (6,000,000)
Sale of investments in
available-for-sale securities - 200,000 5,800,000
Purchases of equipment (493,736) (191,868) (1,023,011)
Expenditures for patent costs (25,340) (53,290) (121,616)
------------ ------------ -----------
Net cash (used in) provided by
investing activities (503,940) 368,717 (2,523,123)
------------ ------------ -----------
(continued)
See notes to consolidated financial statements.
F-7
CEL-SCI CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (cont'd)
YEARS ENDED SEPTEMBER 30, 2010, 2009 AND 2008
2010 2009 2008
---------- ---------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common
stock $ - $ 32,242,716 $ 1,037,542
Proceeds from exercise of warrants
and stock options 6,308,874 8,681,254 14,403
Proceeds from short-term loan - 3,104,057 1,956,803
Repayment of short-term loan - (2,200,000) (1,756,803)
Principal payments on convertible
debt - (754,250) (1,045,000)
Costs for equity related transactions - (2,072,927) (23,795)
------------ ------------ -----------
Net cash provided by financing
activities 6,308,874 39,000,850 183,150
------------ ------------ -----------
NET (DECREASE) INCREASE
IN CASH AND CASH EQUIVALENTS (6,999,273) 32,856,258 (10,281,763)
CASH AND CASH EQUIVALENTS, BEGINNING
OF YEAR 33,567,516 711,258 10,993,021
------------ ------------ -----------
CASH AND CASH EQUIVALENTS,
END OF YEAR $ 26,568,243 $ 33,567,516 $ 711,258
============ ============ ==========
CONVERSION OF CONVERTIBLE DEBT
INTO COMMON STOCK:
Decrease in convertible debt $ - $ 1,206,341 $ -
Increase in common stock - (30,159) -
Increase in additional paid-in
capital - (1,176,182) -
------------ ------------ -----------
$ - $ - $ -
============ ============ ===========
CONVERSION OF INTEREST ON
CONVERTIBLE DEBT INTO COMMON STOCK:
Decrease in accrued liabilities $ - $ 42,885 $ -
Increase in common stock - (1,774) -
Increase in additional paid-in
capital - (41,111) -
------------ ------------ -----------
$ - $ - $ -
============ ============ ===========
PAYMENT OF CONVERTIBLE DEBT PRINCIPAL
WITH
COMMON STOCK:
Decrease in convertible debt $ - $ 285,000 $ -
Increase in common stock - (9,728) -
Increase in additional paid-in
capital - (275,272) -
------------ ------------ -----------
$ - $ - $ -
============ ============ ===========
ISSUANCE OF WARRANTS:
Increase in derivative
liabilities $ - $ (8,877,217) $ (891,336)
Increase in discount on notes
payable - 245,000 -
Decrease in additional paid-in
capital - 8,632,217 891,336
------------ ------------ -----------
$ - $ - $ -
============ ============ ===========
EXERCISE OF DERIVATIVE LIABILITIES:
Decrease in derivative liabilities $ 5,510,490 $ - $ -
Increase in additional paid-in
capital (5,510,490) - -
------------ ------------ -----------
$ - $ - $ -
============ ============ ===========
MODIFICATION OF WARRANTS:
Increase in additional paid-in
capital $ (1,532,456) $ (24,061) $ (173,187)
Decrease in additional paid-in
capital 1,532,456 24,061 173,187
------------ ------------ -----------
$ - $ - $ -
============ ============ ===========
See notes to consolidated financial statements.
(continued)
F-8
CEL-SCI CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (cont'd)
YEARS ENDED SEPTEMBER 30, 2010, 2009 AND 2008
2010 2009 2008
---------- ---------- -----------
ACCOUNTS PAYABLE:
Increase in patent costs $ - $ 7,285 $ 14,013
Increase in accounts payable - (7,285) (14,013)
------------ ------------ -----------
$ - $ - $ -
============ ============ ===========
EQUIPMENT COSTS INCLUDED IN
ACCOUNTS PAYABLE:
Increase in research and office
equipment $ 10,436 $ 15,147 $ 201,998
Increase in accounts payable (10,436) (15,147) (201,998)
------------ ------------ -----------
$ - $ - $ -
============ ============ ===========
WARRANTS ISSUED FOR LOAN:
Increase in debt discount $ - $ 65,796 $ -
Increase in additional paid-in
capital - (65,796) -
------------ ------------ -----------
$ - $ - $ -
============ ============ ===========
STOCK MODIFICATION RECORDED AS
DIVIDEND
Increase in common stock $ - $ (11,667) $ -
Increase additional paid-in
capital - (479,061) (424,815)
Increase accumulated deficit - 490,728 424,815
------------ ------------ -----------
$ - $ - $ -
============ ============ ===========
ADOPTION OF ASC 815-40
Increase in derivative
liabilities $ (6,186,343) $ - $ -
Increase in accumulated deficit 6,186,343 - -
------------ ------------ -----------
$ - $ - $ -
============ ============ ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOWS
INFORMATION:
Cash expenditure for interest
expense $ 162,326 $ 115,559 $ 224,662
See notes to consolidated financial statements.
F-9
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CEL-SCI Corporation (the "Company") was incorporated on March 22, 1983, in
the state of Colorado, to finance research and development in biomedical
science and ultimately to engage in marketing and selling products.
The Company's lead product, Multikine(R), is being developed for the
treatment of cancer. Multikine is a patented immunotherapeutic agent
consisting of a mixture of naturally occurring cytokines, including
interleukins, interferons, chemokines and colony-stimulating factors,
currently being developed for the treatment of cancer. Multikine is designed
to target the tumor micro-metastases that are mostly responsible for
treatment failure. The basic concept is to add Multikine to the current
cancer treatments with the goal of making the overall cancer treatment more
successful. Phase II data indicated that Multikine treatment resulted in a
substantial increase in the survival of patients. The lead indication is
advanced primary head & neck cancer. Since Multikine is not tumor specific,
it may also be applicable in many other solid tumors.
Significant accounting policies are as follows:
a. Principles of Consolidation--The consolidated financial statements include
the accounts of the Company and its wholly owned subsidiary, Viral
Technologies, Inc. (VTI). All significant intercompany transactions have been
eliminated upon consolidation. Certain amounts from 2009 consolidated
financial statements have been reclassified to conform to 2010 consolidated
financial statement presentation. One such reclassification is the
reclassification of derivative instruments of $35,113,970 from current
liabilities to long-term liabilities on the September 30, 2009 consolidated
balance sheet.
b. Cash and Cash Equivalents--For purposes of the statements of cash flows, cash
and cash equivalents consists principally of unrestricted cash on deposit and
short-term money market funds. The Company considers all highly liquid
investments with a maturity when purchased of less than three months, as cash
and cash equivalents.
c. Restricted Cash--The restricted cash is money held in escrow pursuant to the
lease agreement for the manufacturing facility.
d. Prepaid Expenses and Inventory--Prepaid expenses consist of expenses which
benefit a substantial period of time. Inventory consists of manufacturing
production advances and bulk purchases of laboratory supplies to be consumed
in the manufacturing of the Company's product for clinical studies.
e. Deposits--The deposit on September 30, 2009 was for the manufacturing
facility ($1,575,000) required by the lease agreement, but was refunded in
February 2010, after the Company met the cash requirements of the lease.
F-10
f. Research and Office Equipment and Leasehold Improvements--Research and office
equipment is recorded at cost and depreciated using the straight-line method
over estimated useful lives of five to seven years. Leasehold improvements
are depreciated over the shorter of the estimated useful life of the asset or
the terms of the lease. Repairs and maintenance which do not extend the life
of the asset are expensed when incurred. The fixed assets are reviewed on a
quarterly basis to determine if any of the assets are impaired. Depreciation
expense for the years ended September 30, 2010, 2009 and 2008 totaled
$437,629, $330,820, and $133,604, respectively. During the years ended
September 30, 2010, 2009 and 2008, equipment with a net book value of $2,323,
$270 and $595 was retired.
g. Patents--Patent expenditures are capitalized and amortized using the
straight-line method over the shorter of the expected useful life or the
legal life of the patent (17 years). In the event changes in technology or
other circumstances impair the value or life of the patent, appropriate
adjustment in the asset value and period of amortization is made. An
impairment loss is recognized when estimated future undiscounted cash flows
expected to result from the use of the asset, and from disposition, is less
than the carrying value of the asset. The amount of the impairment loss is
the difference between the estimated fair value of the asset and its carrying
value. During the years ended September 30, 2010, 2009 and 2008, the Company
recorded patent impairment charges of $13,877, $138,525, and $8,114,
respectively, for the net book value of patents abandoned during the year.
These amounts are included in general and administrative expenses.
Amortization expense for the years ended September 30, 2010, 2009 and 2008
totaled $78,488, $86,385, and $81,456, respectively. The Company estimates
that amortization expense will be approximately $71,200 for each of the next
five years, totalling $356,000.
h. Deferred Rent-- Interest on the deferred rent is calculated at 3% on the
funds deposited on the manufacturing facility and for September 30, 2010, is
included in the deferred rent. This interest income will be used to offset
future rent. On September 30, 2010, the Company has included in deferred rent
the following: 1) deposit on the manufacturing facility ($3,150,000); 2) the
fair value of the warrants issued to lessor ($1,481,040); 3) additional
investment ($2,889,409); 4) deposit on the cost of the leasehold improvements
for the manufacturing facility ($1,786,591), 5) amortization of deferred rent
($(1,682,053)); and 6) accrued interest on deposit ($194,535).
On September 30, 2009, the Company has included in deferred rent the
following: 1) deposit on the manufacturing facility ($3,150,000); 2) the fair
value of the warrants issued to lessor ($1,731,667); 3) additional investment
($2,864,698); 4) deposit on the cost of the leasehold improvements for the
manufacturing facility ($1,786,591); 5) amortization of deferred rent
($(882,338)); and 6) accrued interest on deposit ($92,687).
i. Deferred Rent (liability)--The deferred rent (liability) is amortized on a
straight-line basis over the term of the lease with the offset going against
rent expense.
j. Derivative Instruments--The Company entered into financing arrangements that
consisted of freestanding derivative instruments or were hybrid instruments
that contained embedded derivative features. The Company accounted for these
F-11
arrangement in accordance with Codification 815-10-50, "Accounting for
Derivative Instruments and Hedging Activities", "Accounting for Derivative
Financial Instruments Indexed to, and Potentially Settled in, a Company's Own
Stock". In accordance with accounting principles generally accepted in the
United States ("GAAP"), derivative instruments and hybrid instruments are
recognized as either assets or liabilities in the statement of financial
position and are measured at fair value with gains or losses recognized in
earnings or other comprehensive income depending on the nature of the
derivative or hybrid instruments. Embedded derivatives that are not clearly
and closely related to the host contract are bifurcated and recognized at
fair value with changes in fair value recognized as either a gain or loss in
earnings if they can be reliably measured. When the fair value of embedded
derivative features cannot be reliably measured, the Company measures and
reports the entire hybrid instrument at fair value with changes in fair value
recognized as either a gain or loss in earnings. The Company determined the
fair value of derivative instruments and hybrid instruments based on
available market data using appropriate valuation models, giving
consideration to all of the rights and obligations of each instrument and
precluding the use of "blockage" discounts or premiums in determining the
fair value of a large block of financial instruments. Fair value under these
conditions does not necessarily represent fair value determined using
valuation standards that give consideration to blockage discounts and other
factors that may be considered by market participants in establishing fair
value. The convertible debt associated with the Series K convertible notes
was all either repaid or converted into the Company's common stock before
September 30, 2009. The remaining warrants associated with Series K are
valued at $5,372,598 on September 30, 2009 and are shown in the balance sheet
in long term liabilities. Warrants exercised during the year ended September
30, 2010 totaled $534,088 in funds received by the Company. In addition, the
Company recognized a gain of $280,223 on the exercise of the Series K
warrants. Outstanding warrants associated with Series K are valued at
$1,002,502 at September 30, 2010. The Company recorded a gain of $2,856,355
on the remaining Series K for the year ending September 30, 2010.
The Company issued other warrants during the year ended September 30, 2009
that are accounted for as derivative liabilities. See Note 6. At September
30, 2009, the fair value of these derivative instruments totaled $29,741,372
and is shown on the balance sheet in long term liabilities. At September 30,
2010, the fair value of these derivative instruments totaled $4,037,067.
There were 8,813,088 Series A warrants exercised during the year ended
September 30, 2010, that brought in $4,406,544 in funds to the Company. In
addition, the Company recognized a gain of $8,433,451 on the exercise of the
Series A warrants. The fair value of these derivative liabilities will be
adjusted at the end of each interim accounting period as well as at the end
of each fiscal year as long as they are outstanding. The Company recorded a
gain of $12,993,883 on the remaining Series A through E warrants for the year
ending September 30, 2010.
Also included in derivative liabilities are warrants issued to investors in
August 2008. These warrants were valued at $1,906,482 on September 30, 2010,
which resulted in a gain of $4,279,860 for the year ended September 30, 2010.
F-12
k. Research and Development Grant Revenues--The Company's grant arrangements are
handled on a reimbursement basis. Grant revenues under the arrangements are
recognized as grant revenue when costs are incurred. The Company is currently
not receiving funds from any grants.
l. Research and Development Costs--Research and development expenditures are
expensed as incurred. Total research and development costs, excluding
depreciation, were $11,911,626, $6,011,750, and $4,101,563 for the years
ended September 30, 2010, 2009 and 2008.
m. Net Income (Loss) Per Common Share--Net income (loss) per common share is
computed by dividing the net income (loss) by the weighted average number of
common shares outstanding during the period. Potentially dilutive common
stock equivalents, including convertible preferred stock, convertible debt
and options to purchase common stock, are included in the calculation unless
the result is antidilutive.
n. Concentration of Credit Risk--Financial instruments, which potentially
subject the Company to concentrations of credit risk, consist of cash and
cash equivalents. The Company maintains its cash and cash equivalents with
high quality financial institutions. At times, these accounts may exceed
federally insured limits. The Company has not experienced any losses in such
bank accounts. The Company believes it is not exposed to significant credit
risk related to cash and cash equivalents.
o. Income Taxes-- The Company has net operating loss carryforwards at
September 30, 2010 of approximately $115 million. The Company uses the asset
and liability method of accounting for income taxes. Under the asset and
liability method, deferred tax assets and liabilities are recognized for
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases and operating and tax loss carryforwards. Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply
to taxable income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period
that includes the enactment date. The Company records a valuation allowance
to reduce the deferred tax assets to the amount that is more likely than not
to be recognized.
p. Use of Estimates--The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates. Accounting for derivatives is
based upon valuations of derivative instruments determined using various
valuation techniques including the Black-Scholes and binomial pricing
methodologies. The Company considers such valuations to be significant
estimates.
F-13
q. Recent Accounting Pronouncements--In March 2008, the FASB issued Codification
815-20-50-1, "Disclosures about Derivative Instruments and Hedging Activities
- an amendment of FASB Statement No. 133", which changes disclosure
requirements for derivative instruments and hedging activities. The statement
is effective for periods ending on or after November 15, 2008, with early
application encouraged. The Company has adopted this topic with no impact on
its consolidated financial statements.
In June 2008, the FASB issued EITF 07-5, "Determining Whether an Instrument
(or Embedded Feature) Is Indexed to a Company's Own Stock". EITF 07-5 is now
known as Codification 815-40-15-7 and it supersedes EITF 01-6 and provides
revised guidance for, "...the determination of whether an instrument (or an
embedded feature) is indexed to an entity's own stock, which is the first
part of the scope exception in paragraph 11(a) of Statement 133, now known as
Codification 815-10-50. If an instrument (or an embedded feature) that has
the characteristics of a derivative instrument under Codification 815-10-50
is indexed to an entity's own stock, it is still necessary to evaluate
whether it is classified in stockholders' equity (or would be classified in
stockholders' equity if it were a freestanding instrument)." Specifically,
Codification 815-40-15-7 provides a two-step process:
Step 1: Evaluate the instrument's contingent exercise provisions, if any.
Step 2: Evaluate the instrument's settlement provisions.
Codification 815-40-15-7 was effective for the Company as of January 1, 2009
and was applied to outstanding instruments as of October 1, 2009.
Based on this analysis, the Company has determined that some of its warrants
are subject to Codification 815-10-50 and must be revalued at the end of
every reporting period, with changes to the fair value of the warrants to be
accounted for as derivative gains or losses in the income statement. For
further discussion, see Note 10.
In September 2008, the FASB issued Codification 815-10-50-1A, "Disclosures
about Credit Derivatives and Certain Guarantees: An Amendment of FASB
Statement No. 133 and FASB Interpretation No. 45; and Clarification of the
Effective Date of FASB Statement No. 161". This codification applies to
credit derivatives within the scope of ASC 815 and hybrid instruments that
have embedded credit derivatives. It deals with disclosures related to these
derivatives and is effective for reporting periods ending after November 15,
2008. It also clarifies the effective date of Codification 815-20-50-1 as any
reporting period beginning after November 15, 2008. The impact of the
adoption of this codification did not have a material effect on the Company's
consolidated financial statements.
In April 2009, the FASB issued Codification 825-10-65-1, "Interim
Disclosures about Fair Value of Financial Instruments". This topic amends
FASB Statement No. 107, "Disclosures about Fair Values of Financial
Instruments", to require disclosures about fair values of financial
instruments for interim reporting periods of publicly traded companies as
well as in annual financial statements. This topic became effective for
interim and annual reporting periods ending after June 15, 2009. The Company
F-14
adopted this codification for the period ended June 30, 2009. There was no
significant impact from this adoption on the Company's consolidated financial
statement.
In May 2009, the FASB issued Codification 855-10-50, "Subsequent Events"
which establishes general standards of accounting for and disclosure of
events that occur after the balance sheet date but before the financial
statements are issued or are available to be issued. The Statement sets forth
the period after the balance sheet date during which management of a
reporting entity should evaluate events or transactions that may occur for
potential recognition or disclosure in the financial statements, the
circumstances under which an entity should recognize events or transactions
occurring after the balance sheet date in its financial statements and the
disclosures that an entity should make about events or transactions that
occurred after the balance sheet date. This topic became effective for the
Company for the period ended June 30, 2009. The impact of the adoption was
not significant.
In January 2010, the FASB amended Codification 820-10, "Improving
Disclosures about Fair Value Measurement", effective for interim periods
beginning after December 15, 2009. This amendment changes disclosures
required for interim and annual periods with respect to fair value
measurements. The Company has adopted the change in the disclosure
requirements and the effect was immaterial.
r. Stock-Based Compensation-- The Company recognized expense of $1,316,399 for
options issued or vested during the fiscal year ended September 30, 2010,
expense of $1,699,448 for options issued or vested during the fiscal year
ended September 30, 2009 and expense of $561,387 for options issued or vested
during the fiscal year ending September 30, 2008. This expense was recorded
as general and administrative expense. The Company received a total of
$36,330 and $282,841 from the exercise of options during the year ended
September 30, 2010 and 2009, respectively. The following table summarizes
stock option activity for the year ended September 30, 2010.
Non-Qualified Stock Option Plan
-------------------------------
Outstanding Exercisable
---------------------------------------------- -----------------------------------------------
Weighted
Weighted Average
Weighted Average Weighted Remaining
Number Average Remaining Aggregate Number Average Contractual Aggregate
of Exercise Contractual Intrinsic of Exercise Term Intrinsic
Shares Price Term (Years) Value Shares Price (Years) Value
--------- ---------- ----------- --------- -------- ----------- ----------- -----------
Outstanding at 19,578,091 $ 0.48 7.70 $23,979,937 $7,400,431 $ 0.61 4.18 $7,676,815
October 1, 2009
Vested 812,669 $ 0.53
Granted 1,453,450 $ 0.57 9.74 106,592 9.74 106,592
Exercised (18,625) $ 0.31 8.31 6,224 (18,625) $ 0.31 8.31 6,224
Forfeited (4,500) $ 0.77
Expired (30,502) $ 1.05 (30,502) $ 1.05
Outstanding at
September 30, 2010 20,977,914 $ 0.49 7.18 4,209,476 8,163,973 $ 0.62 4.47 1,135,673
F-15
Incentive Stock Option Plan
---------------------------
Outstanding Exercisable
---------------------------------------------- -----------------------------------------------
Weighted
Weighted Average
Weighted Average Weighted Remaining
Number Average Remaining Aggregate Number Average Contractual Aggregate
of Exercise Contractual Intrinsic of Exercise Term Intrinsic
Shares Price Term (Years) Value Shares Price (Years) Value
--------- ---------- ----------- --------- -------- ----------- ----------- -----------
Outstanding at 9,598,874 $ 0.39 7.03 $12,859,317 8,548,876 $ 0.38 6.99 $11,525,319
October 1, 2009
Vested 449,999 $ 0.49
Granted 1,100,000 $ 0.61 9.76 31,000 $ 0.61 9.76 31,000
Exercised (71,333) $ 0.43 1.74 22,400 (71,333) $ 0.43 1.74 22,400
Expired (34,500) $ 2.25 (34,500) $ 2.25
Outstanding at
September 30, 2010 10,593,041 $ 0.40 6.65 3,101,582 8,893,042 $ 0.38 6.02 2,794,276
The total intrinsic value of options exercised during the fiscal years
2010, 2009 and 2008 was $32,999, $242,634 and $5,784, respectively.
The weighted average fair value at the date of grant for options granted
during fiscal years 2010, 2009 and 2008 was $0.52, $0.28 and $0.51,
respectively.
A summary of the status of the Company's non-vested options as of
September 30, 2010 is presented below:
Non-qualified Stock Option Plan:
Weighted
Number of Average
Shares Price
---------- ---------
Nonvested at October 1, 2007 1,439,986 $0.51
Vested (616,328)
Granted 1,039,000
Forfeited (9,332)
-----------
Nonvested at September 30, 2008 1,853,326 $0.61
Vested (1,566,280)
Granted 11,895,614 $0.31
Forfeited (5,000)
-----------
F-16
Nonvested at September 30, 2009 12,177,660 $0.40
Vested (812,669)
Granted 1,453,450 $0.50
Forfeited (4,500)
-----------
Nonvested at September 30, 2010 12,813,941 $0.40
==========
Incentive Stock Option Plan:
Weighted
Number of Average
Shares Price
---------- ---------
Nonvested at October 1, 2007 603,332 $0.49
Vested (280,001)
Granted 300,000
Forfeited -
-----------
Nonvested at September 30, 2008 623,331 $ 0.62
Vested (4,556,108)
Granted 4,982,775 $0.22
Forfeited -
-----------
Nonvested at September 30, 2009 1,049,998 $0.45
Vested (449,999)
Granted 1,100,000 $0.55
Forfeited -
-----------
Nonvested at September 30, 2010 1,699,999 $0.54
=========
In fiscal year 2010, the Company issued 2,553,450 stock options to employees
and directors at a fair value of $1,333,831, ($0.52 fair value per option),
at a weighted average exercise price of $0.59 per share. In fiscal year 2009,
the Company issued 16,878,389 stock options to employees and directors at a
fair value of $4,725,949, ($0.28 fair value per option), at a weighted
average exercise price of $0.343 per share. In fiscal year 2008, the Company
issued 1,339,000 stock options to employees and directors at a fair value of
$677,661, at a weighted average exercise price of $0.51 per share. On
September 30, 2010, the Company had 14,513,940 options that were unvested at
a fair value of $5,333,797, which is a weighted average fair value of $0.37
per share with a weighted average remaining vesting life of 1.87 years. The
fair value of each option grant was estimated on the date of grant using the
Black-Scholes option-pricing model with the following assumptions:
2010 2009 2008
---- ---- ----
Expected stock price volatility 98.6-104.5% 79.5-80.2% 79-81%
Risk-free interest rate 2.54-4.01% 2.82-3.72% 3.68-4.53%
Expected life of options 9.63-10 Years 10 Years 10 Years
Expected dividend yield - - -
F-17
The Company's stock options are not transferable, and the actual value of the
stock options that an employee may realize, if any, will depend on the excess
of the market price on the date of exercise over the exercise price. The
Company has based its assumption for stock price volatility on the variance
of daily closing prices of the Company's stock. The risk-free rate of return
used for fiscal years 2010, 2009 and 2008 equals the yield on ten-year
zero-coupon U.S. Treasury issues on the grant date. Historical data was used
to estimate option exercise and employee termination within the valuation
model. The expected term of options represents the period of time that
options granted are expected to be outstanding and has been determined based
on an analysis of historical exercise behavior. No discount was applied to
the value of the grants for non-transferability or risk of forfeiture.
2. SERIES K CONVERTIBLE DEBT
In August 2006, the Company issued $8,300,000 million in aggregate
principal amount of convertible notes (the "Series K Notes") together with
warrants to purchase 4,825,581 shares of the Company's common stock (the
"Series K Warrants"). Additionally, in connection with issuance of the
Series K Notes and Series K Warrants, the placement agent received a fee of
$498,000 and 386,047 fully vested warrants (the "Placement Agent Warrants")
to purchase shares of the Company's common stock. Net proceeds were
$7,731,290, net of $568,710 in direct transaction costs, including the
placement agent fee. The Series K convertible debt has all either been
repaid or converted into shares of the Company's common stock as of
September 2009.
Features of the Convertible Debt Instrument and Warrants
The Series K Notes were convertible into 9,651,163 shares of the Company's
common stock at the option of the holder at any time prior to maturity at a
conversion price of $0.86 per share, subject to adjustment for certain
events described below. The Series K Warrants were exercisable over a
five-year period from February 4, 2007 through February 4, 2012 at $0.95
per share.
The Series K Notes bore interest at the greater of 8% or LIBOR plus 300
basis points, and were required to be repaid in thirty equal monthly
installments of $95,000 beginning on March 4, 2007 and continuing through
September 4, 2010. The remaining principal balance of $950,000 was required
to be repaid on August 4, 2011; however, holders of the Series K Notes were
allowed to require the repayment of the entire remaining principal balance
at any time after August 4, 2009. Interest had been payable quarterly
beginning in September 30, 2006. Each payment of principal and accrued
interest could be settled in cash or in shares of common stock at the
option of the Company. The number of shares deliverable under the
share-settlement option was determined based on the lower of (a) $0.86 per
share, as adjusted pursuant to the terms of the Series K Notes or (b) 90%
applied to the arithmetic average of the volume-weighted-average trading
prices for the twenty day period immediately preceding each share
settlement.
F-18
The conversion price of the Series K Notes and exercise price of the Series
K Warrants were each subject to certain anti-dilution protections,
including for stock splits, stock dividends, change in control events and
dilutive issuances of common stock or common stock equivalents, such as
stock options, at an effective price per share that is lower than the then
conversion price. In the event of a dilutive issuance of common stock or
common stock equivalents, the conversion price and exercise price would be
reduced to equal the lower per share price of the subsequent transaction.
Accounting for the Convertible Debt Instrument and Warrants
The Company accounted for the Series K Warrants as derivative liabilities
in accordance with Codification 815-10. The Company determined that the
Series K Notes constituted a hybrid instrument that had the characteristics
of a debt host contract containing several embedded derivative features
that would require bifurcation and separate accounting as a derivative
instrument pursuant to the provisions of the topic. The Company determined
that certain of these features cannot be reliably measured and, in
accordance with the requirements of the topic, measured the entire hybrid
instrument at fair value with changes in fair value recognized as either a
gain or loss.
Upon issuance of the Series K Notes and Series K Warrants, the Company
allocated proceeds received to the Series K Notes and the Series K Warrants
on a relative fair value basis. As a result of such allocation, the Company
determined the initial carrying value of the Series K Notes to be
$6,565,528. The Series K Notes were immediately marked to fair value
resulting in a derivative liability in the amount of $9,728,793 and the
Company recognized a charge of $3,163,265, which was recorded as costs
associated with convertible debt. As of September 30, 2008, the fair value
of the Series K Notes was $1,943,240, and the Company recognized a total
gain of $1,799,393 on the convertible debt and associated warrants during
the year ended September 30, 2008. A debt discount in the amount of
$1,734,472 was amortized to interest expense using the effective interest
method over the expected term of the Series K Notes. During the year ended
September 30, 2009, the Company recorded interest expense of $193,980 in
related amortization of the debt discount. During the year ended September
30, 2008, the Company recorded interest expense of $249,106 in related
amortization of the debt discount over the term of the Series K Notes.
Upon issuance, the Series K Warrants and Placement Agent Warrants did not
meet the requirements for equity classification set forth in Codification
815-10-50, "Accounting for Derivative Financial Instruments Indexed to, and
Potentially Settled in, a Company's Own Stock," because such warrants (a)
must be settled in registered shares and (b) are subject to substantial
liquidated damages if the Company is unable to maintain the effectiveness
of the resale registration of the shares. Therefore such warrants were
accounted for as freestanding derivative instruments pursuant to the
provisions of Codification 815-10. Accordingly, the Company allocated
$2,570,138 of the initial proceeds to the Series K Warrants and immediately
marked them to fair value resulting in a derivative liability of $2,570,138
and recognized a charge of $835,666, which was recorded as costs associated
with convertible debt. As of September 30, 2008, the fair value of the
Series K Warrants was $995,793. The Company paid $568,710 in cash
transaction costs and incurred another $223,907 in costs based upon the
fair value of the Placement Agent Warrants, which was recorded as costs
associated with convertible debt. Such costs were expensed immediately as
F-19
part of fair value adjustments required in connection with the convertible
debt instrument and the Company's irrevocable election to initially and
subsequently measure the Series K Notes at fair value. As of September 30,
2008, the fair value of the Placement Agent Warrants was $79,664. In
connection with the June 2009 financing, the Series K notes and warrants
were repriced to $0.40. As of September 30, 2009, the fair value of the
remaining investor and broker warrants was $5,372,598. During the fiscal
year ended September 30, 2010, 1,335,221 Series K warrants were exercised,
on which the Company recognized a gain on conversion of $280,223. When the
warrants were exercised, $1,233,518 of the Series K warrants was converted
from derivative liabilities to equity. At September 30, 2010, the fair
value of the remaining investor and broker warrants was $1,002,502.
During the year ended September 30, 2009, all remaining convertible debt
was converted into common stock or was repaid in accordance with the terms
of the agreement. $24,375 was repaid at 120% and $1,206,341 in convertible
debt was converted into 3,015,852 shares of common stock during the year
ended September 30, 2009.
3. OPERATIONS AND FINANCING
The Company has incurred significant costs since its inception in connection
with the acquisition of certain patented and unpatented proprietary
technology and know-how relating to the human immunological defense system,
patent applications, research and development, administrative costs,
construction of laboratory facilities, and clinical trials. The Company has
funded such costs with proceeds from the public and private sale of its
common and preferred stock. The Company will be required to raise additional
capital or find additional long-term financing in order to continue with its
research efforts. To date, the Company has not generated any revenue from
product sales. The ability of the Company to complete the necessary clinical
trials and obtain Federal Drug Administration (FDA) approval for the sale of
products to be developed on a commercial basis is uncertain. Ultimately, the
Company must complete the development of its products, obtain the appropriate
regulatory approvals and obtain sufficient revenues to support its cost
structure.
The Company has two partners who have agreed to participate in and pay for
part of the Phase III clinical trial for Multikine. Since the Company was
able to raise substantial capital during 2009, the Company is currently
preparing the Phase III trial for Multikine. The net cost of the clinical
trial is currently being negotiated, but is assumed to be about $25 - $26
million. The Company believes that its capital will allow it to enroll the
patients in the Phase III clinical trial. The Company will need to raise
additional funds, either through its existing warrants/options, through a
debt or equity financing or a partnering arrangement, to complete the Phase
III trial and bring Multikine to market. There can be no assurances the
Company will be successful in raising additional funds.
F-20
4. RESEARCH AND OFFICE EQUIPMENT
Research and office equipment at September 30, 2010 and 2009, consists of the
following:
2010 2009
---- ----
Research equipment $3,647,684 $3,292,472
Furniture and equipment 116,996 122,957
Leasehold improvements 126,910 44,419
------------ -------
3,891,590 3,459,848
Less: Accumulated depreciation
and amortization (2,626,759) (2,259,237)
----------- ----------
Net research and office equipment $1,264,831 $1,200,611
========== ==========
5. INCOME TAXES
At September 30, 2010, the Company had a federal net operating loss
carryforward of approximately $115 million expiring from 2011 through 2030.
In addition, the Company has a general business credit as a result of the
credit for increasing research activities of approximately $2,341,000 at
September 30, 2010 and 2009. These tax credits begin expiring after twenty
years from the year in which the credit was generated. The components of the
deferred taxes at September 30, 2010 and 2009 are comprised of the following:
2010 2009
---- ----
Net operating loss $45,940,445 $39,491,048
R&D credit 2,340,614 2,340,614
Amortization of debt discount -- 658,406
Codification 718-10-30-3 1,243,647 683,245
Derivative loss -- 8,919,951
Vacation and other 83,593 9,127
Deferred rent 970,224 -
----------- ----------
Total deferred tax assets 50,578,523 52,102,392
Derivative gain (2,133,259) -
Depreciation (80,026) -
----------- ----------
Total deferred tax liability (2,213,285) -
Valuation allowance (48,365,238) (52,102,392)
----------- ----------
Net deferred tax asset $ - $ -
=========== ===========
In assessing the realization of the deferred tax assets, management
considered whether it was more likely than not that some portion or all of
the deferred tax asset will be realized. The ultimate realization of the
deferred tax assets is dependent upon the generation of future taxable
F-21
income. Management has considered the history of the Company's operating
losses and believes that the realization of the benefit of the deferred tax
assets cannot be determined. In addition, under the Internal Revenue Code
Section 382, the Company's ability to utilize these net operating loss
carryforwards may be limited or eliminated in the event of a change in
ownership in the future. Internal Revenue Code Section 382 generally defines
a change in ownership as the situation where there has been a more than 50
percent change in ownership of the value of the Company within the last three
years.
The Company's effective tax rate is different from the applicable federal
statutory tax rate. The reconciliation of these rates for the years ended
September 30 is as follows:
2010 2009 2008
---- ---- ----
Federal Rate 34.0% 34.0% 34.0%
State tax rate, net of federal benefit 5.91% 3.96% 3.96%
R&D credit 0% 2.01% 5.06%
RT&D credit true-up 0% (0.40%) 0%
Nondeductible expenses 0.02% (0%) (0.04%)
Valuation allowance (39.93%) (39.57%) (42.98%)
------- ------- -------
Effective tax rate 0.0% 0.0% 0.0%
======= ======= =======
The Company adopted the provisions of Codification 740-10, "Accounting for
Uncertainty in Income Taxes" on October 1, 2007 which requires financial
statement benefits be recognized for positions taken for tax return purposes,
when it is more likely than not that the position will be sustained. The
Company has concluded that it has properly filed its tax returns and does not
believe that any of the positions it has taken would result in a disallowance
of any of these tax positions. Therefore, the Company has concluded that
adoption of ASC 740-10 had no impact on its financial positions. No interest
or penalties have been accrued as a result of adoption of this requirement.
In the United States, the Company is still open to examination from 2006
forward.
6. STOCK OPTIONS, BONUS PLAN AND WARRANTS
Non-Qualified Stock Option Plans --At September 30, 2010, the Company has
collectively authorized the issuance of 33,760,000 shares of common stock
under its Non-Qualified Stock Option Plans. Options typically vest over a
three-year period and expire no later than ten years after the grant date.
Terms of the options are to be determined by the Company's Compensation
Committee, which administers the plans. The Company's employees, directors,
officers, and consultants or advisors are eligible to be granted options
under the Non-Qualified Stock Option Plans.
Information regarding the Company's Non-Qualified Stock Option Plans is
summarized as follows:
F-22
Outstanding Exercisable
------------------ ----------------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
------ -------- ------ --------
Options outstanding,
October 1, 2007 7,462,698 $0.69 5,972,712 $0.67
Options granted 1,039,000 $0.60
Options exercised (50,467) $0.29
Options forfeited (43,966) $0.96
---------
Options outstanding,
September 30, 2008 8,407,265 $0.68 6,553,939 $ 0.64
Options granted 12,538,114 $0.38
Options exercised (162,253) $0.38
Options forfeited (462,535) $0.82
---------
Options outstanding,
September 30,2009 20,320,591 $0.49 8,142,931 $0.64
---------
Options granted 1,453,450 $0.56
Options exercised (18,625) $0.31
Options forfeited (35,002) $0.97
---------
Options outstanding,
September 30,2010 21,720,414 $0.50 8,906,473 $0.65
=========
In December 2007, the Company extended the expiration date on 1,680,533
options from the Nonqualified Stock Option Plans with exercise prices ranging
from $1.05 to $1.94. The options originally would have expired between
February 2008 and October 2008 and were extended for five years to expiration
dates ranging from February 2013 to October 2013. This extension was
considered a new measurement date with respect to the modified options. At
the date of modification, the additional cost of the options was $410,471. As
of September 30, 2010, all of these options remain outstanding.
In April 2009, the Company extended the expiration date on 147,000 options
from the Nonqualified Stock Option Plans with the exercise prices ranging
from $1.05 to $1.87. The options originally would have expired between May
2009 and September 2009 and were extended for three years to expiration dates
ranging from May 2012 to September 2012. This extension was considered a new
measurement date with respect to the modified options. At the date of
modification, the additional cost of the options was $2,904. As of September
30, 2010, all of these options remain outstanding.
In January 2010, the Company extended the expiration date on 181,666 options
from the Nonqualified Stock Option Plans with the exercise prices ranging
from $1.05 to $1.76. The options originally would have expired between
February 2010 and November 2010 and were extended for three years to
expiration dates ranging from February 2013 to November 2013. This extension
was considered a new measurement date with respect to the modified options.
At the date of modification, the additional cost of the options was $72,632.
As of September 30, 2010, all of these options remain outstanding.
F-23
Incentive Stock Option Plan--At September 30, 2010, the Company has
collectively authorized the issuance of 17,100,000 shares of common stock
under its Incentive Stock Option Plans. Options vest over a one-year to
three-year period and expire no later than ten years after the grant date.
Terms of the options are to be determined by the Company's Compensation
Committee, which administers the plans. Only the Company's employees and
directors are eligible to be granted options under the Incentive Stock Option
Plans.
Information regarding the Company's Incentive Stock Option Plans is
summarized as follows:
Outstanding Exercisable
------------------ ----------------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
------ -------- ------ --------
Options outstanding,
October 1, 2007 4,601,933 $0.64 3,998,601 $0.63
Options granted 300,000 $0.62
Options exercised -
Options forfeited (156,667) $3.83
---------
Options outstanding,
September 30, 2008 4,745,266 $0.53 4,121,935 $0.52
Options granted 4,982,775 $0.27
Options exercised (100,000) $1.13
Options forfeited (29,167) $1.70
---------
Options outstanding,
September 30, 2009 9,598,874 $0.39 8,548,876 $0.38
=========
Options granted 1,100,000 $0.61
Options exercised (71,333) $0.43
Options forfeited (34,500) $2.25
-------
Options outstanding,
September 30,2010 10,593,041 $0.50 8,893,042 $0.65
=========
In December 2007, the Company extended the expiration date on 225,100 options
from the Incentive Stock Option Plans with exercise prices ranging from $1.05
to $1.94. The options originally would have expired between February 2008 and
December 2008 and were extended for five years to expiration dates ranging
from February 2013 to December 2013. This extension was considered a new
measurement date with respect to the modified options. At the date of
modification, the additional cost of the options was $54,537. As of September
30, 2010, all of these options remain outstanding.
In April 2009, the Company extended the expiration date on 153,000 options
from the Incentive Stock Option Plans with the exercise price of $1.05. The
options originally would have expired between April 2009 and December 2009
and were extended for three years to expiration dates ranging from April 2012
F-24
to December 2012. This extension was considered a new measurement date with
respect to the modified options. At the date of modification, the additional
cost of the options was $3,238. As of September 30, 2010, all of these
options remain outstanding.
In January 2010, the Company extended the expiration date on 337,166 options
from the Incentive Stock Option Plans with the exercise prices ranging from
$1.05 to $1.18. The options originally would have expired between February
2010 and December 2010 and were extended for three years to expiration dates
ranging from February 2013 to December 2013. This extension was considered a
new measurement date with respect to the modified options. At the date of
modification, the additional cost of the options was $139,812. As of
September 30, 2010, all of these options remain outstanding
Other Options and Warrants
The Company accounts for options to non-employees in accordance with
Codification 505-50-05-5, "Equity Based Payments to Non-Employees". The
warrants are valued using the Black-Scholes methodology and are either
expensed as the warrants are vested or as a debit and a credit to additional
paid-in capital if an equity transaction. If the warrants are expensed, they
are revalued each quarter before they are fully vested and the difference in
the value of the warrants is recorded in the consolidated statement of
operations. Warrants issued in connection with some financings are
classified as derivative liabilities due to their terms. See Note 10 for
further discussion of the derivative liabilities. Details of the other
transactions follow.
In November and December 2007, the Company extended the expiration date of
2,016,176 investor and consultant warrants. The options and warrants were due
to expire from December 1, 2007 through December 31, 2008. All options and
warrants were extended for an additional five years from the original
expiration date. The cost of the extension of investor warrants of $424,815
was recorded as a debit to accumulated deficit (dividend) and a credit to
additional paid-in capital. The cost of the extension of the consultant
warrants of $99,181 was recorded as a debit to general and administrative
expense and a credit to additional paid-in capital. The additional cost of
the extension of investor and consultant warrants was determined using the
Black Scholes method.
Expected stock risk volatility 72%
Risk-free interest rate 3.67%
Expected life of warrant 5.17-5.5 Years
In January 2009, as part of an amended lease agreement on the manufacturing
facility, the Company repriced 3,000,000 warrants issued to the lessor in
July 2007 at $1.25 per share and which were to expire on July 12, 2013. These
warrants were repriced at $0.75 per share and expire on January 26, 2014. The
cost of this repricing and extension of the warrants was $70,515 and was
accounted for as a debit to the deferred rent asset and a credit to
additional paid-in capital. In addition, 787,500 additional warrants were
given to the lessor of the manufacturing facility on the same date,
exercisable at a price of $0.75 per share, and will expire on January 26,
2014. The cost of these warrants was $45,207 and was accounted for as a debit
to the deferred rent asset and a credit to additional paid-in capital. The
cost of the warrant extension and the new warrants was determined using the
Black Scholes method using the following assumptions.
F-25
Expected stock risk volatility 61.63%
Risk-free interest rate 1.52%
Expected life of warrant 5 Years
In March 2009, as further consideration for its rights under the licensing
agreement, Byron Biopharma purchased 3,750,000 Units from the Company at a
price of $0.20 per Unit. Each Unit consisted of one share of the Company's
common stock and two warrants. Each warrant entitles the holder to purchase
one share of the Company's common stock at a price of $0.25 per share. The
warrants are exercisable at any time prior to March 6, 2016. The fair value
of the warrants was calculated to be $1,015,771 using the Black Scholes
method with the following assumptions and was recorded as both a debit and a
credit to additional paid-in capital.
Expected stock risk volatility 83.12%
Risk-free interest rate 2.30%
Expected life of warrant 7 Years
Between March 31 and June 30, 2009, 2,296,875 new warrants were issued to the
leaseholder on the manufacturing facility in consideration for the deferment
of rent payments. The cost of these new warrants of $251,172 was recorded as
a debit to research and development and a credit to additional paid in
capital. The cost the new warrants was determined using the Black Scholes
method using the following assumptions.
Expected stock risk volatility 63.03 - 64.46%
Risk-free interest rate 1.82 - 2.13%
Expected life of warrant 5 Years
In June 2009, 2,075,084 warrants issued to two investors in connection with a
financing in August 2008 were reset from $0.75 to $0.40. The additional cost
of the warrants of $123,013 was recorded as a debit and a credit to
additional paid in capital. In addition, the investors were issued 1,815,698
warrants exercisable at $0.40 per share at a cost of $404,460. The additional
cost of the warrants was recorded as a debit and a credit to paid in capital.
The costs were determined using the Black Scholes method using the following
assumptions.
Expected stock risk volatility 63.75%
Risk-free interest rate 2.13%
Expected life of warrant 5.17 Years
In June 2009, the Company issued 10,284,060 warrants exercisable at $0.50 per
share in connection with the June financing. The cost of the warrants of
$2,775,021 was recorded as a debit and a credit to additional paid in
capital. See Note 11.
F-26
Expected stock risk volatility 62.59%
Risk-free interest rate 2.13-2.71%
Expected life of warrant 5 Years
In connection with the reset of the conversion price of the Series K notes
and the exercise price of the warrants from $0.75 to $0.40 after the June
2009 financing, the Series K note holders received 5,348,357 additional
warrants. The cost of these additional warrants is included in the fair value
of the remaining warrants at September 30, 2010. See Note 2.
In June 2009, the Company issued 1,648,244 warrants exercisable at $0.40 per
share to the holder of a note from the Company. These warrants were valued at
$65,796 using the Black Scholes method. In July 2009, the Company issued
1,849,295 warrants exercisable at $0.50 per share to the holder of the note
that was amended for the second time. These warrants were valued at $341,454
using the Black Scholes method. The first warrants were recorded as a
discount to the loan and a credit to additional paid-in capital. The second
warrants were recorded as a debit to derivative loss of $831,230, a premium
of $341,454 on the loan and a credit to additional paid in capital of
$489,776. The first warrants were amortized as interest expense at the time
of the second amendment. On the second amendment, $338,172 of the premium was
amortized as a reduction to interest expense as of September 30, 2009. The
balance of the premium of $3,282 was amortized as a reduction to interest
expense in October 2009. The following assumptions were used to value these
warrants:
June 2009 July 2009
--------- ---------
Expected stock risk volatility 90% 90%
Risk-free interest rate 2.4% 2.4%
Expected life of warrant 5 Years 5 Years
In July 2009, 375,000 warrants held by an investor were extended for two
years. The additional value of the warrants of $24,061 was calculated using
the Black Scholes method using the following assumptions. This cost was
accounted for as a debit and a credit to additional paid in capital.
Original Extended
Warrants Warrants
-------- --------
Expected stock risk volatility 57.14% 57.14%
Risk-free interest rate 1.76% 1.76%
Expected life of warrant 0.08 Year 2.08 Years
In July 2009, 192,500 options were issued with exercise prices between $0.40
and $0.60 per share to three consultants, for past services, at a cost of
$35,911 using the Black Scholes method. The options were accounted for as a
debit to general and administrative expense and a credit to additional paid
F-27
in capital. Also in July 2009, the Company issued 200,000 options to a
consultant with an exercise price of $0.38 per share. The cost of these
options, $43,702, was calculated using the Black Scholes method using the
following assumptions and accounted for as a debit to research and
development and a credit to additional paid in capital.
Expected stock risk volatility 66.74%
Risk-free interest rate 2.71%
Expected life of warrant 5 Years
In July 2009, the Company issued warrants to a private investor. The 167,500
warrants were issued with an exercise price of $0.50 per share and valued at
$43,550 using the Black Scholes method using the following assumptions. The
cost of the warrants was accounted for as a debit to additional paid in
capital and a credit to derivative liabilities.
Expected stock risk volatility 90%
Risk-free interest rate 2.90%
Expected life of warrant 5.5 Years
In July 2009, 100,000 warrants were extended for one year. The cost of the
extension of $3,134 was calculated using the Black Scholes method using the
following assumptions. The cost was accounted for as a debit to general and
administrative expenses and a credit to additional paid in capital.
Original Extended
Warrants Warrants
-------- --------
Expected stock risk volatility 57.14% 57.14%
Risk-free interest rate 1.76% 1.76%
Expected life of warrant 0.17 Year 1.17 Years
In August 2009, the Company received additional financing. In connection with
the financing, the Company issued 4,850,501 warrants exercisable at $0.55 per
share. The cost of the warrants of $1,455,150 was calculated using the Black
Scholes method using the following assumptions and was recorded as a debit to
additional paid in capital and a credit to derivative liabilities. See Note
11.
Expected stock risk volatility 90%
Risk-free interest rate 2.59%
Expected life of warrant 5.51 Years
Also in August 2009, the Company completed an offering to the original Series
K investors. Issued with an exercise price of $0.55 per share, the 541,717
warrants were valued at $249,190 using the Black Scholes method using the
following assumptions. The warrants were accounted for as a debit to
additional paid in capital and a credit to derivative liabilities.
Expected stock risk volatility 90 %
Risk-free interest rate 2.61%
Expected life of warrant 5.5 Years
F-28
In September 2009, the Company received a $2,000,000 loan. In connection with
the loan, the Company issued 500,000 warrants with an exercise price of $0.68
per share. The cost of the warrants of $245,000 was recorded as a debit to
discount on note payable and a credit to additional paid in capital. This
cost was amortized to interest expense when the loan was repaid. See Note 11.
Expected stock risk volatility 90%
Risk-free interest rate 2.54%
Expected life of warrant 5.5 Years
In September 2009, the Company issued 4,714,284 warrants with an exercise
price of $1.50 per share in connection with a financing. The cost of the
warrants of $3,488,570 was calculated using the Black Scholes method using
the following assumptions and was recorded as a debit and a credit to
additional paid in capital. See Note 11. In addition, 714,286 warrants were
issued with an exercise price of $1.75 per share to the placement agent on
the transaction. The cost of $664,286 was calculated using the Black Scholes
method using the following assumptions and was accounted for as a debit to
additional paid in capital and a credit to derivative liabilities.
Financing Placement Agent
Warrants Warrants
-------- --------
Expected stock risk volatility 110% 110%
Risk-free interest rate 1.01% 2.42%
Expected life of warrant 2 Years 4.91 Years
In accordance with Codification 815-40-15-7, derivative liabilities must be
revalued at the end of each interim period and at the end of the fiscal year,
as long as they remain outstanding. As of September 30, 2009, the fair value
of these new derivative liabilities totaled $29,741,372. As of September 30,
2010, the value of the remaining derivative liabilities totaled $5,943,549.
In August 2010, 70,000 options owned by an investor were extended for two
years at a cost of $15,477. This cost was calculated using the Black Scholes
method and was accounted for as a credit to additional paid in capital and a
debit to general and administrative expense. The calculation used the
following assumptions.
Prior to After
Extension Extension
--------- ---------
Expected stock risk volatility 102% 102%
Risk-free interest rate 0.15% 0.49%
Expected life of warrant 0 Years 2 Years
F-29
Stock Bonus Plans -- At September 30, 2010, the Company had been authorized
to issue up to 11,940,000 shares of common stock under its Stock Bonus Plans.
All employees, directors, officers, consultants, and advisors are eligible to
be granted shares. During the year ended September 30, 2008, 205,125 shares
were issued to the Company's 401(k) plan for a cost of $108,590. During the
year ended September 30, 2009, 91,766 shares were issued to the Company's
401(k) plan for a cost of $57,829. During the year ended September 30, 2010,
182,233 shares were issued to the Company's 401(k) plan for a cost of
$112,325.
Stock Compensation Plan-- At September 30, 2010, 9,500,000 shares were
authorized for use in the Company's stock compensation plan. During the year
ended September 30, 2008, 1,789,451 shares were issued at the weighted
average $0.62 per share for a total cost of $1,324,474. During the year ended
September 30, 2009, 1,324,385 shares were issued at the weighted average of
$0.24 per share for a total cost of $312,016. During the year ended September
30, 2010, no shares were issued from the Stock Compensation Plan.
7. EMPLOYEE BENEFIT PLAN
The Company maintains a defined contribution retirement plan, qualifying
under Section 401(k) of the Internal Revenue Code, subject to the Employee
Retirement Income Security Act of 1974, as amended, and covering
substantially all Company employees. Each participant's contribution is
matched by the Company with shares of common stock that have a value equal to
100% of the participant's contribution, not to exceed the lesser of $10,000
or 6% of the participant's total compensation. The Company's contribution of
common stock is valued each quarter based upon the closing bid price of the
Company's common stock. The expense for the years ended September 30, 2010,
2009, and 2008, in connection with this Plan was $123,500, $61,517, and
$110,670, respectively.
8. COMMITMENTS AND CONTINGENCIES
Operating Leases-The future minimum annual rental payments due under
noncancelable operating leases for office and laboratory space are as
follows:
Year Ending September 30,
2011 1,903,471
2012 1,896,205
2013 1,855,889
2014 1,579,931
2015 1,572,839
2016 and thereafter 26,441,949
------------
Total minimum lease payments: $35,250,284
============
Rent expense for the years ended September 30, 2010, 2009, and 2008, was
$3,308,102, $2,759,332, and $253,526, respectively. Rent increased
substantially during the fiscal year ended September 30, 2009 because the
F-30
Company took delivery of the new building in October of 2008; see discussion
below. These leases expire between June 2012 and August 2028.
In August 2007 the Company leased a building near Baltimore, Maryland. The
building was be remodeled in accordance with the Company's specifications so
that it can be used by the Company to manufacture Multikine for the Company's
Phase III clinical trial and sales of the drug if approved by the FDA. The
Company took possession of the building in October 2008.
The lease is for a term of twenty years and required annual base rent
payments of $1,575,000 during the first year of the lease. The annual base
rent escalates each year at 3%. The Company is also required to pay all real
and personal property taxes, insurance premiums, maintenance expenses, repair
costs and utilities. The lease allows the Company, at its election, to extend
the lease for two ten-year periods or to purchase the building at the end of
the 20-year lease. The lease required the Company to pay $3,150,000 towards
the remodeling costs, which will be recouped by reductions in the annual base
rent of $303,228 in years six through twenty of the lease, subject to the
Company maintaining compliance with the lease covenants. Included on the
consolidated balance sheet is an asset of $7,819,522 shown as deferred rent.
$7,068,184 of this asset is long term and the balance of $751,338 is in
current assets. Included in deferred rent are the following: 1) deposit on
the manufacturing facility ($3,150,000); 2) warrants issued to lessor
($1,481,040); 3) additional investment ($2,889,409); 4) deposit on the cost
of the leasehold improvements for the manufacturing facility ($1,786,591); 5)
amortization of deferred rent ($(1,682,053)); and 6) accrued interest on
deposit ($194,535). Also included on the consolidated balance sheet is
restricted cash of $21,357. In July 2008, the Company was required to deposit
the equivalent of one year of base rent in accordance with the contract. The
$1,575,000 included in current assets on September 30, 2009 was required to
be deposited when the amount of cash the Company had dropped below the amount
stipulated in the lease. The Company received a refund of the deposit in
February 2010, when the Company was again in compliance with the contract.
Employment Contracts--In April 2005, the Company entered into a three-year
employment agreement with Maximilian de Clara, the Company's President. The
employment agreement provided that the Company would pay Mr. de Clara an
annual salary of $363,000 during the term of the agreement. On September 8,
2006 Mr. de Clara's Employment Agreement was amended and extended to April
30, 2010. On August 30, 2010, Mr. de Clara's employment agreement, as amended
on September 8, 2006, was extended to August 30, 2013.
F-31
The employment agreement, as amended, also provided that on September 8,
2006, March 8, 2007, September 8, 2007, March 8, 2008, September 8, 2008 and
March 8, 2009, each date being a "Payment Date", the Company issued Mr. de
Clara shares of its common stock equal in number to the amount determined by
dividing $200,000 by the average closing price of the Company's common stock
for the twenty trading days preceding the Payment Date. A total of 2,610,649
shares were issued to Mr. de Clara under this agreement.
The employment agreement provides that the Company will pay Mr. de Clara an
annual salary of $363,000 during the term of the agreement. In the event
that there is a material reduction in his authority, duties or activities,
or in the event there is a change in the control of the Company, then the
agreement allows him to resign from his position at the Company and receive
a lump-sum payment from the Company equal to 18 months salary. For purposes
of the employment agreement, a change in the control of the Company means
the sale of more than 50% of the outstanding shares of the Company's Common
Stock, or a change in a majority of the Company's directors.
In September 2006, the Company agreed to extend its employment agreement with
Geert R. Kersten, the Company's Chief Executive Officer, to September 2011.
The employment agreement, which is essentially the same as Mr. Kersten's
prior employment agreement, provides that during the term of the agreement
the Company will pay Mr. Kersten an annual salary of $370,585 plus any
increases approved by the Board of Directors during the period of the
employment agreement. In the event there is a change in the control of the
Company, the agreement allows him to resign from his position at the Company
and receive a lump-sum payment from the Company equal to 24 months of salary.
For purposes of the employment agreement a change in the control of the
Company means: (1) the merger of the Company with another entity if after
such merger the shareholders of the Company do not own at least 50% of voting
capital stock of the surviving corporation; (2) the sale of substantially all
of the assets of the Company; (3) the acquisition by any person of more than
50% of the Company's common stock; or (4) a change in a majority of the
Company's directors which has not been approved by the incumbent directors.
On August 30, 2010, the Company entered into a three-year employment
agreement with Patricia B. Prichep, the Company's Senior Vice President of
Operations. The employment agreement with Ms. Prichep provides that during
the term of the agreement the Company will pay Ms. Prichep an annual salary
of $194,298 plus any increases approved by the Board of Directors during the
period of the employment agreement.
On August 30, 2010, the Company also entered into a three-year employment
agreement with Eyal Talor, Ph.D., the Company's Chief Scientific Officer. The
employment agreement with Dr. Talor provides that during the term of the
agreement the Company will pay Dr. Talor an annual salary of $239,868 plus
any increases approved by the Board of Directors during the period of the
employment agreement.
In the event there is a change in the control of the Company, the employment
agreements with Ms. Prichep and Dr. Talor allow Ms. Prichep and/or Dr. Talor
(as the case may be) to resign from her or his position at the Company and
receive a lump-sum payment from the Company equal to 18 months salary. For
purposes of the employment agreements, a change in the control of the Company
means: (1) the merger of the Company with another entity if after such merger
the shareholders of the Company do not own at least 50% of voting capital
stock of the surviving corporation; (2) the sale of substantially all of the
assets of the Company; (3) the acquisition by any person of more than 50% of
the Company's common stock; or (4) a change in a majority of the Company's
directors which has not been approved by the incumbent directors.
The employment agreements with Ms. Prichep and Dr. Talor will also terminate
upon the death of the employee, the employee's physical or mental disability,
willful misconduct, an act of fraud against the Company, or a breach of the
employment agreement by the employee. If the employment agreement is
terminated for any of these reasons the employee, or her or his legal
representatives, as the case may be, will be paid the salary provided by the
employment agreement through the date of termination.
F-32
The Company has an additional contract with a consultant for a nine month
period ending in fiscal year 2011. This contract totals approximately
$45,000. Further, the Company has contingent obligations with other vendors
for work that will be completed in relation to the Phase III trial. The
timing of these obligations cannot be determined at this time. The amount of
these obligations for the Phase III trial are approximately $27 million with
the net cost to the Company being between $25 - $26 million.
Iroquois Lawsuit - On October 21, 2009, Iroquois filed suit against the
Company in the United States District Court for the Southern District of New
York. In its lawsuit, Iroquois is seeking $30 million in actual damages, $90
million in punitive damages, the issuance of an additional 4,264,681 shares
of the Company's common stock, the issuance of warrants to purchase an
additional 6,460,757 shares of the Company's stock and a ruling by the court
that the conversion price of the notes and the exercise price of the warrants
are both $0.20.
The Company believes that Iroquois's claims are without merit and has filed a
motion with the District Court seeking the dismissal of Iroquois's lawsuit.
9. LOANS FROM OFFICER AND INVESTOR
Between December 2008 and June 2009, Maximilian de Clara, the Company's
President and a director, loaned the Company $1,104,057. The loan was
initially payable at the end of March, 2009, but was extended to the end of
June 2009. At the time the loan was due, and in accordance with the loan
agreement, the Company issued Mr. de Clara warrants which entitle Mr. de
Clara to purchase 1,648,244 shares of the Company's common stock at a price
of $0.40 per share. The warrant is exercisable at any time prior to December
24, 2014. Pursuant to Codification paragraph 470-50-40-17, the fair value of
the warrants issuable under the first amendment was recorded as a discount
on the note payable with a credit recorded to additional paid-in capital.
The discount was amortized from April 30, 2009 through June 27, 2009.
Although the loan was to be repaid from the proceeds of the Company's then
recent financing, the Company's Directors deemed it beneficial not to repay
the loan and negotiated a second extension of the loan with Mr. de Clara on
terms similar to the June 2009 financing. Pursuant to the terms of the
second extension the note is now due on July 6, 2014, but, at Mr. de Clara's
option, the loan can be converted into shares of the Company's common stock.
The number of shares which will be issued upon any conversion will be
determined by dividing the amount to be converted by $0.40. As further
consideration for the second extension, Mr. de Clara received warrants which
allow Mr. de Clara to purchase 1,849,295 shares of the Company's common
stock at a price of $0.50 per share at any time prior to January 6, 2015.
F-33
The loan from Mr. de Clara bears interest at 15% per year and is secured by
a second lien on substantially all of the Company's assets. The Company does
not have the right to prepay the loan without Mr. de Clara's consent.
In accordance with Codification Subtopic 470-50, the second amendment to the
loan was accounted for as an extinguishment of the first amendment debt. The
extinguishment of the loan requires that the new loan be recorded at fair
value and a gain or loss must be recognized. This resulted in a premium of
$341,454, which was amortized over the period from July 6, 2009, the date of
the second amendment, to October 1, 2009. The loan holder may request
repayment in full or in part at any time after October 1, 2009 on ten days
notice. In October 2009, the balance of the remaining premium of $3,282, was
amortized to interest expense. Amortization of the premium was $338,172 for
the year ended September 30, 2009.
In early September 2009, the Company received a short term loan of
$2,000,000, with associated costs of $73,880, from two investors. The
Company repaid the loan at the end of September 2009, along with $200,000 in
interest. In addition, the Company issued 500,000 warrants at $0.68 at a
cost of $245,000 in connection with the loan. This cost was recorded as a
debit to discount on note payable and a credit to derivative liabilities.
When the loan was repaid, this discount was written off as interest expense.
On September 30, 2009, the fair value of the warrants was $735,000. On
September 30, 2010, the fair value of the warrants was $220,000, and all of
the warrants remain outstanding.
10. STOCKHOLDERS' EQUITY
On April 18, 2007, the Company completed a $15 million private financing.
Shares were sold at $0.75, a premium over the closing price of the previous
two weeks. The financing was accompanied by 10 million warrants with an
exercise price of $0.75 and 10 million warrants with an exercise price of
$2.00. The warrants are known as Series L and Series M warrants,
respectively. The shares were registered in May 2007.
The financing resulted in the issuance of 19,999,998 shares of common stock
to the investors. The warrants issued with the financing qualified for equity
treatment. The Series L warrants were recorded as a debit and a credit to
additional paid-in capital at a value of $5,164,355 and the Series M warrants
were recorded as a debit and a credit to additional paid-in capital at a fair
value of $434,300.
In September 2008, 2,250,000 of the original Series L warrants were repriced
at $0.56 and extended for one year to April 17, 2013. The increase in the
value of the warrants of $173,187 was recorded as a debit and a credit to
additional paid-in capital in accordance with the original accounting for the
Series L warrants.
As a result of the financing, and in accordance with the original Series K
agreement, the Series K conversion price of the notes was repriced to $0.75
from the original $0.86 and the exercise price of the warrants were adjusted
to $0.75 from the original $0.95. The Series K convertible debt and warrants
were revalued with the new conversion price and were adjusted to their new
fair value.
F-34
On August 18, 2008, the Company sold 1,383,389 shares of common stock and
2,075,084 warrants in a private financing for $1,037,542. The shares were
sold at $0.75, a significant premium over the closing price of the Company's
common stock. The warrants were valued at $891,336 and recorded as a debit
and a credit to additional paid-in capital. Each warrant entitles the holder
to purchase one share of the Company's common stock at a price of $0.75 per
share at any time prior to August 18, 2014. The shares have no registration
rights.
On February 26, 2008, the Company issued a total of 258,000 shares of
restricted common stock to two consultants at $0.53 per share for a total
cost of $136,740 of which $70,312 had been expensed at September 30, 2008.
This stock was expensed over the period of the contracts with the
consultants. In April 2008, an additional 258,000 shares of restricted common
stock to two consultants were issued at $0.69 for a total cost of $178,020,
of which $86,984 had been expensed at September 30, 2008. The value of the
stock was expensed over the remaining period of the contracts with the
consultants.
During the fourth quarter of fiscal year 2008, an additional 1,173,000 shares
were issued to consultants at prices ranging from $0.55 to $0.578. The total
cost of $649,994 was expensed to general and administrative expense. At
September 30, 2008, $111,452 had been expensed to general and administrative
expense.
During the year ended September 30, 2009, the Company issued 3,316,438 shares
of common stock in payment of invoices totaling $1,561,343. Common stock was
also issued to pay interest and principal on the convertible debt. See Note
2. In addition, the balance of the shares issued to the Company's president
in September 2008 were expensed at a cost of $200,000. An additional
1,030,928 shares were issued to the president in March 2009 at a cost of
$200,000. An additional 12,672 shares were issued to an employee for
expenses. The shares were expensed at a cost of $3,168.
In November 2008, the Company extended its licensing agreement for Multikine
with Orient Europharma. The new agreement extends the Multikine collaboration
to also cover South Korea, the Philippines, Australia and New Zealand. The
licensing agreement initially focuses on the areas of head and neck cancer,
nasopharyngeal cancer and potentially cervical cancer. The agreement expires
15 years after the commencement date which is defined as the date of the
first commercial sale of Multikine in any country within the territory. In
connection with the agreement, Orient Europharma purchased 1,282,051 shares
of common stock at a cost of $0.39 per share, for a total to the Company,
after expenses, of $499,982.
On December 30, 2008, the Company entered into an Equity Line of Credit
agreement as a source of funding for the Company. For a two-year period, the
agreement allows the Company, at its discretion, to sell up to $5 million of
the Company's common stock at the volume weighted average price of the day
minus 9%. The Company may request a drawdown once every ten trading days,
although the Company is under no obligation to request any draw-downs under
the equity line of credit. The equity line of credit expires on January 6,
2011. There were no draw-downs during the years ended September 30, 2010 or
2009.
F-35
On March 6, 2009, the Company entered into a licensing agreement with Byron
Biopharma LLC ("Byron") under which the Company granted Byron an exclusive
license to market and distribute the Company's cancer drug Multikine in the
Republic of South Africa. The Company has existing licensing agreements for
Multikine with Teva Pharmaceuticals and Orient Europharma. Pursuant to the
agreement, Byron will be responsible for registering the product in South
Africa. Once Multikine has been approved for sale, the Company will be
responsible for manufacturing the product, while Byron will be responsible
for sales in South Africa. Revenues will be divided equally between the
Company and Byron. To maintain the license Byron, among other requirements,
must make milestone payments to the Company totaling $125,000 on or before
March 15, 2010. This payment was received in March 2010. On March 30, 2009,
and as further consideration for its rights under the licensing agreement,
Byron purchased 3,750,000 Units from the Company at a price of $0.20 per
Unit. Each Unit consisted of one share of the Company's common stock and two
warrants. Each warrant entitles the holder to purchase one share of the
Company's common stock at a price of $0.25 per share. The warrants are
exercisable at any time prior to March 6, 2016. The shares of common stock
included as a component of the Units were registered by the Company under the
Securities Act of 1933. The Units were accounted for as an equity transaction
using the Black Scholes method to value the warrants. The fair value of the
warrants was calculated to be $1,015,771 and was recorded as both a debit and
a credit to additional paid-in capital.
In late June and early July of 2009, the Company raised $6,139,739, less
associated costs of $296,576. The Company issued 15,349,346 shares at $0.40
per share to the investors. The Company also issued 10,284,060 warrants,
exercisable at $0.50 per share to the investors at a fair value of $2,775,021
and this cost is shown on the balance sheet as a derivative liability. As of
September 30, 2009, the fair value of the warrants was $15,223,759. During
the year ended September 30, 2010, 8,813,088 warrants were exercised. As of
September 30, 2010, the fair value of the 1,470,972 remaining warrants was
$676,647.
As a result of the June 2009 financing, the conversion price of the Series K
notes and the exercise price of the Series K warrants were reduced to $0.40
per share because the shares sold by the Company were below the conversion
price of the notes and the exercise price of the warrants. Also in
conjunction with the June 2009 financing, the exercise price of warrants
issued in a prior financing was reset to $0.40 per share, resulting in the
issuance of an additional 1,166,667 shares of common stock. The issuance of
these shares was accounted for as a dividend of $466,667 for the year ended
September 30, 2009.
On July 27, 2009, 215,000 shares were issued to employees at $0.39. These
shares will vest at specified milestones; 20% of them had vested by September
30, 2009. During the year ended September 30, 2009, $16,770 of the cost was
expensed. There was no additional vesting for these shares for the year ended
September 30, 2010. In addition, on August 5, 2009, 65,785 shares were issued
at $0.38 to the Board of Directors. The cost of $24,998 was expensed during
the year ended September 30, 2009.
In late August of 2009, the Company raised an additional $4,852,995, less
associated costs of $248,037. The Company issued 10,784,435 shares at $0.45
per share to the investors. The Company also issued 5,392,217 warrants at
$0.55 per share to the investors at a fair value of $1,704,340 and this cost
F-36
is shown on the balance sheet as a derivative liability on September 30,
2009. As of September 30, 2009, the fair value of these warrants was
$8,088,328. On September 30, 2010, these warrants are shown as a derivative
liability of $2,480,420. No warrants were exercised during the year ended
September 30, 2010.
In September of 2009, the Company raised an additional $20,000,000, less
associated costs of $1,423,743. The Company issued 14,285,715 shares at $1.40
per share to the investors. The Company also issued 4,714,284 warrants,
exercisable at $1.50 per share to the investors at a fair value of
$3,488,570. The Company also issued 714,286 warrants, exercisable at $1.75
per share to the placement agent at a fair value of $642,857. The cost of the
warrants is shown on the balance sheet as a derivative liability. As of
September 30, 2009, the fair value of these warrants was $5,694,285. As of
September 30, 2010, the fair value of these warrants is shown as a derivative
liability of $660,000. No warrants were exercised during the year ended
September 30, 2010.
During the year ended September 30, 2010, there were an additional 2,011,174
warrants and options exercised for 2,011,174 shares of common stock at prices
ranging from $0.56 to $0.75. The Company received a total of $1,413,307 from
the exercise of warrants and options during the year ended September 30,
2010.
During the year ended September 30, 2009, 3,316,438 shares of common stock
were issued in payment of invoices totaling $1,561,343. During the year ended
September 30, 2010, 465,158 shares of common stock were issued in payment of
invoices totaling $1,241,026.
In accordance with Codification 815-40-15-7, derivative liabilities must be
revalued at the end of each interim period and at the end of the fiscal year,
as long as they remain outstanding. Series A through E warrants that do not
qualify for equity accounting must be accounted for as a derivative liability
since the warrant agreements provide the holders with the right, at their
option, to require the Company to a cash settlement of the warrant at
Black-Scholes value in the event of a Fundamental Transaction, as defined in
the warrant agreements. Since the occurrence of a Fundamental Transaction is
not entirely within the Company's control, there exist circumstances that
would require net-cash settlement of the warrants while holders of shares
would not receive a cash settlement. As of September 30, 2009, the fair value
of these derivative liabilities was $29,741,372. As of September 30, 2010,
and after the exercise of warrants discussed above, the fair value of these
derivative liabilities was $4,037,067.
During the fiscal year ended September 30, 2010, 8,813,088 of Series A
warrants were exercised, resulting on a gain on derivative instruments of
$8,433,451. When the warrants were exercised, the value of these warrants was
converted from derivative liabilities to equity, and the Series A warrants
transferred to equity totaled $4,276,972.
On October 1, 2009, the Company reviewed all outstanding warrants in
accordance with the requirements of Codification 815-40, "Determining Whether
an Instrument (or Embedded Feature) is Indexed to an Entity's Own Stock".
This topic provides that an entity should use a two-step approach to evaluate
F-37
whether an equity-linked financial instrument (or embedded feature) is
indexed to its own stock, including evaluating the instrument's contingent
exercise and settlement provisions. Two warrant agreements provide for
adjustments to the purchase price for certain dilutive events, which includes
an adjustment to the warrant exercise price in the event that the Company
makes certain equity offerings in the future at a price lower than the
exercise price of the warrants. Under the provisions of Codification 815-40,
the warrants are not considered indexed to the Company's stock because future
equity offerings or sales of the Company's stock are not an input to the fair
value of a "fixed-for-fixed" option on equity shares, and equity
classification is therefore precluded. Accordingly, effective October 1,
2009, 3,890,782 warrants issued in August 2008 were determined to be subject
to the requirements of this topic and were valued using the Black-Scholes
formula as of October 1, 2009 at $6,186,343. Effective October 1, 2009, the
warrants are recognized as a liability in the Company's condensed
consolidated balance sheet at fair value with a corresponding adjustment to
accumulated deficit and will be marked-to-market each reporting period during
which they are exercisable. The warrants were revalued on September 30, 2010,
at $1,906,482. The assumptions used in the fair value calculation for the
warrants as of October 1, 2009 and September 30, 2010 are as follows:
October 1, 2009 September 30, 2010
---------------- ------------------
Expected stock price volatility 95% 100%
Risk-free interest rate 2.151% 0.919%
Expected life of warrant 4.88 years 3.88 years
On March 12, 2010, the Company temporarily reduced the exercise price of
the Series M warrants, originally issued on April 18, 2007. The exercise
price was reduced from $2.00 to $0.75. At any time prior to June 16, 2010,
investors could have exercised the Series M warrants at a price of $0.75
per share. For every two Series M warrants exercised prior to June 16,
2010, the investor would have received one Series F warrant. Each Series F
warrant would have allowed the holder to purchase one share of the
Company's common stock at a price of $2.50 per share at any time on or
before June 15, 2014. After June 15, 2010 the exercise price of the Series
M warrants reverted back to the $2.00 per share. Any person exercising a
Series M warrant after June 15, 2010 would not receive any Series F
warrants. The Series M warrants expire on April 17, 2012. An analysis of
the modification to the warrants determined that the modification increased
the value of the warrants by $1,432,456. The adjustment was recorded as a
debit and a credit to additional paid-in capital. There were no exercises
of the Series M warrants at the reduced price and the exercise price of the
Series M warrants reverted back to $2.00 on June 16, 2010.
On August 3, 2010, the Company's Board of Directors approved an amendment to
the terms of the Series M warrants held by an investor. The investor is the
owner of 8,800,000 warrants priced at $2.00 per share. The investor may now
purchase 6,000,000 shares of the Company's common stock (reduced from
8,800,000) at a price of $0.60 per share. In approving the amendment, the
Company's Directors determined that reducing the number of outstanding
warrants would be beneficial. An analysis of the modification to the warrants
determined that the modification increased the value of the warrants by
$100,000. The adjustment was recorded as a debit and a credit to additional
paid-in capital. As of September 30, 2010, all of these warrants remained
outstanding.
F-38
11. FAIR VALUE MEASUREMENTS
Effective October 1, 2008, the Company adopted the provisions of Codification
820-10, "Fair Value Measurements", which defines fair value, establishes a
framework for measuring fair value and expands disclosures about such
measurements that are permitted or required under other accounting
pronouncements. While topic 820-10 may change the method of calculating fair
value, it does not require any new fair value measurements. The adoption of
Codification 820-10 did not have a material impact on the Company's results
of operations, financial position or cash flows.
In accordance with the topic, the Company determines fair value as the price
that would be received to sell an asset or paid to transfer a liability in an
orderly transaction between market participants at the measurement date. The
Company generally applies the income approach to determine fair value. This
method uses valuation techniques to convert future amounts to a single
present amount. The measurement is based on the value indicated by current
market expectations about those future amounts.
Codification 820-10 establishes a fair value hierarchy that prioritizes the
inputs used to measure fair value. The hierarchy gives the highest priority
to active markets for identical assets and liabilities (Level 1 measurement)
and the lowest priority to unobservable inputs (Level 3 measurement). The
Company classifies fair value balances based on the observability of those
inputs. The three levels of the fair value hierarchy are as follows:
o Level 1 - Observable inputs such as quoted prices in active markets
for identical assets or liabilities.
o Level 2 - Inputs other than quoted prices that are observable for the
asset or liability, either directly or indirectly. These include
quoted prices for similar assets or liabilities in active markets,
quoted prices for identical or similar assets or liabilities in
markets that are not active and amounts derived from valuation models
where all significant inputs are observable in active markets.
o Level 3 - Unobservable inputs that reflect management's assumptions.
For disclosure purposes, assets and liabilities are classified in their
entirety in the fair value hierarchy level based on the lowest level of input
that is significant to the overall fair value measurement. The Company's
assessment of the significance of a particular input to the fair value
measurement requires judgment and may affect the placement within the fair
value hierarchy levels.
The table below sets forth the assets and liabilities measured at fair value
on a recurring basis, by input level, in the condensed consolidated balance
sheet at September 30, 2010:
F-39
Quoted Prices in Significant
Active Markets for Other Significant
Identical Assets or Observable Unobservable
Liabilities (Level 1) Inputs (Level 2) Inputs (Level 3) Total
--------------------- ----------------- ---------------- ----------
Derivative Instruments $ - $ - $ 6,946,051 $6,946,051
=========== =========== =========== ==========
The table below sets forth the assets and liabilities measured at fair value
on a recurring basis, by input level, in the condensed consolidated balance
sheet at September 30, 2009:
Quoted Prices in Significant
Active Markets for Other Significant
Identical Assets or Observable Unobservable
Liabilities (Level 1) Inputs (Level 2) Inputs (Level 3) Total
--------------------- ----------------- ---------------- ----------
Derivative Instruments $ - $ - $35,113,970 $35,113,970
=========== =========== =========== ===========
The following sets forth the reconciliation of beginning and ending
balances related to fair value measurements using significant unobservable
inputs (Level 3), as of September 30, 2010 and 2009:
2010 2009
---- ----
Beginning balance $35,113,970 $3,018,697
Transfers in 6,186,343 8,877,217
Transfers out (5,510,490) (5,273,594)
Realized and unrealized gains/losses
recorded in Earnings (28,843,772) 28,491,650
----------- -----------
Ending balance $ 6,946,051 $35,113,970
=========== ===========
The fair values of the Company's derivative instruments disclosed above are
primarily derived from valuation models where significant inputs such as
historical price and volatility of the Company's stock as well as U.S.
Treasury Bill rates are observable in active markets.
12. NET INCOME (LOSS) PER COMMON SHARE
Basic earnings per share (EPS) excludes dilution and is computed by dividing
net income by the weighted average of common shares outstanding for the
period. Diluted EPS reflects the potential dilution that could occur if
securities or other common stock equivalents (convertible preferred stock,
convertible debt, warrants to purchase common stock and common stock options)
were exercised or converted into common stock. The following table provides a
reconciliation of the numerators and denominators of the basic and diluted
per-share computations:
F-40
2010 2009 2008
---- ---- ----
Net income (loss) - available to
common shareholders-basic $ 8,950,973 $(41,400,758) $(8,128,230)
Add: Conversion of note payable 162,326 - -
Less: Conversion of derivative
instruments (20,130,098) - -
----------- ------------ -----------
Net income (loss) - diluted $(11,016,799) $(31,830,304) $(8,128,230)
Weighted average number of
shares - basic 202,102,859 133,535,050 117,060,866
Incremental shares from:
Potentially dilutive shares 21,414,912 - -
Conversion of note payable 2,760,142 - -
----------- ------------ -----------
Weighted average number of
shares - diluted 226,277,913 133,535,050 117,060,866
============ ============ ===========
Earnings per share - basic $ 0.04 $ (0.31) $ (0.07)
============ ============ ===========
Earnings per share - diluted $ (0.05) $ (0.31) $ (0.07)
============ ============ ===========
Included in the above computations of weighted-average shares for diluted net
loss per share were options and warrants to purchase 21,414,912 shares of
common stock as of September 30, 2010. Excluded from the above computations
of weighted-average shares for diluted net loss per share were options and
warrants to purchase 23,384,797, and 14,488,124 shares of common stock as of
September 30, 2009 and 2008, respectively. These securities were excluded
because their inclusion would have an anti-dilutive effect on net loss per
share.
13. SEGMENT REPORTING
Codification 280-10, "Disclosure about Segments of an Enterprise and Related
Information" establishes standards for reporting information regarding
operating segments in annual financial statements and requires selected
information for those segments to be presented in interim financial reports
issued to stockholders. This topic also establishes standards for related
disclosures about products and services and geographic areas. Operating
segments are identified as components of an enterprise about which separate
discrete financial information is available for evaluation by the chief
operating decision maker, or decision-making group, in making decisions how
to allocate resources and assess performance. The Company's chief decision
maker, as defined under this topic, is the Chief Executive Officer. To date,
the Company has viewed its operations as principally one segment, the
research and development of certain drugs and vaccines. As a result, the
financial information disclosed herein materially represents all of the
financial information related to the Company's principal operating segment.
F-41
14. QUARTERLY INFORMATION (UNAUDITED)
The following quarterly data are derived from the Company's consolidated
statements of operations.
Financial Data
Fiscal 2010
Three Three Three Three
months months months months
ended ended ended ended Year Ended
December 31, March 31, June 30, September 30, September 30
2009 2010 2010 2010 2010
----------- --------- ----------- ------------- --------------
Revenue $ 30,000 $ 30,600 $ 30,900 $ 61,800 $ 153,300
Operating expenses 4,282,849 5,350,958 3,424,959 5,654,787 18,713,553
Non operating expenses
(income) (72,099) (56,167) (38,423) (33,221) (199,910)
Gain/loss on derivative
instruments 23,340,267 4,519,672 2,754,512 (1,770,679) 28,843,772
Modification of warrants - (1,432,456) - (100,000) (1,532,456)
---------- ---------- ------------ ----------- -----------
Net loss available to
common shareholders $19,159,517 $(2,176,975) $ (601,124) $(7,430,445) $ 8,950,973
=========== =========== ============ =========== ===========
Net loss per
share-basic $ 0.10 $ (0.01) $ 0.00 $ (0.04) $ 0.04
=========== =========== ============ =========== ===========
Weighted average
shares-basic 194,959,814 204,173,750 204,592,051 204,757,898 202,102,859
Net loss per
share-diluted $ 0.02 $ (0.03) $ (0.01) $ (0.04) $ (0.05)
=========== =========== ============ =========== ===========
Weighted average
shares-diluted 256,198,162 258,251,010 231,827,525 228,932,952 226,277,913
Fiscal 2009
Three Three Three Three
months months months months
ended ended ended ended Year Ended
December 31, March 31, June 30, September 30, September 30
2008 2009 2009 2009 2009
----------- --------- ----------- ------------- --------------
Revenue $ - $ 19,643 $ 30,450 $ 30,000 $ 80,093
Operating expenses 2,551,823 2,384,760 3,243,576 3,920,391 12,100,550
Non operating expenses
(income) (13,379) 16,717 376,445 18,140 397,923
Gain/loss on derivative
instruments 391,689 264,554 (2,649,493) (26,498,400) (28,491,650)
---------- ---------- ------------ ------------ ------------
Net loss (2,173,513) (2,117,280) (6,239,064) (30,380,173) (40,910,030)
Modification of
warrants - - (466,667) (24,061) (490,728)
---------- ---------- ------------ ----------- -----------
Net loss available to
common shareholders (2,173,513) (2,117,280) $ (6,705,731) $(30,404,234) $(41,400,758)
=========== =========== ============ =========== ===========
Net loss per
share-basic $ (0.02) $ (0.02) $ (0.05) $ (0.19) $ (0.31)
=========== =========== ============ =========== ===========
Net loss per
share-diluted $ (0.02) $ (0.02) $ (0.05) $ (0.19) $ (0.31)
=========== =========== ============ =========== ===========
Weighted average
shares-basic and
diluted 122,215,334 124,701,667 130,076,656 156,916,920 133,535,050
F-42
The Company has experienced large swings in its quarterly gains and losses
in 2010 and 2009. These swings are caused by the changes in the fair value
of the convertible debt each quarter. These changes in the fair value of
the debt are recorded on the consolidated statements of operations. In
addition, the cost of options granted to consultants has affected the
quarterly losses recorded by the Company.
15. SUBSEQUENT EVENTS
In accordance with Codification 855-50, "Subsequent Events", the Company has
reviewed subsequent events through the date of the filing. The Company
received a $733,437 grant under The Patient Protection and Affordable Care
Act of 2010 (PPACA). The grant was related to three of the Company's
projects, including the Phase III trial of Multikine. The PPACA provides
small and mid-sized biotech, pharmaceutical and medical device companies with
up to a 50% tax credit for investments in qualified therapeutic discoveries
for tax years 2009 and 2010, or a grant for the same amount tax-free. The tax
credit/grant program covers research and development costs from 2009 and 2010
for all qualified "therapeutic discovery projects."
On December 10, 2010, the Company entered into a sales agreement with
McNicoll Lewis & Vlak LLC (MLV) relating to shares of common stock which have
been registered by means of a shelf registration statement filed in July
2009. The Company may offer and sell shares of its common stock, having an
aggregate offering price of up to $30 million, from time to time through MLV
acting as agent and/or principal.
Sales of the Company's common stock, if any, may be made in sales deemed to
be "at-the-market" equity offerings as defined in Rule 415 promulgated under
the Securities Act of 1933, as amended, including sales made directly on or
through the NYSE Amex, the existing trading market for the Company's common
stock, sales made to or through a market maker other than on an exchange or
otherwise, in negotiated transactions at market prices prevailing at the time
of sale or at prices related to such prevailing market prices, and/or any
other method permitted by law. MLV will act as sales agent on a best efforts
basis. The Company is not required to sell any shares to McNicoll Lewis &
Vlak and McNicoll Lewis & Vlak is not required to sell any shares on the
Company's behalf or purchase any of its shares for its own account.
McNicoll Lewis & Vlak will be entitled to a commission in an amount equal to
the greater of 3% of the gross proceeds from each sale of the shares, or
$0.025 for each share sold, provided, that, in no event will McNicoll Lewis &
Vlak receive a commission greater than 8.0% of the gross proceeds from the
sale of the shares. In connection with the sale of the common stock on behalf
of the Company, McNicoll Lewis & Vlak may be deemed to be an "underwriter"
within the meaning of the Securities Act of 1933, as amended, and the
compensation of McNicoll Lewis & Vlak may be deemed to be underwriting
commissions or discounts.
F-43
CORPORATE INFORMATION
Board of Directors Corporate Headquarters
Stock Profile
Maximilian de Clara CEL-SCI Corporation
Chairman and President 8229 Boone Boulevard CEL-SCI Corporation's Common
CEL-SCI Corporation Suite 802 Stock is traded on the NYSE
Vienna, VA 22182 Amex exchange under the symbol
Geert R. Kersten USA CVM. CEL-SCI also trades on
Chief Executive Officer five German stock exchanges
CEL-SCI Corporation Telephone: (703) 506-9460 under the Symbol LSR, German
Facsimile: (703) 506-9471 Securities Code
Alexander G. Esterhazy www.cel-sci.com (Wertpapierkennnummer) 871006
Financial Advisor
C. Richard Kinsolving, Ph.D. Independent Auditors There are approximately 1,800
Chief Executive Officer BDO USA, LLP stockholders of record as of
BioPharmacon, Inc. Bethesda, MD September 30, 2010. CEL-SCI
its Common Stock since its
has not paid cash dividends on
its common stock since its
inception.
Peter Young, Ph.D. Counsel SEC Form 10-K
President Hart & Trinen A copy of CEL-SCI's annual
Agnus Dei, Inc. Denver, CO report to the Securities and
Exchange Commission on Form
10-K is available without
charge upon written request to:
Corporate Officers Transfer Agent and Registrar Corporate Communications
Maximilian de Clara Computershare Investor Services CEL-SCI Corporation
Director and President 350 Indiana Street, Suite 800 8229 Boone Boulevard, Suite 802
Golden, CO 80401 Vienna, VA 22182
Geert R. Kersten (303) 262-0600
Chief Executive Officer
Treasurer
Eyal Talor, Ph.D. Stockholders Inquiries
Chief Scientific Officer
Inquiries regarding transfer
John Cipriano requirements, lost certificates
Senior Vice President of and change of address should be
Regulatory Affairs directed to the transfer agent
Patricia B. Prichep
Senior Vice President of
Operations
Corporate Secretary
Daniel Zimmerman, Ph.D.
Senior Vice President of
Research, Cellular Immunology
CEL-SCI Corporation
8229 Boone Boulevard
Suite 802
Vienna, VA 22182
USA
---------------